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Friday, October 27, 2006

Rave - KQ has another banner (Half) Year

KQ did not disappoint though the torrid profit growth over the past 3 years has slowed down during 1H 2006-7.

The total passengers carried were up 7% to approx 1.3 Million thus setting the stage for another record for 2006-7.
KQ owns 49% of Precision Air, which has now become the largest Tanzanian airline as well as regional powerhouse for the Tanzanian market.

Highlights

Turnover (KES Millions):

Passenger 24,237 +10.7%
Cargo and Mail 2,812 +13.5%
Handling 541 -7.8%
Other 876 +129.1%
Total Revenue 28,466 +12.3%

Direct Expenditure 19,803 +15.4%
Overheads 4,572 +11.6%
Total Expenses -Fuel 7,648 +26.3% (The largest cost increase but only 15% attributable to the increase in the cost of fuel thanks to hedging)
Other 16,727 +10.0%

Operating Profit 4,091 +0.2% (Rather disappointing)
Operating Margin (%) 14.4% -1.7% (Not good but fuel costs is the major contributor)
Net Finance Expenses (592) +3.4% (Cash rich but more loans needed to buy more planes)
(Loss) on Foreign Exchange (155) +51.6% (Primarily due to strong KES effect on $ deposits)
Other Non-Operational Items 126 + 223.1% (Precision Air in TZ)

Profit before Tax 3,470 +8.9%
Taxation 1,041 +8.9%
Profit after Tax 2,429 +8.9%

Net Profit Margin (%) 8.5% -0.3%

Earnings per share before tax (KShs) 7.52 +8.9%
Earnings per share after tax (KShs) 5.62 +8.9%

So what do I think?
A commendable performance considering the extremely high fuel prices experienced during the past 6 months. There will be some relief in 2H since fuel prices have dropped since Oct 2006. KQ benefits from the price drop only to the extent of the unhedged portion.

KQ has hedged its fuel thru April 2007 - probably at higher prices than the current $60 per barrel but has already reduced the fuel surcharge on their tickets. This may neutralise any benefit KQ has from the decrease in fuel costs.
  • There is still a 20% unhedged benefit that will flow through in the next 6 months.
  • KQ will replace its 2 SAAB aircraft with new regional jets which increase carrying capacity, range, are faster & have lower costs per km. Of course, they will raise the current debt levels
  • New 777 will be delivered in Feb 2007 for a larger network as well as lower costs per km. Full benefits will flow through in 2007-8.
  • The old 737-200s will be replaced by 3 new 737-800s in 2H 2006-7. Full benefits will flow through in 2007-8 since the capacity is higher.
In spite of the current challenges esp new entrants, I expect KQ to do better in 2H 2006-7 since they will have newer - more efficient - aircraft with a network that is continously being expanded thus reducing costs across the board. New agreements in East Asia will allow for better connections. The Paris sector allows for increased N. American connections (in addition to LHR & AMS) while tapping into a new tourist market.

Over all I expect lower fuel prices will boost KQ's bottomline as it has been subsidising some seats in Economy class on many sectors. Furthermore, KQ will be able to sell more tickets to price-concious travellers. They will have a new 737-800 in time for the Xmas rush

I expect that the general price reduction of air travel, lower fuel costs, winter in the Northern hemisphere and better economic growth in Africa will be the key to KQ's having a better 2H 2006-7.

11 comments:

kenyanentrepreneur said...

Those are a lot of expectations.

coldtusker said...

Life is but expectations.

The only guarantee is... death.

kenyanentrepreneur said...

and taxes...

coldtusker said...

Not if you are the KES 100 Million minister in kibaki's government... or for that matter in many African countries...

Kudrinketh said...

I'm still a skeptic about KQ future prospects because of too many variables;

1.Unpredictable oil prices.
I know airlines try to hedge, but this is not exact science and sometimes can backfire on you.Iraq looks like its headed for a vicious civil war,and we know the greater Middle East will follow suit.

2.Terrorism:
All it takes is just one bomb and its over.Even the threat of terrorism is enough to inflict losses. e.g BA losses over terrorism threats a few months ago.

3.Over-reliance on the ficle tourism industry:
Lets face it, KQ's resurgence is due to increase in tourism, and we all know how ficle these tourist can be.All it takes is another politically motivated clashes at the coast.And the ingredients are all there;land-issues,impending elections,growing Islamic fundamentalism increasingly influenced by neighboring Somali.

