Negative net-worth to stalk KQ investors for 4 years

Kenya Airways shareholders are likely to be stuck with a negative net-worth position for the next four years even if the company’s profit position recovers under the restructuring, analysts at Genghis Capital say.

KQ ended up in negative equity position — where total liabilities exceed assets — of Sh5.9 billion for the full-year ended March 2015, with the same widening to Sh33 billion for the half year to September 2015.

Genghis projects the negative equity position will further widen between this year and 2020, peaking at Sh64.9 billion in 2019 as the company incurs higher financing costs to fund a turnaround.

KQ is yet to decide whether to go for equity, debt or a mix of both in funding its turnaround plan.

READ: KQ eyes rebound with McKinsey turnaround plan

“It’s quite clear that KQ may not be in a position to reverse its current state soon even if it was to grow its revenues by 10 per cent in the next three years. Thus, there is a dire need for capital injection by the shareholders to reverse the equity position,” said Genghis researchers Mercyline Gatebi and Wanjiru Gichuru.

The report says the airline’s revenue is likely to keep growing over the next four years, but that a return to profits will be dependent on a possible bailout by major shareholders that include government. KQ is also selling off some assets including land and aircraft to raise capital.

The Treasury had estimated that KQ would need an injection of between $500-600 million (Sh50-60 billion) in bailout, while Standard Investment Bank estimated the amount needed at Sh100 billion.

According to the Genghis analysts, net losses will progressively come down over the next three years, as revenue increase, with the airline projected to return to profitability in 2020.

KQ will also be able to enter into more favourable fuel hedges after 2017, with its current arrangement preventing it from benefiting fully from the falling price of oil due to contracted hedging.

The firm took its contracts when the price of the commodity was much higher than it is today. Oil is currently selling at around $34 per barrel having seen a fall from peaks of above $100 a barrel in June 2014.

The national carrier had by March last year put in place hedging contracts for 79 per cent of its anticipated fuel requirements up to March 31, 2016 and 40 per cent of requirements to March 2017, when the fuel hedge contracts.

“Therefore, we anticipate that the company will still report losses on their fuel derivatives at the end of this financial year 2016, due to the falling oil prices. After the expiry of the contracts, the airline is expected to position itself to benefit from the falling oil prices,” said the Genghis analysts.

Going forward, the airline can expect to see some cost reduction on the back of a restructuring process midwifed by consultancies McKinsey and Seabury, while the sale of aircraft will leave fewer plane types on their books, thus reducing the size of spare parts inventories and simplifying the training of maintenance and repair personnel.