Dark and bright spots in Kenya Airways’ Sh26.1 billion loss

When Kenya Airways CEO Mbuvi Ngunze was ushered onto stage, he had no choice but to face the cameras, journalists, analysts and investors to say, “We have delivered the same bottom line.”

Once again, the national carrier, after making about 58,400 landings and take offs, could not defend its slogan of ‘Pride of Africa’.

Instead, for the year ended March 31, 2016, it has broken its own record to post worst ever results to report Sh26.23 billion loss.

And when it was the turn of the carrier’s Chairman Amb Dennis Awori to speak, he painted the picture of how deep the wound in KQ’s financial books is. Unlike last year when the company announced a Sh25.74 billion loss from a five star hotel and received mockery on social media, this time, the venue was Pride Centre- the KQ headquarters.

“We could have done this, as usual, in a downtown hotel but we thought that given the circumstances... it would be better to do it here to give you an opportunity to see us up close,” he started off.

With the loss, shareholders walked away empty handed for the fourth year in a row after the board of directors failed to recommend any dividend. The last time they ever took home a share of their investment was in 2012, where they were awarded 81 cents per share.

At Nairobi Securities Exchange (NSE), where KQ is listed, it shed over 8 per cent of its value thanks to the announcement. It later settled at Sh4.35 before wrapping the week at Sh4.10-being half its average share price of 2015.

In 2011, its share was priced at Sh32.25. That means, in the last five years, it has lost by 87.38 per cent, largely attributed to the market’s bear run which also hurt the majority of listed firms.

More worrying is that KQ has plunged into deep ends of negative equity of Sh35.6 billion. At negative shareholders’ equity, which is the difference between current assets and current liabilities, KQ would struggle if all its obligations were to be paid at once. As at end of March, its statement of financial position show, it did not have sufficient assets to cover its liabilities.

Its debt ratio has also widened to 122.51 per cent, meaning that most of its assets are funded by liabilities.

Its debt to equity ratio is still in negative meaning that it is the lenders who are in the control seat as opposed to the owners of the firm. Since 2011, lenders have been putting in more money than the owners.

Whereas in 2011, for every one shilling that a shareholder of KQ was putting in, lenders were adding in Sh2.41. In 2014, for every one shilling from the company owners, lenders were pumping in Sh4.27 until last year, the firm’s equity sunk into negative equity. That has widened by a massive 493 per cent until there is a gap of Sh35.6 billion to cover just current liabilities.

 

MAJOR BLOW

Since about 98 per cent of KQ loans, according to acting Group Finance Director Dick Murianki, are dollar denominated, the swing in exchange rate that saw the shilling lose 12.9 per cent of its value dealt a major blow to KQ’s finances.

Its finance cost, which is in form of interest being paid to service loans, went up by 48.85 per cent to Sh7.04 billion. This is the highest amount in over five years to be paid by the airline in a 12-month period.

That a national carrier is at the mercy of lenders puts to question the role of the big shareholders, the Government, which owns 47.94 per cent and Air France-KLM which has 43 per cent stake. But even as figures suggest otherwise, Ngunze says the two have shown unwavering support.

“When I announced results last year, I remember doing interviews and basically we were being buried. But a year later, we are still operating. I thank all our stakeholders and hat off to them for standing by us and believing in KQ story,” said the CEO.

He added that the two are embedded in restructuring the capital optimisation of the firm.

But despite the slight recovery in solvency ratios, Murianki said the company is still in negative equity because of losses accumulated over time and the hedged reserves. The hedged reserves were in negative figure of Sh13.49 billion.

“Our loans are dollar-denominated. When we value them on year-on-year basis, we hold that movement in the reserves. We only recognise it in profit and loss when we have made the actual payment,” he explained.

But hidden in this loss are some positives. On this basis, the CEO said that the bottom line may have been the same but the quality in this loss, gives some hope.
“At operating line, we reached break-even if you exclude one-offs. If we did not have movements in exchange rates between this year and last year, the results would have been Sh16 billion loss,” explained Ngunze.

Excluding one off impact elements such as sale of assets, compensation for late delivery of aircraft, write-offs and impairments, the CEO adds that the loss before tax improved by Sh2.51 billion.

Having cut its current liabilities by Sh7.16 billion supported hugely by 32.8 per cent cut in its loan and borrowings to Sh29.3 billion, the airline injected some energy in its liquidity ratios, which measures the ability to meet short term obligations.

Its current ratio, which measures the ability to service short term borrowings improved by 0.05 points to settle at 0.31. However, at this position, KQ is still far away from the required threshold of 2. Therefore, its current assets can only service about 30 per cent of the liabilities falling due in 12 months period.

 

NEGATIVE POSITION

Full year revenue grew by Sh6 billion to Sh116.2 billion while direct costs dropped by Sh8.2 billion. As a result, gross profit margin, an indicator of how much gross profit is made for every unit of sale increased to 41.58 per cent.

However, the net loss meant that its net profit margin remained at negative position of 22.47 per cent. That means that for every single shilling that KQ generates as revenue, it attracts a net loss of Sh0.22.

The return on investment ratio continues to be in negative, a trend that begun in 2013. At a negative position of 16.48 per cent, it means, every one shilling of asset invested in KQ lenders and shareholders are attracting a loss of Sh0.16.

But its activity ratios recorded a slight recovery. The fixed asset turnover ratio, improved from 0.78 to 0.90. Its ability to generate revenues from non-currents assets has strengthened. Its total assets turnover ratio has also moved from 0.61to 0.73 a pointer to the impact of reducing flight number from 43 to 36.

Reduced flight numbers coupled with trimming of workforce, Ngunze said, has enabled the firm to save Sh811 million every month since the subleased planes are generating revenue while the sold ones have minimised idle capacity.

Having moved its cash and cash equivalent from Sh3.26 billion to Sh4.82 billion and its net cash from operating activities having jumped by massive 424 per cent to Sh6.36 billion, its cash flow position also improved.

Its debt coverage ratio, which measures the ability of a firm to pay liabilities from cash generated from operations moved from 0.65 per cent to 3.28 per cent. This is the highest since 2012.

However, even with the improvement, the firm’s ability to satisfy long term debt using operating cash flow is too low at 0.05 despite being an improvement from 0.01 in 2015.

Going forward Ngunze says his focus is to revisit capital structure and find ways to reduce debt as well as injecting in new equity. According to Awori, attracting investors while still in negative equity position is not easy.

“As at now, if we go out to investors, we would probably have a problem setting valuation for the airline. We have to make the airline more attractive first,” he said.

The company will be betting on ‘Operation Pride’ initiative which is anchored on closing profitability gap by revisiting business model and secure financial stability.

“In order to come back to roughly five per cent profit after tax, we need about $200 million dollars to the bottom-line because of the losses we have cumulatively made,” Ngunze says.