h note - kenolkobil · h note analysts: samora kariuki +254 020 288 8553 ... ment of mnc’s from...

9 September 2011

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SE

AR

CH

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Analysts:

Samora Kariuki +254 020 288 8553

Email: [email protected]

Stella Karembu +254 020 288 8419

Email: [email protected]

mailto:[email protected]

mailto:[email protected]

2

Equity Research| Energy and Oil

We initiate coverage of KenolKobil with a BUY recommendation for the 12 month

horizon at a target price of KES 25.63 from an intrinsic current value of KES 21.34.

The IMF in their June 2011, world Economic Outlook forecast a 5.5% growth

rate for Sub-Saharan Africa (SSA). This growth rate will see increased demand

for fuel as more vehicles, bigger infrastructure projects and increasing trade

will boost fuel demand. We therefore see significant pent-up demand for fuel

and thus growth in KenolKobil turnover and profits.

Consequently the turnover in the first half of the year grew by 38%. Given the

current high inflationary environment and the Kenya shilling depreciation we

do not expect this growth to be sustained in the second half of the year or for

the full year. We therefore discount this growth by 25% and propose that turn-

over will grow by 29% for FY 2011.

The Company is currently trading at a historical P/E of 8.5 and a half year div-

idend yield of 5.1% . At the current price we anticipate the full year dividend

yield will jump to 7.2% with full year profit growing by at least 53% and divi-

dend payout remaining at 40% as the Company continues to reinvest the ma-

jority of its profit for growth and expansion.

The diversification by product and region has given KenolKobil a foothold

and competitive advantage in the markets it operates in. The Company has a

heavy presence with over 400 service stations in East and Central Africa as

well as Southern Africa.

Due to its economies of scale and their highly competitive pricing, the oil

marker is able to successfully apply and win tenders to supply Crude Oil to

both the Kenyan and regional markets, through the Kenya Government’s

Open Tender System (OTS) and through other Government and commercial

contracts.

The establishment of an additional trading desk in Zimbabwe has also al-

lowed KenolKobil tap into new markets. Owing to this and the above , Kenol-

Kobil has been able to increase its trading revenues which are expected to

surge in the coming years.

Kenol Kobil Equity Research

Sales Sales Equity Earnings EPS DPS BVPS P/E Earnings EPS P/BV ROE Dividend

Year KES ('000) Growth % KES ('000) KES ('000) KES KES KES (x) Growth % Growth % (x) (%) Yield (%)

2008A 117,047 10,916 882 0.59 0.35 7.42 17.3x 1.38x 8.1% 3.4%

2009A 96,693 (17.4%) 11,455 1,295 0.88 0.33 7.76 11.6x 46.7% 49.2% 1.31x 11.3% 3.2%

2010A 101,761 5.2% 12,706 1,777 1.21 0.52 8.61 8.4x 37.2% 37.5% 1.18x 14.0% 5.1%

2011P 130,839 28.6% 14,341 2,724 1.85 0.74 9.72 5.5x 53.3% 53.0% 1.05x 19.0% 7.2%

2012P 168,226 28.6% 16,561 3,696 2.51 1.00 11.22 4.1x 35.7% 35.7% 0.91x 22.3% 9.8%

2013P 216,297 28.6% 19,531 4,946 3.36 1.34 13.23 3.0x 33.8% 33.8% 0.77x 25.3% 13.2%

2014P 278,104 28.6% 23,466 6,554 4.45 1.78 15.90 2.3x 32.5% 32.5% 0.64x 27.9% 17.4%

2015P 357,572 28.6% 28,642 8,620 5.86 2.34 19.41 1.7x 31.5% 31.5% 0.53x 30.1% 22.9%

VALUATION SUMMARY

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Dividend Yield

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%ROE

TO DEC FY10 FY11F

P/E (x) 8.4x 5.5x

P/B (x) 1.2x 1.0x

Div. yield (%) 5.1% 7.2%

VALUATION MULTIPLES

NSE Code KENO

Bloomberg Code KNOC KN

Reuters Code KENO.NR

NIC Bloomberg NICB KN

Current Price (KES) 10.20

Target Price (KES) 25.63

Expected Capital Gain (%)) 151.3%

Expected Dividend (KES/share) 1.21

Dividend Yield (%) 4.7%

Expected Total Return 156.0%

KEY STATISTICS (02-Sept-11)

Issued Shares ('Mn) 1,476

Market Cap (KES Bn) 15.05

EPS 1.20

DPS 0.52

Dividend Yield 5.10%

P/E 8.5

Sector P/E 9.2

BUY

2-Sep-11

3

KenolKobil Equity Research

INVESTMENT CASE

We maintain a BUY recommendation on KenolKobil with a 12-month Target Price of KES 25.63,

based on our DCF Valuation , 151.3% above the current share price. .

Increased Storage Capacity: Kenol Kobil has vastly increased its group storage capacity over the

years with acquisitions of terminals in Tanzania, Burundi, Rwanda, DRC and Uganda. The

growth in storage is reflected in the 60.36% CAGR of inventories since 2006. In addition, im-

proved storage works towards the company’s advantage when bidding for OTS tenders in Ken-

ya, ETE’s in Ethiopia and other government and commercial contracts within the Great Lakes

Region.

Focused Management: The company has a long tradition of acquiring, training and maintaining

its top talent. This is reflected in having employees like Mr. G. N. Mwangi who has been a senior

manager in the company for over 36 years. The 7 members of the Group Management team have

a combined tenure of 123 years with the company. Going forward, the management with a deep

knowledge and experience of the African downstream market and connections in the same will

grow business volumes and profits.

Geographical Diversification: Since the start of the previous decade, the company’s strategy

changed to focus on investing in other countries. To this end, the company has extended its

reach to Uganda, Tanzania, Burundi, Rwanda, Ethiopia, Zambia and Zimbabwe (primarily oil

trading). The geographical diversification has lowered the percentage of Kenyan sales volumes

to 81%, we expect this figure to further decline going forward. The geographical diversification

greatly reduces country specific political risk.

Product Diversification: The company is well diversified through its product line which con-

of its lubricants, LPG, Fuel Oil, Commercial, Retail, Re-seller, Trading, Non-Fuel and Bitumen

business lines. The Fuel Oil & Bitumen segment contributes towards 20% of Pre-tax Profits,

closely followed by its Aviation business which contributes 17% of Pre-tax Profits. The latter is

expected to grow due to growing Intra-Africa travel, though may face headwinds due to in-

creased competition in the segment. We expect LPG, a higher margin business to contribute

more towards profits going forward as the company invests in LPG storage facilities.

Wide Retail Network: The company has 400 retail outlets spread across East and Central Africa

as well as Southern Africa. In Kenya, the company has 156 outlets, this number is expected to

increase past the 160 mark by end 2012, effectively controlling over 25% of the retail outlets in

the country. The wide distribution network bodes well for the company as in essence, a Kenyan

has a 1 in 4 chance of fuelling at a Kenol Kobil retail outlet. In addition to the fuel factor, the

wide retail network greatly boosts the company’s ability to earn revenues from its non-fuel busi-

ness going forward further diversifying its income streams.

