NSE weekly: KQ cut up by a hedge, CEO Mahinda's exit & others

NSE has started catching fire and should hit 3,000 before end of June as fund managers close for interim reporting. Discerning investors who conquered their fears in March are of course exiting into still underpriced shares... UK investors note £/Ksh rate is now Ksh125 (was 128 earlier in the week) from its strong Ksh114 earlier.

Results & Announcements:
The headline will be that KQ posted an eye-watering loss for 2009 (the largest in Kenya's history?), but

• Turnover was higher than prior yr across board though some of this was due to the slightly stronger Ksh over the period
• Passenger numbers were either higher or flat in all the its flight regions
• If you remove the hedging strategy's P&L impact from both yrs, KQ had a higher PAT than 2008

However,

• operating profit was lower driven by higher costs, which is not good especially if the $ strengthens this year
• the hedge was/is a mess and there is no getting around that. Mark to market is not the issue because that is international accounting standard. KQ would still have incurred the realised losses of Ksh1.4bn. You can't hedge a large portion of your fuel for 3yrs at $120 when the oil price has never gotten that high before. It’s similar to the way you won't buy a share at near its highest price. A 6 or 12 monthly rolling/calendar hedges might have been more ideal to allow recalibration of KQ's hedging strategy to oil futures.

So how did Virgin make a profit where BA and KQ haven't? Well, it didn't under IFRS but it did under UK GAAP (its a private company so can do this), which still allows hedging revaluation movements to be done via balance sheet and STRGL as opposed to P&L. DPS is Ksh1 and payable in October... Share price tanked initially but recovered to close down 15% for the day at Ksh20. Going forward, KQ will probably take a hit of a similar magnitude of released loss on its hedge, will have a lower unrealised loss (a round number would be Ksh1.5bn assuming oil prices stay at current levels), and should see continuing improvement in its BAU revenue for this year.

EABL's CEO Gerald Mahinda move is a bit strange. He has presided over a very successful spell at EABL and its a bit of a surprise he wasn't given a bigger job as say MD for the African operations. His replacement seems a relative novice into the Kenyan market. An opportunity for Keroche?

Macro:
Economy will move sideways this year and with remittances down expect interest rates to have to rise at some point to help bridge the budget gap.

FTSE and other markets:
Staying well balanced. Barclays went down well below £3 as expected but has since resurged as it confirmed BGI sale. Next test for all banks is the performance of govt bonds which may end up forcing interest rates upwards.

NSE Update- technical hitch gives way to bounce

The NSE was a one way bet, until the "technical hitch" on Thursday. Even the papers had the quotation marks around the technical hitch. Equity for example had 1 share in demand for every 8 suppplied on Wednesday. On Thursday after the " ", the ratio was the almost the same but opposite. For Equity, this sounds okay given it had just announced very good results, but AK, KCB, EABL and others didn't announce their results on Thursday. 2ndly yesterday was a surprise, because although Equity announced its results on Thursday morning, the 10% rule was lifted yesterday. In any case, my take is the two days rise was aimed at Co-op IPO and investors (as opposed to speculators/traders), should eiether step in slowly or wait for a full week of solid volume rises.

Results announced in the last week:
KCB- up 69% yoy driven by strong F&C and strong jaw effect between costs and income. Flat vs. Q2.
DTK-up but can't locate its results
KQ-down 63% yoy, but a commendable perfomance in respect of growing revenue in the first half despite everything. It must get its customer service and hedging right to recover. Really needs a new CEO.
ARM-up 15% yoy on similar turnover growth. Cash flow a bit stronger after loan.
Equity- up 277% yoy for the 9 months driven by Safcom IPO and Ksh0.2m higher than my forecasted fall from Q2.
HFCK-up 36%, Equity has a 20% stake and is in my view, unlikely to take a bigger chunk of HFCK for the time being.

Elsewhere, EA Cables appointed James Mworia, a young guy from TC as its new CEO (apparently).

Thursday shorts

I guess the fact that she has been doing the job fairly competently (and anybody would be compared to Ntamani) should have and has given her a head start for the real position. Insiders will be happy because they are familiar with Stella Kilonzo, but for us investors, I think the preference would have been for an unconnected but knowledgeable individual to guide the markets to the next stage. In anycase, its good to have a lady at the top and I hope she positively surprises...

I thought KQ would tank in its full year PAT given the problems its had (accident, customer service, Virgin), higher oil prices and so forth. Lakini, I think the stronger shilling in the 2nd half of the its financial year helped (I believe KQ normally hedges against a weakening shilling) as did its oil-hedging (fuel expenditure was flat yoy). If you take into account 30% flight occupancy for the Jan and some of Feb, the numbers are very good.

