Category Archives: Kenya Airways

Reading the Tea leaves at Centum, Kenya Airways, Safaricom – Part III

Following up from last year, three companies that had their year-end in March 2017 – Centum, Kenya Airways, and Safaricom have just published their annual reports. Later this month, they will all have shareholders annual general meetings – Safaricom’s will be on September 15, Kenya Airways, who already had an EGM will have their AGM on 22 September, while Centum’s will be on September 25th at Two Rivers, Nairobi.

Notes from the annual reports.

Centum:

  • Has a massive 234-page annual report (up from 192 pages), and the company has 37,163 (last year 37,325) shareholders. 44 shareholders have more than 1 million shares.
  • Board changes at the AGM: New chairman Donald Kaberuka will meet shareholders, and this year Henry Njoroge Imtiaz Khan and Dr. James McFie all step down from the board.
  • Shareholders will also be asked to approve the incorporation of ten Ramani Arch companies as Vipingo subsidiaries, Rehati Holdings, Zahanati Holdings Greenblade Growers, and a Greenblade EPZ.
  • Centum will pay shareholders Kshs 1.2 per share dividend (up from 1.0 last year)
  • Had 86 billion assets. Profit was Kshs 1.5 billion for the year then added with other gains from value changes, this reached Kshs 6.1 billion.
  • Their auditors, PWC, flagged issues like loan impairment at Sidian, loans at Chase Bank, the value of unquoted assets, the value of goodwill, and the value of investment properties.

    Centum shareholders to meet at Two Rivers.

  • Centum has 35 billion worth of subsidiaries including Two Rivers Development (50% of lifestyle centre and 100% of water, ICT, apartments, and phase 2) , GenAfrica Asset Managers (73%), Almasi Beverages (52% of Investment holding company for Mount Kenya Bottlers, Kisii Bottlers and Rift Valley Bottlers), Bakki Holdco (Sidian Bank) and Vipingo Estates
    Associates: Centum sold off their entire 26.4% of KWAL (for Kshs 1.1 billion) while at Longhorn they raised their stake to 60%.
  • Unquoted investments include General Motors East Africa (GMEA – estimated Kshs 3 billion worth), Nas Servair (estimated Kshs 765 million) and Nabo. NAS, where they own 15% opened three Burger King restaurant franchise outlets in Kenya. Centum still owns 17.8% of GMEA after Isuzu bought a majority 57% stake from GM. They also own 25% of Platinum Credit that provides loans to civil servants and has 80,000 customers.
  • Their Lulu Field acquired 14,000 acres in Masindi Uganda for agriculture.
  • They own  27.6% of Nairobi Bottlers which accounts for 47% of the Coca Cola sold in Kenya.
  • In energy, they own 37% of Akira geothermal and 51% of Amu Power.
  • Managers earn more from performance bonuses than salaries.
  • They have borrowed Kshs 1.4 billion from Coca Cola Exports (for Almasi to buy crates and bottles), 3.1 billion from First Rand, Kshs 982 million from Cooperative Bank (for working capital), Kshs 573 million from Chase Bank (for infrastructure at Two Rivers and vehicles for Longhorn), and Kshs 440 million from KCB (for machinery at Mt. Kenya Bottlers)
  • They are owed Kshs 12 billion by related parties including 1.1 billion by Two Rivers Development, 3.1 billion by Centum Exotics, 3.3 billion from Centum development, 1.3 billion by Mvuke (Akira geothermal), 672 million at Vipingo Development and 533 million from Investpool Holdings.

