ANALYSIS Kakuzi Report Final 2013

Kakuzi Limited Analytical Report
ANALYSIS OF THE FINANCIAL HEALTH OF KAKUZI LIMITED
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Table of Contents
1.0INTRODUCTION........................................................................................................... 4
1.1Company Profile......................................................................................................... 4
1.2Vision And Strategy.................................................................................................... 4
1.3Core Values................................................................................................................ 5
1.4Company Structure..................................................................................................... 5
1.5Corporate Social Responsibility..................................................................................6
2.0SWOT ANALYSIS......................................................................................................... 7
2.1Strengths.................................................................................................................... 7
2.2Weakness................................................................................................................... 9
2.3Opportunities.............................................................................................................. 9
2.4THREATS................................................................................................................... 10
3.0BALANCED SCORE CARD.......................................................................................... 11
3.1BALANCED SCORECARD FOR PERFORMANCE MEASUREMENT..................................12
3.2THE BALANCED SCORE CARD DOMESTICATED TO KAKUZI LTD................................15
3.3The Financial perspective......................................................................................... 15
3.4The customer perspective........................................................................................ 15
3.5Internal Business Processes...................................................................................... 16
3.6Learning and Growth................................................................................................ 16
4.0ASSESSMENT OF FINANCIAL HEALTH OF KAKUZI......................................................17
4.1Profitability............................................................................................................... 17
4.2Liquidity.................................................................................................................... 18
4.3Efficiency ................................................................................................................. 19
4.4Leverage................................................................................................................... 20
4.5Investor Concerns .................................................................................................... 21
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4.6CAPITAL STRUCTURE................................................................................................ 22
4.7COST OF EQUITY....................................................................................................... 23
4.8NOMINAL COST OF DEBT.......................................................................................... 24
4.9EFFECTIVE COST OF DEBT........................................................................................ 24
4.10WEIGHTED AVERAGE COST OF CAPITAL.................................................................25
4.11VALUE OF THE COMPANY........................................................................................ 26
4.12Z SCORES: EDWARD ALTMANS MODEL..................................................................27
5.0FINDINGS AND OBSERVATIONS ............................................................................... 29
6.0RECOMMENDATIONS AND CONCLUSIONS.................................................................30
6.1Recommendations.................................................................................................... 30
6.2Conclusions............................................................................................................... 31
REFERENCES...31
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1.0
INTRODUCTION
1.1
Company Profile
Kakuzi Limited is a listed company trading on both the Nairobi and the London Stock Exchange.
The company engages in the cultivation, manufacture and marketing of tea, growing and marketing
of avocados, livestock farming, and a joint pineapple operation with Del Monte, macadamia and
forestry development. Kakuzi is the largest producer of Avocado in East Africa and exports
approximately 45% of the total volume from Kenya. Kakuzi is also focused on the development of
out grower and Smallholder Avocado growers.
Kakuzi limiteds parent company is Camellia Plc, a UK based corporate, with a 50.7% shareholding.
Kakuzi Limiteds subsidiaries include Estates Services Limited, Siret Tea Company Limited, and
Kaguru (EPZ) Limited. Kakuzi Limited has a joint venture agreement with Del Monte Kenya
Limited, for the growing of pineapples.
Kakuzi Limited operates in two separate locations in Kenya, the main operation and Head Office is
based at Makuyu about 65 Km North East of Nairobi and the other operation mainly Tea, is situated
in Nandi Hills about 350 Km North West of Nairobi.
Its plantations comprise 480 hectares of macadamia nuts, 408 hectares of avocados, 959 hectares of
tea, 64 hectares of pineapple, 1282 hectares for forestry and 7805 hectares for cattle farming. It
houses 861 permanent staff with a peak of an additional 720 fixed term contract staff dependent on
the seasonality of activities (Kakuzi, 2013).
1.2
Vision And Strategy
Vision
Similar to all Camellia Plc. businesses, Kakuzi's vision establishes the long-term direction for the
company which is based on a number of guiding principles.
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The development of a worldwide group of businesses requiring management to take a long

term view.
The achievement of long-term shareholder returns through sustained investment.
Investing in the sustainability, environment and the communities in which we do business.
Ensuring that the quality and safety of our products meet the highest international standards.
The continuous refinement and improvement of the companys existing businesses using our
internal expertise and financial strength.
Strategy
Kakuzi strategy is to continue focusing on a mixed agricultural portfolio to mitigate the profit cycle
risk to which agriculture has historically been subject to. Its core business activities are tea,
avocados, forestry and macadamia nut production.
Kakuzi key strategic thrust is developing macadamia nut production which will add scale and
customer service to parent company's existing operations in Malawi and South Africa (Kakuzi,
2013).
1.3
Core Values
The summary code of conduct is to;
1.4
Understand and comply with all legal requirements
Be honest, open and co-operative with all regulators
Prohibit bribery in any form
Compete independently and not enter into any anti-competitive agreements
Properly record, report and review financial and tax information

