Global markets view
The decline in most major stock indexes continued from the previous week. The main driver of the drop has been fear of the negative impact on global economic growth as China tightens its monetary policy to rein in runaway inflation. This week China raised its reserve requirement for banks to 18%. UK’s FTSE 100 dropped by 1.10%, India’s Sensex by 2.84% and China’s Shanghai composite by 3.24%. Japan’s Nikkei bucked the global trend rising 3.06%. The strength in Japanese equities has been attributed to the slip of the yen against the dollar and the flow of funds into undervalued Japanese stocks.
In Emerging Africa the Ghana All Share Index rose by 2.90% taking it past the 7,000 mark which it last touched in June 2010. The Nairobi 20 Share index was down 0.33%. The Nigerian All Share index dropped by 1.61%.
Global commodity price movements were mixed. Crude Oil, Gold and Copper fell by 3.37%, 0.97% and 1.43% respectively. Arabica Coffee and Cocoa futures prices rose by 4.69% and 4.50% respectively. Tea prices at the Mombasa auction increased rose marginally: up 1.38%, while the volumes sold leaped by 12.78%.
Standard & Poor's Ratings Services raised Kenya's long-term sovereign credit rating to B+ from B due to a more stable political environment, the ratings agency said Friday. "The raising of the sovereign credit rating on Kenya reflects our view of the country's falling political risks in the wake of the adoption of a new constitution, as well as the country's improved economic outlook," .
Accra, Ghana
GSE Movers
Top gainers
Ghana Commercial Bank +7.50%, Ecobank Transnational + 7.14%
Top losers
Mechanical Lloyd Company -14.29%, SG-SSB Bank – 1.69%
Ghana Commercial Bank
Ghana Commercial Bank reported an 8% increase in profits after tax for the first nine months of 2010 compared to the same period in 2009. The top line has grown by over 50% but a huge credit impairment loss (71 Million Cedis) dragged down the profit figure. Excluding this possibly one time hit to the income statement, GCB results would have been very solid. Although the share is trading at close to its 52 week high of 2.05 Cedis, the current PE ratio 12 is undemanding given the strong income growth over the past year.
Nairobi, Kenya
NSE Movers
Top gainers
Kenya Power and Lighting +6.13%, City Trust +4.17%
Top losers
Sameer -19.50%, Scangroup -11.97%
Kenya Power and Lighting (KPLC)
KPLC's share price jumped on Friday; the closing date for the one for eight shares split. KPLC announced a rights issue in the ratio of 20 for every 51 held. The record date for the rights issue is the 25th of November 2010. The objective of the rights issue is to raise Kshs 9 Billion to fund long term growth.
While KPLC’s restructuring of its capital (redemption of the preference shares held by the government and the rights issue) is potentially dilutive, the medium term to long term prospects for the company are good. The dilution from the issue of the additional ordinary shares to the government has been mitigated by the cancellation of preference shares on which KPLC pays Kshs 1.25 Billion in interest annually. The ongoing rural electrification program and Kenya’s strong projected economic growth will lead to increased demand for electricity over the long term.
KPLC is moving towards prepaid metering for a majority of its clients. This will enhance the company’s working capital position. The cash that has been paid upfront could be invested in short term treasury bills to augment interest income to electricity sales. Prepaid metering should also reduce risk of default.
Accra, Nairobi: Week ended November 12, 2010
Global markets view
Share prices fell across the world on fears that China will raise interest rates to rein in inflation. The S&P finished the week 2.17% lower, the Sensex, Shanghai Composite and the Bovespa dropped by 4.04%, 4.60% and 3.08% respectively. Commodities were also affected: Crude Oil was down 1.13%, Gold 2.30% and High Grade Copper Futures dropped 1.41%.
In Emerging Africa the Ghana All Share Index, which is more closely correlated with global stock markets than the rest, fell 1.57%. The Nairobi 20 Share index was down 1.22%. The Nigerian All Share index surged 2.29% driven by a recovery in banking stock prices. Tea prices at the Mombasa auction increased by 3.9%; volumes rose by 6%.