Exit of Multi-National Companies: The group is expected to benefit with the continued divest-

ment of MNC’s from the SSA downstream sector. MNC’s site the lack of efficient scale as most

countries consume less than 100,000 barrels per day of petroleum. This lack of efficient scale

informs the under-investment in infrastructure and thus contributes to higher costs of doing

business. KenolKobil however, will benefit as they have a longer term outlook and the requisite

knowledge and experience of running a successful downstream operation in Africa. KenolKobil

greatly benefited from the exit of Shell in Ethiopia, acquiring what were formerly Agip’s assets.

Strong Balance Sheet: The company has a strong balance sheet, with assets worth over KES 46.0

billion, net current assets of KES 8.6 billion and cash equivalents of over KES 10.4 billion. This

financial strength is a significant asset that will assist in further Mergers and Acquisitions

(M&A) activities, ensuring easy financing for its working capital and winning government and

commercial tenders. In addition, the balance sheet enables the company to utilize the capital

markets for its financing requirements, whereas a number of its competitors cannot do the same.

Overall Scale Economies: This factor cannot be downplayed, scale economies going forward are

a crucial element of success in the downstream business. Given the relative homogeneity of the

bulk of its product lines, scale economies will enable it to lower overall unit costs and better

compete on margins. In an industry that relies on high volumes and low margins, scale is abso-

lutely crucial. We are actually of the opinion that scale will enable it to ride out the short term

issues stemming from the ‘Price Control’ regime as the company, going forward, will operate on

lower unit costs. The current Deal Poa promotion is a case in point.

Source: Company Reports

Retail14%

Commercial7%

Aviation17%

Export14%

Fuel oil & Bitumen

20%

Trading11%

LPG8%

Non-fuel5%

Lubricants4%

% Contribution to PBT by Product


Product

% Contribution to

PBT

Retail 14%

Commercial 7%

Aviation 17%

Export 14%

Fuel oil & Bitumen 20%

Trading 11%

LPG 8%

Non-fuel 5%

Lubricants 4%


Country

No of Service

Stations

Market

Share

Kenya 156 25%

Uganda 64 10%

Tanzania 27 11%

Zambia 25 11%

Rwanda 46 32%

Ethiopia 65 6%

Burundi 17 15%

Zimbabwe Trading N/A

Total Outlets 400

Retail Operations

4

Global Oil Sector Overview

The global oil industry consists of the process of extraction, refining, trans-

portation and marketing of oil products. Growth over the years has been

on an upward trend. This has been driven by increased oil demand from

Asia and South America.

Going forward, the key factors that will shape global energy and oil dy-

namics in the future will be shaped by population growth and growth in

GDP per capita. These two factors are the primary determinants of energy

and oil demand as higher incomes and rising populations will require

energy for heating, transportation, industry and electrification. However,

global energy demand in the future, will according to the BP Energy Out-

look, be driven by non-OECD energy demands. In the report, BP suggest

that non-OECD demand will account for over 93% of the growth in energy

demand.

According to the United Nations World Population Projections, the world

will be populated by 8.3 billion inhabitants by 2030, growing by a CAGR

of 1.9%. This growth will be driven by a 4.33% CAGR of the Sub-Saharan

African population and a 1.57% CAGR of the Asian Population. By 2030,

Sub-Saharan Africa and Asia will account for 75% of the world’s popula-

tion.

In addition to the dramatic population dynamics, GDP per capita growth

is expected to be strong within Asia and Sub-Saharan Africa with subdued

growth in the OECD economies. According to the IMF, China is expected

to be the world’s largest economy, as measured by GDP by 2030. The se-

cond graph shows the GDP projections. In the next 20 years, if global

growth rates are the same as the rates experienced during the last twenty

years, then global per caput GDP is expected to stand at $20, 387.29 in

2030.

These two factors, population growth and per capita GDP will by and

large lead to significant increases in global energy demand. Nonetheless,

there are other factors that will come into play. They are;

Reduced OECD energy intensity levels.

Increased motorization and industrialization in non-OECD countries.

Global energy demand and supply dynamics.

1. Reduced OECD Energy Intensity Levels

It is expected that as a result of a lower rate of industrialization, motor

vehicle saturation as well as a focus on lowering carbon emissions; OECD

energy demand will reduce over time. In fact, according to the BP Statisti-

cal Review of World Energy, OECD energy demand, as measured by oil

consumption is said to have peaked in 2005 and will actually decline to

41.5 mbp/d by 2030.

The changing outlook for OECD fuel consumption will have a direct im-

pact on global fuel demand and supply dynamics and thus will directly

affect price.


Source: World Bank

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

0

5,000

10,000

15,000

20,000

25,000

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

20

OE

CD

Per

Cap

ita

GD

P

Per

Cap

ita

GD

P

GDP Per Capita

Sub-Saharan Africa World OECD Countries (RHS)

Growth Projections based on

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1950 1960 1970 1980 1990 2000 2010 2020 2030

No

of

Pe

op

le (

Mn

)

Global Population Projections

World Africa AsiaEurope Northern America SSASouth America

Source: United Nations World Population Projections

0

10,000

20,000

30,000

40,000

50,000

60,000

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

OECD Oil Consumption (Thousand Barrels Per Day)

Source: BP Statistical Review of World Energy

5

2. Increased Industrialisation and Motorisation in non-OECD Countries

As has been discussed, population growth as well as GDP growth in the fu-

ture will be driven by non-OECD states, primarily China. This in turn will

influence the levels of industrialization and motorization. As a pointer, over

the last twenty years, per capita electricity consumption measured as KWh

per capita has grown by a CAGR of 5.11% in Asia and 2.21% globally. Despite

the significant growth in Asian electricity consumption, OECD electricity con-

sumption is still larger than Asian electricity consumption by a factor of ap-

proximately 2.5. This points towards, higher pent-up demand for electrifica-

tion and thus energy.

In addition, higher incomes are leading to demand for motor vehicles. The

higher demand for motor vehicles has a direct impact on energy demand.

From the second graph to the left, it is clear that motorization within the non-

OECD states has been rising. Road sector gasoline consumption per capita has

shown a rising trend especially in Asia, while OECD and SSA gasoline con-

sumption has been flat. In fact, OECD gasoline consumption has declined by a

rate of 0.2% p.a. since 1988 vis-à-vis a positive 3.12% CAGR in Asia and a

0.06% CAGR in Sub-Saharan Africa.

3. Global Energy Demand and Supply Dynamics

With the aforementioned in mind, we estimate that global oil demand will

grow as result of non-OPEC industrialization and GDP growth, but will be

moderated by increased fuel efficiency within OPEC member states.

OPEC demand will fall by a CAGR of approximately 0.5% p.a. over

the next twenty years.

Global oil demand, driven by BRICS and SSA will grow to about

105mb/d a rate of approximately 1.3% p.a. with non-OECD growth

coming at around 2.2% p.a. This is according to the BP Energy Sector

Outlook 2010.

Supply will be driven by increased utilization of the current oil fields,

especially in Iraq and Saudi Arabia with the latter having the poten-

to raise production from the current 2.5 mbp/d to about 4 mbp/d. Uti-

lisation of Canadian Oil Sands, Brazilian Deep Sea reserves and high-

er African production will meet the rising demand.