Company Structure
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The Kakuzi Board consists of the Chairman, who has non-executive responsibilities, four other nonexecutive directors and two executive directors. The Board meets quarterly and is responsible for
establishing the corporate governance pillars, setting the strategic direction, reviewing business
performance and supervision of the management of Kakuzi operations. The directors have the
knowledge, experience, autonomy and skills enabling them to carry out their Board responsibilities
(Kakuzi, Annual Reports, 2013).
Mr. Kenneth Tarplee
Mr. Christopher Ames
Mr. Richard Kemoli
Mr. Nicholas Nganga
Mr. Stephen Waruhiu
Mr. Daniel Ndonye
Executive Directors
Mr. Graham Mclean
Mr. Ketan Shah
Company Secretary
Mr. J.L.G Maonga
1.5
Chairman
Director
Director (Upto 7th August 2012)
Director
Director (Appointed on 29th November 2012)
Director (Appointed on 29th November 2012)
Managing Director
Finance Director
Corporate Social Responsibility
Kakuzi Company continues to dedicate a part of its profit to social responsibility activities aimed at
enhancing the living standards of those living close to its installations. Kakuzi businesses have the
potential to impact the communities in which they operate. Kakuzi continue to make a positive
contribution to these communities wherever possible in the passionate belief that the well-being of
the community has a positive impact on their operations.
The companys CSR mandated is to:
Consult the local communities affected by our businesses and ensure that all comments are
responded to and, where appropriate, acted upon
Understand how our businesses can most effectively support the needs of their local
communities and contribute to local programs and initiatives
Ensure the social effects of major investments are assessed and monitored at the planning
stage.
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Ina addition to their CSR activities the company also ensures the provision of basic services to
employees and their dependents. This may include:
Access to running, potable fresh water and foodstuffs
Access to primary health care for employees and their dependents
Ensuring that resident children of employees of primary school age are in school
Access to company housing that meets or exceeds local norms or statutory requirement.
2.0 SWOT ANALYSIS

The SWOT analysis is beneficial to companies in that it helps in analysing the overall strategic
position of a business, its resources, and its environment.
2.1
Strengths
Product diversification: The process of expanding business opportunities through additional

market potential of an existing product. Diversification may be achieved by entering into
additional markets and/or pricing strategies. Kakuzi has diversified by entering into the dairy
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products market, forestry, livestock rearing, macadamia nut production, fresh pineapple
production, avocado of which it is the largest exporter, among others.
CSR and Environmental Initiatives: Kakuzi has given strong emphasis to this significant
operational area. We have ensured that all water supply sources within out control are
protected through planting and development of indigenous tree species. Our tea factory is
self-sustainable in fire wood supplies and our production factories for tea and avocado have
attained top level international certifications, such as ISO 22000, Global GAP and Rain
Forest Alliance. Our community outreach programmes have been successful and we will
continue to give a strong emphasis to this very important area of our operation. We have 12%
of our total land area covered by forestry (Kakuzi, Annual Reports, 2013)
The company operates in the agricultural, food and beverages industry and produces valuable
agricultural products that are on constant demand in the export market and locally. The
companys recent entry into avocado production has seen remarkable success driving profits
for 2011 and 2012. Its high-performing Fuertes and Hass avocado crop varieties especially at
its Makuyu operation have had increasing value especially in the European export market.
Positive cash returns from cattle rearing venture.
Good export market presence: The Company enjoys a strong presence in the export market
and access to the European market through its parent company, Camellia Plc.
To meet the international tea standards one must have top notch product inputs, thus for
Kakuzi having top of the range tea input produces quality outputs which are sought after in
many foreign countries, Kakuzi exports only the finest quality tea.
Well developed and recognized brand.
Strong financial foundation.
The location of its main businesses within the Nairobi metropolitan, with the main
establishment being at Makuyu favors the company in terms of asset value and in operations
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through easy access to the local market in the capital city and proximity to the international
airport.
The company has large ownership of land assets including an agro forestry farm in Thika, tea
farm in Nandi Hills, which provide a strong asset base for the company.
2.2
Weakness
The company is part of the big 6 tea producing companies of the country, making the tea
market a very competitive sub sector.
Poor and infrequent communication of their product to the target market, little to no
advertising is done to create awareness of their products locally is a major hindrance to their
overall profitability.
The high fluctuation of prices for agricultural produce locally and internationally caused by
changes in weather affecting overall production affects the expected revenue and sales value
for the company (KHRC, 2008, p.22).
2.3
Opportunities
Kakuzi has the potential to further diversify their portfolio beyond those products they
currently have.
Large markets from the avocado and macadamia nut ventures the company has recently
diversified into.
The current high value of tea and fresh avocado especially in the international market
continues to bolster the companys financial position. The expected entry into the lucrative
macadamia and processed agricultural fruit market, and its long-term approach for agro
forestry are expected to bring sustainable business for the company in coming years
(Gikunju, 2007)
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The strategic alliances with the parent firm, the companys local subsidiaries and other agro
processing companies notably Del Monte (K) Ltd present wider business opportunities for
the company and its products.
Kakuzi s entry into marketing of avocado fruit internationally presents a new market
opportunity with high potential and very low competition from other major producers in the
region. Currently Kakuzi is the largest avocado exporter
Increasing their fresh pineapple exports from 5% to a higher value.