Kenya Airways 

  • The report is 172 pages (up from 149 pages) and KQ has 79,753 shareholders (up from 78,577).
  • Going Concern: While their auditors KPMG have a material matter about KQ’s uncertainty as a going concern, the Directors have prepared the consolidated and company financial statements on a going concern basis since they are confident that the plans described above provide a reasonable expectation that the Group and Company will be able to meet their liabilities as and when they fall due and will have adequate resources to continue in operational existence for the foreseeable future. The Directors believe the plans above will improve the Group and Company’s profitability, cash flows and liquidity position. 
  • Sebastian Mikosz takes over as Group Managing Director & CEO, replacing Mbuvi Ngunze.
  • Tax treatment: the accumulated tax loss of Kshs 71 billion of Kenya Airways and Kshs 782 million of JamboJet will be carried forward for ten years and used to offset future taxable profits.
  • The fleet in 2017 had 39 aircraft down from 47. The board approved the sale of 6 aircraft, and 5 have since bene sold. Also, two Embraer 170’s were returned early to the lease owners while three Boeing 777-300 were leased for four years by KQ to Turkish Airlines with another two Boeing 787-800 leased to Oman Air for three years.
  • Borrowings Barclays Bank PLC – Aircraft loans 325 million at 4.87%, Citi/JP Morgan – Aircraft loans Kshs 71,649 million at 1.89%, African Export – Import Bank (Afrexim) – Aircraft Loans Kshs  21,050 million at 4.82%, and short-term facilities of 24,776 million at 8.58%, and Government of Kenya  24,540 million at 8.58%. The short term facilities were drawn down from Equity Bank, Jamii Bora Bank, Kenya Commercial Bank, Commercial Bank of Africa, I & M Bank, Chase bank, National Bank of Kenya, Diamond Trust Bank, Co-operative Bank, NIC bank and Ecobank for the financing of pre-delivery payments for ordered aircraft.
  • On Time Performance (“OTP”):  The top delays contributors were:1) Aircraft serviceability and availability;2) ATC restrictions and weather;3) Passenger and ramp handling;4) Crew shortage; and5) Connectivity due to new schedules with more efficient use of aircraft.
  • 13 incidents related to disruptive passengers/inappropriate behaviour were reported in 2016/17 financial year compared to 21 incidents reported in the prior year.
  • A total of 70 bird strikes were reported during the period under review compared to 63 cases in the prior year. Most of the reported bird strikes caused minimal damage to our aircraft, but several resulted in costly maintenance, parts replacement, and operational delays. These include two reported air turn back incidents and two rejected take-offs due to bird strikes.

Safaricom

  • The report is 144 pages (down from 172) and the company has 582,775 shareholders (down 600,000 shareholders last year and 660,000 the year before that).
  • At the AGM, shareholders will approve payment of a dividend of Kshs 0.97 per share (out of EPS of 1.21) – for a total dividend payout of almost Kshs 39 billion. Last year they paid Kshs 57 billion in dividends (35% of which went to the government to whom they also paid Kshs 84.3 billion in taxes and other fees).
  • Shareholders will approve a name change to Safaricom PLC. Also, they will vote on special board change resolutions following the Vodacom Vodafone deal; these  will mandate that the Chairman and all independent directors of Safaricom be Kenyan citizens, and also to require that a super-majority of the board (75% of directors) vote to approve changes to the business plans, appointments of the managing director and chief financial officer, and branding of the company – which previously Vodafone had a direct veto over.
  • Balance sheet of Kshs 108 billion down from 117 billion.
  • Bonga points (a loyalty scheme) now total  Kshs 3.3 billion (up from 3.2 billion) are a liability to be converted to revenue as customers utilize their points.
  • Safaricom also has deferred revenue of Kshs 3.4 billion from unused airtime and bundles (up from 2.7 billion) which include Kshs 243 million of managed services under the police contract.
  • For, the National Police Service communication project an amount of KShs7.5 billion was received during the year and the outstanding balance at the year-end was KShs4.47 billion.
  • The Group has short-term borrowing facilities with Commercial Bank of Africa, Standard Chartered Bank and Barclays Bank of Africa.
  • Safaricom has an active ESOP: 13.7 million shares historically valued at KShs193.2 million (2016: 30.4 million shares valued at KShs375.12 million) vested and were exercised by eligible staff.
  • Risks: their auditors, PWC, flagged  issues such as accuracy of revenue recognition, while
    Safaricom itself considers business risks including terror and cyber attacks, competition  (from companies like WhatsApp), the regulatory environment and weakened economic growth.
  • They have an Insider trading policy. Directors and staff are made aware that they ought not to trade in the company’s shares while in possession of any material insider information that is not available to the public or during a closed period.
  • Subsidiaries are One Communications, Instaconnect, Packet Stream Data Networks, Safaricom Money Transfer Services, East Africa Tower Company, IGO Wireless, Flexible Bandwidth Services, Comtec Training and Management Services, and Comtec Integration Systems – all 100& owned, while The East African Marines Systems Limited (TEAMS) is an associate company where they own 32.5%.
  • New products and innovations include Blaze, Flex and M-Pesa Kadogo under which they waived all charges for m-pesa transactions smaller than Kshs 100 ($1). 
  • Besides partnerships such as M-TIBA, Eneza and M-KOPA, they had others with women in technology, Little Cabs, athletics and music. Also, the Safaricom Spark Fund invested in six companies – Sendy, mSurvey, Eneza, Lynk, FarmDrive, and iProcure.
  • The company donated Kshs 381 million to the Safaricom foundation.
  • Twaweza – when we come together, great things happen– is the next phase of the Safaricom brand.