Accra, Ghana
GSE Movers
Top gainers
SIC Insurance +11.11%, Ghana Oil +4.00%
Top losers
Ecobank Transnational -6.67%, CAL Bank -3.33%
SIC Insurance
SIC Insurance recently reported its results for the nine months to September 2010. Earnings per share climbed from 2.30 Pesewas to 2.67 Pesewas, a rise of 16%. The company reported a big jump in underwriting profit compared to the previous year, and a small drop in investment income. Shareholder’s funds climbed by 19%.At the current price the PE based on the nine months results is 11; a reasonably low figure.
Ecobank Transnational
Ecobank’s share price has been see-sawing between 14 and 15 Pesewas for the last nine weeks. Ecobank has offices in 31 African countries and has a broader presence across West, Central, East and Southern Africa than any other bank. Growth in revenues was flat in the first six months of the 2010 while profit was lower due to higher impairment provisions primarily in the Nigerian subsidiary. Profits in the nine months to September 2010 were up 35% on the prior year, which points to a very strong third quarter performance. The share is cheap at the current price (PE of 9).
Nairobi, Kenya
NSE Movers
Top gainers
City Trust +8.27%, Carbacid + 4.90%
Top losers
Eaagads -35.03%, Pan Africa -9.09%
Eaagads
Eaagads gave back the huge gains made last week after media reports of a dispute regarding land that was to be earmarked for a major real estate project. Eaagads' performance as a coffee company has been erratic; a conversion of the business to a real estate company as had been earlier envisaged would have been a real game changer.
Pan Africa
Pan Africa reported half year after tax profits for the period to June 2010 of Kshs 210 Million: the full year after profits for 2009 were Kshs 138 Million. Barring a major unexpected reversal, the full year results for 2010 should be very good given the performance of the bond and stock markets in the year to date. The current price of Kshs 70 translates into a low PE of just 7.95. While the stock is cheap, the little float on the counter translates into low liquidity which would make it difficult to quickly accumulate a significant holding.
Share prices fell across the world on fears that China will raise interest rates to rein in inflation. The S&P finished the week 2.17% lower, the Sensex, Shanghai Composite and the Bovespa dropped by 4.04%, 4.60% and 3.08% respectively. Commodities were also affected: Crude Oil was down 1.13%, Gold 2.30% and High Grade Copper Futures dropped 1.41%.
In Emerging Africa the Ghana All Share Index, which is more closely correlated with global stock markets than the rest, fell 1.57%. The Nairobi 20 Share index was down 1.22%. The Nigerian All Share index surged 2.29% driven by a recovery in banking stock prices. Tea prices at the Mombasa auction increased by 3.9%; volumes rose by 6%.
Accra, Ghana
GSE Movers
Top gainers
SIC Insurance +11.11%, Ghana Oil +4.00%
Top losers
Ecobank Transnational -6.67%, CAL Bank -3.33%
SIC Insurance
SIC Insurance recently reported its results for the nine months to September 2010. Earnings per share climbed from 2.30 Pesewas to 2.67 Pesewas, a rise of 16%. The company reported a big jump in underwriting profit compared to the previous year, and a small drop in investment income. Shareholder’s funds climbed by 19%.At the current price the PE based on the nine months results is 11; a reasonably low figure.
Ecobank Transnational
Ecobank’s share price has been see-sawing between 14 and 15 Pesewas for the last nine weeks. Ecobank has offices in 31 African countries and has a broader presence across West, Central, East and Southern Africa than any other bank. Growth in revenues was flat in the first six months of the 2010 while profit was lower due to higher impairment provisions primarily in the Nigerian subsidiary. Profits in the nine months to September 2010 were up 35% on the prior year, which points to a very strong third quarter performance. The share is cheap at the current price (PE of 9).
Nairobi, Kenya
NSE Movers
Top gainers
City Trust +8.27%, Carbacid + 4.90%
Top losers
Eaagads -35.03%, Pan Africa -9.09%
Eaagads
Eaagads gave back the huge gains made last week after media reports of a dispute regarding land that was to be earmarked for a major real estate project. Eaagads' performance as a coffee company has been erratic; a conversion of the business to a real estate company as had been earlier envisaged would have been a real game changer.
Pan Africa
Pan Africa reported half year after tax profits for the period to June 2010 of Kshs 210 Million: the full year after profits for 2009 were Kshs 138 Million. Barring a major unexpected reversal, the full year results for 2010 should be very good given the performance of the bond and stock markets in the year to date. The current price of Kshs 70 translates into a low PE of just 7.95. While the stock is cheap, the little float on the counter translates into low liquidity which would make it difficult to quickly accumulate a significant holding.