2.4
THREATS
Foreign Exchange Rate Volatility: The group operates internationally and is exposed to
foreign exchange risk arising from various currency exposures, primarily with respect to the
US dollar and Euro. Foreign exchange risk arises from future commercial transactions, and
recognized assets and liabilities. This is a risk faced by the company on a yearly basis and
could result to adverse losses for the company.
At 31 December 2012, if the Shilling was weaker / stronger by 5% against the US dollar with
all other variables held constant, the consolidated post tax profit would have been Shs.
90,650 (2011: 4,537,000) higher/lower mainly as a result of US dollar trade receivables
(Kakuzi, Annual Reports, 2013).
Cash Flow Interest Rate Risk: The Group has borrowings and bank overdraft facilities at
variable rates, which exposes the Group to cash flow interest rate risk. The group regularly
monitors financing options available to ensure optimum interest rates are obtained (KHRC,
2008).
The Group has interest earning deposits, whose income would be subject to interest rate risk.
An increase/decrease in interest rates of 5% would have resulted in an increase/decrease in
post-tax profit of Shs 3,636,000 (2011: Shs 2,490,314) (Board-of-Directors-Kakuzi, 2011).
The global trend of being health conscious may affect tea consumption, the changing
lifestyles and attitudes towards healthier lifestyles has affected consumption among some
segments of the health conscious population.
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The company faces litigation surrounding its joint venture with Del Monte Ltd affecting the
companys marketing activity for its pineapple produce. The company lacks processing plant
for pineapple fruit and jeopardy surrounding its business relationship with Del Monte could
potentially lead to low returns and loss of significant market for the produce.
Threat of substitute products e.g. herbal tea.
Difficult dealings with the labor union over employee conditions, which is common in most
horticultural and other plantation firms in Kenya, has affected its dealings with workers.
Unruly behavior amongst rioting workers has put business operations, personnel and property
at risk at the companys Makuyu operation, denting the companys image and creating
unnecessary costs through arson and destruction of crops (Were, 2008).
Adverse macroeconomic effects on its revenues especially caused by the high fluctuation in
the local currency have potential negative impact on its international market revenues, with
appreciating value of the shilling causing lower value for its tea and other products
internationally (KHRC, 2008).
3.0 BALANCED SCORE CARD

The balanced scorecard (BSC) is a strategy performance management tool - a semi-standard
structured report, supported by design methods and automation tools that can be used by managers to
keep track of the execution of activities by the staff within their control and to monitor the
consequences arising from these actions. Further it is a strategic planning and management system
that is used extensively in business and industry, government, and nonprofit organizations
worldwide to align business activities to the vision and strategy of the organization, improve internal
and external communications, and monitor organization performance against strategic goals.
Balanced Scorecards, when developed as strategic planning and management systems, can help align
an organization behind a shared vision of success, and get people working on the right things and
focusing on results.
Doing the right things and doing things right is a balancing act, and requires the development of
good business strategies (doing the right things) and efficient processes and operations to deliver the
programs, products and services (doing things right) that make up the organizations core business.
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While there are differences in development and implementation of scorecard systems for private,
public and nonprofit organizations, the disciplined process of strategic discovery used to develop
scorecard systems has more similarities than differences, so the framework we will describe applies
equally well to different types of organizations.
3.1 BALANCED SCORECARD FOR PERFORMANCE MEASUREMENT
Translating Vision and Strategy: Four Perspectives
The balanced score card consists of the following elements: strategic management framework,
measurement system, and communication tool. The balanced scorecard suggests that we view the
organization from four perspectives, and to develop metrics, collect data and analyze it relative to
each of these perspectives:
The Financial perspective
The Customer perspective
Internal Business Process
Learning and Growth
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Guide to the Balanced Score Card
ENTERPRISE SCORE CARDS
SOURCE OF ENTERPRISE SYNERGIES

1. Internal Capital Management Create synergy
through effective management of internal capital
& labor markets.
2. Corporate Brand Integrate a diverse set of
FINANCIAL SYNERGY How can we increase the
businesses around a single brand, promoting
shareholder value of our Portfolio? To succeed
common values or themes.
financially how should we appear to our

shareholders? What are the objectives, measures,
targets and initiatives?
3. Productivity strategy-Leads to Improved Cost