Ethiopian Airlines merges with Addis Hub Plan

Last month, Ethiopian Airlines announced that the Ethiopian government had decided to create a new Aviation Holding Group that would include the airline as a centre point.

.. (the)  new Aviation Holding Group with various diversified aviation strategic business units like: Ethiopian Airports Enterprises, Passenger Airline, Cargo Airline and Logistics Company, Ethiopian Aviation Academy, Ethiopian Inflight Catering Services, Ethiopian MRO Services, Ethiopian Hotel and Tourism Services etc.

It will promote customer services by a marriage of passenger inflight experiences with service on the ground at Addis Ababa, Ethiopia. The model seems to be along the lines of Dubai, and is one that Kenya Airways management has lamented about the need to also have at Nairobi –  and getting Kenya’s national airline aligned with other sectors of the airport and city for Nairobi to be a true aviation hub.

The ultimate aim is to upgrade the customer experience at the airport to meet global standard and thereby making ADD (Addis) airport the best connecting hub in Africa.

More from this Addis Fortune newspaper article:

  • The merger, which is said to be requested by the leadership at Ethiopian Airlines, gave the Group a mandate of providing airport services without discrimination including constructing, expanding, maintaining and managing airports, according to its establishment regulation.
  • Established with an authorised capital of 100 billion Br, the Group was formed after the approval of the regulation by the Council of Ministers. Before the merger, a committee chaired by Sufian Ahmed, an adviser to the Prime Minister and Tewolde, made a feasibility study to draft the regulation.
  • Founded in 1945, Ethiopian Airlines claims to be sub-Saharan Africa’s largest carrier with more than 95 international and 21 domestic destinations. In 2014/15, Ethiopian Airlines earned a net profit of 3.5 billion Br, which makes it among the highest profit earning state-owned enterprises in the country. During the same period, the Airports Enterprise also netted a profit of over half a billion Birr.
  • One of the major goals of the merger of the two state-owned enterprises is also raising the efficiency of the airports and profit.

Airline Megadeal

As KLM scales down its investment in Kenya Airways, it is involved in another aviation mega-deal.  Air France-KLM is buying a 31% stake in Virgin Atlantic as part of a series of deals that look set to shake up the airline world.

IFC celebrates KLM’s investment in KQ

Excerpts 

  • Delta Air Lines becomes the largest shareholder at 49 percent in Virgin Atlantic and founder Richard Branson cedes control. He will retain a 20% stake through his Virgin Group and the airline will continue to fly under the Virgin brand.
  • Delta Air Lines will take a 10% stake in Air France-KLM with the three airline companies coming together to create a single global joint-venture.
  • China Eastern Airlines will also take a 10% stake in Air France-KLM.
  • Air France-KLM’s investment in Virgin Atlantic will cost around $287 million (£220 million), while the two 10% stake sales are being valued at $981 million (€751 million) each for Delta and China Eastern.

The long-term aim of the deals is to bring the two pre-existing joint ventures—Air France-KLM, Delta and Alitalia, and secondly Delta and Virgin Atlantic—within a single joint-venture. The goal is that all the companies work more closely together, helping them fly more passengers to more destinations at a lower cost (to themselves). Plus, Air France’s balance sheet gets a makeover.