Safaricom continues to find its way downwards. A strong case of not letting in FFIs who think 20% in three months is excellent return and bolt as soon as they get it. I still haven't taken a position. I check bids/offers courtesy of rich.co.ke and they still don't make pretty reading. The price will get to a stage I just have to go in. Safcom has much better fundamentals than a whole slew of other counters. I still recall the fears many had about AK last year.

Fascinating story brewing here. ARM is the young soldier, the pick of the 3 cement counters. But Bamburi is the aging gorilla with 15% stake.

A short history of Kenyan IPOs: Lessons and reminiscences

KCB: Listing price Ksh20 in 1988. Suffice to say that if you were shareholder in 1988,you most likely would have lost your hair but made good evenutally as the stock is KSh24 (after many rights, additional divestures and spilts). Was the 1st GoK privatisation.
NBK: Listing price Ksh10 in 1994. Even with a 2nd GoK divesture in 1996, has posted 400% returns for IPO investors despite its dismal perfomance profits-wise. Thanks Jimnah.
Kenya Airways: Listing price Ksh11.25 in 1996. Its IPO was the Safaricom of its day and has salutary lessons for us all. Its listing in 1996 saw 110,000 new investors (was a huge number in those days) and was the first by an African Airline. Within no time and helped by Goldenberg, drought and moi-economics, the economy was in ICU. KQ's shares went down to KSh6 andwere stuck there for a spell. Investors slashed their wrists and vowed never again until KenGen IPO came along.
KenGen: Listing price Ksh11.90 in 2006. This IPO ushered the new era of NSE complete with CDSC accounts, investors increasing to 500k+ and was the first IPO I took part in. Perhaps due to the absence of IPOs for along-time, lessons were learned by all
                
                  *Don't make IPO a free-for-all, you'll end up high investor expenses from annual reports, AGMs and                     the like
                   *Share price will stagnate due to liquidity glut
                  * Do price it low
                  *Every investor will see profits and jump, cue oversubscriptions and interest-rate earning for brokers

ScanGroup: Listing price Ksh10.45  in 2006. With lessons learned, guys jumped and made a mint (some 300%). The share still has way too many investors. I have cashed out after getting frustrated about the stagnant price.
Everready: Listing price Ksh9.50 in 2006. A lemon among the recent IPOs. And most knowledgeable investors new it before it listed and thus went in for speculative purposes. Its high lasted a month before plummeting below IPO price where it has refused to come away from. I sold at around KSh18 for one my cdsc account and was flat on another due to lax broker nonsense.
Access Kenya: Listing price Ksh10 in 2007. Although I've made more money from others, this one I am enjoying because it has something of a schedenfraude about it. Firstly, many trashed it on the basis of the forthcoming fibre optic and Telkom's takeover by French Telecom. Secondly, the upside is so huge that I won't be surprised if it reaches mid 30s by next year. Beyond that, it's all about how well it adapts to increased competition, but I am sure it will.
Kenya Re: Listing price Ksh9.50 in 2007. Companies were now wise to the ways of retail investors and restricted their participation. This has ensured that the upside seen in the share has stayed as institutional investors are long-term. But will that last if KRe doesn't change its pre-IPO ways and given this Jan/Feb claims? I am still holding a small portion though I may dispose once I get a dividend for 2007.
Safaricom: Listing price Ksh5.00 in 2008. I hope many can see a pattern emerging in all the preceding IPOs. So judge Safcom as you'd any other share. That way, you'll invest on the basis of its fundamentals which will either look strong or weak. If you think it's strong, why buy for speculative purposes only to go for it later when it might have doubled in value? If you think its weak, then you better review your exit strategy once you know the allocations and especially for the QII and foreign investors. As well as the cabinet composition. If either or both has  massively oversubscribed and cabinet is kosher, you are in the money . And out of the money if v.v.

KQ, minted stockbrockers, REITS

It doesn't rain, it pours is apparently KQ's new mission statement. OK, things have been tough because of the political quagmire, lakini, its managed to lose practically its top management with no CFO; HR director(i hear there was a change); commercial director; no flights manager; no technical director. Do they all know something that we don't? Now even Paris flights are a
are likely losing it money. I have posted before on its pre-crisis issues. I passionately believe in KQ, but we now need a change of leadership, because that is where
the buck stops. Let it get someone who can steer it through the next year operationally so it'll be ready as the economy takes off.
For every Francis Thuo and Nyaga stockbrokers, there is a D&B and CFC, two brokers that though not on the straight and narrow take home some serious revenue from buying and selling yours and my shares. Stockbroking should be the one business in Kenya that should bankable year on year if you don't do anything stupid. Truly, IF is a big word.
It’s pleasantly surprising to see that Rutleys still plans to go ahead with its property fund and may even list as a REIT
if and when CMA wakes up from its slumber and decides to allow them. Bora Capital another property fund venture has gone quite despite interest from
many including in the Diaspora.

