Where Samruk-Kazyna's 2015 Profit Came From

PR is a delicate business

Yesterday the Samruk-Kazyna (SK) group of companies presented its 2015 performance report.

Read superficially, it is hard not to be amazed at SK's efficiency: in a crisis year, it managed to post a profit.

Corporate governance has a basic conflict between shareholders and management. Management always strives to show positive short-term results, while shareholders look more at the company's capitalization, since what they want is a return on the funds they have invested.

Let us go through the main points SK published yesterday and the reasons behind each increase.

Consolidated net profit increased by 30 percent to KZT 304 billion.

Let us see what drove the increase in profit.

Revenue grew only slightly, by 3.8%, mainly because of the devaluation of the tenge.

At the same time, the cost of goods sold rose by 5%, and as a result gross profit fell compared with 2014 to KZT 404.7 billion.

The cost of goods sold includes only direct production costs and production overheads.

Now, line by line:

General and administrative expenses came to KZT 380.5 billion, up 6.7 percent on 2014. The main increase came from accrued fines and penalties of KZT 49 billion, as well as from higher salaries and consulting expenses!!!!

Expenses fell as a result of cuts in sponsorship and in taxes.

Next, transportation and selling expenses fell by 35 percent in 2015 to KZT 211 billion.

Next, impairment losses declined. In 2014, impairment amounted to KZT 292.2 billion. Last year it amounted to KZT 382 billion.

Impairment is a rather abstract thing. In reality, if one follows the rules, the figure should be higher, but as a rule management tries to minimize these charges and argues to the auditors until the very end that everything is fine.

Impairment is a direct indicator of management's inefficiency, since it occurs mainly because fixed assets were bought at inflated prices, because the business was misconceived, or because the company dealt with sham enterprises.

All of this falls within the competence of management.

According to the financial statements, in 2015 the largest impairments were on Kashagan (KZT 69 billion), Kazakhturkmunai LLP (KZT 44.9 billion) and Atyrauneftservice LLP (KZT 33.4 billion).

Silicon production accounted for KZT 19.2 billion.

Impairment of VAT came to KZT 54.5 billion (most likely owing to sham entrepreneurship, but this needs to be verified).

Impairment of interests in associates came to KZT 38.3 billion.

In short, we need more information on impairment, and it has to be looked into.

In total, the operating loss was KZT 481 billion, which is of course better than the 2014 loss of KZT 569 billion.

If we exclude impairment, which is a non-cash and rather subjective item, the loss in 2015 was KZT 187 billion, versus KZT 263 billion in 2014.

It must be said that the smaller loss in 2015 was driven by lower selling and transportation expenses. But it is too early to celebrate. A detailed breakdown of selling expenses shows that they consist mainly of rent tax and customs duty payments, which do not depend on management's efforts: they are set by the Tax Code. If we strip out the reduction in taxes, transportation and selling expenses come to KZT 85 billion against KZT 84.7 billion. In other words, the cost reduction came solely from the lower tax component, because rates fell along with oil prices. Nothing more.

So if we remove all of these factors and leave only what is attributable to management, we see higher production costs, higher administrative expenses, and transportation costs staying at last year's level.

Let us move on.

Finance costs rose, as did finance income.

We will not look at other income and expenses.

Income from associates fell from KZT 457 billion to KZT 149 billion. The main reason was the drop in oil prices.

And then there is the item that gave SK its profit: a foreign exchange gain of KZT 683 billion!

I think the credit here goes more to KazMunayGas Exploration Production (KMG EP), which did not convert its money from dollars into tenge and so earned an enormous exchange gain.

Income from discontinued operations also boosted profitability. Incidentally, in 2014 discontinued operations likewise pulled the result into positive territory. In 2014 they brought in KZT 714 billion; in 2015 the figure is more modest, at KZT 261.6 billion.

In 2015, KMGI, in which a 51 percent stake is to be sold, was classified as a discontinued operation.

This, roughly, is how the Samruk-Kazyna group's results are produced. On paper everything looks beautiful, but the beauty comes solely from lower taxes and foreign exchange gains.