Citi forecasts tough times ahead for Kenya Airways

Citigroup’s research arm has downgraded its target price for the Kenya Airways stock citing an expected fall in the airline’s earnings for the year. The national carrier’s stock was trading at Sh11 on Friday, which is lower than Citi’s projection of between Sh13 and Sh12.

The share has shed 12 per cent in the past six months, despite a rally of most Nairobi Securities Exchange listed stocks.

In an analysis based on the airline’s performance in the March 2013 quarter, Citi projected the company’s net profit would fall due to an estimated nine per cent reduction in expected revenue from Sh101.9 billion to Sh98.3 billion in 2013.

“For financial year 2013 estimated, we expect Kenya Airways to report a net loss of Sh7.9 billion (Sh6.93 per share), compared to Sh7.5 billion (Sh6.66 per share) estimated previously.

This would be a substantial fall from a net profit of Sh1.65 billion (Sh3.58 per share) in 2012 financial year,” says Citi research in its report.

Citi retained its earlier forecasts for 2014 -2015 as a net loss of Sh3.13bn (Sh2.09 per share) in 2014 and a net profit in 2015 of Sh0.6 billion (Sh0.41 per share).

In addition to the 3.7 per cent decline in passenger traffic already reported, they also expect passenger revenue yield to fall by an estimated six per cent.

“We are concerned that current losses could undermine cash flow, such that Kenya Airways may need to raise more capital, both debt and equity,” adds Citi.

On the upside, Citi sees a potential of Kenya Airways raising the additional capital from Etihad Airlines should their code sharing partnership with prove to be successful.

Etihad has a strategy of deepening its alliances by taking equity stakes in other airlines rather than participating in one of the three main global alliances.

KQ finance director Alex Mwangi had given a positive outlook in April, saying that the airline expects to close the year with a modest profit that’s is however less than 25 per cent of the Sh1.7 billion net profit posted the prior year.

Passenger volume in the quarter was flat compared to a year ago, likely to have been caused by the Euro-zone recession and possible concerns over violence in the run-up to last month’s elections affecting tourism.

The main source of capacity reduction was Europe (-30.4 per cent compared to a year ago), due to the suspension of its route to and from Rome and reduction in service to and from London.

The main routes that recorded capacity growth were the Middle East /India/Far East and East Africa. Asian growth was mainly due to Boeing 777s replacing Boeing 767s as well as the launch of a new route to New Delhi.