Feeds

12361 items (0 unread) in 79 feeds

Rants, Raves & Reviews

• February 24, 2009
• Kenya Airways - Oversold?

  Posted: February 24th, 2009, 1:59am EST

  Tags:  Rave  

  I was reviewing share prices vs reported book values & my own 'projections' of profits. So what follows are my own views/opinions.
  
  I will discuss the prospects of various listed firms as businesses with a discussion of the share prices as well. As many of you know I am a huge Warren Buffet fan so I hope I do him justice.
  
  Pick # 1 (BTW, WB does not believe in investing in airlines... I know, I know...)
  
  Kenya Airways (KQ) - Price on 24-02-2009 is 20/-
  
  KQ has faced a tough 3 years with the plane crash in May 2007 - this was at the peak for KQ - and then the hits started;
  - elections in late 2007
  - post-election violence in 2008
  - record high oil/fuel prices
  - global financial turmoil in late 2008 & continuing
  
  So the question is whither KQ as a business?
  
  Let's do a SWOT Analysis (I will update it as I get comments)
  
  Strengths
  

  1. KQ is among Africa's largest & strongest airlines. Dominant in E & C Africa.
  2. Strong Balance Sheet (Sep 30 2008) shows Kes 10bn in cash/liquid assets. Approx 20/- per share.
  3. National airline thus an advantage in getting airport slots in bilateral agreements.
  4. Privatized for over a decade. GoK owns 23%. KLM 26%. Better management vs government controlled firms.
  5. KQ can survive 2 years of losses while smaller airlines will collapse.
  6. Majority of the revenue is in US$, GBP & Euros.
  7. Aircraft have high fixed costs but deployment is flexible.
     

  Weakenesses
  

  1. Single hub (JKIA) thus exposure to local politics - see effect on KQ during Nov 08-Mar 09 election period.
  2. Inefficient hub (JKIA is controlled by the GoK) leading to inefficiencies.
  3. Reliance on government controlled entities for Jet A1 fuel. KQ faces problems sourcing fuel in various countries including Kenya, Ghana, DRC, Zambia, etc.
  4. Over-reliance on Europe for tourists. Credit crunch in Europe will hurt KQ.
  5. Inflexible (high fixed-cost) aircraft. Only 3 Embraers (E-190). The rest are Boeing jets.
  6. Higher cost airline with large(r), unionized & inflexible contingent of staff.
     

  
  Opportunities
  

  1. Africa, especially Sub-Saharan Africa (SSA), has the lowest airline penetration.
  2. Ineffecient government owned/controlled carriers (e.g. Air Tanzania, Air Zimbabwe, SAA) benefits KQ.
  3. Increasing African trade with the Mid-East, Far East, China & India will increase passenger & cargo numbers.
  4. Huge potential in tourism from the increasingly wealthier Chinese, Indians & Middle Easterners.
  5. KQ has become the 'local' or 'regional' airline for many SSA countries e.g. Lusaka-Lilongwe, Lagos-Abidjan-Monrovia, Accra-Freetown, etc.
  6. Global Financial Crisis will enable 787 deliveries to be made sooner than expected.
     

  Threats
  

  1. Ethiopian Airlines has a stronger pan-African presence & better global reach vs KQ. And it keeps growing.
     
  2. Airlines privatizing - or recently privatized - all over Africa including Air Tanzania, Air Uganda, Air Malawi, etc.
  3. New & expanding Low-Cost Airlines (Jetlink, Fly540)
     
  4. Low purchasing power in SSA means air travel is a luxury for 99% of the population thus limited growth in the next 5 years.
  5. High & volatile oil (fuel) prices.
  6. Low barriers to entry. Anyone can buy a plane (see Fly540, Air Uganda). Both in Kenya & in SSA.
     

  
  Financial Discussion
  
  

  • KQ has almost 20/- (per Sep 30 2008 balance sheet) in cash or near-cash. The 1H 2008-9 period was barely profitable BUT most other airlines made losses.
  • Oil prices were at their peak in 1H 2008-9 but they have dropped by 65% though KQ entered into unfavourable hedges which will continue into 2009. KQ will see benefits of lower prices in 2009-10.
  • KQ has been aggressively expanding in 2008. KQ will continue expanding into Africa & globally in 2009:
    

  1. Dhaka (Bangladesh)
  2. Kisangani (DRC)
  3. Libreville
  4. Blantyre (Malawi)
  5. Malabo (Equatorial Guinea)
     

  The good news for KQ is that they can easily discontinue loss-making routes while open new routes rapidly provided they have agreements in place.
  
  So the business is OK. Sustainable. And growing 50% over the next 3-5 years.
  
  Earnings: KQ barely managed 1.59 for 1H 2008-9. I expect a better 2H thus at least 3.50 for FY 2008-9 which leads me to say BUY.
  
  PE = 6x which is great. Cash flow will be lower as KQ spends to expand.
  PB = 0.5 (Kes depreciation has boosted value of aircraft/assets but note an offset for US$ loans/liabilities)