Market Brief:
- The All share index by 0.9% to 139.42. This was partly due to significant selling pressure (mostly from foreign investors) on several large cap counters, notably Equity, Safaricom and KCB. We attribute this to profit taking activities but recommend investors with a long-term outlook and with no liquidity constraints to take advantage of such price declines.
- Kenya Airways (KQ) maintained its upward price momentum on the back of higher speculative activity. This activity has been spurred by the recent price decline and some positive news on its cargo business as Europe re-opens. We caution investors that KQ’s growth prospects are still bleak.
News Highlights:
Sameer Africa Discontinues its Tyre Business
Sameer Africa announced that it has resolved to cease its tyre business.
According to the company, the decision comes after several changes in business operations and strategy failed to improve the performance of the tyre business.
The closure is expected to result in the termination of employment contracts of approximately 73 employees (in both management and union cadres).
The company estimates that the closure costs will amount to approximately KES 223.0 million (KES 60.0 million for staff redundancy costs and KES 163.0 million for impairment costs on fixed assets).
As at the end of FY2018, the tyre business accounted for 88.4% of the company’s revenues.
With the closure of its unprofitable tyre business, the company will continue to operate solely in the property rental business.
The company expects the decision to improve financial performance with FY2020 profit projections of KES 69.0 million in FY2020 and KES 185.0 million in FY2021.
Commentary:
Whilst the exit offers the company an opportunity to focus on the property market, we are concerned about its ability scale this business especially in light of the expected decline in economic activity in FY2020 and the challenges facing the property market (oversupply).
This announcement also brings out the challenges facing of some of players in the manufacturing sector. Eveready East Africa followed a similar path. Other companies such as East African Cables are facing financial difficulties and may end up facing a similar fate.
Kenya Airways Seeks KES 7.0 Billion from Treasury
According to the Business Daily, Kenya Airways (KQ) is seeking KES 7.0 billion from Treasury to cover maintenance of grounded planes and operating expenses (such as salary payments) as the airline’s revenues contract due to the Covid-19 pandemic. The airline is also looking to get tax breaks and waivers on navigation and landing fees.
KQ had previously received KES 5.0 billion from Treasury in February for maintenance, operations and funding of fleet engines overhaul.
Commentary:
We expect KQ’s top-line growth to weaken owing to lower passenger revenues following flight restrictions that have arisen from the pandemic.
In addition, despite the airline converting grounded passenger planes for use in cargo shipments (the existing cargo fleet is small and can only fly relatively short distances), we expect this will not be adequate to supplement income especially as it faces competition from other airlines such as Ethiopian Airlines.
We note that private sector lending is currently skewed away from sectors highly affected by the pandemic (such as the airline industry, tourism etc.) and may not be a viable option. Government seems to be the only option but with competing needs, there is a risk that government may be forced to re-look at its commitment to the survival of the airline (similar to South African airlines).
In sum, the airline has been grappling with increased competition, mismanagement and heavy reliance on debt as revenues fail to cover expenses. We opine that the pandemic will only worsen
bottom-line performance for the airline. There is also no clear long-term strategy to reverse the fortunes of the airline. We therefore recommend a SELL on the counter.
Recommendations:
Long Term Buy- KCB, Equity, Absa, Stanbic, NCBA
Hold- Safaricom
Sell- Stanchart, Bamburi, KQ