GROW (Get Rich Opportunity of the Week): Kenya Airways Stock a Buy!

After some months of ranting about the limitations of development aid policy, its disgusting mix of Utopianism and arrogance, and the mediocrity that is government in Kenya, I feel that it might be more productive, and fun, to focus on good news. Under the just unveiled GROW series, I shall endeavor to unveil what I think are exciting investment opportunities in Kenya and in the wider East African region. And I am hoping that others who have business ideas that they are not presently trying to patent or pursue in some secrecy share them on this blog.

I come up with good business ideas far more often than I attempt to bring them to practical fruition. So why should they just die, when they might inspire someone else? Having said that, let me confess that on many an afternoon in the library working on my dissertation I have daydreamt of inspiring a go-getter type with an idea that they turn into a billion dollar company. This entrepreneur extraordinaire, having rang the opening bell of the New York Stock Exchange, turns to me with a grateful tear in his eye and awards me a tiny stake worth millions.

First on the GROW SERIES is buying Kenya Airways stock which trades on the Nairobi Stock Exchange.

Kenya Airways has returned a 48 per cent increase in its after-tax profit for the six months to September 2005. For the year, its earnings were $30 million compared $19.5 million in the same period in 2004 and $4.5 million in 2003.

In 2005, it reached the 2 million mark in passenger carryings, a growth of 20% over the previous year. The airline’s net margin improved to 9.2% from 4.3% in 2004.

KQ is the leading regional carrier to Africa operating from its Nairobi hub. It was established in 1977, the hey-decade of the White Elephant Project and went on to lose money for almost every subsequent year until its privatization process in 1996. Since then, it has posted growing profits yearly and is now Africa’s first privately privatized flag carrier.

These positive changes in the company can be directly attributed to KTAP (Kenya Airways TurnAround Project) which over the years has overhauled the airline’s revenue management, cost structures and route and fleet planning with invaluable help from KLM which owns almost a quarter of the stock.

The good news in my opinion goes beyond celebrating the past, the stock is still undervalued. Despite having zoomed from a 12-month low of Kshs 17.15 to Kshs 78.50 on 7/11/2005, it is still trading at a price/earnings ratio of 9.34 on top of having a dividend yield of 1.59%. The clincher: Kenya does not have a capital gains tax!

Compare this with major US airlines which have a net profit margin of -0.7% or even the regionals which can only boast of a 3.6% margin and a dividend yield of 0.6%. This is a great opportunity for everyone who fancies diversifying their portfolio and snapping up a bargain. A glance at the company’s shareholder profile reveals that the world still does not know what a gem KQ is: there are only 77 foreign individual stockholders and 6 foreign institutional investors compared to almost 83,000 Kenyans and 2962 Kenyan institutions by mid-2005.

KQ Managing Director Titus Naikuni recently had this to say:

‘Strong market growth remained in Europe following the successful deployment of the 1st Boeing 777 aircraft as well as the Middle East & Asia that includes the Far East operations. Naikuni further noted that all African regions experienced increased passenger growth, West and Central Africa 17%, East Africa 19%, North Africa 14% and Southern Africa 36%. Over the period, the Kenyan domestic network experienced cut backs in frequencies in response to decline in demand and this restricted traffic growth to 4%. Uplifted Cargo volumes experienced a substantial growth of 38% mainly from increased KQ belly space on the B777 and the increased deployment of the larger B767 in Africa. The escalating global fuel prices impacted the year’s result as fuel cost was 63% above prior year, 30% of it owing to price difference and the rest due to growth in operations and the movement in the KSh/US$ exchange rate. The airline fuel price averaged 140.74usc/ag partly mitigated by a successful net hedging benefit of KSh 235m realized in the year.’ Go here for a simple investor presentation.

So what of the currency risk in buying KQ? Well that is always a consideration when it comes to emerging markets investing, though I am hoping that some of the people reading this are in Kenya. While the currency has experienced some volatility, it strengthened against the dollar since an August 2004 low of Kshs 82 per dollar to Kshs 73 in March 2005 and a subsequent softening to the present Kshs 77. In more palatable and simpler terms, the underlying macroeconomic and fiscal picture may not be the prettiest but nor is it indicative of a currency that is vastly overvalued and undervalued by the market. I doubt that there is a currency crisis anywhere round the corner. The greatest threat will be that the government will decide to print money for the 2007 elections as has happened in the past with disastrous results for inflation, but that still leaves two full years of investing in this wonderful stock. (In case you want to learn more about Kenya’s monetary and fiscal position, click here for a June 2005 Central Bank of Kenya statement)

If this post has raised your interest in learning more about the stock or even purchasing some of it, do not hesitate contact one of the stockbroker firms found in the NSE’s page. Then please write and tell me what you have done and how it is working out for you. The GROW series is open; I hope to hear from lots of people with ideas of how profits can be made in Kenya in particular and East Africa in general.