21 January 2013

Africa: The Pride of Africa @ Kenya Airways

Kenya Airways was established on the 22nd of January 1977 and will be celebrating its 36th anniversary next week. The airline business is probably the most volatile and high beta business anywhere in the world and a 36-year anniversary is something remarkable especially when you consider that Kenya Airways has been operating deep on the frontier.

During these 36 years, venerable names such as Continental Airlines, Pan American World Airways, Trans World Airlines, Japan Airlines, Malaysia Airlines to name a few have filed bankruptcy and in some cases vanished from the scene.

Kenya Airways' longevity is therefore an admirable thing and seeing the logo of the flag carrier in airports all over the world, something that we can all be proud of.

It has been powerful guerilla advertising for Kenya and long before the concept of 'geurilla advertising' was invented. Turnover has increased 392% since 2003 to Kenya shillings 107.897b in the last full year, Kenya Airways flew 3.6m passengers 12 months through March 2012 up from 1.6m in 2003.

And now after successfully completing its rights issue last year, it's bulking up its fleet. The key risk for the airline was the rights issue.

If it could not raise that capital, it would have been unable to bulk up. Therefore, investors need to appreciate that with the rights issue, Kenya Airways got the ante with which it could stay at the table and play the game.

The outsize risk for investors was that it could not complete the rights issue and that it would have no head room for expansion. The airline is taking delivery on a new plane practically every month now.

Today the EAC is the 2nd fastest growing region in the world after ASEAN. Africa is rising. Where once we were disconnected from the world, we have been connected.

And Kenya Airways is connecting all points in Africa to the world. There is an embedded franchise. There is an embedded knowledge of how to operate in what remain difficult to operate places.

I know plenty of 'Johnny come latelys' are coming after Kenya Airways' lunch but look at what happened to JetLink. Africa remains a very asymmetric market.

The corporate intelligence built up over 35 years is not something that can be replicated overnight. Now lets look at the investment case. Kenya Airways' share price closed at 10.95. Since January 2012, it has retreated 44.55%.

Kenya Airways reported a 1st half PAT loss of Sh4.788b. The market cap is 16.386b Kenya shillings which is under $200m.

There are many known unknowns, the price of fuel being one of them. And the volatility around the business is higher than in most enterprises.

The courts need to appreciate that the CEO has to be allowed a free hand because a judge of the high court has plenty of expertise in the law but none when it comes to running an airline.

And if we want the airline to be around in another 35 years and to be providing employment for Kenyans, there are times when the captain has to rightsize in order to secure the long term future.

I have noticed that we swing like a pendulum from excessive optimism to excessive pessimism. Everyone keeps asking me; 'What's happening in the stock market?'

The answer is we have emerged from a disequilibrium, an extended period of dislocation. I have a supreme conviction that the Kenya Airways share price is dislocated and has been for a quite a while.

Absolutely all the bad news is baked into the price. I think we are going to see a series of positive surprises this year and that Kenya Airways has the potential to rally really hard.

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