KenolKobil FY15 Earnings Expectations

Dear All,

KenolKobil is expected to announce its FY15 results on Thursday, 17th March 2016 after market close. Kestrel Capital is hosting a conference call with the Group Managing Director, Mr. David Ohana on Friday, 18th March 2016 at 3:00PM EAT (GMT +3:00 hours). For the dial-in details, please contact research@kestrelcapital.com.

We revise our EPS forecast for the FY15E period to KES 1.20 per share (previously forecasted FY15E EPS of KES 1.09), excluding any impact from the sale of the Tanzania and Congo operations. We expect 2H15 to be as good as 1H15 due to the stable operating environment coupled with the reduction in debt.

Main drivers continue to be focus on higher margin sales, low operating costs, repayment of debt and growing non-fuel and niche segment. The lower oil prices have allowed KenolKobil to accelerate repayment of debt at a faster pace than initially anticipated; a recent news article on 25th February 2016 quoted net debt at US$ 28.0m. Focus on repayment of more expensive local currency debt in FY15 (as compared to dollar denominated debt) has reduced interest expenses. We note that management recently commented in an interview that it expects to be debt free by May 2016. We do note however that in the medium to long term, debt levels may vary with working capital requirements which are dependent on oil prices.

Foreign exchange losses are expected to be higher than anticipated as regional currencies were fairly volatile last year.

Dividend payout is expected to remain unchanged with a payout ratio in the 25%-30% range.

Sale of Tanzania and Congo operations

We view this as a positive development for KenolKobil. This was expected as part of the restructuring exercise started in 2013. Tanzania was an underperforming subsidiary and consistently under pressure given the high level of competition, inefficiencies and a difficult market environment generally. We view it as an earnings accretive outcome because Tanzania was a break-even subsidiary (at best) and the sale proceeds could be used to further deleverage.

Both Tanzania and DRC operations were fairly small. In Tanzania, KenolKobil had 17 retail stations and a long term lease for an oil storage terminal while in DRC it owned one storage depot. Therefore we do not expect a major impact to the top line of the company.

In terms of logistics, the restructuring should have no impact on other subsidiaries as KenolKobil could either use third party storage in Tanzania or supply product via Kenya to ensure uninterrupted supply to the landlocked regional subsidiaries.

Management has confirmed that the Tanzanian transaction was a sale of equity in the subsidiary as a going concern (as opposed to an asset sale) and the sale will be booked in the FY15 financials. The company is expected to derive a capital gain from the transaction (capital gain amount undisclosed) and the proceeds will be used to pay down debt. Furthermore, the sale of the Tanzania and Congo operations marks the end of the asset restructuring exercise commenced in 2013.

My 2 cts

Both Research pieces come across as lazily written. The two analysts are reading the dividend payout ratio from the dividend payout of 2013 and 2014 which were mere token dividends to appease the type of major shareholders at Kenolkobil who have a strong preference for immediate cash over strategic growth capital. Certainly the business back to normalcy and debt settled no way this shareholder would expect 10 or 20 cts. It is going to be 50% of earnings at lowest point.

The margin analysis is equally lazy. Fuel price is down while the gross margin is still at 7 /=. That gross margin is 2016 has go to be 10 - 13%. No way also KK is growing profits by kshs 180m annually for the next 2 years. On lower / no long term debt the savings are beyond kshs 300m.

Geez analysts put in an honest shift!!

It can hit 14 with a faint volume.

We'll know that after seeing how much they sold in 2015 then gauge.

We'll know at H1 the pace of growth. If those gains are booked As profit, won't the share just sky rocket? Coz profits year on year could be up more than 100% if the capital gain is good