KQ stock drops but analysts paint positive outlook

The financial troubles facing Kenya’s national carrier Kenya Airways saw the airline’s stock on the Nairobi Securities Exchange (NSE) drop 9.52 per cent last Friday.

However, some analysts point out that the airline has a positive outlook in the next four years if the turnaround strategy that the management is pushing for works.

The airline’s share closed the trading session at Ksh5.7 ($0.05)  from the previous day’s Ksh6.3 ($0.06).

“The long-term view is quite positive especially after bringing in the financial consultant to help them with balance sheet restructuring,” said Ms. Mercyline Gatebi, an analyst at Gengis Capital.

“From 2015, they will not have any heavy expenditure, so this will be a positive thing in their books. I also hope that the bridge financing and the sale of assets worth $100 million will give them a breather.”

Last week Thursday Kenya Airways announced a net loss of Ksh25.74 billion ($251 million) for the full year ended March 31 from a loss of Ksh4.86 billion ($46.82 million) in the previous year.

Its share price lost 7.35 per cent of its value on the material day closing the trading session at Ksh6.3 ($0.06) per share from Ksh6.8 ($0.065) per share on Wednesday.

“Going forward KQ has to bring in a new partner. It is time to replace KLM as a strategic partner because this partnership appears not to be working,” said Amish Gupta, Director-in-charge of investment banking at Standard Investment Bank (SIB).

According to Eric Munywoki, a research analyst at Old Mutual Securities Ltd, investors are likely to keep off KQ stock because of the losses the company is incurring

“With the losses you will expect most investors to be bearish or reluctant to trade in the stock currently. The strategy is to improve fleet management and improve efficiency by leveraging on partnership with other airlines,” said Mr Munywoki.

In 2012, the airline’s management approached its existing shareholders looking to raise Ksh20.68 billion ($199.26 million) through a rights issue to fund future expansion plans.

The company issued 1.5 billion new shares to the existing shareholders at a discounted price of Sh14 ($0.13) per share, (32.2 per cent discount), but only managed to raise Sh14.5 billion ($139.71 million).

Analysts however contend that enhanced diversification has gone down well for the airline as several subsidiaries such as Jambojet and cargo services have recorded strong growth prospects.

“These lines would enhance growth for the firm in the long run as they continuously expand their scope,” said Kevin Tuitoek, an analyst at Gengis Capital.

“Future flights towards the US based on the Category One status from the Federal Aviation Administration (FAA) in the US would ensure that the airline is able to open up newer connections other than the normal routes, cutting travel time and enhancing turnover.”

It is argued that following the cancellation of the travel bans on West African countries that were largely affected by the Ebola epidemic, the resumption of flights would enhance the capacity and general turnover for the company as the route contributed up to 4 per cent of the traffic flows.

“Furthermore, the cancellation of several travel bans imposed by Western countries, the largest contributor towards Kenya’s tourism industry, will usher in greater prospects of an uptick in tourism inflows in the country following a downturn in arrivals,” said Mr Tuitoek.

KQ’s debt sustainability however remains a key focal point as short-term debt obligations result in a strain on the liquidity ratios.

The restructuring of the debt sustainability from short to long-term under the guidance of Afriexim bank would offer a stronger balance sheet.

A large proportion of any earnings made will be concentrated on revamping their balance sheet through meeting their debt obligations hence the minority shareholders may not enjoy any immediate benefit from Kenya Airways.

External factors seem to play a greater role in the portended outcome of how fast Kenya Airways will resurface.