Precision Air aeroplane at the Julius Nyerere International Airport in Dar es Salaam. Analysts warn the IPO may not be lucrative with spiralling fuel costs. File
Precision Air will need to manage its fuel costs better to avoid fluctuations in its net earnings, analysts at Sterling Capital have said.
The Tanzanian airline, whose initial public offering (IPO) opens on October 7, has recorded volatility in net profit in line with fuel price fluctuations.
“Operating profits depict a steady increase except for 2008, attributable to the global financial meltdown which affected the global economy. However, the bottom line remains volatile largely as a result of fuel price fluctuations,” said Sterling Capital analysts.
“It is on the back of net profit volatility that the Cashflow position remains weak.”
Sterling said Precision Air’s IPO price of Tsh475 (Sh29.39) is “over-priced,” arguing the airline may find it difficult to maintain profitability due to the volatility in fuel prices.
Precision Air is selling 58,841,750 shares targeting to raise Tsh27.9 (Sh1.7) billion. Sterling Capital’s report on Precision Air says that the Tsh475 initial public offer (IPO) price is based on the airline’s ability to grow profits although this is vulnerable to fuel prices, the major cost for airlines.
Fuel contributes up to 40 per cent of operating costs for an airline and as the input rises coupled with the weakening of currencies against the dollar, this cost takes a bigger bite from profits than expected.
“On this basis, we are of the opinion that, the stock is too expensive to invest in,” says the Sterling Capital report.
Precision Air’s net profits as of 2011 stood at Tsh1.1 billion (Sh67.8 million), a 54 per cent drop from the Tsh2.8 billion (Sh172 million) posted in 2010.
This is the lowest profit level in 5 years and is a gradual decline, save for 2008 when the airline was caught in the turbulence of the global financial crisis but even then net profit of Tsh1.66(Sh102 million) billion are still larger than last year’s.
This gives the airline a net profit margin of 2 per cent which is half its peer and partner Kenya Airways which has a 4 per cent margin.
Despite the profitability drop Precision Air’s business on the whole looks promising since projections are that the firm has maintained growth rates in its revenues by an average compound annual growth rate of 14.22 per cent over the last five years says the report.
And to maintain profitability, any airline must manage input costs.
Eric Musau, a research analyst at Standard Investment Bank, said that businesses such as airlines that have revenues and costs that are dollar- denominated need tighter management of the latter if they are to take advantage of a weak shilling.
“But at the moment it (the industry) appears generally well positioned,” said Mr Musau.
Export oriented firms are also well positioned to ride on the weakening Shilling which has fallen to an all time low of Sh104 to the dollar.