Finally, we expect that global crude prices will decline in the near

term as double dip recession fears affect global oil demand. In the

medium term, oil is likely to pick up as Euro-area economies as well

as the USA recover from their deleveraging process. China is expected

to remain a strong player with regards to oil demand.

In the longer run however, we expect to see structural adjustments to

the oil prices as they reflect technological innovations that will reduce

per capita oil consumption levels. Despite the increase in Natural Gas

Liquids and Bio-fuels, these are likely to have an immaterial effect on

oil demand. The real change in oil demand is likely to be driven by

technological changes.

There still remain significant challenges with regards to political risk

within the Middle East, as reflected by the Libyan crisis. We expect

such short term fluctuations to remain and as such there remains an

aspect of volatility within the global oil industry.


Source: World Bank Data

0

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2000

3000

4000

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6000

7000

8000

9000

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2000

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KW

h/C

ap

ita

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CD

KW

h/C

ap

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Electricity Consumption (KWh/Capita)

Asia Sub-Saharan Africa (all income levels) SSF OECD States (RHS)

0

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(kt

of

oil

eq

uiv

ale

nt)

(kt

of

oil

eq

uiv

ale

nt)

Road Sector Gasoline Consumption/Capita (Kt of oil Equivalent)

Sub-Saharan Africa Asia OECD states (RHS)


Source: BP Statistical Review of World Energy

0

20

40

60

80

100

120

19

50

19

54

19

58

19

62

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66

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74

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78

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82

19

86

19

90

19

94

19

98

20

02

20

06

20

10

20

10

USD

Pri

ce

Crude Oil Prices in 2010 $

6

Sub-Sahara Africa Industry Review

Consumption

The Sub-Saharan Africa petroleum industry is beset by a number of challenges, but

yet blessed with a number of opportunities. In SSA, lack of sufficient oil demand

plagues the petroleum industry as most countries cannot meet sufficient economies

of scale. According to the World Bank, a country requires a consumption of 100,000

barrels per day to achieve efficient scale.

The above graph shows that although energy consumption has been growing, it still

remains below the recommended minimum efficient scale of 100,000 barrels per day.

Therefore, Sub-Saharan African energy consumers are made to pay a premium and

fuel costs are higher.

The graph on the left shows the pump prices for diesel as a percentage of GDP per

capita for some selected regions. It is clear that the capacity constraints affect the end

price for consumers. This then has an effect on petroleum marketers as they are una-

ble to enjoy scale economies when purchasing crude from oil producers.

Market Segmentation


0

10000

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40000

50000

60000

70000

80000

(Kt

of

oil

eq

uiv

ale

nt)

Year

Energy Consumption(barrels/day)

SSA (bpd)


Source: World Bank Data & NIC Securities Estimates

Botswana 5 31% 93% 2,367 200

Burkina Faso 19 38% 71% 1,963 526

Ivory Coast 23 25% 75% 1,544 435

Kenya 25 22% 65% 1,228 417

Madagascar 4 34% 100% 2,675 2,500

Malawi 4 n.a 100% 2,800 2,500

Mali 53 15% 46% 915 189

Niger 18 48% 83% 2,959 556

Senegal 13 40% 84% 2,445 769

South Africa 9 25% 71% 1,699 1,111

Tanzania 25 16% 50% 1,107 400

Uganda 40 33% 69% 1,831 250

Number of Oil

Marketing

Companies

Market Share of

Leader

Industry C4

Ratio

HHI Index HHI if market is

equally shared


0.00%

0.01%

0.02%

0.03%

0.04%

0.05%

0.06%

0.07%

0.08%

0.09%

0.10%

Pe

rc

en

tag

e (

%)

Diesel Prices as (%) of GDP per Capita

Arab World ARB European Union EUU

North America NAC OECD members OED

South Asia SAS Sub-Saharan Africa (all income levels) SSF

7

As given by the preceding table, the market structure in most Sub-Saharan Africa nations is rather seg-

mented thereby lowering the ability of oil marketers to achieve scale and thus efficiency. Effective compe-

tition, resulting from having less market segmentation would also lead to easier regulation from industry

regulators.

Currently, the intense competition leads to some malpractice including fuel adulteration. For instance, in

Mali, there are 53 market players fighting for a share of only 750,000 cubic metres of annual oil demand.

The over-concentration has led some global oil marketers most notably Shell and Chevron, to exit from

the downstream petroleum business and concentrate on the more glamorous and lucrative extractive

business. This exit has opened the doors for local players such as Sasol in South Africa and Kenol Kobil in

Kenya to grow their market shares through consolidation.

Supply Bottlenecks

The preceding table shows some information on fuel infrastructure and logistics in some select SSA na-

tions. Supply bottlenecks, brought about by poor distribution systems plague the downstream petroleum

industry. For instance, from the above table, only 6 countries out of the 9 utilize a pipeline for their petro-

leum transport. Of these 6, only South Africa and Botswana transport over 80% of their petroleum

through the pipeline. In Kenya, the Energy Regulatory Commission (ERC) pricing formula accounts for

80% of pipeline transport, with 20% being transported by road. The pipeline in addition often operates at

50% capacity.

Road transport costs are much higher than pipeline costs. Moreover, road transport is plagued by poor

road infrastructure, a lack of clear custom procedures leading to additional costs, risk factors arising from

theft and malpractice and other such issues. These then ensure that total costs are on the rise.

In addition to the transport infrastructure constraints, most oil markets are characterized by inadequate

port infrastructure. The poor port infrastructure ensures that petroleum marketers incur high demurrage

costs as tankers weight for discharge. Storage capacity is nonetheless adequate as there is often sufficient

storage capacity at the major ports. Dar es Salaam leads the way in this regard with more than 13 sepa-

rate storage installations with total storage capacity of almost 500,000m3.



Source: World Bank Study

Ivory Coast Senegal Botswana Kenya Madagascar Malawi S. Africa Tanzania Uganda

Product Imports as % of Total Cons 5% 60% 100% 51% 100% 100% 5% 100% 100%

Primary Ports for Imports Abidjan Dakar Durban Mombasa Tamatave Beira Durban Dar es Salaam Mombasa

Maximum Tanker Size (DWT) 30,000 50,000 45-50000 80,000 >50000 40,000 45-50000 45,000 80,000

Third party access to storage terminals N Y Quid pro Quo Y Vague Limited Quid pro Quo Y Y

Secondary port for imports None None None MSA, Shimanzi None Dar, Nacala None None Dar es Salaam

Primary transportation mode Rail and Road Road Pipeline to Gauteng Pipeline and Road 70% by road Road and Rail Pipeline Road Pipeline then Road

Third party access to storage depots N Y Quid pro Quo Quid pro Quo Y Y Quid pro Quo Y Limited

8

Silver Lining

Despite these issues, the Sub-Saharan Africa petroleum sector faces a number of silver linings.

Growing populations, improved per capita incomes and increasing trade portend to the attain-

ment of minimum efficient scales within the SSA petroleum sector.

SSA per capita income is projected to grow by a CAGR of 4.02% to stand at $4100.00 by 2030.

This will lead to higher fuel demand and as such, volume growth for petroleum marketers.

