Why do I still stick with KK?
I have gone through a logic process. I did the same with KQ [which I like as a Kenyan firm] then sold out just after the Rights Issue when the Investment Logic failed. I support KQ as an airline not an investment.
1) I look at 'forward statements' or outlook not history [unless it is to learn about patterns]. At today's price of 10.40, I like it versus other options. Nevertheless, I remain diversified. I am not a speculator so I look at it over 3-5 years but I will sell out if I think the price has overtaken sense.
2) KPRL - Read this
http://www.cofek.co.ke/Letter%20to%20KPRL.pdf
All the major [non-briefcase] players are upset with KPRL's inefficiencies
"In 2011 for instance, an audit by Deloitte & Touche showed that the marketers had suffered a cumulative loss of up to Sh7 billion arising from the re-exporting for further refining."
http://www.standardmedia...finery-was-long-overdue
There was another audit in the works & KK mentioned in the AGM that it was happy with the results/conclusions.
KK has sued KPRL for KES 3.1bn [which is probably derived from Deloitte's audit report] which may be relied on the court/s. I expect other OMCs are waiting in the wings to see where this goes. I expect KPRL to fold up sooner than later in its current format. The good news is that it owns lots of land & storage tanks which are very valuable assets.
3) KPC - An arbitrator ruled for KK for 5.4bn or so. A foolish judge said the KES 5.4 bn award to KK is too much for the economy. The fool had no concept of 'biashara' when land in Embakasi is valued at 100mn/acre & Orbit was granted an award over 100 acres = 11bn. The losses by KK & KQ (1H) of KES 6bn hasn't closed them down. KQ raised 14bn in the Rights Issue. KPLC raised 9bn. Kenya's economy is not as fickle as the fool thought. KenGen issued a 9bn bond & is looking for 30bn. What did the Thika Highway cost? What do MPigs & Senators cost us annually? How much was kibaki's retirement palace? How much did Safcom make in 2012-13? What loss did Orange make? Kidero wants to raise 40bn from Nairobians. 5.4bn is only 60 days revenue if he succeeds!
Status of the case: KK appealed to the Appeal Court to set aside the idiot's ruling that the award be re-adjudicated. The hearing is set for 3Q 2013 with delays occasioned by the vetting, elections & petitions. According to the lawyer on KK's board, the ruling, if in favor of KK, will continue accruing interest until paid. At 10% p.a. that = 540mn/year!
There are 2 aspects to an award. The judgement/award. The collection/payment. You get a judgement & then attempt to collect. Unfortunately, the process is quite long. So after all the appeals are done & if KK wins, it still has to collect. KK can settle instead of collecting the full amount by negotiating lower transit fees, transfer of storage capacity in various locations, etc whose benefits flow to KK over a few years.
BTW, KES 5.4bn will not bankrupt KPC since it makes huge profits from (monopoly) transit fees as well as the assets it owns. At some point GoK may step in & 'subsidize' KPC like it does NOCK & did for NBK.
Litigation is NOT fun. Not what should happen but sometimes there is little choice. IMO, KPRL should just hand over the stocks they owe to KK. KK would be happy with that as opposed to litigation. As for KPC, they need to settle with the Triton litigants as well as negotiate with KK & close the chapter.
If KPRL & KPC lose vs KK [& I hope KPRL & KPC lose huge] that will open a floodgate of lawsuits [under precedence] against them by others like Vivo/Shell, Total, etc
So my calculations:
KK has 1.5bn shares trading at 10.40 = 16bn
KK has non-core assets it plans to sell within 2-3 years for $60mn = 5bn (assume cost 1bn so net 4bn pre-tax. Capital gains are not taxed in Kenya at the moment but I want to be conservative)
KPRL 3.1bn less 30% discount = 2.2 bn
KPC 5.4bn less 30% discount = 3.8
The NON-RECURRING (pre-tax) GAINS over 3 years = 4bn+2.2bn+3.8bn = 10bn
A more prudent [no more gambling on hedges, no need to fight for turnover, etc] business can yield 2bn (PBT) annually even with price controls.
The pre-tax gains over 3 years = 16bn [value of the firm today] with a going concern & other assets still in place after 3 years.
Taxes: There will be taxes imposed on net gains/collections on any award. There is a chance Capital Gains are introduced & that will affect many firms/investments. The loss in 2012 can be used to offset profits in 2013. The loss of KES 9bn is a lot of 'tax loss' to carry-forward. KRA is unlikely to get much from KK for 2-3 years.
Cashflow: On a cashflow basis, KK benefits from any awards [though it suffers paying the lawyers while it waits] & non-payment of income tax because of loss carry-forwards.
Balance Sheet: KK carries many assets (especially land & buildings) at cost. The sale of under-performing assets will 'unlock' value i.e. we will see 'P&L gains' from the sale which translate to cash or lower debt on the Balance Sheet.
As a Warren Buffett fan, I am not betting on a turnaround as much as the niche (& potential) KK has carved out. It will not be easy but a single stumble (granted it was a major stumble) should not doom KK. Its peers [Total] had 2 bad years but seem positive about the future. It might not be unique to KK. If they make another loss in 2013, then I may reconsider.
Or I have rose-colored glasses on
Greedy when others are fearful. Very fearful when others are greedy - to paraphrase Warren Buffett