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Daily Market Report – 17th June 2020


Faida Research - June 17, 2020 - 0 comments

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Market Commentary:

  • The All Share Index gained marginally by 0.1% to close the day at 144.90. The NSE 20 Index however retreated by 1.0% to close the day at 2,004.36 while the market turnover declined by 12.4% to KES 414.7 million. Britam was the top loser of the day, declining by 9.6% similar to the previous trading session, to close the day at KES 8.70 (continued profit taking activity). Overall, foreign investors were net-buyers, at 72.9% compared to 49.7% of the day’s net sales.

 

News Highlights:

 Kenya Power Issues Profit Warning

 Kenya Power has announced a profit warning for the FY2020 which ends on June 30th 2020 — effectively indicating that it expects for the current financial year to be lower than the earnings reported in the previous financial year.

 According to the Capital Markets Regulations, listed companies are required to issue profit warnings when they expect projected earnings for the current financial year to be at least 25.0% lower than the earnings realized in the preceding financial year. This implies Kenya Power expects earnings for FY2020 to be at least 25.0% lower in comparison to the after tax profit of KES 262.0 million recorded in FY2019.

 Kenya Power expects earnings to be negatively affected by:
i. slow growth in electricity sales — hampered by the COVID-19 control measures (which have resulted in reduced consumption by industrial and commercial users, who account for c. 70.0% of electricity sales) and
ii. higher finance costs

 In order to enhance financial performance, the company plans to focus on:
i. enhancing operational efficiency
ii. growing sales
iii. reducing system losses
iv. managing costs

Commentary
 The anticipated earnings decline comes as no surprise as we expect most companies to struggle this calendar year particularly due to the debilitating impact of COVID-19 and its ensuing measures.

 However, prior to the COVID-19 pandemic, Kenya Power’s earnings had been on a downward trajectory declining from KES 5.3 billion in FY2017 to KES 262.0 million in FY2019.

 This has been historically attributed to:
i. increasing finance costs due to rising debt burden
ii. poor hydrological conditions
iii. depressed economic environment
iv. unstable political environment (FY2019)
v. increase in distribution and transmission costs

 Thus, due to the aforementioned reasons as well as the impact of COVID-19, we have significant concerns about the company’s profitability going forward and assign a SELL recommendation on the counter.

 

Recommendations:

Long Term Buy- KCB, Equity, Absa, Stanbic, NCBA

Hold- Safaricom

Sell- Stanchart, Bamburi, HF

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