Growing trade with China will also significantly contribute to the SSA growth. According to the

Chinese Ministry of Commerce, China had $9.3 billion worth of Foreign Direct Investment in

Africa, up from only $431 million in 2003. In addition, Chinese total trade volumes with Africa

stood at $110 billion in 2010.

Growing trade with China and the BRICS nations’ portend towards more fuel demand going

forward given that most projects undertaken are energy and fuel intensive,



0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Pe

r C

ap

ita

GD

P

GDP Per Capita in SSA

Growth Projections based on CAGR of per

caput GDP since 1990.

2030 Projections

9

Kenyan Petroleum Industry Analysis

Above is a schematic displaying a broad perspective of the process of getting fuel to the con-

sumer.

Short History of Petroleum Industry

The Kenyan petroleum industry has grown in leaps and bounds since independence. In the

early years of our nation’s industry, the petroleum industry was in the hands of the multina-

tional oil firms such as Total Kenya, Shell/BP, Chevron, Agip, Esso and Kenyan firm Kenol

Kobil. The firms had set up their own physical infrastructure including depots, loading facilities

and retail outlets.

However, after the petroleum industry deregulation in October 27th, 1994, a number of smaller

players entered the industry. The rationale for the deregulation and liberalization was well

summed up by economist, Arthur D. Little who said ‚the petroleum end use prices would go

down in a competitive market environment free of exogenous factors as long as the country was

not going through an inflationary period‛.

Businesspeople entered into the oil industry by setting up their own retail outlets as they

sourced their inventory from the bigger players. The increased number of market players result-

ed in unattractive economic conditions for the multi-nationals as the smaller players would

compete on lower margins as well as undertake other underhand practices including fuel adul-

teration.

This then led to a period of consolidation and exiting amongst the multi-nationals. Agip and

Esso sold their assets to Shell/BP and Mobil respectively. Later on, Mobil sold their assets to Oil

Libya followed by Chevron who sold their assets to Total Kenya. Just recently, Shell agreed to

sell their African assets to a consortium composed of Swiss trading firm Vitol and Global Pri-

vate Equity (PE) firm Helios. The deal ensured that the Helios/Vitol consortium obtained Shell’s

depots and also the Kipevu Oil Terminal formerly owned by Triton.

“The petroleum end use prices would go

down in a competitive market environ-

ment free of exogenous factors as long as

the country was not going through an

inflationary period”.

Arthur D. Little


10

Lately, global oil trading firms such as Addax, related to Sinopec and Glencore have slowly

entered the industry. In fact, Addax has slowly been growing its market share which as at

June 2011 stood at 1.3% from the 0.2% it controlled a year earlier.

Below is a table showing the main types of fuels sold in Kenya and the overall market vol-

umes in cubic meters.

Market Structure

The Kenyan petroleum industry is arguably an oligopolistic structure, this view is in-

formed by the fact that it has a C4 ratio of roughly 64.7% (as of June 2011 data).

There are a few players controlling over 60% of the market thus curtailing effective compe-

tition. Nonetheless, the C4 ratio has been on a downward trend both as a result of the

MNC’s divesting from the market as well as the smaller companies such as Galana, Hass,

NOCK and Gapco gaining some foothold within the industry.

The oligopolistic structure stems from the high infrastructural costs associated with setting

up retail outlets and maintaining them according to international standards. This then fa-

vours larger players who benefit from lower unit distribution costs due to their scale econ-

omies. Going forward, we expect increased rationalization to occur leading to a larger C4

ratio.

This will primarily be driven by the petroleum pricing regulations implemented by the

ERC as well as infrastructure investments by the healthy marketers. As per the table on

page 10, branded companies control most of the retail activities within the major provinces;

Central, Coast, Nairobi and Rift Valley.


Province Independent

Branded

Company

% Controlled by

Branded Co Total % of Total

Central 63 82 56.55% 145 13.78%

Coast 64 84 56.76% 148 14.07%

Eastern 64 58 47.54% 122 11.60%

Nairobi 74 217 74.57% 291 27.66%

Nyanza 24 37 60.66% 61 5.80%

Rift Valley 104 133 56.12% 237 22.53%

Western 25 23 47.92% 48 4.56%

Total 418 634 60.27% 1052 100.00%

Source: Petroleum Institute of East Africa


2.0

2.5

3.0

3.5

4.0

4.5

2004 2005 2006 2007 2008 2009 2010

Vo

lum

es i

n c

ub

ic m

etr

es (

Mil

lio

ns)

Total Sales Volumes in m3

Products 2004 2005 2006 2007 2008 2009 2010 HY 2011

Avgas 2,462 2,763 2,752 2,999 3,380 2,007 2,672 1,216

Jet A-1 675,930 710,670 751,927 808,363 705,705 740,211 747,841 400,777

Premium Gasoline 376,034 383,267 429,900 438,545 417,794 542,856 633,397 343,969

Regular Gasoline 86,453 81,258 79,056 73,241 61,033 55,158 56,953 25,007

Kerosene 305,825 389,607 364,234 329,853 285,003 374,945 323,441 162,681

Gas Oil 948,066 1,052,581 1,221,373 1,370,126 1,429,838 1,675,577 1,583,718 811,853

Industrial Diesel 30,787 29,623 45,292 47,007 30,344 23,897 26,570 15,995

Fuel Oils 472,107 586,661 713,702 674,809 600,999 590,944 570,232 343,109

LPG* 41,884 48,827 64,639 74,017 78,030 59,773 63,779 37,025

Bitumen* 8,262 11,650 14,634 16,677 17,733 12,405 7,761 6,889

Lubricants 36,508 30,965 39,336 33,074 32,675 26,514 30,970 20,715

Greases* 604 1,206 3,775 3,130 2,431 1,429 1,069 267

TOTAL 2,984,922 3,329,078 3,730,620 3,871,841 3,664,965 4,105,715 4,048,404 2,169,505


Company 2002 2003 2004 2005 2006 2007 2008 2009 2010 HY 2011

Kenol Kobil 18.10% 16.39% 21.67% 24.29% 27.09% 23.63% 26.12% 21.90% 19.40% 21.70%

Shell/BP/Agip 29.10% 21.47% 22.96% 21.31% 25.21% 25.33% 27.82% 17.20% 16.10% 13.30%

Total Kenya 14.20% 15.18% 25.14% 25.64% 19.86% 24.22% 20.44% 23.60% 27.50% 19.00%

Chevron 16.10% 15.06% 15.85% 18.79% 17.46% 15.40% 14.22%

Oil Libya/ Mobil 11.30% 13.90% 14.38% 9.97% 10.39% 11.42% 11.40% 9.90% 11.70% 10.70%

C4 Ratio 77.50% 68.10% 85.62% 90.03% 89.62% 88.58% 88.60% 72.60% 74.70% 64.70%

Acquired by Total Kenya

Total Inland Market Shares0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 HY 2011

C4

Ra

tio

(%

)

Trends in Industry C4 Ratio


11

ERC Pricing Formula & Effect on Market Structure

In December 2010, the government through the Energy Regulation Commission (ERC) issued

the Energy (Petroleum Pricing) Regulations 2010. These regulations were implemented with a

view of instituting price controls in the retail oil market. The rationale behind this was that

historical pump price data displayed the fact that pump prices were sticky downwards, but

rather elastic upwards. Marketers were quick to pass higher crude prices to customers, but

were slow to pass on the benefits of lower crude prices. The major insight came in 2008-2009

when global crude prices fell by more than 200% from $137.35 to $41.20. Despite this signifi-

cant drop, petroleum pump prices fell by only 41%. The efficiency losses arising from this

price sticky-ness was deemed to have a non-trivial effect on economic output.