Structure, Increased Asset Utilization,
4. Growth strategy - Expand Revenue
Opportunities Shareholder Value, & Expand
Customer Value
1. Cross-Selling Create value by cross-selling a
broad range of products/services from several
business units.
2. Common Value Proposition Create a
CUSTOMER SYNERGY How can we share the
consistent buying experience, conforming to
customer Interface to increase total customer
corporate standards at multiple outlets
value? To achieve our vision, how should we

appear to our customers?
3. Product / service attributes Customer

Perspective, Customer Value Proposition Price,
Quality & Availability Selection Functionality
4. Relationship - Service, Brand, Partnership
1. Shared Services Create economies of scale by
sharing the systems, facilities and personnel in
critical support processes.
2. Value Chain Integration Create value by
integrating continuous processes in the industry
value chain.
3. Operations Management Processes:
Supply,Produce,Distribute,Manage Risk.
4. Customer Management Processes: Select
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INTERNAL BUSINESS PROCESSHow can we
Customers,Acquire New Customers Retain
manage processes to achieve economies of
Existing Customers,Grow Business with
scale or value chain integration? To satisfy our
Customers.
shareholders and customers, what business processes 5. Regulatory & Social Processes
must we excel at?
6. Environment,Safety & Health,Employment

7. Community
8. Innovation Processes.
9. Identify New Opportunities, Design and
Develop
10. Launch
1. Intangible Assets Share a competency around
the development of human, information and
organization capital.
LEARNING AND GROWTH How can we
2. Strategic Themes Provide leadership in
develop and share our intangible assets? To
complex organizations through the management
achieve our vision, how will we sustain our ability to
of strategic themes
change and improve?
3. Human capital, information capital and

organizational capital i.e. Culture, leadership
and team work.
3.2 THE BALANCED SCORE CARD DOMESTICATED TO KAKUZI LTD

3.3
The Financial perspective
The financial health of Kakuzi limited has been on an upward trend over the five year period. The
company seeks to leverage on its existing assets for business diversification. As per the diagram
above it would be a good idea to increase efficiency of the company, in recent years especially e.g.
2012 the efficiency numbers have increased tremendously. Thus there is need to work on the
efficiency.
3.4
The customer perspective
Customer satisfaction should always be the focus of every company. If customers are not satisfied,
they will eventually find other suppliers that will meet their needs or substitute products. Poor
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performance from this perspective is thus a leading indicator of future decline, even though the
current financial picture may look good. Thus as per the score card above, service excellence is of
utmost importance for the longevity of the company. Kakuzis attention to quality production
continues to receive international recognition (Paul, 2005).
3.5
Internal Business Processes
Reduction of the cash conversion cycle/ improved efficiency is also of importance as a longer CCC
will impact on the profitability of the company and leads the company into bad debts. Thus reduced
payables days of holding should be considered.
For efficiency and effectiveness of operations Kakuzi has been able to invest in internal capacity and
to modernize its operations in order to enhance its efficiency as well as invest in innovation in all its
business spheres as seen from the diversification of their portfolio.
3.6
Learning and Growth
Alignment of personal goals to the companys goals will ensure all employees are working to a
common goal. The feeling of belonging will help increase their morale which improves productivity.
This in turn has positive impacts on the overall productivity of the company.
Kakuzi encourages the professional and higher learning as well as continuous development,
continuous development/ learning is necessary to keep abreast of all the changes in the business
environment. In addition to continuous development and general professional training the company
should ensure that they hire the key technical talent to ensure processes are performed accordingly.
Having highly trained professional staff also resonates well with the consumers as they know that
they can get value for their money (Paul, 2005).
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4.0 ASSESSMENT OF FINANCIAL HEALTH OF KAKUZI

4.1 Profitability
i)
5YEARANALYSIS
Profitability
a)
GrossProfit Margin/markup=
2008
2009
2010
2011
2012
Grossprofit * 100
Turnover
Gross Profit
Turnover
673,645.00
1,613,216.00
41.76%
876,778.00
2,008,157.00
43.66%
954,192.00
2,113,774.00
45.14%
1,167,418.00
2,376,862.00
49.12%
733,229.00
1,564,792.00
46.86%
THECOMPANYHASHIGHPROFITMARGINSWHICHWILLBEBENEFICIALFOR
FUTUREOPERATIONS
b) Net proft asapercentage of sales=Net profit
* 100
Sales
Net Profit
282,918
390,295
385,379
644,397
408,656
Turnover
1,613,216
2,008,157
2,113,774
2,376,862
1,564,792
c) ReturnonInvestment =
17.54%
19.44%
18.23%
27.11%
26.12%
Net Profit
* 100
Total Assets
Net Profit
Total Assets
=
282,918
390,295
385,379
644,397
408,656
2,283,983
2,343,199
2,614,898
3,817,320
3,571,700
12.39%
16.66%
14.74%
16.88%
11.44%
d) Return on Equity=Net profit*

