Category Archives: Kenya privatization

Kenya Airways 2020 results

Kenya Airways (KQ) recorded an unsurprising record loss for a year in which Covid-19 saw grounded aircraft and closed airspaces. After the worst year for aviation since 1999, KQ’s Chairman Michael Joseph said he expects that the airline will not recover to pre-Covid growth and revenue levels till about 2023 and will use the period to right-size its fleet, and deal with legacy issues & contracts. A bill currently in Kenya’s Parliament will place the airline in an aviation holding company with the Kenya Airports Authority.

KQ flew 1.8 million passengers, down 66% from 2019, and they were grounded by Covid-19 through the summer which is usually their most-profitable period. For the year, revenue was down 60% to Kshs 52 billion, and while operating costs were down 39%, it still resulted in a loss of Kshs 36.2 billion. 

KQ Group MD Allan Kilavuka said the airline has resume flying to routes that are safe and which provide steady revenue (China is their best route but all airlines are restricted to two flights a week). They have also revived cargo, delivering more flowers, food and pharmaceuticals. They added a new cold storage facility (300-ton capacity) and converted a 787 Dreamliner into a preighter (adding 50 tons of capacity). The airline also started a Mombasa – Sharjah cargo flight, resumed weekly cargo ones to Delhi, and in Southern Africa, they obtained 5th freedom rights to operate cargo flights between Johannesburg, Harare, Lilongwe, Dar es Salaam and Maputo.

This year, they will explore partnerships with other airlines (in Africa and Europe) as their joint-venture with KLM comes to an end, by mutual consent, in September 2021. They also plan to convert another aircraft into a preighter and will explore commercial drone operations, after having bought four for training.  

Sugar Privatization in Kenya

Kenya has floated an international expression of interest for the privatization of five sugar companies.

The Government through the giant Agriculture and Food Authority (AFA), manages the sugar sector. The five are Chemelil Sugar Company, South Nyanza Sugar Company (SONY), Nzoia Sugar Company, Miwani Sugar Company (under receivership) and Muhoroni Sugar Company (under receivership).

The Government is seeking investors who will redevelop the factories into sugar complexes and manage them on lease for 25 years, turning them to profitability through modernization and efficient management. Investors, as individual or consortiums, will have to demonstrate familiarity with the sugar industry, submit regulatory documents (PIN, incorporation certificates, factory operation licenses), and prove their experiencing managing sugar plantations for at least 5 years, and their available financing.

The Government’s Privatization Commission has long had plans to privatize the sugar companies as part of a COMESA arrangement and to modernize Chemelil, rehabilitate SONY, expand Nzoia, and address the debts of Miwani and Muhoroni. It’s shareholding is 96% at Chemelil, 99% at Sony, and 98% at Nzoia. It also owns 49% of Miwani and 17% of Muhoroni through the Agricultural Development Corporation. Other government agencies with shareholding include the Development Bank of Kenya with 1.4% of Chemelil and 0.3% of Muhoroni respectively, IDB with 0.3% and 0.9% of SONY and Nzoia respectively, and ICDC with 0.7% of SONY.

To prepare the companies for this exercise, the government had undertaken balance sheet restructuring, writing off debts that the five owed to it, the Kenya Sugar Board, and to growers, as at December 31, 2019. They have also written off with taxes and penalties through 30 June 2019 and accrued up to date.

Recently, two governors, Wycliffe Oparanya of Kakamega and Anyang’ Nyong’o of Kisumu, writing on behalf of the Lake Region Economic Bloc, welcomed the Government’s decision to waive Kshs 62 billion (~$580 million) of debts owed by the firms. They also asked that a bill in Kenya’s Parliament direct that millers make payments to sugar farmers within 7 days of delivering crop and with these payments based on the sucrose content, rather than the weight of cane.

They also asked for a reintroduction of the Sugar Development Levy to ensure that farmers, counties, and the factories will have steady financial flows. Chemelil, Muhoroni and Miwani are located in Kisumu County, Nzoia is Bungoma, while SONY is in Migori county.

