By Ibrahim Karuthiru;
Kenya Airways (KQ) recently released its Full Year Results and as expected, net loss reduced by a decent margin, but still it was huge loss, no matter how management tried to talk it out and focus investor to the new changes. Others saw nothing but doom, as is always the case social media lit up, with nothing good to say about KQ, frankly I cant blame them, it is what it is.
But keeping up with the stock market isn’t everyones forte.I make sure to read every bit of information in matters world, business, regulations, taxes etc anything else but politics. To keep it simple KQ had major news but how to interpret it is much more of maybe skill and continuous improvement.
I attended KQ’s AGM last year and I was lucky to have got the airline’s Group and Company loans and Borrowing list sheet. Things were tough and still are, current debt payable within an year amounted to Sh 29.3 Billion while longterm debt was Sh 113.2 Billion.
With a total of Sh 142.5 Billion in debt, as it was most only focused on the big loss and a few noticed the drop in total loans from 147.7b in 2015 to 142.5b in 2016.
It was then that the Kenyan Govt, its majority shareholder was in search of a way out for KQ to turn around the company for a greater future and its ability to sustain itself away from the now led Govt bailout. That was all talk until the man who made Safaricom the Largest company and introduced a product that has won major global awards (Mpesa) was brought in to save KQ, the man was Micheal Joseph.
As an investor, I was quick to fire shorts reminding him that Safaricom and Kenya Airways have very different fundamentals. That was until he made several changes in the management of the airline and brought in one Sebastian Mikosz, if he ever reads this I take back my words.
A bit of back ground here who is Sebastian Mikosz;
To begin with, Mikosz KQ turn around isn’t his first rodeo, before KQ he has had great success with another Govt airliner, Lot Polish Airliner. This is an airline he headed until he fell out with powerful labour unions and as we know labour unions are blood suckers, a phrase I use and may come to haunt me later in life.
As Lot was already in bankruptcy they dialed the only 911 call to the CEO who would breath the company back to life, that man was none other than Mike Tyson look alike called Sebastian Mikosz.
So how did Mikosz turn around look like;
To begin with, those economy class free magazine disappeared and if you wanted a sandwich you had to whip out a credit card, looks like the free lunch in KQ will soon be gone. Lot had initially prepared to ask for as much as 1 Billion Zlotys bailout under Mikosz but that Bailout was cut to just 381 Million Zlotys.
In his own words, “We want the aid to be as small as possible,” and as Munger says, nothing much to add. Mikosz has shareholders interest at heart not to mention an addition to his turn around prowess resume when he turns around KQ.
According to FT, he was able to “bring in swingeing cuts in the workforce, revamp contracts with pilots to make them more flexible, and try to squeeze savings and profits out of every aspect of the airline’s operation.”
Back to KQ numbers, the Balance sheet restructuring has turned me into a believer or is it Biliber maybe soon I will be singing to the Baby song by Justin. Moving on swiftly, KQ with a debt of Sh 142.5 Billion has literally pulled a fast one, in a good way. Lets stick to what the article on DN said ,“Treasury is to convert Kshs 25b debt to shares and further guarantee Kshs 77.3b in the event of default”.
So for all of you critics and non-Bilibers who didnt get the memo here is the math, KQ has a negative equity of around Kshs 45 Billion, Govt just converted Kshs 25b and guaranteed another Kshs 77.5 Billion. If we theoretically take that out of the books Equity jumps to a healthy positive 57.5, for a stock you can buy at around Kshs 5. With net loss carry forward into the billions meaning the next time KQ actually pays taxes will be probably 6-8 years from now, which means with Mikosz cutting unnecessary costs his modus operandi and a job he is very good at, no tax to pay, and guaranteed loans (means top management concentrate on operations).
It also means a that the operating earnings hits net earnings as it is, which blows up the cashflow and paying down those debts wont be such a big issue any more.
Again looked at it different MJ and Mikosz are in it for the glory a failure in reputation could be very damaging. Hence incentives are all pulled to make this work and shareholders are in it for a great ride. Mikosz took about 2 years to turn Lot from bankruptcy to profit, I would say you have very little time left by mid 2018 and early 2019 KQ will have taken off.
And you thought investing is all about big math, free cash flow and the frequent price gauging I see people follow like a religion. If its doing great and expected to continue it means the price has already priced that expectation in it, hence not so much a good buy.
On a personal level I would say mortgage your house and keep buying, few are the times this opportunities come a long and when they do break the bank.
WHAT OF RISKS??
The biggest was the loan at around Sh 142.5 Billion. Now that Sh 102 Billion has left, KQ can never be in a better situation than current. On the other hand it might as well default, keep in mind that the largest debt portfolio is in dollars, so if the dollar quickly appreciates then so do interest costs, hedging has also cost KQ more in the past instead of actually helping it.
But for a one two Punch I still would bet on Mikosz knock out, he knows a thing or two about it.
About Roy Ibrahim ;
Ibrahim is the Managing Director of Bricklane Capita LLC, an investment manager with offerings for institutional clients and individual investors globally.