100
Equity
Net Profit
Turnover
Total Assets
Equity
Net profit/Turnover*Turnover/Total Assets
*Total assets/Equity
Net profit/Turnover
Turnover/Total Assets
Total assets/Equity
282,918
1,613,216
2,283,983
1,396,141
385,379
2,113,774
2,614,898
1,882,604
644,397
2,376,862
3,817,320
2,756,765
408,656
1,564,792
3,571,700
2,801,225
=
THEOVERALLPROFITABILITYOFTHECOMPANYISGOOD
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390,295
2,008,157
2,343,199
1,707,453
20.26%
22.86%
20.47%
23.38%
14.59%
4.2 Liquidity
ii)
Liquidity
Focusonliquidityasit isnormallythe main cause of companydownfall
a) Current Ratio =Current Assets
Current liabilities
Current Assets
Current Liabilities
229,477
312,322
=
0.73
275,217
134,224
2.05
432,800
222,394
1.95
1,174,645
351,157
3.35
1,237,473
146,023
8.47
The company'sliquidityratio doesnot meet the required2:1ratio, thusin

some yearse.g2008, 2010itsbarelyable and safe to meet maturing
obligations, when theyfall due
b) QuickRatio =(Current assets- Inventory)
Current liabilities
Current Assets
Current Liabilities
Inventories
229,477
312,322
34,103
=
0.63
275,217
134,224
48,979
1.69
432,800
222,394
41,568
1.76
1,174,645
351,157
179,830
2.83
1,237,473
146,023
65,428
8.03
c) Acidtest ratio =Cashandequivalents

Current Liabilities
CashandEquivalents
Current Liabilities
Between 2008& 2010, the quick ratio is low, indicatingthe
company doesnt keep excess cash in hand, and relies too
much on inventory to pay its short termliabilites, while in =
2011/12the opposite is true
d) Free cash flows
=Net profit +/- change infixedassets+/- change inWorkingcapital
Change inFixedassets
Change inWorkingCapital
6,901
312,322
85,464
134,224
217,866
222,394
0.98
897,332
351,157
2.56
897,540
146,023
0.02
0.64
6.15
Change
Change
Change
Change
Change
17,099
14,476
114,116
460,577
-308,448
-225,397
-132,358
136,729
870,608
-142,306
491,216
508,177
134,534
-686,788
859,410
Net Profit
=
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4.3 Efficiency
iii)
Efficiency
Inventories
Receivables
Payables
Cost of GoodsSold
Turnover
a)Inventorydaysof holding=
41,568
173,366
210,807
1,284,419
2,113,774
179,830
97,483
283,252
1,426,866
2,376,862
65,428
274,505
129,212
895,249
1,564,792
11
11Days
15
15Days
12
12Days
46
46Days
27
27Days
35
26
30
15
64
36
28
60
72
53
36Days
28Days
60Days
72Days
53Days
10
13
-18
-11
38
Receivables * 365
Turnover
RDOH
=
RDOH higher than 50may indicate collection problems and pressure on cash
flows, thus in 2012the RDOH was higher than 50signifyingcollection
problems
c) Payable daysof holding=
Payables
*365
Cost of goodssold
PDOH
48,979
140,774
90,604
1,195,941
2,008,157
Inventory *365
Cost of goodssold
IDOH
b) Receivable daysof holding=
34,103
154,657
110,492
1,121,010
1,613,216
d) Cashconversioncycle
=Inventorydaysof holding+Receivable daysof holding- Payable daysof holding
=
The longer the cash conversion cycle the greater the ability to experience bad
debts , the lesser the efficeincy of the company, Kakuzi is quite efficient as
the CCCis through the years is significantly low.
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4.4 Leverage
iv) Leverage (Gearing)
a)
Longtermdebt
Equity
LongTermdebt
Equity
=
b)
604,515.00
1,964,609
624,408.00
2,210,504
709,398.00
2,756,765
624,452.00
2,801,225
43.76%
30.77%
28.25%
25.73%
22.29%
685,997.00
1,567,633
312,322
604,515.00
1,964,609
134,224
624,408.00
2,210,504
222,394
709,398.00
2,756,765
351,157
624,452.00
2,801,225
146,023
63.68%
37.60%
38.31%
38.47%
27.50%
1,567,633
2,283,983
1,964,609
2,343,199
2,210,504
2,614,898
2,756,765
3,817,320
2,801,225
3,571,700
1.5
1.2
1.2
1.4
1.3
390,189
51,399
558,890
19,473
553,934
414
920,093
0
479,299
0
29
1,338
Longtermdebt+Current liabilities
Equity
LongTermdebt
Equity
Current Liabilities
The capital ratio has surpassed the prescribed amounts and should be
reevaluated as this could prove detrimental to the company
c)
Equity Multiplier = Total Assets
Equity
Equity
Total Assets
=
The equity multiplier is below the prescribed levels, thus the number of
times equity can be derived fromassets is also low.
d)
T.I.E=
685,997.00
1,567,633
T.I.E=EquityBefore Interest andTaxes(EBIT)