Accra, Nairobi: Week ended November 5, 2010
Global and local market conditions
Stock markets rallied strongly across the world on the Fed’s announcement of a further $600 Billion in economic easing measures. The S&P 500 (US) rose 3.6%, the FTSE 100 (UK) 3.5%, the Sensex (India) 4.86%, the Bovespa (Brazil) 2.74%, the Johannesburg All Share 3.37% and the Shanghai (China) composite by 5.1%.
The Frontier Africa stock market indexes did not follow the global trend. The NSE 20 Share Index was down 0.16%, the Nigerian All Share Index fell by 0.97%. The Ghana All Share rose by a paltry 0.41%.
Commodities rose strongly across the board. Crude oil was up 5.5%, Gold 2.95%, High Grade Copper Nov Settlement (COMEX) 5.68%, White Sugar December Futures (LIFFE) 7.40%, and Palm Oil 5.71%.
Accra, Ghana
GSE Movers
Top gainers
AngloGold Ashanti +17.24%, Enterprise Insurance Company +7.96%, CAL Bank +6.67%
Top losers
Aluworks -11.76%, SG-SSB -6.67%, SIC Insurance -5.56%
AngloGold Ashanti
AngloGold’s share price has leaped this week after holding steady for the past six weeks. In that period the price of Gold has continued to edge upwards. Gold prices are at all time high; rising 8% over the last six weeks to USD $1,397.70 per 100 ounce. Goldman Sachs recently raised its 12 month gold forecast to $1,650 per 100 ounce, an 18% upside from current levels.
Surging gold prices will boost the profits and in turn the share prices of gold miners such as AngloGold.
Nairobi, Kenya
NSE Movers
Top gainers
Eaagads +31.85%, Scangroup +8.11%, Rea Vipingo Plantations +7.84%
Top losers
Standard Group -7.18%, Housing Finance -6.48%, KenGen -4.97%
Standard Group
The current week’s drop in Standard Group’s share price is not unexpected given the volatile price movement of this counter. Standard Group’s share has been trading in the Kshs 43.50 to 48.50 range in the past eight weeks. A rise in one week appears to be followed by a drop in the following week.
Standard Group reported a 139% increase in profits for the six months to June 2010, compared to the same period in 2009. The counter is cheap on a PE ratio basis: 8, compared to the roughly 14 for the market as a whole.
Kenya Airways
Kenya Airways reported a 67% rise in half year profits confirming our November 1 projection that the company was likely to report good results in line with global industry performance. The performance was extremely good given that the half year to September 2009 was boosted by a Kshs 1.7 Billion gain in fuel derivatives: operating profit was Kshs 2.4 Billion in 2010 compared to Kshs 162 Million in 2009.
If KQ replicates the second half of 2009/10 in 2010/11, the full year figures will be superb. Going by the optimistic forecasts by several airlines for 2010/2011 KQ is likely to do better in the second half of 2010/11 compared to 2009/10. The key challenge will be fuel prices: aviation prices were up 27% in 2010 compared to 2009 according to KQ’s half year report. Crude oil prices are on an upward trend as the global economy recovers: aviation fuel prices will rise in lock-step.
Stock markets rallied strongly across the world on the Fed’s announcement of a further $600 Billion in economic easing measures. The S&P 500 (US) rose 3.6%, the FTSE 100 (UK) 3.5%, the Sensex (India) 4.86%, the Bovespa (Brazil) 2.74%, the Johannesburg All Share 3.37% and the Shanghai (China) composite by 5.1%.
The Frontier Africa stock market indexes did not follow the global trend. The NSE 20 Share Index was down 0.16%, the Nigerian All Share Index fell by 0.97%. The Ghana All Share rose by a paltry 0.41%.
Commodities rose strongly across the board. Crude oil was up 5.5%, Gold 2.95%, High Grade Copper Nov Settlement (COMEX) 5.68%, White Sugar December Futures (LIFFE) 7.40%, and Palm Oil 5.71%.
