The following is an update from Genghis Capital after the release of Kenya Airways capital restructuring circular;
The transaction seeks to cut Kenya Airways’ debt by approximately KES 50.0 Billion (KES 27.3Bn owned by the government and KES 22.7Bn by certain banks) and revert its negative equity of KES 44.0 Billion to positive equity of KES 11.8 Billion.
Analysis vs Proposed Recommendations:
Using the price that existed as at Genghis previous analysis, KES 6.80, 8.5Bn new shares would be allocated for the transaction. In the proposed transaction, 28Bn new shares will be created at an implied price/share of KES 2.13. Per this assessment, the dilution to other shareholders from conversion of banks and the government debt, equates to 19.0X vs. our estimate of 5.7X (from 43.47% to 2.25% stake). This is before the other shareholders exercise their rights, in a planned rights issue.
Proposed Capital Restructuring:
For the restructuring to be successful, below are the key steps of the proposed transaction;
- Share split; To effect creation of the new shares at a price above par value (shares split 20 times, moving par to KES 0.25 from KES 5.00.
- Consolidation 4:1; To consolidate the newly issued 28Bn shares to 6.3Bn shares, to have a meaningful share price.
- Rights issue; For other shareholders to prop up their diluted stake by raising KES 1.5Bn.
Possible Scenarios on the Success/ Failure of the transactions:
Scenario 1: Assuming Success
The transaction will pull equity above negative to KES 11.8Bn. Despite the massive dilution, we are of the view that this is a necessary step bearing in mind that currently all shareholders own a stake worth zero in KQ.
Scenario 2: What if the Transaction Fails?.. The Ugly
The airline has indicated that there is no alternative to this transaction and if it will not be executed, then operations cannot be sustained as a going concern and insolvency proceedings will begin. If this is the case, then, the company will be delisted, shareholders will be left with nothing, unsecured creditors both government and banks will also be left with nothing, as the assets of the company have been charged to the benefit of secured lenders.
In the stock market, what currently gives the counter value is sentiment and goodwill hinged on recovery of the airline (which we are positive is forthcoming, long term). The restructuring efforts are noble and necessary. Despite this, it is critical that current shareholders consider the significant dilution of their current stake in the airline. Genghis therefore reiterates their previous view that the counter is highly dilutive and speculative in nature.