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How NMG played tricks to avoid 2017 profit warning

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[dropcap]A[/dropcap]s the Nation Media Group (NMG) announced further restructuring of its operations on Wednesday, a dirty little secret emerged showing the extent to which its business has sunk.

Business Today has established that 2017 could turn out to be the worst year for NMG, which has been churning out billion-shilling profits for some time now. In fact, according to highly placed sources at Nation Centre, the current retrenchment had been planned for late last year, but was pushed to January 2017 to save the company from a financial dent that would have seen it issue a profit warning.

Sometime in October, the company’s CEO Joe Muganda approached the board with a proposal to lay off staff. It looked the only way out for a company struggling to grow revenues.

After the maths was done, it emerged that the whole process would cost it Ksh 200 million. When this was balanced against the projected profit for 2017, it became clear that such a significant expense would shave off a huge chunk of its earnings, pushing it into the threshold of issuing a profit warning to investors.

For a blue-chip listed company such as Nation Media Group that prides itself in being a pace-setter, issuing a profit warning would have been embarrassing to both its management and board. The board considered the erosion that such a move would visit on the Nation brand and decided to postpone the retrenchment to this year, when it would have enough time to manage the expense.

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Outgoing Nation Media Group CEO Joe Muganda. He resigned last month to take up a job as Vivo Energy Managing Director after a tough year at Nation Centre.

Companies listed at the Nairobi Securities Exchange (NSE) are required by Capital Market Authority rules to alert investors/shareholders if earnings are projected to fall by at least 25%.

It was a tough year for media houses and even Standard Group, Nation’s main rival, issued a profit warning for 2017 early November, the second time in three years citing “prevailing adverse market conditions in the second half of the year” particularly in August when the country went to a protracted General Election.

SEE: Watching the watchdog: media madness on the spot

Standard, it seems, however, factored in the cost of its retrenchment, which was executed in December.

The situation the Nation finds itself in is not surprising, given that its 2017 half-year pretax profit to June grew by a mere 2.3% to Ksh 1.17 billion, reversing a drop in the previous year. In other words, profit growth for the year nearly stagnated. The second half of the year was worse as politics slowed down advertising from mainstream government ministries and semi-autonomous agencies as well as the private sector. Expending Ksh 200 million would have obviously cut down the profits drastically.

Finding itself in this unfamiliar territory, the board switched on its alarm bells and the CEO started feeling more hit to explain why revenues had drastically tanked. Barely two months later, Joe Muganda threw in the towel, surprising the market by resigning before his contract ended.

READ: Politics and debt threaten Kenya’s growth


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