The deadline for the expressions of interest, that are to be submitted by sealed envelopes to AFA, is August 3. The bid documents will be disinfected (it’s Covid-19 season), and opened, with the results announced on August 4, 2020, at the AFA offices.

Kenya Airways 2019 results

Kenya Airways announced their results for 2019, which its Chairman Michael Joseph described as a reasonably good year in which they opened new routes, improved on performance and flew a record number of passengers, but one in which they had to make new accounting standard adjustments and then end by looking ahead to a Coronavirus world.   

Group CFO Hellen Mwariri read the financial results starting with an explanation of IAS17 that was replaced by IFRS16. In 2019, the airline had shown improved revenue of Kshs 128 billion which was a 12% increase from the Kshs 114 billion the year before. They had flown 5.1 million passengers, a 7% increase and opened new routes to Genera and Rome with connections to Malindi.

The revenue growth of Kshs 14 billion was offset by increased direct costs from more flights of Kshs 5.8 billion, increased fleet ownership costs with the return of two Boeing 787s that were previously-leased out, resulting in a Kshs 6.4 billion expense, and increased finance costs which went up by Kshs 4.9 billion.

The main difference with the new accounting standard was that leases which were not on the balance sheet, are now included, with interest as an expense and this would affect airlines heavy on leasing. She said that mainly as a result of the 76% increase in finance costs, the airline’s loss for the year also increased by 71%, going up from Kshs 7.5 billion in 2018 to Kshs 12.9 billion in 2019. 

Much like former CEO Mbuvi Ngunze, the airline’s new Group CEO Allan Kilavuka, who recently took over from Sebastian Mikosz, was welcomed with an in-tray of increased losses and new challenges, this time brought about by Coronavirus. 

He estimated the impact of Coronavirus was a revenue loss of revenue, to date, of $150 million (~Kshs 16 billion) and that even if they start flying in June, he estimated that revenue will be $400 million (Kshs 43 billion) lower than 2019.

He said the airline was tentatively preparing to resume flights on June 8 2020. For now, they have converted three Boeing 787’s for cargo and have daily flights carrying flowers (1,200 tons to Europe so far), food (2,600 tons to Europe & the Middle East) and medical equipment (1,500 tons), while occasionally also operating occasional passenger repatriation flights.

The losses sent the airline back into negative equity territory, but the Chairman spoke of light at the end of their restructuring, which was through the planned creation of an airline holding company, that would include the Kenya Airports Authority and probably a re-nationalised Kenya Airways. A bill is with the Attorney General and should go to Parliament in a matter of weeks. Parliament has, in essence, revived an earlier plan to enable the airline to compete with its regional peers that are all state-owned. 

National Bank Responds to KCB Takeover Bid

National Bank of Kenya (NBK) has published a circular over the proposed takeover by the KCB Group.

KCB has also now published their own circular for NBK shareholders, that has been approved by the CMA and which details their side of the deal.

NBK Circular Highlights:

  • The board of NBK recommends shareholders approve the Kshs 9 billion deal even though they value their share at Kshs 6.10  as no competing offers have been received so far, and the bank, while strong, needs additional capital to meet regulatory capital and grow its business. They add that the Government has a policy of sector consolidation to create strong banks.
  • NBK is the thirteenth largest bank in Kenya, a Tier-2 bank.
  • KCB has proposed that NBK continue to operate as a separate subsidiary of KCB for two years during which there will be no staff changes. An integration will come after, along with an organizational structure review, which may lead to a reduction of the workforce and “optimization” of the distribution network. i.e. branches, ATM’s and agents. NBK has 1,356 staff, serving about 650,000 customers.
  • Deal a foregone conclusion?: After the re-designation of the preference shares, NBK’s two key shareholders, the Government of Kenya and National Social Security Fund own a combined 93.23% of the bank’s shares.
  • KCB valued NBK at Kshs 5.6 billion. NBK has 48,987 shareholders who will receive 147,383,968 ordinary shares in the share capital of KCB, equivalent to approximately 4.59% of the share capital of KCB.. The NBK Board appointed Standard Investment Bank (SIB) to independent advise them on the market value of NBK and SIB arrived at a fair value for each NBK share of Kshs 6.10 – the result of combining the dividend discount method (5.41), net assets multiple (6.62) and historical share trading price (5.01).
  • Listing history: NBK was wholly owned by the Government until 1994 when it sold by 32% to the public through a listing on the NSE, followed by another share sale in May 1996. One of the conditions of the KCB offer is that the NBK shareholders should approve the de-listing of NBK from the NSE.