The ERC then issued pricing guidelines based on;

The Free on Board (FOB) costs of crude oil delivered to the refinery.

Transportation costs from Mombasa to the nearest wholesale depot.

A wholesale margin of 6%.

Costs of petroleum yielded from the refinery (refinery fees).

Taxes and levies

Retail margin of 6%.

We are of the opinion that over the long run, bigger players will benefit from this pricing

schedule as they can better manipulate their unit costs through scale economies. In addition,

the wholesale margin doesn’t apply to marketers who obtain their inventories directly from

Kipevu. Smaller players, primarily resellers are charged the wholesale margin. Going for-

ward, we expect to see more consolidation and rationalization that will manifest itself in a

higher industry C4 ratio.

In addition, the pricing regulations could see marketers focus on other business lines such as

lubricants, LPG and Aviation products. Smaller outlets, primarily based in up country areas

could benefit as the price set in the formula is positively related to the distance from Momba-

sa thereby ensuring a homogeneity of retail margins.

Major Market Stakeholders

Kenya Petroleum Refineries Ltd

The refinery was initially set up by Shell/BP in 1960 to serve the East African region. In 1971,

the government acquired a 50% stake in the refinery. It was configured for; distillation, hy-

drotreating, catalytic reforming and bitumen production. The inability to conduct cracking

affects the refinery’s ability to refine some cheaper forms of crude oil. The company receives

crude through an oil jetty at Kipevu.

The refinery has a processing capacity of 4.0 million metric tons but currently only processes

approximately 1.6 million metric tons. In 2007, Essar, an Indian firm purchased the Shell/BP/

Chevron stake.

The company currently operates as a toll operator, refining crude on behalf of marketers, but

the company will convert into a merchant refinery in January. A merchant refinery buys its

own crude to sell to the marketers.

Industry players suggest that converting the refinery to a merchant refinery will lower pump

prices by around 10% as marketers will not have to pay processing fees.

The company suffers from some infrastructural constraints, but has recently signed a KES 1.2

billion loan agreement with Barclays for expansion and improvement of its facilities. Stand-

ard Chartered are organizing further financing.

Power outages ensure that the refinery is not fully utilized. It’s nominal capacity can easily

serve the Kenyan market but it operates at only 40% capacity. In addition, inability to crack

crude means that it provides too much fuel oil and not enough of the white products that the

market demands. The refinery plans to expand their power producing abilities so as to in-

crease output and has thus signed a KES 1.2 billion loan facility with Barclays.



Company Market Share (%)

Kenol Kobil 21.7%

Total Kenya 19.0%

Shell 13.3%

Oil Libya 10.7%

Gapco 5.5%

National Oil 4.5%

Gulf Energy 3.4%

Hass Petroleum 3.3%

Fossil 2.0%

Bakri International 1.7%

Galana Oil 1.4%

Hashi Energy 1.4%

Engen 1.4%

Addax 1.3%

Alba 1.1%

Banoda 0.9%

Royal 0.7%

Trojan International 0.6%

Oilcom 0.6%

MGS 0.5%

Rivapet 0.5%

Jade Petroleum 0.5%

Tosha Petroleum 0.4%

Others 3.6%

Total 100.0%

12

Kenya Pipeline Company

The Kenya Pipeline Company (KPC) is fully owned by the Government of Kenya. The company

was registered in 1973 with the mandate of transporting petroleum products to the hinterland

from the coast. Below is a schematic showing the direction of the pipeline.

The pipeline consists of three main lines.

Mombasa to Nairobi is 14 inches wide and 450 km long, it has a flow rate of 880m3/hr.

Nairobi to Eldoret is 8 inches wide and 325km long with a flow rate of 220m3/hr. The company

has now commissioned a parallel pipeline that is 6 inches wider with a flow rate of 757m3/hr.

The Sinderet-Kisumu line is 6 inches wide and 121km long with a flow rate of approximately

160m3/hr.

The company faces losses due to power outages and thefts along the pipeline.

We expect that future energy demand will place further pressures on the pipeline as it is estimat-

ed that over 50% of the country’s petroleum is transported by road. This occurs despite the fact

that the costs of road transport are twice those of transporting through the pipeline. This infra-

structural constraint puts unnecessary pressure on fuel inflation.

Energy Regulation Commission (ERC)

The Energy Regulatory Commission (ERC) was established under the Energy Act (2006). This

was done with a view towards better regulatory oversight of the Energy Industry. The commis-

sion’s amongst other duties include;

Determines the monthly maximum pump prices.

Advises the Ministry of Energy about developments in the Energy Sector.

Develops policy specific to the Energy sector, &

Ensures that fair competition and good conduct are in place within the Energy sector.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2002 2003 2004 2005 2006 2007 2008 2009

00

0's

Cu

bic

Me

tre

s

Year

Port Throughput in (Cubic Metres


13

COMPANY OVERVIEW

History

Kenol Kobil was founded in May 1959 by Mr. R.S Alexander. At the time the company focused on

wholesale distribution of Kerosene under the SAFI brand. The company was listed in the Nairobi Stock

Exchange in 1959 and later in that year begun acquiring service station outlets. The company expanded

into wholesale distribution of petroleum products such as fuel oils, gasoline and diesel.

This was done with a view of capturing the growing agricultural sector especially in Central Kenya,

where it had depots in Sagana and Thika, in addition to its depots in Nakuru and Mombasa.

In 1986, the company merged its operations with Kobil by signing a joint operations agreement. This

would include cost sharing and streamlining of management so as to reduce overall operating costs and

benefit from some scale economies. This strategy paid off as the company was able to import bulk petro-

leum for supply to industrial and large scale farming clients.

Kenol Kobil has a strong culture of innovation and this was reflected in the company being amongst the

first oil marketers to honour credit cards.

Acquisitions

Subsidiaries

As well as operating under the ‘KenolKobil’ umbrella in Kenya, KenolKobil owns and operates six sub-

sidiaries across Africa under the ‘Kobil’ brand as shown below.


Kobil

Uganda

Kobil

Tanzania

Kobil

Zambia

Kobil Petroleum

Rwanda SARL

Kobil

Ethiopia

Kobil

Burundi

Commencement of Operations Feb-1999 May-2001 Mar-2002 May-2002 May-2005 Oct-2009

KenolKobil's Shareholding 100% 100% 100% 100% 100% 100%

No. of Service Stations as at December 2009 61 25 28 46 64 14

Source: 2011 Commercial Paper Information Memorandum

14

Market Share

The schematic on the left shows the growth in KenolKobil. In 2007, the company ac-

quired an 100% stake in Kobil petroleum by allotting shares in KenolKobil to the share-

holders of Kobil Petroleum.