While Virgin has been struggling, as shown by the modest transaction price, it has one very attractive asset: landing slots at London’s crowded Heathrow airport, where passengers tend to pay higher fares

Meanwhile, some tension has been cited in the partnership between KLM and Air France.

  • A clash of national cultures and an inability to understand each other’s languages threatens to make the merged Air France-KLM group of airlines unmanageable, according to a leaked internal company report.
  • French staff in the Franco-Dutch company complain their colleagues from the Netherlands are money-grubbing, while the Dutch regard the Air France staff as aloof, according to the report. Among the petty grievances, there is irritation that a KLM employee working in Paris is charged €10 for lunch in the canteen, while an Air France colleague pays only €4.

 

KQ EGM 2017

Kenya Airways (KQ) held an EGM – extraordinary general meeting of its shareholders today in Nairobi. KQ Chairman, Michael Joseph opened the KQ EGM with a statement that this was essential to the future of the airline, as it restructured their debt and reduced their cash payments. He cited the origin of the airlines’ problem as the fleet expansion, ordering new planes back in 2005, that arrived later than expected, and soon after there were issues like terrorist attacks, economic decline, Ebola and the airport fire. This was at a time that there were a lot of state-owned Middle East airlines allowed to Nairobi who did not have a profit motive and who undercut their KQ’s prices.

KQ’s first Dreamliner arrives in April 2014

He said the board had made responses such as offloading some aircraft to leases till the situation improved and they had also hired Sebastian Mikosz as CEO, who is a turnaround specialist.

Excerpts from the KQ EGM and the hour-long Q&A with shareholders

The Michael Joseph factor: Shareholders seem to have a lot of faith in Michael Joseph as a person to lead the turnaround. This is because of his legacy at Safaricom; he himself admitted as much in the challenge ahead of him, but he said that turning around KQ was much more complicated than Safaricom.

Hot button issues:

What Went Wrong? When it’s not clear what happened, Kenyans typically assign blame to corruption or mismanagement and several shareholders ask about a forensic audit query that had been done at KQ. Joseph said they had not forgotten the forensic audit, and he was going to clean the airline; he said that action had been taken with staff several dismissed or in court (He said justice was slow in the country cited a case where the former CFO had sued the airline and that case had not been heard a year later).

Payment to advisors; This came up several times and the figure cited was Kshs 1 5 billion. Joseph said the payment was a lump sum figure for the many advisors engaged in the complex restructuring deals. He cited Mckinsey as one case he was not happy and which had been terminated. Others were international competitively sourced and they had negotiated them down but had to pay.

Management ownership and staff pay: Shareholders asked the board and management to show commitment, by becoming shareholders. Joseph said he was a big investor at Safaricom and the KQ restructuring had an employee share ownership plan (ESOP) as part of the ownership plan, while disclosures about directors shareholdings would be forthcoming. Another shareholder asked the board and management to take a pay cut in line with what was expected of other employees.

Role of Government: Joseph said that the Government had allowed many new foreign airline flights to Kenya and that whenever the president visited abroad, other presidents asked if their airlines can fly to Kenya, or the tourism minister allows them to fly tourists to Mombasa – forgetting about KQ. Part of their future engagement with government will be on licensing of other airlines. On a question about nationalizing the airline, Joseph said that this had been ruled out and that KQ would remain a public company.

Banks left out to dry: Some shareholders asked if the banks agreed to the conversion? Banks lend depositors money to get it back and not for shares – and do not take KQ’s problems to other banks where this will make us miss dividends. There is a court case brought by some banks that will be ruled on August 10.

Fleet and performance CEO Mikosz spoke about monitoring the perception created in media about delays and cancellation at KQ and which unfairly gave the airline a bad impression. He said that flying 160 flights per days you expect 2-5% are expected to have some delays and this was standard in the aviation industry, but their stats were good.

Minority shareholders: Several minority shareholders said they had voiced issues at past AGM’s about high ticket prices, low dividends, and other issues who had been ignored and who were told that the airline was alright. Michael Joseph said he was an independent director and he and others were there to look out for minority shareholders.