The NBK board’s opinion on the bank’s valuation is not expected to change anything unless a competing bid materializes – and the deadline for that is July 17.

KCB’s Circular to NBK Shareholders:

  • KCB has invited NBK shareholders to accept their offer by completing and returning forms during the offer period that runs from 10 July to 30 August. If the deal succeeds, their new swapped shares will list on September 16. 
  • On the pricing, NBK traded 26,638 shares per day in the last 6 months. In the last three months, NBK share prices ranged from Kshs 4.3 to 4.5 while those of KCB ranged from Kshs 38 – 44.
  • KCB reserves the right to vary the terms of its offer up to 5 days before the closing date (which means they have a chance to improve on any competing offer).
  • If 75% of NBK shareholders accept the offer, the others will remain minority shareholders in an unlisted (NBK) company, but if over 90% accept, then KCB will move to compulsorily acquire the remaining shares of other NBK shareholders.
  • KCB notes that NBK’s loan book has a non-performing ratio of 49%. 
  • Any share amounts that convert into fractions of a share in the swap formula will be rounded upwards to a full share.
  • There is a long-stop date of Thursday 31 October, 2019, and if the deal is not concluded by then, the KCB offer will lapse, and all acceptances will be considered void.

KWAL at 50

This week, Kenya Wine Agencies Ltd (KWAL) celebrated fifty years of business. At a Nairobi dinner event to mark the occasion, KWAL Managing Director, Lina Githuka, said that the company, which had been privatized four years earlier, had renovated its portfolio and improved its operation. These had resulted in volumes going up threefold and, with profits up ten times, had set the stage for a second round of privatization.

During the event, there were clips and narrations showing the history of the companywhich was established in 1969 by the Government of Kenya to bottle wines and spirits. initially, and up through the 1990s when Kenya’s economy was liberalized, KWAL had a monopoly to import leading international brands like Martell, Hennessy, Bacardi and Campari which they worked with local business owners to distribute to hotels and shops. Later in the 1980s, they opened a commercial winery and embarked in the manufacturing, process and bottling of local wines. While grapes are not easily obtainable here, they used other fruits, starting with pawpaw from Kakamega and later Pekera, and “Papaya” became the first domestically produced wine in Kenya. They later added variants based on passion fruit (Passi Flora), strawberries (Kingfisher), and apples (Woodpecker).

KWAL, under KWA Holdings E.A, is now a subsidiary of Distell, which owns 55% of the company after acquiring a 26% stake in April 2017 for Kshs 1.1 billion.  The company produces 20 brands locally including Kingfisher for the last 36 years, and through its partnership with Distell, also distribute many top international brands. The KWAL portfolio includes Yatta juices, ciders (Savanna, Hunters, Kingfisher) wines (Nederburg, Drostdy-Hof, 4th Street), Amarula, and Viceroy.

Distell reported that Kenya had a stellar year (in 2018) with volume up 32% and revenue up 27%, which was partly attributed to the impressive performance of local brands like Kibao and Hunter’s Choice. KWAL plans to open a production facility at Tatu City, near Nairobi, their first new manufacturing plant in two decades, at a cost of Kshs 3 billion to meet the demand of fast-growing brands.

Kenya’s Cabinet Secretary for Industrialization, Peter Munya, who was the chief guest at the event,  said the Government was prioritizing value addition and local content in investments and that the Cabinet had recently approved an investment policy to legally safeguard all the incentives offered to investors. He applauded the privatization process which had rejuvenated KWAL, and he hoped this would extend to the sugar sector where private companies were doing very well, unlike the Government-owned ones.