The oil marketer has grown to have a market share of 21.7% as of June 2011. Going

forward, the company plans to be a leading Pan-African oil marketing company focus-

ing on the mid-stream and down-stream sectors. So far, they’re well on their way to

achieving this ambition.

Key Products

The company focuses on the following key products;

Lubricants - sale of motor vehicle and industrial lubricants. This is done mainly

through the Castrol brand, but recently Kenol has introduced its own brand of

lubricants.

Commercial - This consists of selling petroleum products to industrial and com-

mercial clients in wholesale quantities.

Aviation - KenolKobil supplies carriers with jet-fuel. This is a rather lucrative

business given that Nairobi is one of the main transport hubs in Africa.

Export - This segment focuses on bulk exports to land-locked countries in East and

Central Africa.

Trading - The trading segment is involved in developing new markets especially

for land-locked countries which don’t have refineries. The desk also applies for

Tenders for the OTS system. So far, the company has won over 50% of the OTS

tenders. The trading desk is buoyed by the company’s vast storage facilities in

Kenya, Tanzania and now Mozambique.

Fuel Oil & Bitumen - The company sells fuel oil and bitumen sourced from KPRL

for sale to industrial clients and contractors. Bitumen is a vital input in road con-

struction. The firm’s fuel oil and bitumen segments are expected to grow with

increased infrastructure investment in SSA.

LPG - The company markets Liquefied Petroleum Gas through its K-gas brand.

The brand has significant market shares in the retail and commercial segments.

The company continues to invest in LPG filling plants and storage facilities to

maximize the vast potential of its LPG business in its main markets.

Non-fuel - The company, due to it’s vast retail network focuses on non-fuel busi-

ness line such as convenience stores, drug stores and ATM points. It has signed up

a number of restaurants including Kula Korner, Kenchic, Java and Innscor in its

outlets. It collects rents and other fees from these outlets. We expect this business

segment to grow in absolute terms as it signs up more outlets into its vast retail

network.

Retail - The company is the country’s leading petroleum retail marketer with ap-

proximately 412 outlets scattered throughout Eastern and Southern Africa with

over 160 in Kenya. The retail business is well known due to its K-card promotion

as well as the recent ‚Deal Poa‛ promotion through which clients obtain a dis-

count on the pump prices..



Retail14%

Commercial7%

Aviation17%

Export14%

Fuel oil & Bitumen

20%

Trading11%

LPG8%

Non-fuel5%

Lubricants4%

% Contribution to PBT by Product


0%

5%

10%

15%

20%

25%

30%

Kenol Kobil Market Share

15

Network

KenolKobil operates a vast network of stations in Kenya and its subsidiaries across the

continent. As at end December 2010, KenolKobil had 156 service stations in Kenya and

another 244 service stations outside Kenya as highlighted in the table below.

Strategy:

Going forward, the group’s strategy is focused on the following areas;

Continuing with the overall group vision’s expansion plans through M&A’s as well as organic

growth. The company to this end has a ‚move-south‛ expansion plan aiming at acquiring

petroleum businesses in the Great Lakes Region as well as Southern Africa, including South

Africa. The overall strategy is to be an “African Player in Africa for the African People”.

Developing the mid-stream segment through setting up the African Trading Desk. This is a

brilliant strategy as being an African player, with the local expertise and connections, they can

take advantage of the African growth story. A story, which we believe in due to growing glob-

al trade and improving macro-economic climates in most SSA economies.

Growing the retail and other profitable business lines within its operating markets. To this

end, the company will focus on growing the high margin LPG, Fuel Oils, Exports and Lubes

business.

A continued investment in storage. In 2010, the company acquired storage facilities in Tanza-

nia, Bujumbura, Jinja and is looking towards acquiring or developing more facilities in Lu-

bumbashi, Lusaka and Bujumbura. Lubumbashi and Lusaka offer immense opportunities due

to the vibrant mining sectors. In addition, going forward we expect that the oil business will

be a low margin, high volume business. With this in mind, storage facilities will be a crucial

competitive edge. In our view, this is one of the prime factors that will lead to Kenol Kobil’s

success in Africa.

Developing the non-fuel business line encompassing property development and real estate.

To this end, the company has Mr. Per. N. Jakobsson in its board. Mr. Jakobsson has immense

experience in the European real estate industry and offers valuable insights to the team. In

addition, the company has significant land holdings as a result of its investments in retail out-

lets and storage terminals. We expect to see significant increases in the ‚other income‛ catego-

ries of the P&L statement.

Developing alliances with MNC’s. This strategy will assist in improving the deal pipeline for

its M&A activities. We expect this to be a significant strategy going forward as MNC divest-

ment from the SSA downstream sector offers great opportunities for African players such as

KenolKobil.

Internal Training and Capacity building. The group so far has set an immaculate example to

Kenyan companies with regards to talent acquisition, training and retention. This is best illus-

trated in the over 123 years of combined service by the 7 members of the Group Management

team. This rich HR base in itself is a significant source of competitive advantage in the African

downstream oil sector, especially as MNC’s divest.



Network

Region 1991 1995 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010

Kenya 41 48 73 82 65 68 69 64 69 160 155 156

Uganda - - 26 42 52 52 58 60 61 61 61 64

Tanzania - - - 11 15 15 15 18 18 19 23 27

Zambia - - - 11 14 15 16 20 20 24 28 28

Rwanda - - - 1 1 1 18 38 38 43 46 46

Ethiopia - - - 0 - - 1 1 50 59 64 65

Burundi - - - - - - - - - - 4 14

Total 41 48 99 147 147 151 177 201 256 366 381 400

Number of Stations

16


Management & Board Of Directors:

Board of Directors

The Board of directors has a rich mix of experience, expertise and business acumen. Mr. Segman, the

group chairman and MD, joined the company in 1990 and has risen the ranks to lead the company.

He is an experienced oil man with over 29 years of industry experience. His sharp focus and busi-

ness savvy has lead the company to grow its market share over the years.

Ms. Pat Lai joined the company in 2006 as the Chief Financial Officer (CFO), of South African de-

scent, she has heavy industry experience in finance and financial management. The other directors

have significant experience in sectors such as real estate, banking, auditing, law and manufacturing.

Senior Management (Group Management)

Mr. J. Segman - Chairman and Group MD (Israeli)

Ms. P. Lai - Group Finance Director (South African)

Mr. G.N. Mwangi - Group Export & Regional Supply Manager (Kenyan)

Mr. P. Kondo - Group M& A and Regional Support Manager (Kenyan)

Mr. S. W. Muthuma - Group Trading & Supply Optimisation Manager (Kenyan)

Mr. K. Mugenda - Group Internal Audit Manager (Kenyan)

Mr. J.J. Kariuki - International Finance Manager (Kenyan)

The group management team is a pointer to the company’s dedicated management and growth. The

aforementioned group has worked for an average of 18 years for the company. This shows that the

group has experience and an in-depth knowledge of the company.