4.Emerging cut-throat competition:
The days when KQ had a monopoly on profitable routes are numbered, its already attracting strong competition on Nairobi-Mombasa route.

5.Pandemic outbreak of disease:
Africa generally has weak mechanisms to control a pandemic.Imagine how China, an emerging power, did badly during the Avian flu.If this happenned in Africa(doesnt have to be Kenya),they will probably ban any flights to Europe.

6.Labor issues:
There is always an underlying possibity of a strike by pilots,stewards,mechanics,air-traffic controllers.

CT ,knowing how much you're in love with KQ, i can already predict how you will react.Emotions aside, gimme 5 reasons why anyone should invest in KQ shares, and dont tell me how KQ shares have climbed recently.past performance is no predictor of future performance.

coldtusker said...

"Past performance is no predictor of future performance."

Absolutely... thus I attempt to "predict"... I like the word since KE hates it...

There are ALWAYS risks but for the price (126/-) vs the potential... KQ has few peers on the NSE...

Business is about risk and vision. Credit goes to KQ's GREAT MANAGEMENT TEAM... They have not let me down yet...

They have a measured expansion that allows them to be either #1 or 2 on most routes they fly...


I will be KQ specific where possible.

Oil Prices - The bane of airlines for many years. KQ will do OK as long as it doesn't rise beyond $80. KQ is in a much HEALTHIER position than most African competitors including SAA and Ethiopian.

Terrorism - There is little one can do when idiots want to kill others. You have to learn to live with it. After 9/11, New Yorkers (more than ever) live in high-rises. Did the hijackings of 1970s & 1980s kill off air travel?
No, coz the easiest way to travel.

Tourism - Less important to KQ czo of African travellers. Expansion to the Far East to reduce reliance on UK market. Paris will open new markets. Nevertheless, important to KQ.

Kenya can maintain the tourism momentum by improving security & roads.

Competition - It is good. It will help KQ become efficient. Note that the Kenya (Nbi-Msa) market is "small" for KQ.

KQ's biggest threat is Emirates but unless there are expansion restrictions, I do not see SAA & Ethiopian as significant threats yet.

Pandmics - What can one do? All airlines will be affected. Kenya needs to ensure that humane rearing methods are used. A pandemic is likely in Asia, which will drive tourists to Africa.

Labour - Yes, that is a problem. I think KQ should sacrifice short-term gains to crush the unions. Unions generally want to reward "seniority" not productivity. KQ has started traning new staff who will probably supplement the current staff.

Kudrinketh said...

Oil prices
The prices went up to $75 range without any major flare ups in the Middle East.I see it going over $100 if a civil war erupts over there.

Terrorism
You can never underestimate its effect on the airline industry.American airline industry is yet to recover fully from 9/11 five years later.

Tourism
When i fly KQ(which i do often) i dont see that many Africans,and i fly economy. now you cannot tell me that all these whites are Africans

Competition
I dont think any business welcomes competition.I dont look NBi-Msa as a small market coz i know most tourist book KQ precisely becase they're the only major airline doing that route, aka all-in-one shopping.

Labor
Glad you aknowledge the inherent risk with labor unions.I share your sentiments, they're bankrupting American airlines and automobile industry.

Terrirism/Pandemic
The helplessness of the airline industry to these unpredictables is why i stay away from airline stocks.there is just so much a good management can do, and it seems like a lot of important issue in the airline industry in general are beyond their control

kenyanentrepreneur said...

Past performance is no predictor of future performance.

That is why I NEVER try to predict which way the share price will go. it is futile.
all these "predictions" are reflected in the price. trying to "analyze" whether the price is too high or too low based on things like terrorism and weather patterns is just crazy.

& don't quote warren buffett. you won't become like him by trading on the nse.

coldtusker said...

KE - Where in my entry have I "predicted" a price?

Why not quote WB? He is the ultimate guru in investing in VALUE and MANAGEMENT. He is NOT a "trader" like your oft quoted John Henry.

Unlike you, all some of us poor Kenyans have only the NSE. In KENYA (not NYC or on the NYSE or NASDAQ) what other "options" do you recommend. Feel free to use projects successfully completed & within the reach of the average mwananchi.

I am NOT a millionaire nor will a bank lend me money nor do I believe in Get Rich Quick schemes.

Don't give me the John Henry BS. Do post his bio for me... I always try and link & quote WB coz he's Da Man...

P.S. He does not like US Airlines but he has made good money on US Airways... smart man that...

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