- 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.
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
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.
Long Term Buy- KCB, Equity, Absa, Stanbic, NCBA
Sell- Stanchart, Bamburi, HF