Kenya Airways: Half Year ended September 2011

Kshs 000's	HY 2009	HY 2010	HY 2011
Total revenue	33,488,000	41,214,000	54,587,000
Total expenses	33,326,000	38,834,000	53,913,000
Operating profit	162,000	2,380,000	1,019,000
Realised gain/ (loss) on fuel derivatives	(2,706,000)	(51,000)	1,454,000
Profit before tax	1,229,000	2,051,000	2,825,000
Profit after tax	860,000	1,436,000	2,034,000
Net Margin	2.57%	3.48%	3.73%
Earnings per share	1.86	3.11	4.40
Change from prior period	HY 2009	HY 2010	HY 2011
Total revenue	11%	23%	32%
Total expenses	24%	17%	39%
Operating profit	-95%	1,369%	-57%
Profit before tax	-55%	67%	38%
Profit after tax	-60%	67%	42%
Earnings per share	-56%	67%	41%

Analysis:

Kenya Airways’ total revenue went up by 32% from 41.2B in 2010 to 54.6B in 2011. Pre-tax profits increased to 2.83B from the previous year’s figure of 2.05B. This represented a growth of 38%. Net profit margin was slightly higher in 2011 at 3.73%.

PAT rose by 42% to Kshs. 2.03B. A big component of the profit was a favourable outcome in its fuel hedge position.

Earnings per share grew by 41% to Kshs. 4.40. On November 2011 the share closed at Kshs. 22.75. A significant discount to the Kshs. 140 -150 range it traded between September and October 2006.

KQ’s share has underperformed the NSE 20-Share Index and the NYSE ARCA Airline Index in the year to date. KQ has declined by 52.7% since January 1, 2011 compared to 29.1% and 24.5% drops recorded by NYSE ARCA and NSE respectively.

Precision Air, a subsidiary of Kenya Airways concluded its IPO on 7 November 2011. Precision Air offered 58, 841,750 shares at Tshs. 475 per share, which translates to a PE of 50 based on the company’s most recent results. This P/E is several multiples of KQ’s which trades at a P/E of 2.61 based on the half year results to September 2011.

Compared with global airlines KQ’s share price is cheap. KLM-Air France (which holds a big stake in KQ) is trading at a P/E of about 14, Singapore Airlines and Qantas Airways have P/E ratios of about 19 and 15 respectively, despite the latter having recently grounded its flights following a labour dispute. KQ’s low P/E ratio suggests that the airline’s share is significantly undervalued.

Outlook:

Kenya Airways managed to make a profit despite the constraints it faced in the period, including increases in fuel costs and the volatility of the Kenyan Shilling against the US Dollar.

Kenya Airways shareholders approved its plan for a rights issue to raise funds for route and fleet expansion. Kenya Airways aims to double its fleet within five years and increase its already large footprint across Africa. It is expected that over 1B shares valued at approximately Kshs. 22B will be issued. The expected dilutive effect of the rights issue partially explains the recent fall in KQ’s share price.

In a bid to further strengthen its position in the regional market, the airline intends to launch a low-cost carrier to serve the East African market.

SWOT Analysis

Strengths:

· Kenya Airways’ head office is strategically placed in Nairobi; a hub which allows easy connection to Central, West, and Southern Africa.

· Serves the highest number of destinations within Africa. KQ flies to 46 Africa cities. The next closest competitor, Ethiopian Airlines, flies to 32 African destinations.

· A good safety track record

· A strong international partner: KLM-Air France

Weaknesses:

· Frequent labour disputes

· Government influence due to significant shareholding (The Kenyan government has a 23% stake).

· Susceptibility to foreign currency risk and upheavals in the world economy.

Opportunities:

· Africans are getting wealthier and are increasingly able to afford air travel

· Increase in trade within the African continent necessitating more air travel

· Continued rapid growth in Asia contributing to increased trade and travel between Asia and Africa

Threats:

· High and increasing cost of aviation fuel

· The lucrative African aviation market is attracting strong global players: Emirates, Qatar, Virgin Atlantic, etc are increasing their flight frequencies to African destinations.

· Improvement in road and railway infrastructure could lead to a reduction in demand for air transport. KQ’s domestic market, Kenya, is currently undertaking massive road infrastructure projects.

The number of smaller low cost carriers is increasing posing a challenge to Kenya Airways’ leading position in the domestic market.

