Life suddenly hard for CEO who earns Sh1 million per day

Will Centum Investment profit warning be the beginning of the end for the generous compensation packages for management?

The CEO who earns Ksh1 million per day has just been hit by the hard reality of business life: what goes up must come down. James Mworia, the CEO of Centum Investments has been forced to announce that the earnings of the company that pays him Ksh375 million per year will drop so significantly that investors must take caution.

In financial terms, Centum has simply issued a profit warning. Which means its profit for the year ended 31st March 18, will be at least 25% lower than the previous year’s. Not that issuing a profit warning is anything strange. After, all over a dozen companies listed at the Nairobi Securities Exchange (NSE) did so in the last financial year.

But this is Centum – which is seen in the market as a money machine – and it’s owned by one of the richest Kenyans and most flamboyant businessman in the country.

When you are used to making piles of cash, accepting, let alone talking about, a major decline in profit can be hard to swallow. That’s the unenviable situation that Mworia, arguably the highest paid CEO in Kenya, finds himself in. The young CEO, in his thirties, earned Ksh375.6 million – or approximately Ksh1 million per day – in the year ended March 2017, 87 per cent increase from Ksh201.1 million in 2016. In total, Mr Mworia has earned nearly Ksh1 billion for the last eight years.

Will this profit warning be the beginning of the end for the generous compensation packages that Centum shareholders, led by the principal owned Chris Kirubi, have been lavishing on the management? When it comes to rewarding great performance, no company beats Centum.

In June 2016, Centum staff were awarded a hefty Ksh1 billion in bonuses barely eight months after the company had rewarded about 90 employees an equivalent of Kshh11 million after a sterling performance with top executives getting an average of Ksh34 million.

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Mr Kirubi is the single-largest shareholder of Centum Investments with a 28.64% stake. For years Centum’s boat has been cruising, fueling a wave of pay increases and bonus for Mworia and his army of managers. This, it turns out, egged them on. They worked smarter, even harder, turning in profit increases and stimulating the owners to open their wallets wider.

The company has invested in a number of businesses across various sectors including real estate, health, financial services, energy, ICT, fast moving consumer goods (FMG) and more recently, education.

But as they say nothing lasts forever. The Group’s earnings machine appears to have hit a speed bump and profit after tax declined by 16% in 2017 on account of lower gains on disposal of investments compared to the previous period realised gains to stand at Ksh8.3 billion down from Ksh9.9 billion.

Fast forward to 2018 – and the reverse gear is engaged. The company on Friday 11th May 2018 issued a profit warning, stating its net earnings for the year ending March 31, 2018 will be at least 25% lower than those posted for the year ending March 31, 2017.

In a notice to the Nairobi Securities Exchange (NSE), Mr Mworia said the expected decline is mainly attributed to valuation of investment properties and ‘exit’ transactions. As at noon on Friday, the Centum share price was down by more than 9% following the profit warning announcement. Investment firm Centum’s share price dropped by Sh2.50 Friday, selling at an average Sh38 from the Sh40.50 it traded in on Thursday. Centum is also listed on the Ugandan Securities Exchange.

“Although our investment properties recorded a gain in value in the year ending March 31, 2018 this gain was lower than that recorded in the year ending March 31, 2017 which is consistent with the performance of the Kenyan real estate market where real estate generally and investment property in particular appreciated in value at a lower rate in 2017 on account of the political environment and the reduced access to credit by the private sector,” Mr Mworia said in the profit warning announcement.

He noted, however, that Centum has seen increased market activity and interest since the beginning of this year and has put in place a robust investment programme focused on delivering market validated real estate products in its three development sites. He also says the decrease in revaluation gains has no impact on cash flow generated from operations.

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On the other hand, Mr Mworia says that in accordance to prudent accounting rules on revenue recognition, the company has not recognised realised gains from disposal of investment for transactions that were signed in the year ending March 2018 but which had not been concluded by 31st March 2018. Those gains will be booked in the financial year ending March 31, 2019.

“The combined effect of the lower property valuation gains and deferral of recognition of realised gains will be a decline in the Group’s consolidated net profit by at least 25%. Adjusted for the effect of the two items, profitability would have remained largely at the same level as the prior year,” he adds.

Centum 3.0 strategy

He, however, says Centum does not expect that the decline in reported earnings will have an impact on the anticipated divided declaration for the financial year ending March 31, 2018. But then it may negatively impact on executive compensation especially the bonuses.

Mworia also says the company in on track in executing its Centum 3.0 strategy that covers the period 2014-2019, adding the growth outlook for a majority of the underlying companies in its growth portfolio is positive and they have developed a robust dealing pipeline for the new financial year.

Well, the market will be keenly watching what Mr Kirubi, now undergoing cancer treatment, will say about this at the company’s annual general meeting.

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