Friday Shorts

The French have a healthy contempt for the English and the Anglo-Saxon economic model. Jérôme Kerviel is thus a hero in France because he brought down the model in France. In the UK, they are saying he went berserk because he was working long hours for a Frenchman-30 hours per week.
Check this though, according to the FT;

• Check this though, according to the FT;
• Kerviel’s positions' loss before being discovered ($1.5bn)
• SocGen's loss due to sub-prime write-offs ($2.0bn)
• SocGen's loss due to unwinding of Kerviel 's positions ($3.4bn)
• So who should be fired and in the dock?
  
  

KQ has done the right thing by seeking to cut its costs in a period where its seeing 15% capacity in its planes. Anyone running a business will tell you, profit equals revenue less costs. If revenues are falling, you cut costs to maintain profitability. Should it get to Ksh40, it'll be tempting to get into.

Here is a paradox, I keep hearing that Nation's balanced approach to politics is unpopular and has led to lower sales, yet every time there is a breaking story you can't get into its website? Que?

Speaking to Nak-based cousins last weekend, I was worried by how fatalistic they sounded about the wars in their backyard. Both are businessmen so I really thought things were done for our economy. Lakini something tells me we may have turned the corner after we stayed at the abyss and didn't like what we saw. In which case, this was a prime buying week at the NSE. Imagine BBK at Ksh64!

EasyCoach's cancellation of its service to Western Kenya and resultant job losses, makes me question the whole barricade brigade. Who will suffer most if you can't get goods or services into your region?

• 
  

Kenya Airways: Troubles of its own making?

I've been unable to find a right entry price for KQ over the last 12 months because every time I considered doing so, there was an issue that meant the price fell.

1. Virgin's entry
   
2. The corporate email that was leaked
3. The clash in Cameroon
4. Disappointing final results for FY 2006
5. Likely disappointing results for first half of 2007/2008 financial yr.

Having travelled home with them, I can attest that most of the problems look to be internal and may require a new CEO to turn things around. On the outbound journey, we had one hour delay in boarding and an additional half hour to fuel the plane. We only got told about the "fueling". We then got onto the runaway, but couldn't take off because there was a problem with the starter. That took an another one and half hours to fix. We eventually took off 3 and half hours late. KQ would have incurred a fee for being late in taking off and presumably another for landing late at JKIA. Coming back we were an hour late boarding. For lunch, you could have any meal as long as it was beef. So repeat business will be hard for it to get especially on its most important routes revenue-wise.
On the issue of losses due to the weaker dollar, what not trade in more than one currency? Oil prices are harder to deal unless you hedge well.
Bottomline: Change CEO or some of the other managers; reduce routes if unable to run all them profitably or things could go Uchumi-way.

KQ-where to next?

1. 19% fall in PAT for the first half after last year PAT fell
2. Rivals eating into its lucrative EU route
3. Delta to start direct flights from USA
4. Cargo revenue being nibbled by Qatar and others
5. Fuel prices going up so will hit the 2nd half
6. Costs to repair customer service and loss of staff

Where is the good news for our fine Airline?

• Africa routes-but we move fast and qualitatively consolidate the routes we've got so far and others
  
• Persevere with Far East markets
• Price smartly e.g. cheaper weekday flights from Europe
• How has Delta been able to fly into Kenya if US is concerned about JKIA? There is a case for GoK to intervene and get KQ the same status

Price Comment: Price will find its floor over the next 6 months.

NSE: A preview of H2 07

July to Dec will likely be dominated by the slated IPOs namely Kenya Re, Safaricom and far-fetchedly, (NBK, Telkom) and the General Election. Analysing these and their likely impacts:

Kenya Re: As Kenya Re is using an AccessKenya type of IPO mode, this will lock out some of the speculative retail investors and will also reduce the upside expected. Its unlikely that Kenya Re will have a strong downward impact on the NSE. But bear in mind that with previous oversubscriptions, overextended refund periods, the retail sector are becoming increasing choosy about IPOs. Verdict: minimal downside impact on NSE index.

Safaricom: GoK will be under immense political and public pressure to do this IPO as a free-for-all i.e. similar to KenGen. If it does, the NSE may well see counters falling by 5-10% as liquidity dries up. But, will GoK allow the wider market to fall at the expense of putting smiles on the same folks? Yes/maybe. Bottomline: expect some impact on NSE counters

General Elections: Impact has been -ve in past elections with some correlation being seen when there has been uncertainty as to the new head of state. This time will be no different except that it should be clear within July/Aug how bad the impact will be on NSE. At the moment, the political consensus is that IF the ODM house gets itself in order and unites behind its candidate, there might be a real political contest in which case expect some downside on the NSE.


