Monthly Archives: April 2012

Reading the Kenya Airways Tea Leaves

Today is the last day of the Kenya Airways  rights issue in which they are seeking to raise Kshs 20 billion ($240 million) from shareholders.  The 35-year-old company is  one of the most-talked about companies in Kenya mainly as as a model of privatization gone right.

The airline which dubs itself The Pride of Africa has set out to branch out across Africa and cover every African capital, but has also had to fight a rearguard action from a handful of local airlines and gulf carriers.

The information memorandum is about 236 pages, but with most of the data in it one year old, relating for the financial year that ended in March 2011. Also, there have been no stockbroker reports about this rights issue.

Shareholders:

  • The company has 73,612 shareholders (old data)
  • The authorized share capital of the airline  is Kshs 10 billion (102) comprising 2  billion shares with a  par value of Kshs 5. 461 million have been issued and in 2011 shareholders had a return on equity of 15%.
  • Approval has been obtained from the stock exchanges in Tanzania (page 130) and Uganda  (page 127) where KQ” share are cross-listed.
  • The directors’ shareholding is listed (98) and they don’t own much in the airline while the CEO does not own any shares in the airline (odd as the marketing camping exhorts Kenyans to invest in the pride of Africa) and this does not bind the CEO to improve the share performance of the airline.
  • For any KQ shareholder who does not participate in their shareholding will mean a substantial dilution in their shareholding (93) and this has been enumerated in a court case where a shareholder sued the airline to stop the rights issue.

Rights issue:

  • Proceeds of the rights issue will be used to make pre-delivery payments (28) for aircraft  between June 2012 and March 2013  and pay down some unsecured loans.
  • The success level of the rights issue is to raise Kshs 14.4 billion ($173 million) (26)  and KQ will lower its risk profile (and maybe borrowing costs) by having a higher equity level (23).
  • Kenyans have to own at least 50% of the shares and the transaction advisors may refuse transfer of shares to foreigners that will violate that (p37)
  • Shareholders are being offered 16 new shares for every 5 held. They were priced at a discount when the offer was announced, but the market price is now the same as the rights price was at a discount, but now trades (Kshs 14.9) at  about the offer price.
  • The  rights issue will cost Kshs 620 million ($7.4 million) (p38) -comprising commissions of Kshs 310 million, advertising 66M, CMA Kenya fees 51M, underwriting (up to 47M), and lead transaction advisor 15M  ($180,000)
  • The issue is underwritten for only up to Kshs 420 million (93) and they are aiming to raise Kshs 20 billion.
  • Rump allotment: Qualified institutional investors (33) will be invited to buy shares at the discounted price concurrent with the rights issue , and these social security funds of Rwanda, Uganda, Tanzania, Burundi, pension & insurance companies in East Africa, financial forms in South Africa and other foreign institutional investors(230). Yesterday’s paper had a story that the IFC will own 7.4% of KQ after the rights issue. 

Performance:

  • Despite revenue increasing from Kshs 41 billion to Kshs 55 billion  ($662 million) in the first six months of their 2012 year, operating profit for the 6 months was Kshs as 1 billion ($12 million), down from 2.4 billion  the year before. This was attributed to increased employee costs and new routes and the airline issued a profit warning in January 2012 profit wanting in January 2012 (68) citing the rising fuel costs which will impact full year profits for 2012.
  • For the full-year to March 2011 revenue of Kshs 85 billion (comprising passenger 75, freight 6.5, handing 1.4)  and had direct costs of Kshs 54 billion (comprising fuel of 25b billion, landing 8 billion, maintenance 7b, sales commission 2.7b), fleet ownership of 9 billion, 13 billion on administration (11 billion on staff).
  • Of the revenue, 54% is from African routes, 27% Europe, and 19% Mid-East & Asia (68) .
  • Their hedging policy is to hedge 80% of their fuel requirements for the next one year hedged and 50% for following months  (70).
  • Their debt-equity ratio in 2010 was 111% (borrowings of Kshs 20 billion against equity of Kshs 17 billion) and this improved to 88% in 2011.
  • Deferred income – includes compensation from a manufacturer (204 -likely Boeing)  of Kshs 2.5 billion and they also have deferred tax liabilities of Kshs 8 billion (203)

Banking: KQ has borrowing of Kshs 25 billion ($301 million) (201)  from Private Export Funding (PEFCO), Barclays and ABN Amro at rates of 4-6%  over 12 years and lien of credit for Kshs 20 billion (202). The loans are routed through Simba Finance, Swara Aircraft Finance, Chui Aircraft Finance and Kifaru Aircraft who are registered as owners of the aircraft  (81) (these are not subsidiaries) and will transfer their titles once the loans (secured through Eximbank) are repaid (201). KQ also drew new loan facilities in 2011 from Standard Bank, KCB and Barclays to pay for pre-delivery payments (87) . KQ also earns rates of 4 -6% on their deposits (198).

