- The All Share Index eased by 0.8% to close the day at 137.81. We partly attribute this to losses on Safaricom (1.2%), EABL (1.1%), Coop (0.4%) and KCB (0.3%).
- Kenya Airways was among the top losers of the day, declining by 22.0%. We attribute this to profit taking activities which were exacerbated by the announcement of its dismal FY2019 financial results. The airline’s after-tax loss grew by 71.0% y/y to KES 13.0 billion (see below for more on the financial results).
- Equity Group (+4.8%), however, was among the top gainers on increased investor demand as investors took advantage of yesterday’s price slump.
Kenya Airways Loss Widens by 71.0% for FY2019
Kenya Airways after tax loss widened by 71.0% y/y to a KES 13.0 billion from an after-tax loss of KES 7.6 billion in FY2018.
According to management, the loss was partly due to adoption of 1FRS 16 and an increase in operating costs associated with a 15.0% increase in capacity (deployed to offer increased connectivity between city pairs and investment in new routes).
Total income edged up by 12.4% y/y to KES 128.3 billion (FY2018: KES 114.2 billion). According to the airline the growth was due to improved passenger revenue (+8.9%), cargo revenue (as cargo tonnage grew by 6.3% to 68,264 tonnes), ancillaries and other revenue streams. This was primarily owing to expansion of the Kenya Airways network.
Following the expansion to Geneva, Rome and Malindi, passenger numbers grew by 6.7% to 5.1 million passengers. The increase in passenger revenue was further driven up by New York operations. Moreover, capacity deployed in Available Seat Kilometres (ASKs) increased by 15.0% while the Cabin factor registered a minimal decline of 0.6 points to 77.0%.
Operating costs rose by 12.5% y/y to KES 129.2 billion. This was attributed to increase in capacity deployed and an increase in fleet ownership costs attributed to the return of two Boeing 787 aircraft that had been subleased to Oman Air. According to management, the airline benefitted from the reduced global fuel prices and maintained low fuel costs through its hedging program.
Consequently, the airline recorded a 24.9% y/y growth in operating loss to KES 853 million.
Other costs edged up by 74.8% y/y to KES 12.2 billion (FY2018: KES 7.0 billion). Interest income fell by 33.3% y/y to KES 30 million.
The airline expects that it will take a year to gain traveler confidence and recover travel demand in light of the Covid-19 pandemic. From 25th March most of its operations were suspended.
As noted previously, the airline has been grappling with increased competition and high operating and financial leverage. The performance reflects these challenges facing the airline.
Our biggest issue with the company is the lack of a clear long-term turnaround strategy. However, according to the Business Daily, a legal framework for the airline’s nationalization will be discussed in Parliament in the coming week. This may form the first step towards a more comprehensive action plan for the recovery of the airline.
The nationalization could be the reason for the recent increase in speculative activity and price gain (though the nationalization was not non-public information). We urge caution when trading on this news. The airline has been surviving on the government’s goodwill. In our view, the share price reflects mostly this government goodwill. In buying out the other investors, the government may consider previous initiatives to keep the airline afloat and the current financial condition of the airline.
Long Term Buy- KCB, Equity, Absa, Stanbic
Sell- Stanchart, Bamburi, KQ