DailySun
The recent re-entry of Kenya Airways into the Nairobi Securities Exchange this week has elicited a favorable response from investors.
Trading resumed on Monday after a suspension lasting about four and a half years, with shares of the national carrier initially rising to Sh6 (4.6 US cents).
By the close of trading on Wednesday, shares were priced at Sh4.76 (3.7 US cents) each, resulting in a total market capitalization of Sh25.21 billion ($193.67 million) for the airline.
The initial trading suspension began in July 2020, following a government proposal suggesting the nationalization of the airline, which was grappling with escalating debts due to the drop in global air travel caused by the Covid-19 pandemic. At that time, shares were valued at Sh3.83 (3 US cents).
However, the nationalization plan was dropped after the airline began showing signs of recovery. In 2022, a change in government leadership led to significant policy changes, with President William Ruto shifting the focus from nationalization to privatization. These developments, alongside the airline’s recent return to profitability, enabled its relisting on the exchange this week.
“The trading suspension of Kenya Airways PLC shares was lifted due to the company’s recent positive performance, which included a profitable quarter and the withdrawal of the National Aviation Management Bill 2020,” the NSE announced on Monday.
Profitability elevates sentiment
Analysts attribute the investors’ optimistic view of Kenya Airways’ stock to its recent financial achievements, showcasing a turnaround following an extended period of losses and substantial debts.
In the first half of the financial year ending June 30, 2024, the airline realized a profit after tax of Sh513 million ($3.96 million) — its first profit since 2013, after settling taxes and debt obligations.
During this period, the airline’s revenue rose by 22% to Sh9 billion ($69.5 million), driven by a 10% increase in passenger numbers, reaching 2.54 million. Additionally, the airline implemented an expansive turnaround strategy aimed at cutting costs, enhancing capacity, and reorganizing finances, which led to a 22% reduction in overhead costs and a notable decrease in debt, positively influencing its profitability.
“Our goal has been to strengthen our core operations, enhance customer service, and pursue new growth avenues. This performance positions us favorably to tackle challenges in the aviation sector and prepare for future expansion,” remarked Allan Kilavuka, CEO of Kenya Airways, last August.
Restructuring financial obligations
Kenya Airways has endured financial challenges for over a decade, exacerbated significantly in 2017 when the airline obtained an $841.6 million loan from the Export-Import Bank of the United States (EXIM). Of this loan, $525 million was guaranteed by the government and was intended for the acquisition of seven aircraft and a new engine as part of an expansion plan.
However, the strengthening dollar against the shilling over the following years resulted in considerable increases in financing costs for the dollar-dominated loan, further plunging the airline into debt.
In 2022, the Kenyan government intervened by taking over the debt, converting it to local currency and restructuring the repayment conditions, providing the airline with essential relief.
Post-conversion of debt into equity, local commercial banks have acquired approximately 38.1% ownership in the airline. The Kenyan government retains the largest stake at 48.9%, with KLM Royal Dutch Airlines holding 7.8% and minority investors comprising 2.8%.
Search for a strategic investor
While the reduction in debt and a focus on operational efficiency have allowed Kenya Airways to regain profitability, analysts warn that investors should remain alert to the risks associated with the airline’s negative book value, indicating that its liabilities surpass its assets.
“The recent turnaround of KQ (Kenya Airways) sets the stage for investors to expect improved performance moving forward. Nonetheless, the main obstacle for the airline could be its negative book value, which may hinder its positive stock activity,” noted Ronny Chokaa, an analyst at Capital A Investment Bank, in comments shared with The Africa Report.
Kenya Airways last reported a negative book value of Sh123.6 billion ($954 million), highlighting the severe impact of years of consecutive losses on its financial health.
For an extended period, the airline has been searching for a strategic investor to aid in its financial recovery, with the government signaling its willingness to transfer ownership to a private entity capable of reviving the airline’s fortunes. However, despite previous management assertions that they were in the “final stages” of securing a strategic partner, no such collaborations have been announced.