Staff:

  • KQ has 4,355 staff who earned Kshs 11 billion ($132 million) in 2011 (numbers in December are 4,672 (61).
  • KLM appoints the CEO, finance director and one director for each 10% they own (106).
  • Directors and key management were paid 223 million in 2011, with directors earning 78 million of that (175).
  • KQ is recruiting expatriate pilots to meet a shortage (65).
  • Have an Ab Initio pilot training program (pilots who had no previous flight experience)  that now has 87 pilots getting training in South Africa (61). KQ has an arrangement with Co-Op bank in which these students can borrow and pay for their expensive training of pilots and they have drawn Kshs 500 million ($6 million) (112).
  • KQ will hire a director for a new fleet delivery department and separate that from the technical department (61)
     

Fleet:

  • KQ operates 33 aircraft, 20 under lease (108) and has 7 spare engines.
  • Have Kshs 20 billion worth of leases (213)  and commitments to buy about Kshs 100 billion ($1.2 billion) worth of aircraft (212)
  • Paid deposits of Kshs 2.1 billion to Boeing (192) and Kshs 631 million for leases of Boeing and Embraer planes & engines.
  • Have signed purchase agreements for 10 Embraer 190, three 777-300ER,  and 9 Boeing 787 Dreamliner’s with options for 4 more (111)
  • Future fleet will comprise Embraers (for domestic/short routes), Boeing 737 (NG) next generation (for medium/Africa routs), and Boeing 787/777 for intercontinental routes). They also have board approval to acquire 12 freighters (53).
  • Sold 2 Saab 340 aircraft to Alandia as well as land in Nairobi and Lusaka, (108)

Customers & Passengers:

  • Flew 3.1 million passengers in 2011 and 1.8 million in the first half of 2012.
  • All KQ ground staff participated in customer service training at the end of 2011 (65)
  • The airline seeks to maintain & improve on on-time performance but this has been hampered by airport congestion, traffic jams unavailability of equipment and a lack of captains (65)
  • KQ plans to re-design their network to decongest JKIA by having more mid-day flight blocks, in addition to the current morning  & evening ones (58)
  • Passenger meals are by KLM catering and NAS (111)

Risks: Risks to the company include adverse publicity from terror alerts or attacks,  aircraft crashes (91) fuel prices (90) and the slow pace of Jomo Kenyatta Airport (JKIA) expansion (90) which impacts on time performance. They need the airport authorities to complete terminal 4 which will be exclusive for KQ with 7 parking bays nose-in, and also construct multi-level terminals, have a separate domestic terminal, and (later) construct a new (greenfield) airport and a second runway.

On-going construction at Jomo Kenyatta International Airport, Nairobi

But they also note in risk mitigation that:  Support from the Government of Kenya for the airline is another important positive factor, which allows the airline to compete successfully. Lenders’ and investors’ experiences with flag carriers and airlines in general across the world create an expectation that carriers tend to find some way to keep operating in difficult circumstances, and this usually involves the state in some form or another (63)
 

Litigation: KQ has suffered two fatal crashes and there are still cases and investigations that stem from those two in Cameroon (2007)  and Ivory Coast (2000) . There are minor passenger and staff cases, but also a long-running claim by Kenya Revenue Authority for indirect taxes (page 107)

Competition:

  • KQ is largest in Africa with 42 African destinations compared to Ethiopian 40, South Africa (22) (p47)
  • Comparing airline traffic (62) between Africa to the world, the top is South Africa, Egypt Air, Air France, and KQ is 8th , just behind Ethiopian and Emirates while for traffic between Africa and Asia, KQ  is 6th behind Emirates, Ethiopian, Qatar, Egypt Air.
  • KQ enjoys some advantages by having a young aircraft fleet, while other countries don’t have working airlines. It competes in the region with Ethiopian & South Africa, but these airlines have distant hubs in Johannesburg and Addis, while Gulf carriers pull traffic away from the region with their long haul aircraft and cheap tickets (64).
  • KLM owns 26% of KQ and KQ owns 41.23% of Precision Air in Tanzania (72) after their own rights issue which reduced KQ’s shareholding from 49%.

New African Consumer

Today in Nairobi McKinsey & Co, and TBWA released a report on The New African Consumer. It’s one that trends towards rapid urban driven growth with people having with more discretionary spending power,  and one not based on resources. The top states with the highest consumption per capita, and accounting for 75% of all of Africa are SA Egypt, Nigeria, Morocco, Algeria, Sudan, Tunisia, Libya, Ethiopia and Kenya. Crucially most of the growth (80%) will come from people who earn more than $10,000 per month.

It’s a useful road map for companies looking to understand future trends in Africa and offer lessons such as be online (Africa had more Google ad clicks than Western Europe), brands & quality matter, distribution is king, data is scarce, respect country differences & act local, prepare for talent shortage, and expect to iterate (have dynamic execution).

Konza station

The report should lead to a bigger debate, one based on future sustainable economic trends. The same report points out that more babies were born in  Nigeria than all of western Europe. So more studies need to be done in that regards to answer where will the increased African population work? Where will they learn and get medical care? Who will build houses for them? How will they commute? Who will grow food for them as more will reside in large urban centres? Will they be able to cross borders in such of improvement in any of these challenges? That’s the next set of questions & opportunities to balance out with the insightful trends in this report.