Other highlights will be the interim results of various shares, especially Equity (can it double Q2 profits to justify current multiples being reflected in its share price?), EA Cables, NBK (will they get any uplift from the npl pay-off as alleged by some?) and KQ (any impact of accident?) and will Mumias give its long-suffering shareholders some +ve news by releasing improved FY 06 results. Also, in the frame will be M&A in form of CFC Stanbic who its clear they have done their homework in terms mitigating against BOC/Carbacid-type of hold-ups. As well as Equity/HFCK?

Results Catch-up

KCB: saw 38% rise in Q1 after tax profits helped by strong loan growth (ksh16bn year on year (44%)) which drove 22% rise in interest income and 24% growth in Fees and commissions. Gratingly for those who like to see banks doing their intermediary role, KCB is driving loan growth forward without concomitant rise in loan loss provisions. KCB’s current momentum (it plans to open 10 new branches every year and expand regionally to Sudan, TZ and Ug in that order), explain the recent share spilt.
Equity: A doubling of income (both interest income and fees) led to a massive 226% rise in PAT from prior yr’s Q1 and led to questions about sustainability. The bank has now acquired a ksh6.9bn loan to help further expansion as it looks to enter the mortgage sector.
NBK: Saw Q1 PAT fall by ksh7m to ksh152m on falling net income. NBK has finally had ksh20bn of its Ksh33bn NPLs written-off by GoK. Though there will be no immediate impact, earnings will improve in the long-term as a cleaner balance sheet allows it to lend more. This will and is atracting speculators in the short-term.
KQ’s 15% drop in PAT for FY was a surprise when it shouldn't have been i.e. CEO Titus had flagged this earlier in the yr. The surprise was in the reasons for the fall (weaker dollar and fuel costs). The dollar is weaker compared to prior yr, but was only below the average rate of 72 for around 2 months of KQ's financial year. Fuel costs can be hedged to a large extent.
DTK: After tax profits doubled from year earlier with strong income on a growing loan book supported by only a slight increase in expenses . DTK is issuing a rights issue for its TZ business.
Its AKD stable mate, Jubilee also announced FY which grew by 51% on growth across all income streams. For its shareholders, there is a final dividend of ksh3.25 and 1 for 4 shares held bonus share issue to look forward to.
Finally, NIC Bank's strategy of niching the market seems to have paid-off in FY06 with PAT growing by 59%. NIC continues to innovate and its contrary strategy means it will make money at times when others may not. As with other growing medium-sized banks, NIC will need to recapitalise at some pt (possibly via a long-term loan or rights issue) as affirmed by Fitch ratings agency.

Shareholder Activism?

Just imagine that if it wasn't for The Children Investment Fund (TCI) increasing their stake in ABN Amro to 1% and demanding that the bank either breaks up or looks for a merger, ABN Amro would today still be serenely going about its business as only the Dutch do. Tomorrow, Barclays will most likely confirm that it has agreed to merge with ABN Amro, thus acting as a white knight to save ABN Amro from being broken up. And its not as if the ABN was underperfoming, only that its strategy was not clear.

Today there are Kenyans who hold large but minority stakes in some of the top NSE stocks, the question is, would they demand for example that KQ fires its head of customer service following recent poor pefomance in this area? Or could Transcentury demand the cancellation of Manitoba's management contract with KPLC due to continued underperfomance? Only time will tell...

SNO woes, KQ hits turbulence & the Aburiria Nation

The announcement that Reliance didn't make the deadline to buy the SNO licence is quite depressing on two fronts, its implications for growth of internet and the outsourcing business and an indictment of the govt's tender process. Even if the choosing the appropriate company to award the tender is tricky, one part of it should have been easy, if you require that all the bidders have to have a Kenyan partner-why not do separate tendering for potential Kenyan partners and then encourage the bidders to pick from the list?
Having travelled with Kenya Airways in the late 1990s and then more recently, last week's announcement of performance woes wasn't much of a surprise. In 1990s, KQ had great staff, great check-in, strawberry and cream, fair competitive price. Fastfwd to more recently, patchy food, nightmare lose of luggage, overbooked check-in from JKIA, some of the highest prices on the London-NBI route. KQ has ridden on that "Pride of Africa" for too long. Richard Branson is coming in not just to compete with BA for the Heathrow route, but with Emirates/Qatar for Asia routes and KQ for the African routes. Come on Titus!
Titus (Tajirika) features prominently in the Aburiria country, the "imaginary" country of Ngugi wa Thiongo's newish and lol Wizard of the Crow. Read it!