Financial costs
Equity Before Interest and Taxes

Financial costs
The more times your T.I.Ethe better , if the T.I.Eis low this means the
company has a lower capacity to pay debts, thus in 2011& 2012, the company
has no capacity to pay debts
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4.5 Investor Concerns

v)
Investor
DividendPerShare
Market price
EarningsPerShare
1.00
23.00
13.12
2.50
31.75
17.34
2.50
81.50
15.87
3.75
69.50
28.06
3.75
40
19.35
57.04%
54.61%
19.47%
40.37%
48.38%
4.35%
7.87%
3.07%
5.40%
9.38%
7.62%
14.42%
15.75%
13.36%
19.38%
92.38
85.58
84.25
86.64
80.62
1.75304878
1.83
5.14
2.48
2.07
a) Returnof shares: EPSyeild= Earningspershare * 100

Marketprice
EPSis signifyinggood returns for Kakuzi
b) Dividendyeild=
Dividendper share * 100

Marketprice
=
This shows that the company's shares are not stable and fluctuate yearly, the
issuingof dividends varies yearly as well.
DividendPolicy= Dividendpershare
Earningspershare
The company has agood high retention ratio which is an indicator of agood
growth. The company also seems to vary its issuingof dividends in each year
Retention
c) Price earningsratio=
Market price
Earningspershare
=
Page 21 of 32
4.6 CAPITAL STRUCTURE
CAPITAL STRUCTURE
2008 %
2009 %
2010 %
2011 %
2012 %
Amount(shs' 000) Proportions
Amount(shs' 000)Proportions Amount(shs' 000)
Proportions Amount(shs' 000) ProportionsAmount (shs' 000) Proportions
Equity
1,567,633
70%
1,964,609
74%
2,210,504
78%
2,756,765
80%
2,801,225
82%
Capital
LTD
685,997
30%
694,515
26%
624,408
22%
709,398
20%
624,452
18%
Structure
2,253,630
100%
2,659,124
100%
2,834,912
100%
3,466,163
100%
3,425,677
100%
As a rule of thumb Equity should never be below 67% and Long Term debt should never exceed 33% at the maximum , the figures above indicate
that Kakuzi is within the prescribed amounts of equity and long term debt for the five year period.
Page | 22

4.7 COST OF EQUITY
2008
2009
2010
2011
2012
Cost of Equity, Amount(shs'
Ke
000) Proportions Amount(shs' 000) Proportions Amount(shs' 000) Proportions Amount(shs' 000) Proportions Amount(shs' 000) Proportions
DPS
1.00
2.50
2.50
3.75
3.75
Market Price
Ke
Ke
23.00
0.043478261
4%
31.75
0.078740157
8%
81.50
0.030674847
3%
Cost of financing the company with equity is quite low for four years (2008-2011), but in 2012 the cost of financing with
equity increased tremendously in 2012, which is not advisable.
Page | 23
69.5
0.053956835
5%
40
0.09
9%

4.8 NOMINAL COST OF DEBT
2008
Nominal cost of Debt, Kd
Finance cost
Long term debt
Borrowings
Kd
Kd
2009
2010
2011
2012
Proportions
Proportions
Proportions
Proportions
Proportions
51,399
685,997
0
7.492598364
Kd = 7.49%
19,473
604515
0
3.221260018
Kd = 3.22%
414
624408
0
0.066302802
Kd = 0.06%
709,398
0
0
Kd = 0%
624,452
0
0
Kd = 0%
2009
3.22126002
0.7
2.25488201
2.25%
2010
0.0663028
0.7
0.04641196
0.05%
2011
0
0.7
0
0%
2012
0
0.7
0
0%
4.9 EFFECTIVE COST OF DEBT
Effective Cost of Debt, Ki

Kd
1-T
Ki =
Page | 24
2008
7.492598364
0.7
5.244818855
5.24%
4.10
WACC
Equity
Ke
LTD
Ki
Ko/WACC
Page | 25
WEIGHTED AVERAGE COST OF CAPITAL
2008
70%
4%
30%
5.24%
5%
0.05
2009
74%
8%
26%
2%
6%
0.06
2010
78%
3%
22%
0.05%
2%
0.02
2011
80%
5%
20%
0%
4%
0.04
2012
82%
9%
18%
0%
8%
0.08

