I will discuss the prospects of various listed firms as businesses with a discussion of the share prices as well. As many of you know I am a huge Warren Buffet fan so I hope I do him justice.
Pick # 1 (BTW, WB does not believe in investing in airlines... I know, I know...)
Kenya Airways (KQ) - Price on 24-02-2009 is 20/-
KQ has faced a tough 3 years with the plane crash in May 2007 - this was at the peak for KQ - and then the hits started;
- elections in late 2007
- post-election violence in 2008
- record high oil/fuel prices
- global financial turmoil in late 2008 & continuing
So the question is whither KQ as a business?
Let's do a SWOT Analysis (I will update it as I get comments)
- KQ is among Africa's largest & strongest airlines. Dominant in E & C Africa.
- Strong Balance Sheet (Sep 30 2008) shows Kes 10bn in cash/liquid assets. Approx 20/- per share.
- National airline thus an advantage in getting airport slots in bilateral agreements.
- Privatized for over a decade. GoK owns 23%. KLM 26%. Better management vs government controlled firms.
- KQ can survive 2 years of losses while smaller airlines will collapse.
- Majority of the revenue is in US$, GBP & Euros.
- Aircraft have high fixed costs but deployment is flexible.
- Single hub (JKIA) thus exposure to local politics - see effect on KQ during Nov 08-Mar 09 election period.
- Inefficient hub (JKIA is controlled by the GoK) leading to inefficiencies.
- Reliance on government controlled entities for Jet A1 fuel. KQ faces problems sourcing fuel in various countries including Kenya, Ghana, DRC, Zambia, etc.
- Over-reliance on Europe for tourists. Credit crunch in Europe will hurt KQ.
- Inflexible (high fixed-cost) aircraft. Only 3 Embraers (E-190). The rest are Boeing jets.
- Higher cost airline with large(r), unionized & inflexible contingent of staff.
- Africa, especially Sub-Saharan Africa (SSA), has the lowest airline penetration.
- Ineffecient government owned/controlled carriers (e.g. Air Tanzania, Air Zimbabwe, SAA) benefits KQ.
- Increasing African trade with the Mid-East, Far East, China & India will increase passenger & cargo numbers.
- Huge potential in tourism from the increasingly wealthier Chinese, Indians & Middle Easterners.
- KQ has become the 'local' or 'regional' airline for many SSA countries e.g. Lusaka-Lilongwe, Lagos-Abidjan-Monrovia, Accra-Freetown, etc.
- Global Financial Crisis will enable 787 deliveries to be made sooner than expected.
- Ethiopian Airlines has a stronger pan-African presence & better global reach vs KQ. And it keeps growing.
- Airlines privatizing - or recently privatized - all over Africa including Air Tanzania, Air Uganda, Air Malawi, etc.
- New & expanding Low-Cost Airlines (Jetlink, Fly540)
- Low purchasing power in SSA means air travel is a luxury for 99% of the population thus limited growth in the next 5 years.
- High & volatile oil (fuel) prices.
- Low barriers to entry. Anyone can buy a plane (see Fly540, Air Uganda). Both in Kenya & in SSA.
- KQ has almost 20/- (per Sep 30 2008 balance sheet) in cash or near-cash. The 1H 2008-9 period was barely profitable BUT most other airlines made losses.
- Oil prices were at their peak in 1H 2008-9 but they have dropped by 65% though KQ entered into unfavourable hedges which will continue into 2009. KQ will see benefits of lower prices in 2009-10.
- KQ has been aggressively expanding in 2008. KQ will continue expanding into Africa & globally in 2009:
- Dhaka (Bangladesh)
- Kisangani (DRC)
- Blantyre (Malawi)
- Malabo (Equatorial Guinea)
So the business is OK. Sustainable. And growing 50% over the next 3-5 years.
Earnings: KQ barely managed 1.59 for 1H 2008-9. I expect a better 2H thus at least 3.50 for FY 2008-9 which leads me to say BUY.
PE = 6x which is great. Cash flow will be lower as KQ spends to expand.
PB = 0.5 (Kes depreciation has boosted value of aircraft/assets but note an offset for US$ loans/liabilities)