Friday, November 25, 2005

Development Bank of Kenya Announces Third Quarter 2005 Results

DBK's results were substantially better than 2004 but disappointing when compared against other Kenyan banks.

This is a government controlled bank through ICDC (not ICDCI). It was in the news when a merger with HFCK was contemplated. The then CEO (Peter Lewis Jones) of HFCK was removed from office as CDC's influence waned in the running of HFCK.

Assets increased to KShs 2.50 Billion
PBT was KShs KShs 110 Million
PAT was KShs 77 Million
Shareholders' Equity is KShs 1.017 Billion
Customer deposits are a mere KShs 655 Million

3Q PAT vs. 2Q PAT was + KShs 9 Million only! Therefore a bank with KShs 1 Billion in Equity made a mere 0.3% per month!

So what do I make of it? Well... my thoughts are in BLUE...

The ROE is amongst the lowest in the sector.

Bank --- 2004 Equity -- 3Q Earnings -- ROE
--------------------------------Annualised-- Annualised
DBKL ---- 973,828 ----- 102,976 ---------------- 10.57%
KCB ---- 2,643,842 ------ 284,300 -------------- 10.75%
I&M ---- 1,850,730 ------ 335,256 -------------- 18.11%
Diamond -- 1,437,072 ----- 249,148 ------------ 17.34%
NIC ---- 2,643,842 ------ 284,300 ------------10.75%

Caveat: There are many smaller private banks not included in the list. I tried to match up similar sized banks that have a stronger presence in the business sector. KCB was included as a "former" government controlled bank. National Bank of Kenya has substantial preferred capital thus is not a good comparison.

DBKL should;

  • be sold to another financial institution which wants entry into the Kenyan market e.g. State Bank of India bought a majority stake in Giro bank.
  • buy other stable banks that have weaker balance sheets but growth potential e.g. Consolidated Bank of Kenya
  • merge with other stable banks that have weaker balance sheets but growth potential e.g. HFCK

When 5-year T-bonds are yielding 12.5% for a post-tax 10.625% (after a 15% withholding tax), any bank that can't achieve/match that return needs to rethink their business strategy.

NIC & Diamond are increasing their footprint & lowering costs through automation. KCB is growing in Kenya with a regional focus. I&M has shown strong growth in the SME sector.

What is DBKL doing to (prudently) grow & maintain its presence in the sector?

Tuesday, November 08, 2005

KQ Announces Interim 2005-6 Results

KQ announced better than expected results for the period from Apr 1 - Sep 30 2005. Comparisons are H1 2005-6 vs H1 2004-5.

  • Turnover/Revenue +29% to KShs 25.4 Billion
  • PBT +36% to KShs 3.2 Billion
  • PAT +48% to KShs 2.2 Billion
  • EPS +48% to KShs 4.83

So what do I make of it? Well... my thoughts are in BLUE...

The effective tax rate reduced by 6% thus the higher PAT vs PBT. I think the "depreciation tax shield" accounts for the difference. The depreciation benefit will continue as they have 3 new 777s of which 2 were delivered in H1 2005-6.

KQ has expanded its reach especially to the East with 3 Chinese destinations (Hong Kong, Shanghai & Guangzhou). In view of their current expansion I expect Singapore & Japan will be added to their list of destinations in 2007.

Further expansion to African destinations continues with new routes e.g. Bamako & Dakar as well as expansion of existing sectors e.g. Lagos. Virgin Atlantic has taken a majority stake in Nigerian Arlines & created Virgin Nigeria & they will be a significant threat to KQ.

KQ announced that they will commence direct MBA-LHR flights in Dec 2005 to cater to an important tourist market. KQ is probably trying to counter the various charter operations that fly direct to Mombasa.

KQ plans to fly to Paris (France) & Freetown (Sierra Leone) by March 2006.

  • I see a move to expand the West African market for onward flights east to China.
  • Paris will open up a HUGE market for safari travellers esp from the French, German, Italian & East European markets.
  • The Italian market is primarily served by charter flights but KQ provides an opportunity for scheduled services. Air France & Alitalia can provide seamless domestic feeders to KQ.
  • There will be 4 European hubs for KQ London, Amsterdam, Paris & Instanbul. Istanbul provides a getway for East European travellers e.g. Ukraine.
  • Additional European hubs also provide greater opportunities for N. American travellers to connect thru to Kenya using Northwest, KLM & Air France as feeders. Northwest flies daily from Detroit to Amsterdam. Air France flies from New York to Paris.

Passenger growth for the Mid-East & Asia +15% but turnover was -1%. This doesn't bode well for the Mid-East market since margins are under pressure from Emirates (Dubai), Etihad (Abu Dhabi) & Qatar Airways. The Mid-East airlines are well financed & provide a hub to European & Asian destinations. Emirates has expanded its reach to West Africa thus providing an alternate route to East Asia & India.

Passenger growth for Kenya +34% & turnover was +48%. Collapse of local carriers e.g. Regional Air & EASA decreased competition. KQ plans to introduce 767 flights (NBO-MBA) to increase capacity during peak early morning & evening flights that cater to business travellers.

Passenger growth for Europe +27% & turnover was +34%. New 777s with larger capacities & collapse of EASA led to tremendous growth. Average seat occupancy also increased - in spite of increased seats. London must have done very well with 90%+ levels. Increased European tourism due to a favorable Euro rate vs KShs. Istanbul was an additional destination during H1 2005-6 vs 2004-5.


  1. Huge & wealthier Asian markets esp Hong Kong, China & Japan have not been fully exploited.
  2. Economies in sub-Saharan Africa have started growing as well as stabilized governments.
  3. Regional airlines have been decimated thus little regional competition (see Challenges on SAA & ET).
  4. Kenya's economy shows strong signs of growth fueled by liberalization.


  1. Mid-East carriers who are very well financed & have the implicit backing of their governments e.g. Emirates is owned by the City of Dubai.
  2. Resurgent S.Africa Airways & Ethiopian Airlines will provide competition for KQ in the core regional markets
  3. Fuel prices. Even though (Nov 8 2005) they have dipped below $60/barrel, they could rise. Kenya lacks sufficient refining capacity thus KQ can be held hostage by a shortage.
  4. Terrorism still lurks in the background. Whether directed at KQ or other airlines a 9/11 style attack can cripple the industry.
  5. Avian flu can cripple tourism esp from the new Chinese destinations. In addition, East Africa is at risk from migratory birds thus an outbreak can devastate Kenyan tourism.
  6. Unstable African nations is still a threat to KQ. The incident in Ivory Coast last year shows how KQ's fleet & crew can be stranded.


Financially strong airline with excellent management & partners e.g. KLM. Nevertheless, at best, it will have limited international reach but a strong regional focus on East, Central & South Africa. Definitely needs to be added to the portfolio at today's (Nov 8 2005) price of 76/- for gains over a 3-year period till growth levels off.