Shareholder profile


Name of Shareholder No. of Shares % Shareholding

Wells Petroleum Holdings Ltd 366,614,280 24.91%

Petroholdings Ltd 255,211,080 17.34%

Highfield Ltd 183,350,000 12.46%

Chery Holding Ltd 128,204,000 8.71%

Energy Resources Capital Ltd 88,185,720 5.99%

CFC Stanbic Nominees Ltd 28,866,200 1.96%

Standard Chartered Nominees Non Res A/C 9867 23,132,700 1.57%

J. Segman and Field Marsham representing ESOP 9,000,000 0.61%

KCB Nominees Ltd A/C 769G 8,603,610 0.58%

CFC Stanbic Nominees A/C R48703 8,362,700 0.57%

Others 372,230,910 25.29%

Total 1,471,761,200 100.00%

Mr. J. Segman Chairman and Group Managing Director

Mr. D. Oyatsi Non-exec Director

Mr. P.N. Jakobsson Non-exec Director

Mr. J. Mathenge Non-exec Director

Mr. T. Davidson Non-exec Director

Ms. P. Lai Group CFO

Mr. D. Ndonye Non-exec Director

Board of Directors

17


FINANCIAL ANALYSIS

The company has outperformed the market over the last 8-years growing by a CAGR of 23.38% vis-à

-vis the 11.87% annualized growth rate of the overall market represented by the NSE-20 Share In-

dex. This analysis excludes dividends.

A look at their latest HY 2011 results reveals that the KenolKobil posted an impressive 83% jump in

half-year after tax profits from KES 1.18 billion in June 2010 to 2.16 billion in June 2011.

The company’s turnover increased from KES 60.3 billion to KES 83.3 billion representing a 38% in-

crease. This was mainly due to volumes growth brought about by the company’s presence in East-

ern and Central Africa. The company now has 400 retail outlets in Africa and this number is ex-

pected to grow both organically and through acquisitions.

Distribution costs actually fell by 3% due to improved efficiencies. We are of the opinion that

the company now clearly benefits from its economies of scale and this is expected to continue

due to the increase in its storage terminals. The storage terminals to a great extent reduce the

unit costs of distribution.

Administrative expenses increased by 33%. Management attributed this increase to an increase

in debt provisions made for a doubtful commercial client. Finance costs showed a dramatic in-

crease from KES 721 million to KES 1.3 billion, an 85% increase. This was ascribed to the weak

shilling that has impacted on their unrealized exchange losses. The oil marketer nonetheless is

confident that it can overcome this through both hedging and its geographical diversification.

KenolKobil posted a profit from the sale of one of its properties which is reflected in the ‚other

income‛ entry. Going forward, management is of the opinion that it could benefit from the

property market due to its extensive asset base in both Kenya and its other operating markets.

On the balance sheet, there was a 69% increase in inventories, a marked increase. This, the MD

argued, is a strategic plan going forward. We are of the opinion that its focus on the trading

business will necessitate increased inventories. This in turn, has informed their decision to ex-

pand their storage capacity throughout its operating markets as is evidenced by their recent

acquisition of the World Oil complex in Dar-es Salaam and two other terminals in Bujumbura

and Jinja.

The company recorded a 53% increase in EPS to KES 1.47 and a 9.6% increase in DPS to KES

0.57. This represents an earnings yield of approximately 13% and a half year dividend yield of

approximately 5%. Going forward, management has committed itself to a 40-45% dividend

payout.

Overall, management forecasts that the full year 2011 profits will be much higher than 2010

profits. Going by their half year results, their profit forecasts have turned out to be true. A fo-

on expanding its distribution and supply channels will see increased revenues.

0

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7,000

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E-2

0 S

ha

re I

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ex

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no

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Kenol Kobil vs NSE 20 Index

10:1 share Split

10:1 Share Split

18


VALUATION SUMMARY

We arrive at our 12-month target price (TP) of KES. 25.63 based on the

FCFF method. We get our TP from growing the fair (intrinsic ) value of

KES. 21.34 by the Cost of Equity (20.1%) at a perpetual growth rate of

4.0%. The period used for our DCF model was 5 years ending in 2015.

METHODOLOGY

Valuation Date Sep-11

Next Year End Dec-11

LONG TERM GROWTH ASSUMPTIONS

Risk Free Rate (5yr Bond) 13.5% Long-term GDP growth (%) 4.0%

Equity Risk Premium 6.0% Long-term Inflation 7.0%

Beta 110.0%

Cost of Equity 20.1%

Cost of Debt 14.5%

Tax Rate 30.0%

After-Tax Cost of Debt 10.1%

WACC 14.9%

2011F 2012F 2013F 2014F 2015F

EBIT 4,861 6,250 8,036 10,332 13,284

Taxes on EBIT (1,458) (1,875) (2,411) (3,100) (3,985)

Changes in deferred taxes - - - - -

NOPLAT 3,403 4,375 5,625 7,232 9,299

Depreciation 894 1,149 1,478 1,900 2,443

Free Cash Flow 4,297 5,524 7,103 9,133 11,742

Increase in Working Capital 4,596 (4,153) (5,339) (6,865) (8,827)

(Increase)/Decrease in CAPEX (548) (704) (905) (1,164) (1,497)

Gross Investment 4,049 (4,857) (6,245) (8,029) (10,324)

Unlevered Free Cash Flow 8,345 667 858 1,103 1,418

Terminal equity value - - - - 70,250

Cash Flows to be Discounted 8,345 667 858 1,103 71,668

Discount Factor @ WACC 0.87 0.76 0.66 0.57 0.50

Discounted Cash Flows 7,263 505 565 633 35,777

Value of Operations (NPV) 44,744

Less: debt, minority int. (13,773)

Add: Cash & Cash equivalent 527

Implied equity value 31,498

Diluted shares Outstanding (Mn) 1,476

Implied equity value per share 21.34

12 month Target Price (KES) 25.63

DCF Valuation

DISCOUNTED FREE CASH FLOW TO THE FIRM (DCFF)

WACC COMPUTATION

TOTAL RETURN

Target Price (KES/share) 25.63

Current Price 10.20 26 2.0% 3.0% 4.0% 5.0% 6.0%

Expected Capital Gain (%)) 151.3% 11.9% 37.15 39.48 42.39 46.15 51.18

12.9% 31.82 33.47 35.49 38.02 41.28

Dividend (KES/share) 1.21 14.9% 23.79 24.63 25.63 26.84 28.31

Dividend Yield (%) 4.7% 16.9% 18.08 18.50 19.00 19.57 20.26

18.9% 13.84 14.04 14.26 14.52 14.82

Expected Total Return 156.0%

SENSITIVITY ANALYSIS - TARGET PRICE

Long Term Growth (%)

WACC

19


INCOME STATEMENT

Year to Dec (KES 'Millions) 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Turnover 117,047 96,693 101,761 130,839 168,226 216,297 278,104 357,572

EBITDA 3,772 3,062 4,363 5,755 7,399 9,514 12,232 15,727

D&A 744 674 695 894 1,149 1,478 1,900 2,443

Operating Profit 3,028 2,387 3,667 4,861 6,250 8,036 10,332 13,284

Profit Before Tax 1,446 1,933 2,698 3,891 5,280 7,066 9,362 12,315

Tax (564) (639) (921) (1,167) (1,584) (2,120) (2,809) (3,694)

Net Income 882 1,295 1,777 2,724 3,696 4,946 6,554 8,620

Dividends (515) (478) (765) (1,088) (1,477) (1,976) (2,618) (3,444)