Why Telco Mobile Money wins over M-Banking

Safaricom’s mobile money transfer service M-Pesa is only five years old yet it has about twice as many subscribers as all the bank accounts in Kenya. The numbers are not growing as fast any more and many commercial banks now offer services that link to telco mobile money, or promote their own m-banking platforms, or extend services to customers through agents

But the attraction of mobile phone companies as preferred mobile money wallets is that they have gained customer trust with simple tariff structures. Millions of Kenyans are comfortable sending and receiving money by mobile phone. They know what it costs e.g. Kshs. 30 shillings ($0.40) to send money, and Kshs. 30 to withdraw money on the other end.

But for banks, they enter the mobile phone relationship with a stain in the minds of many of their customers as they have a legacy and history of imposing dozens of fees on their account holders & customers. While there are banks that have no ledger fees (just transaction charges similar to mobile phones Kshs 20 or 30 per transaction) and others that have free ‘mobile’ banking, the legacy of banks is also one of changing customer terms, raising tariffs and interest rates, phasing out services, migrating customers to new costlier services, phasing out services that were promoted as ‘free’, migrating their customers to more expensive options at will.

For comparison, if you leave Kshs 1,000 (~$12) in your M-Pesa account it will be there until you use it, with no phantom charges eating it away (it won’t stay in your phone for 6 months). But if you leave the same Kshs 1,000 in your bank account for a few months, the money will be exhausted by various tariffs like ledger fees, dormant account fees, minimum balance fees and the account will be drained out and shut down. Unfortunately, a similar distrust extends to companies offering third party payment services m-commerce, payments, settlements etc. as they are new or unknown entities to customers until they establish a behaviour pattern with customer tariffs.

This should also be a caution to mobile operators not to shake up their cost structures too often. Safaricom recently changed their M-Pesa tariffs, but by having simple & clear disclosures and not levying hidden or unexplained charges, they will keep the trust that their customers have.

WEF Africa 2012

The World Economic Forum on Africa takes places next month (9-11 May) in Addis Ababa, Ethiopia. 700 guests will get a chance to attend sessions along three themes of strengthening Africa leadership, accelerating investment in frontier markets and scaling innovation for shared opportunities and hear from speakers such as Donald Kaberuka, Kofi Annan, Gao Xiqing – President of the China Investment Corporation, and Doug McMillon – the CEO of Wal-Mart International.

The last session in East African forum was in Dar es Salaam after it was reported that Kofi Annan had steered the event away from Nairobi and the next session will likely be back in South Africa followed by a West African venue afterwards.

Last week, a session was held in Nairobi to identify themes that should be discussed and those that were put forward by local business leaders included; the lack of basic technical skills in many countries, difficulty forming cross border partnerships, a need to assess the impact of NGO’s on the continent, speaking the truth to governments (Ethiopia), drawing out better news reporting in Africa, and a need to move the forum beyond talk and towards tangible actions that transform Africa.

NSE Moment: Kenya Airways Rights, Private Equity

Rights Issue: Kenya Airways just launched a rights issue, in which the airline hopes to raise Kshs 20.6 billion ($250 million) from shareholders its 73,612 shareholders (to whom it has mailed out a 36 page abridged prospectus in lieu of the full 236 page information memorandum)

While KLM (Dutch airline owns 26% of KQ) and the Kenya Government (23%) have committed to take up their full rights, thus assuring the airline of 49% investor commitment, some retail may be shocked to find out the amount they are being asked to pay for the rights. The formula works out as 16 new shares for every 5 owned (pay 3.2X their shareholding) so if one owns 1,000 shares worth ~Kshs 14,000 ($167), they are being asked to Kshs 45,000 ($542) to take up their full rights.

Some banks have lined up for the controversial practice of shares for loans, but with a rights issue there is some assurance of getting your full allocation. See more reading and analysis of the KQ rights here.

Not now: Both UAP Insurance & Family Bank have set aside plans to list at the Nairobi Stock Exchange for now. The bear market, (is it ending?)is said to be the reason, but Family have again postponed a listing to raise cash from a private investor instead. With UAP they are expanding in the region in Uganda, South Sudan, and DRCongo but they feel the market is not conducive and the will go for property/real estate investments to fund these new territories.

Why not NSE?: Africa Assets recently published their 2012 East Africa Private Equity Survey and while they found a lot of investor optimism, with 53 funds operating in the region (16 solely focused on investing in East Africa) , most deals in East Africa are ‘small’ (40% are under $5M) and none of the fund managers see IPO’s at local stock exchanges as viable exit avenues for their investments (49% expect a sale to a strategic investor)

The Survey also notes that Kenya’s Capital Markets Authority (CMA) is finalising the legal and regulatory framework for a new Small and Medium Enterprises Exchange (SMEX). This market will have less stringent listing requirements than the main Nairobi Securities Exchange (NSE), which is intended to encourage more SMEs to consider a listing.

Apart from the costs of listing and the paperwork, another general obstacle to SMEs listing is that it implies a massive transition: for companies that are, by definition, small and often family owned, the requirement to disclose internal information to an anonymous investment public and have outsiders involved in the company’s decision making will be challenging.