4.11
VALUE OF THE COMPANY
2008
Value of Kakuzi Amount (shs'000)
EAT 282,918,000.00
WACC
0.05
Value 5,658,360,000
Page | 26
2009
Amount (shs'000)
390,295,000
0.06
6,504,916,667
2010
Amount (shs'000)
385,379
0.02
19,268,950
2011
Amount (shs'000)
644,397,000
0.04
16,109,925,000
2012
Amount (shs'000)
405,104
0.08
5,063,800.00

4.12
Z SCORES: EDWARD ALTMANS MODEL
Zscore for KAKUZI ltd FY 2008 2012

ZScore =1.2A +1.4B+3.3 C +0.6D+0.99 E
Where
A = WorkingCapital / Total Assets
B = Retained Earnings/ Total Assets
C = EBIT/ Total Assets
D = Market Value of equity / Book Value of Total Liabilities
E = Sales/ Total Assets
YEAR2012
1 A WC/TA
Z- score
= 1,091,450 = 0.306
0.3667
YEAR2011
1.2 A WC/TA
3,571,700
1 B RE/TA
= 2,703,225 = 0.757
= 479,299
1.0596
1.4 B RE/TA
= 0.134
0.4428
3.3 C EBIT/TA
= 2,801,225 = 3.636
2.1814
= 2,658,765 = 0.697
0.9751
= 1,564,792 = 0.438
= 920,093
= 0.241
0.7954
0.6 D E/TL
= 2,756,765 = 2.599
1.5596
1,060,555
0.4337
3,571,700
0.99 E S/TA
= 2,376,862 = 0.623
0.6164
3,817,320
4.48
Page | 27
0.2589
3,817,320
770,475
1 E S/TA
= 0.216
3,817,320
3,571,700
1 D E/TL
= 823,488
3,817,320
3,571,700
3 C EBIT/TA
Z- score
4.21
YEAR2010
1 A WC/TA
Z- score
795,570
= 0.247
0.2966
YEAR2009
1.2 A WC/TA
Z- score
=
= 0.109
0.1313
= 1,866,609 = 0.650
0.9095
3,218,591
1 B RE/TA
2,873,255
= 2,112,504 = 0.656
0.9189
1.4 B RE/TA
3,218,591
3 C EBIT/TA
553,934
2,873,255
= 0.172
0.5679
3.3 C EBIT/TA
3,218,591
1 D E/TL
= 2,210,504 = 2.193
1.3157
= 2,113,774 = 0.657
0.6502
YEAR2008
Z- score
30,472
= 0.011
0.0137
= 1,469,633 = 0.552
0.7728
2,662,519
1 B RE/TA
2,662,519
3 C EBIT/TA
390,189
= 0.147
0.4836
= 1,567,633 = 1.432
0.8591
2,662,519
1 D E/TL
1,094,886
1 E S/TA
= 1,613,216 = 0.606
0.5998
2,662,519
2.73
Page | 28
= 0.195
0.6419
0.6 D E/TL
= 1,964,609 = 2.162
1.2973
0.99 E S/TA
= 2,008,157 = 0.699
0.6919
2,873,255
3.75
558,890
908,646
3,218,591
1 A WC/TA
2,873,255
1,008,087
1 E S/TA
314,307
3.67

The Z score for Kakuzi Ltd has been improving over the years i.e. from 2.7 in 2008 to 4.5 in 2012
Current Z score of 4.5 is an indication that the firm is solvent and liquidation is out of question.
This can also be demonstrated by Chepshy's Confidence Level as below:
Confidence Level = 1 - 1/Z squared
= 1 - 1/(4.48*4.48)
= 0.950175383
= 95%
A confidence level of 95% is very high, hence this supports the conclusion that the firm is not anywhere
near liquidation.
5.0 FINDINGS AND OBSERVATIONS
As the figures dictate:
Comparisons between the presented book values and calculated values shows that Kakuzi
Ltd is grossly undervalued, placing it as a better company to be purchased.
The company has considerably high profit margins , this is beneficial for future
operations of the company
The companys capital structure is sound, with equity above the prescribed 67% debt
below 33% at the maximum.
The prescribed normal for quick ratio should be 1.1; we can observe ratios of up to 8.03
in 2012. For the period under evaluation only the year 2008 had the prescribed ratio.
Page | 29
The debt composition is within the prescribed amounts.
Between 2008 & 2010, the quick ratio is low, indicating the company doesnt keep
excess cash in hand, and relies too much on inventory to pay its short term liabilities,
while in 2011/12 the opposite is true.
RDOH higher than 50 may indicate collection problems and pressure on cash flows, thus
in 2012 the RDOH was higher than 50 signifying collection problems.
The longer the cash conversion cycle the greater the ability to experience bad debts , the
lesser the efficiency of the company, Kakuzi is quite efficient as the CCC is through the
years is significantly low.
Over the period under evaluation, the capital ratio has surpassed the prescribed amounts
and should be reevaluated as this could prove detrimental to the company.
The more times your T.I.E the better , if the T.I.E is low this means the company has a
lower capacity to pay debts, thus in 2011 & 2012, the company has no capacity to pay
debts.
"The company has a good high retention ratio which is an indicator of a good growth.
The company also seems to vary its issuing of dividends in each year
6.0 RECOMMENDATIONS AND CONCLUSIONS