Accra, Ghana
GSE Movers
Top gainers
AngloGold Ashanti +17.24%, Enterprise Insurance Company +7.96%, CAL Bank +6.67%
Top losers
Aluworks -11.76%, SG-SSB -6.67%, SIC Insurance -5.56%
AngloGold Ashanti
AngloGold’s share price has leaped this week after holding steady for the past six weeks. In that period the price of Gold has continued to edge upwards. Gold prices are at all time high; rising 8% over the last six weeks to USD $1,397.70 per 100 ounce. Goldman Sachs recently raised its 12 month gold forecast to $1,650 per 100 ounce, an 18% upside from current levels.
Surging gold prices will boost the profits and in turn the share prices of gold miners such as AngloGold.
Nairobi, Kenya
NSE Movers
Top gainers
Eaagads +31.85%, Scangroup +8.11%, Rea Vipingo Plantations +7.84%
Top losers
Standard Group -7.18%, Housing Finance -6.48%, KenGen -4.97%
Standard Group
The current week’s drop in Standard Group’s share price is not unexpected given the volatile price movement of this counter. Standard Group’s share has been trading in the Kshs 43.50 to 48.50 range in the past eight weeks. A rise in one week appears to be followed by a drop in the following week.
Standard Group reported a 139% increase in profits for the six months to June 2010, compared to the same period in 2009. The counter is cheap on a PE ratio basis: 8, compared to the roughly 14 for the market as a whole.
Kenya Airways
Kenya Airways reported a 67% rise in half year profits confirming our November 1 projection that the company was likely to report good results in line with global industry performance. The performance was extremely good given that the half year to September 2009 was boosted by a Kshs 1.7 Billion gain in fuel derivatives: operating profit was Kshs 2.4 Billion in 2010 compared to Kshs 162 Million in 2009.
If KQ replicates the second half of 2009/10 in 2010/11, the full year figures will be superb. Going by the optimistic forecasts by several airlines for 2010/2011 KQ is likely to do better in the second half of 2010/11 compared to 2009/10. The key challenge will be fuel prices: aviation prices were up 27% in 2010 compared to 2009 according to KQ’s half year report. Crude oil prices are on an upward trend as the global economy recovers: aviation fuel prices will rise in lock-step.
Company to watch Nov 1, 2010: Kenya Airways
Share price statistics
November 1, 2010 Closing price: 44.75
Five year high: 150
Five year low: 16
One year high: 66
One year low: 24
Market capitalization: Kshs 20.6 Billion
Price to earnings ratio: 10.17
Price to book ratio: 1.04
1 Year return: 88.66%
Global industry market conditions and performance
Americas
US airline stocks have gained over 25% in the last two months. The sector benchmark (The NYSE Arca Airline Index) is at its highest point since May 2007. Continental, American Airlines, Delta, JetBlue all reported strong third quarter results driven by rising passenger numbers, higher ticket prices and stable aviation fuel prices.
Two of the biggest Airlines in Latin America: TAM of Brazil and LAN of Chile announced a merger to consolidate their existing strong positions and catapult them to the top 15 in the world by size. According to industry figures Brazil’s domestic market grew by over 25% in the first eight months of the year. TAM and GOL (TAM’s competitor in Brazil) continue to report strong traffic growth month on month. The other Latin American aviation markets continue to grow strongly in tandem with the strong GDP growth.
Europe
British Airways reported profits for the six months ended September 2010; the first time the company has made a profit since 2008. BA’s merger partner Iberia was profitable for the nine months ended September 2010. Both companies attribute their profits to increased premium traffic.
Lufthansa tripled its profits in the third quarter of 2010. KLM-Air France lifted earnings guidance for 2010 and projects a strong performance in 2011.
Middle East and Asia Pacific
Emirates Airlines reported on Monday that its profit for the first six months had risen by more than 351% driven by huge demand in both cargo and passenger freight. Middle East airlines did well through the financial crisis period; industry figures indicate that the traffic in the region grew by 11% in 2009.
Cathay Pacific reported rising cargo and passenger traffic in the course of 2010. Air China Profits were up 484% for the first nine months of 2010, while All Nippon Airways (Japan’s largest carrier) reported an almost five fold increase in profits for the second quarter compared to last year.
Regional aviation market
Kenya Airways has the largest number of routes in Africa, and continues to add new routes. In the year ended March 2010, the airline launched 7 new destinations: Ndola, Gaborone, Malabo, Kisangani, Brazaville, Bangui and Libreville. Following the failure of several national airlines in Africa in the 1990s Kenya Airways’ was left with only two credible African competitors: South African Airways and Ethiopian Airlines. Some national airlines have been revived but most have a limited fleet.