Shareholders at the KQ EGM unanimously voted for the lengthy balance sheet restructuring that was done in a single vote.

Another circular will be issued with terms for shareholders investing afresh in the airline.

The next meeting will be a regular shareholder’s AGM on September 21.

KQ EGM swag: transport to/from town, t-shirt, packed lunch by NAS.

Shareholders Chat with Mbuvi Ngunze

I had a tea chat with Mbuvi Ngunze former CEO of Kenya Airways (KQ), now advisor to the board on his time at the airline and views for the future. It was with a view from the perspective of retail investors and shareholders who will be affected by a restructuring process that is ongoing.

Excerpts

Assets: The airline now has a lean fleet with three aircraft groups: Embraer 190’s, Boeing 787’s and Boeing 737-800’ s (with some 700’s); while this is thin, this choice decision to stretch the fleet was much better than having idle aircraft sitting around – and they have been able to serve similar passenger numbers with the smaller fleet. He added that the global industry is in a slump with airlines like Emirates and Ethiopian parking aircraft but with KQ did not have that option, and it was perfectly okay to lease out aircraft and get them  back in a few years

Liabilities: They were servicing bank loans, but these unsecured lenders (the local banks) had to be refinanced. While some banks were upset about the deal to take equity in the airlines, and some are less comfortable in taking a hit, he emphasized that KQ had to treat all banks as an asset class equally in the transactions, and could not pick only some the banks.

Could this have been done earlier so the restructuring was not as drastic? He said it had to happen like this, in sequence, and that they had to right-size their operations before they turned to the banks and the balance sheet.

Revenue:   Routes have to make commercial sense to take them on. While there is an expectation to have direct flights to the US start soon, he;d rather get the ability to code share, sell tickets, and earn revenue  by selling tickets from Nairobi to any US city first. KQ can’t do that now, but Kenyan passengers do that with their partner KLM.

Also, there are many aspects to ticket pricing and KQ has to maximize on routes where they can to realizxfe profits for shareholders.

Expenses:  Expensive Advisors? one complaint about the restructuring was the amount going to be paid to deal advisors  –  but he said that was traditional for arranging such deals and the costs were about 5% which as typical

Management: I conveyed a question from blogger/investor Coldtusker – on a perennial problem  at KQ of misaligned interests between board/management and shareholders, – his predecessor famously hinted that he’d rather buy livestock than airlines shares, and Mbuvi said that this was one of the things being addressed in the new equity deals that calls for KQ employees to own up to 2% of the airline through an ESOP. He could not say if this is what led to pilots staging a go slow last week, but he said that he was not involved on a day-to-day business since he hadlong ago  handed over and oriented his successor – but added that performance-based compensation had to happen – however unpopular it was for pilots or shareholders.

Other Chats

  • Expectations: He said, it’s wrong to compare KQ and Ethiopian airlines, as they operate in totally different airline market. Ethiopia is a closed aviation market, while Kenya is an open market – and Kenya’s open policy means that they control 40% of traffic into Nairobi, while Ethiopia has 80%. At Addis, Emirates flies’ 7 times there, compared to 21  to Nairobi and they also control cargo.
  • London Heathrow sale: a slot is not a building or a desk that was sold – it is the much-coveted right to a time to land and take off from Heathrow
  • The Senate was a circus – one that delayed and disrupted ongoing shareholder discussions, and where wild claims were made before television cameras – such as allegations of secret ownership of aircraft. He said KQ does not need to use intermediaries to talk to Boeing or Embraer.
  • He has no regrets; he came in as CEO at a time when things went wrong at the airline, but he does not feel he was handed a poisoned chalice.
  • Could things have been done differently? Yes, he would have taken Project Mawingu in slower steps.

For shareholders, he said it could have been worse and he says this restructuring is not due to the new companies act – the law was always there. Nationalization was considered, but it was discarded as it would not be good for KQ to operate as a government parastatal.

At the EGM this week, where shareholders will vote on an equity restructuring program, the same board will be there, and he will attend as a board advisor, not the CEO. The board will change after that and he says that going forward, he plans to be a shareholder of the airline.