6.1
Recommendations
The company has greater capacity for diversification, thus it should look at other additional areas to
venture into.
Page | 30
The companys marketing strategy should be made more aggressive, this is in a bid to create /
increase awareness of the brand and its product offerings.
6.2
Conclusions
Using Chepshys Confidence levels Model, Kakuzi Ltd has above average confidence levels.
The z-score of Kakuzi Ltd are above the margin 3, signifying that Kakuzi Ltds future
can be accurately predicted.
A confidence level of 95% is very high, hence this supports the conclusion that the firm is not
anywhere near liquidation.
Overall profitability is good; this is profitable for the companys future operations.
Page | 31

REFERENCES
Board-of-Directors-Kakuzi. (2011). Kakuzi Limited Annual Report and Financial Statements for
the Year Ended 31 December 2011. Nairobi, Kenya: Kakuzi Limited.
Gikunju, W. (2007, November 5). Kenya: Kibaki Tips Scales for Kakuzi Directors in Spat Over
Tea Farm. Business Daily.
Kakuzi. (2013, November 19). About Us. Retrieved from http://www.kakuzi.co.ke/about-us
Kakuzi. (2013, November 19). Annual Reports, 2010 and 2011. Retrieved from
http://www.kakuzi.co.ke/investor-relations.
Kakuzi Financial Reports 2008 -2012
KHRC. (2008). A Comparative Study of the Tea Sector in Kenya A Case Study of Large Scale
Tea Estates. Nairobi, Kenya. Kenya Human Rights Commission.
Paul, N. R. (2005). Balanced Scorecard Diagnostics: Maintaining Maximum Performance.
Texas: John Wiley & Sons.
Ross, S. A. (2001). Corporate Finance (6th Edition ed.). New York: McGraw Hill.
Were, E. (2008, March 12). Kenya: Kakuzi Records Profit Despite Strong Shilling. Business
Daily.
Page | 32

ANALYSIS Kakuzi Report Final 2013

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Kakuzi Limited Analytical Report

ANALYSIS OF THE FINANCIAL HEALTH OF KAKUZI LIMITED

Kakuzi Limited Analytical Report

Kakuzi Limited Analytical Report

Kakuzi Limited Analytical Report

Vision And Strategy

Kakuzi Limited Analytical Report

The development of a worldwide group of businesses requiring management to take a long

The achievement of long-term shareholder returns through sustained investment.

Investing in the sustainability, environment and the communities in which we do business.

The summary code of conduct is to;

Understand and comply with all legal requirements

Be honest, open and co-operative with all regulators

Prohibit bribery in any form

Compete independently and not enter into any anti-competitive agreements

Properly record, report and review financial and tax information

Kakuzi Limited Analytical Report

Corporate Social Responsibility

Kakuzi Limited Analytical Report

Access to running, potable fresh water and foodstuffs

Access to primary health care for employees and their dependents

2.0 SWOT ANALYSIS

Product diversification: The process of expanding business opportunities through additional

Kakuzi Limited Analytical Report

Positive cash returns from cattle rearing venture.

Well developed and recognized brand.

Strong financial foundation.

Kakuzi Limited Analytical Report

Kakuzi Limited Analytical Report

Increasing their fresh pineapple exports from 5% to a higher value.

Kakuzi Limited Analytical Report

Threat of substitute products e.g. herbal tea.

3.0 BALANCED SCORE CARD

Kakuzi Limited Analytical Report

The Financial perspective

The Customer perspective

Internal Business Process

Learning and Growth

Kakuzi Limited Analytical Report

Kakuzi Limited Analytical Report

SOURCE OF ENTERPRISE SYNERGIES

FINANCIAL SYNERGY How can we increase the

businesses around a single brand, promoting

shareholder value of our Portfolio? To succeed

common values or themes.

financially how should we appear to our

3. Productivity strategy-Leads to Improved Cost

CUSTOMER SYNERGY How can we share the

consistent buying experience, conforming to

customer Interface to increase total customer

corporate standards at multiple outlets

value? To achieve our vision, how should we

3. Product / service attributes Customer

Kakuzi Limited Analytical Report

Customers,Acquire New Customers Retain

manage processes to achieve economies of

Existing Customers,Grow Business with

scale or value chain integration? To satisfy our

6. Environment,Safety & Health,Employment

LEARNING AND GROWTH How can we

2. Strategic Themes Provide leadership in

develop and share our intangible assets? To

complex organizations through the management