Equity Bank: Quarter ended September 2011

Kshs 000's	Q3 2009	Q3 2010		Q2 2011	Q3 2011
Total assets	97,422,640	136,584,452		171,352,419	195,377,260
Net loans and advances	58,143,947	70,904,578		97,711,984	109,366,657
Customer deposits	65,660,674	97,017,969		144,501,820	123,987,006
Loan: deposit ratio	89%	73%		68%	88%
Total interest income	7,839,595	9,883,116		8,310,553	13,554,541
Total interest expense	1,130,035	1,493,636		1,044,687	2,439,223
Net interest income	6,709,559	8,389,480		7,265,865	11,115,318
Total operating income	11,269,371	16,506,583		13,151,039	20,455,896
Total operating expense	7,052,223	10,042,900		7,315,395	11,446,694
Cost: income ratio	63%	61%		56%	56%
Profit before tax	4,217,148	6,463,683		5,835,645	8,989,202
Profit after tax	3,384,473	5,125,581		4,737,626	7,292,920
Earnings per share	1.14	1.93		1.75	2.63
Return on assets	3.5%	3.8%		2.8%	3.7%
Change from prior period	Q3 2010	Q3 2011 (1)	Q3 2011 (2)*
Total assets	40%	14%	43%
Net loans and advances	22%	12%	54%
Customer deposits	48%	-14%	28%
Loan to deposit ratio	-16%	20%	15%
Total interest income	26%	63%	37%
Total interest expense	32%	133%	63%
Net interest income	25%	53%	32%
Total operating income	46%	56%	24%
Total operating expense	42%	56%	14%
Cost to income ratio	-2%	0%	-5%
Profit before tax	53%	54%	39%
Profit after tax	51%	54%	42%
Earnings per share	69%	50%	36%
Return on assets	0.3%	0.9%	-0.1%

*The column titled Q3 2011 (1) shows the change from the results of Q2 2011 to Q3 2011, while Q3 2011 (2) gives the change between Q3 2010 to Q3 2011.

Analysis:

Equity Bank saw increases of 32% and 24% in its interest income and total operating income. Equity also had a very profitable quarter, with a 42% growth in its PAT figure.

Net loans and advances grew substantially from Q3 2010 to Q3 2011 while customer deposits dropped from Q2, though the figure of 124B was still higher than 97B posted in Q3 2010.

Total interest expense increased more than twofold from Q2 of the same year, and by 63% from Q3 2010. The value of total assets rose by 43% and the return on assets also increased slightly from the previous quarter.

The cost to income ratio dropped 5 points to 56% in Q3 2011 from 61% in 2010 due to the increase in expenses in the period.

Equity’s annualized earnings per share were Kshs. 2.63 for Q3, following the growth in the bank’s profits. The P/E ratio is 7.55, based on a share price of Kshs. 19.85 by the close of trading on 2 November 2011.

Outlook:

Although Equity Bank, a microfinance bank, is faced with the same challenges as most banks in Kenya today, it has managed to post impressive results in this past quarter. Inflationary pressure and rising Central Bank lending rates have led the bank to raise its own lending rate to 15%, which still remains lower than other banks.

In a statement at the bank’s recent investor briefing, CEO Dr. James Mwangi said that though the bank had faced several challenges, they intended to continue with the good performance in the next quarter by placing emphasis on increasing their customer value proposition. He said the impressive profits were due to high staff productivity, an effective business model and an improved loan book. Based on the strategies they had laid out in the previous quarter, they increased their focus on understanding the customers’ needs, pushed for more output from their staff and optimized their IT facilities. The bank plans to stick to this strategy in order to maintain consistent growth in Q4.

Recently, a World Economic Forum report listed Equity Bank as one of 16 New Sustainability Champions in the global emerging markets. Already the bank has a network of over 5000 Equity Agents who provide the bank’s services where there are no fully fledged branches yet. Furthermore, the bank offers its services through various mobile platforms, notably the M-Kesho mobile account which has successfully reached out to customers who didn’t have access to financial services before. This has drawn a lot of SME clients who have driven its growth thus far. In the future, Equity hopes to venture into mortgage financing so as to diversify its services. Equity’s customer base and branch network continues to expand rapidly and is likely to continue doing so for the foreseeable future.