African economies have been growing at about 5% per annum on average in the last 5 years: the resulting increase in wealth has lead to an increase in demand for aviation services.
In the East African market Kenya airways is facing growing competition from small airlines local airlines and a resurgent Uganda Airlines, but is still the dominant carrier.
Kenya Airways performance
Kenya Airways’ performance has been mixed over the last four years. Pretax profits of Kshs 5.9 Billion in 2007, Kshs 6.5 Billion in 2008 were followed by a huge loss of Kshs 5.7 Billion in 2009 and modest pretax profits of Kshs 2.6 Billion for the year ended March 2010. The 2010 performance was dragged down by a Kshs 3 Billion rise in overheads, which management attributed to a big wage settlement. Revenue growth was flat in 2010.
Investment case
Kenya Airways trades at a reasonably low PE ratio: 10. Given that this ratio is based on a relatively weak performance for the year ended March 2010, an improvement in 2011 will translate into an even cheaper valuation.
The share seems to have strong support at the current price. Even after releasing weak 2010 results the price declined to only Kshs 44, and for the last few months has traded in the Kshs 43 to Kshs 48 range.
The African aviation market is bound to grow at a brisk rate in tandem with the region’s economic growth; Kenya Airways is very strongly positioned in this market. Nairobi, Kenya Airways’ base, is a strategically located hub providing easy connection to several central and southern African cities. Kenya Airways is thus well placed to get traffic from international airlines whose final stop is Nairobi.
Strong performance this year by most global airlines could be a sign of good things to come for Kenya Airways.
The tourism/travel industry seems to have picked up. The Kenya tourism board has reported that 2010 is on track to record the highest tourist arrivals in the history of the country. TPS Serena (the only listed hotel chain) has seen a big spike in its share price, buoyed in part by media reports of the good tourism numbers. In the US and European markets online travel companies such as Expedia and Priceline have reported big jumps in second and third quarter profits as a result of a big spike in travel bookings.
With the recent acquisition of KLM, Kenya Airways now has a stronger strategic partner: Air France KLM. This bigger partnership should translate to increase traffic from code share agreements.
Investment risks
Airline stocks are risky. Any number of unexpected events could turn the fortunes of any airline for the worse. The volcanic ash in Europe earlier in the year grounded several airlines and hit profits. An accident could damage the reputation of any airline.
Oil prices which have been stable are likely to tick up if the global economic recovery gathers steam. Aviation fuel is the biggest component of Kenya Airways’ direct costs: a big upward swing in the price of oil could easily wipe out the company’s operating profits.
Kenya Airways overheads have increased sharply over the past two years. Revenue growth of 17% in 2010 over 2008 has been matched by an increase in overheads of 55%. A failure to contain these costs will negate benefits from better operational performance.
Wrong fuel hedge bets can easily wipe out profits; in 2009 the company lost Ksh 8.9 Billion in realized and unrealized losses on fuel derivatives. The impact of the fuel hedges has been both positive and negative over the years and has contributed immensely to the airline’s volatile earnings.
November 1, 2010 Closing price: 44.75
Five year high: 150
Five year low: 16
One year high: 66
One year low: 24
Market capitalization: Kshs 20.6 Billion
Price to earnings ratio: 10.17
Price to book ratio: 1.04
1 Year return: 88.66%
Global industry market conditions and performance
Americas
US airline stocks have gained over 25% in the last two months. The sector benchmark (The NYSE Arca Airline Index) is at its highest point since May 2007. Continental, American Airlines, Delta, JetBlue all reported strong third quarter results driven by rising passenger numbers, higher ticket prices and stable aviation fuel prices.
Two of the biggest Airlines in Latin America: TAM of Brazil and LAN of Chile announced a merger to consolidate their existing strong positions and catapult them to the top 15 in the world by size. According to industry figures Brazil’s domestic market grew by over 25% in the first eight months of the year. TAM and GOL (TAM’s competitor in Brazil) continue to report strong traffic growth month on month. The other Latin American aviation markets continue to grow strongly in tandem with the strong GDP growth.