Retained Earnings 367 816 1,011 1,636 2,219 2,970 3,935 5,176

Weighted Shares in Issue (Millions) 1,472 1,472 1,472 1,472 1,472 1,472 1,472 1,472

EPS 0.59 0.88 1.21 1.85 2.51 3.36 4.45 5.86

DPS 0.35 0.33 0.52 0.74 1.00 1.34 1.78 2.34

Payout Ratio 59.3% 36.9% 43.0% 40.0% 40.0% 40.0% 40.0% 40.0%

FINANCIAL STATEMENT FORECASTS

Year to Dec (KES 'Millions) 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Total Current Assets 21,111 25,171 26,062 35,372 41,486 49,464 59,837 73,292

Total Assets 27,709 31,289 32,217 41,180 46,849 54,255 63,893 76,401

Total Non-Current Liabilities 491 541 632 632 632 632 632 632

Total Current Liabilities 16,302 19,293 18,879 26,207 29,657 34,092 39,795 47,127

Equity

Share capital 74 74 74 74 74 74 74 74

Share premium 5,166 5,166 5,166 5,166 5,166 5,166 5,166 5,166

Other reserves 582 317 244 244 244 244 244 244

Retained earnings 4,579 5,420 6,456 8,091 10,311 13,281 17,216 22,392

Proposed dividend 515 478 765 765 765 765 765 765

Total Shareholders Equity 10,916 11,455 12,706 14,341 16,561 19,531 23,466 28,642

Total Equity and Liabilities 27,709 31,289 32,217 41,180 46,849 54,255 63,893 76,401

BALANCE SHEET

Year to Dec 2008 2009 2010 2011F 2012F 2013F 2014F 2015F

Margins

EBITDA Margin (%) 3.22 3.17 4.29 4.40 4.40 4.40 4.40 4.40

D&A Margin 0.64 0.70 0.68 0.68 0.68 0.68 0.68 0.68

EBIT Margin (%) 2.59 2.47 3.60 3.72 3.72 3.72 3.72 3.72

Profit Margin (%) 0.75 1.34 1.75 2.08 2.20 2.29 2.36 2.41

Return on Equity

ROA (%) 3.2 4.1 5.5 6.6 7.9 9.1 10.3 11.3

Equity Multiplier 2.5 2.7 2.5 2.9 2.8 2.8 2.7 2.7

ROE (%) 8.1 11.3 14.0 19.0 22.3 25.3 27.9 30.1

ROCE (%) 3.2 4.1 5.5 6.6 7.9 9.1 10.3 11.3

Efficiency Ratios

Asset Turnover (x) 4.2 3.1 3.2 3.2 3.6 4.0 4.4 4.7

Fixed Asset Turnover (x) 17.7 15.8 16.5 22.5 31.4 45.1 68.6 115.0

Inventory Turnover (x) 10.2 7.6 7.3 8.6 8.9 8.9 8.9 8.9

Receivables Turnover (x) 14.9 12.2 10.6 11.7 13.0 13.0 13.0 13.0

Payables Turnover (x) 11.7 7.5 9.6 14.4 11.3 11.3 11.3 11.3

Gearing

Debt to Equity (%) 60.4 37.4 108.4 96.0 83.2 70.5 58.7 48.1

Debt to Total Assets (%) 23.8 13.7 42.8 33.4 29.4 25.4 21.6 18.0

MARGINS AND RATIOS

20


Downside Risks

Wild swings in global crude prices occasioned by Middle East unrest and global supply-

demand imbalances.. These changing international crude prices present significant risk to Ke-

nolKobil.

Increased Competition: Fuel adulteration has led to unfair competitive advantage in the in-

dustry. The market has also become increasingly competitive especially due to the entry of

independent dealers who are now engaged in both the trading and the retailing of oil prod-

ucts.

A decline in standards as Multinationals exit the industry.

Exchange rate volatility occasioned by a worsening trade balance and weak capital flows.

Piracy off the coast leading to losses and higher prices due to higher insurance premiums.

However the above risks are mitigated by the following

In light of the fluctuating international oil prices, KenolKobil continually strive to competitive-

ly source for produces and thereby carefully manage its inventory and sales. If this well execut-

ed, the oil marketer can draw benefits from relatively lower priced products.

The oil marketer has also vamped up its storage capacity over the years allowing it to bid for

tenders under the OTS and other Government and commercial contracts.

To combat the presence of increased adulterated fuel, KenolKobil actively engages the public

and the regulatory bodies to create awareness on the dangers of adulterated products.

KenolKobil has recently revamped its discount fuel card, K-Card in an effort to attract and

maintain consumers as well as offering special discounts on its retail pump prices, dubbed the

‘Deal Poa’ promotion. Such incentives are among the many competitive pricing strategies the

oil marketer is applying to beat its competition.

Growing population ensuring higher fuel demand.

Uganda oil production expected early next year that will potentially reduce fuel prices.

A growing economy that will raise per capita GDP levels and as such strengthen fuel demand.

Industry consolidation going forward that is expected to improve regulatory oversight and

efficiency.

21


Bn Billions

BRICS Brazil, Russia, India, China & South Africa

BVPS Book value per Share

C4 Ratio Sum of the Market Shares of the Top 4 Companies

CAGR Compound Annual Growth Rate

CAPEX Capital Expenditure

DPS Dividends per Share

D&A Depreciation & Amortisation

DY or Div Yield Dividend Yield

EPS Earnings per Share

EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation

EBIT Earnings Before Interest and Tax

ERC Energy Regulatory Commission

ETE Electronic Tendering Engine

f Forecast

FDI Foreign Direct Investment

FY Financial Year

GDP Gross Domestic Product

HHI Herfindahl–Hirschman Index (Measure of the size of firms in relation to the industry)

KES Kenya Shilling

KPC Kenya Pipeline Company

KWh Kilowatt Hour

LPG Liquefied Petroleum Gas

M&A Mergers & Acquisitions

Mn Millions

MNC Multi National Countries

mpb/d Million Barrels Per Day

NOCK National Oil Co-operation of Kenya

NOPLAT Net Operating Profit Less Adjusted Taxes

NPV Net Present Value

OECD Organisation for Economic Co-operation and Development

OPEC Organisation of Petroleum Exporting Countries

OTS Open Tender System

P/E Price to Earnings

P/B or P/BV Price to Book Value

PAT Profit after Tax

PBT Profit before Tax

Per Caput GDP Per Capita GDP

ROA Return on Assets

ROE Return on Equity

ROCE Return on Capital Employed

SSA Sub-Saharan Africa excluding South Africa

USD United States Dollar

WACC Weighted average cost of Capital

RECOMMENDATION GUIDE

STRONG BUY: Highly Undervalued Strong Fundamentals

BUY: Good Value/ Strong Fundamentals

ACCUMULATE: Undervalued/ Good Fundamentals/ Buy on Price Dips

HOLD: Correctly valued with little pricing upside or downside

REDUCE: Overvalued / Reduce exposure/ Declining Fundamentals

SELL: Highly Overvalued with Weak Fundamentals

ABBREVIATIONS

h note - kenolkobil · h note analysts: samora kariuki +254 020 288 8553 ... ment of mnc’s from...

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