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.