Europe
British Airways reported profits for the six months ended September 2010; the first time the company has made a profit since 2008. BA’s merger partner Iberia was profitable for the nine months ended September 2010. Both companies attribute their profits to increased premium traffic.
Lufthansa tripled its profits in the third quarter of 2010. KLM-Air France lifted earnings guidance for 2010 and projects a strong performance in 2011.
Middle East and Asia Pacific
Emirates Airlines reported on Monday that its profit for the first six months had risen by more than 351% driven by huge demand in both cargo and passenger freight. Middle East airlines did well through the financial crisis period; industry figures indicate that the traffic in the region grew by 11% in 2009.
Cathay Pacific reported rising cargo and passenger traffic in the course of 2010. Air China Profits were up 484% for the first nine months of 2010, while All Nippon Airways (Japan’s largest carrier) reported an almost five fold increase in profits for the second quarter compared to last year.
Regional aviation market
Kenya Airways has the largest number of routes in Africa, and continues to add new routes. In the year ended March 2010, the airline launched 7 new destinations: Ndola, Gaborone, Malabo, Kisangani, Brazaville, Bangui and Libreville. Following the failure of several national airlines in Africa in the 1990s Kenya Airways’ was left with only two credible African competitors: South African Airways and Ethiopian Airlines. Some national airlines have been revived but most have a limited fleet.
African economies have been growing at about 5% per annum on average in the last 5 years: the resulting increase in wealth has lead to an increase in demand for aviation services.
In the East African market Kenya airways is facing growing competition from small airlines local airlines and a resurgent Uganda Airlines, but is still the dominant carrier.
Kenya Airways performance
Kenya Airways’ performance has been mixed over the last four years. Pretax profits of Kshs 5.9 Billion in 2007, Kshs 6.5 Billion in 2008 were followed by a huge loss of Kshs 5.7 Billion in 2009 and modest pretax profits of Kshs 2.6 Billion for the year ended March 2010. The 2010 performance was dragged down by a Kshs 3 Billion rise in overheads, which management attributed to a big wage settlement. Revenue growth was flat in 2010.
Investment case
Kenya Airways trades at a reasonably low PE ratio: 10. Given that this ratio is based on a relatively weak performance for the year ended March 2010, an improvement in 2011 will translate into an even cheaper valuation.
The share seems to have strong support at the current price. Even after releasing weak 2010 results the price declined to only Kshs 44, and for the last few months has traded in the Kshs 43 to Kshs 48 range.
The African aviation market is bound to grow at a brisk rate in tandem with the region’s economic growth; Kenya Airways is very strongly positioned in this market. Nairobi, Kenya Airways’ base, is a strategically located hub providing easy connection to several central and southern African cities. Kenya Airways is thus well placed to get traffic from international airlines whose final stop is Nairobi.
Strong performance this year by most global airlines could be a sign of good things to come for Kenya Airways.
The tourism/travel industry seems to have picked up. The Kenya tourism board has reported that 2010 is on track to record the highest tourist arrivals in the history of the country. TPS Serena (the only listed hotel chain) has seen a big spike in its share price, buoyed in part by media reports of the good tourism numbers. In the US and European markets online travel companies such as Expedia and Priceline have reported big jumps in second and third quarter profits as a result of a big spike in travel bookings.
With the recent acquisition of KLM, Kenya Airways now has a stronger strategic partner: Air France KLM. This bigger partnership should translate to increase traffic from code share agreements.
Investment risks
Airline stocks are risky. Any number of unexpected events could turn the fortunes of any airline for the worse. The volcanic ash in Europe earlier in the year grounded several airlines and hit profits. An accident could damage the reputation of any airline.
Oil prices which have been stable are likely to tick up if the global economic recovery gathers steam. Aviation fuel is the biggest component of Kenya Airways’ direct costs: a big upward swing in the price of oil could easily wipe out the company’s operating profits.
Kenya Airways overheads have increased sharply over the past two years. Revenue growth of 17% in 2010 over 2008 has been matched by an increase in overheads of 55%. A failure to contain these costs will negate benefits from better operational performance.
Wrong fuel hedge bets can easily wipe out profits; in 2009 the company lost Ksh 8.9 Billion in realized and unrealized losses on fuel derivatives. The impact of the fuel hedges has been both positive and negative over the years and has contributed immensely to the airline’s volatile earnings.
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