What next for Kenya Airways shareholders?

From left, NSE vice chair Bob Karina, Kenya Airways CEO Sebastian Mikoz and NSE chief executive Geoffrey Odundo during KQ's relisting at the bourse on November 29, 2017. PHOTO | SALATON NJAU | NMG
From left, NSE vice chair Bob Karina, Kenya Airways CEO Sebastian Mikoz and NSE chief executive Geoffrey Odundo during KQ's relisting at the bourse on November 29, 2017. PHOTO | SALATON NJAU | NMG 

Since the financial restructuring of Kenya Airways #ticker:KQ and the listing of its new shares on the Nairobi Securities Exchange (NSE) on November 29, 2017, there have been many questions, much confusion and a fair amount of euphoria regarding the trading of KQ shares on the NSE.

It is common knowledge that the airline was facing financial distress prior to the restructuring. The company therefore opted to renegotiate and reduce its debt by giving its creditors a large equity stake in the airline.

This in order to reduce the airline’s debt burden and to continue the airline’s operations. This process significantly affected the overall shareholding structure of the company.

As a result of converting a large amount of debt to equity, KQ issued a large amount of new shares which resulted in significant dilution to existing shareholders, meaning the old shareholders now own a smaller piece of a much healthier company.

This means, where the old shareholders had owned 100 per cent of KQ before the new shares issuance, today these same shareholders own five per cent.

This five per cent shareholding was effectively left for old shareholders as goodwill from the banks and other lenders. One of the outcomes of the restructuring and issuance of new shares was share consolidation.

Each and every investor had its shareholding consolidated by a ratio of 4 to 1 to reduce the total number of outstanding shares in issue. In the end, each shareholder’s ownership stake in KQ has not changed, as each shareholder was consolidated on the same basis.

If you owned 4,000 shares before consolidation, then you own 1,000 shares after consolidation. But your percentage ownership stake in KQ has not changed. Share consolidation has no effect on the value of an individual’s shareholdings.

This brings us to the issue of value. Prior to the restructuring, the net asset value of the company was negative, with the company owing billions of shillings to its lenders.

In theory, the shares were worth nil but were trading at around Sh5 per share on pure speculation and, quite frankly, was not justified by any fundamental analysis of the company.

Today and as a result of converting debt to equity and issuing new shares, the net asset value (net asset value or NAV is the value of a company’s assets minus the value of its liabilities) of KQ is positive, the company is solvent and its debt burden is greatly reduced.

The NAV per share of KQ after an assumed debt restructuring was estimated at around Sh1.57 per share at March 31, 2017.

Given the interim losses to September 30, 2017, the NAV per share would now be less, probably around Sh1 per share which, coincidentally, equals the share’s par value today.

To this end, it is very difficult to understand how the stock market is valuing KQ at over Sh15 per share which reflects a multiple to NAV of over 15 times and a market value of nearly Sh125 billion.

Also, comparing today’s share price of Sh 15 to the share price of KQ before the restructuring of around Sh5 simply makes no sense, as the share price before the restructuring represented an irrational price that, quite frankly, was as unsustainable as Kenya Airways’ debt burden at the time.

Investors should value their shares today based on fundamental valuation methods like net asset value, cash flow and earnings.

Andre DeSimone is CEO Kestrel Capital, a member of the NSE and advisor to Kenya Airways.