Market Commentary:
- The All Share Index gained by 2.0% to close the day at 129.59 mainly attributed to Safaricom gaining by 4.8% to KES 27.40 with investors taking advantage of the price decline in the recent trading sessions. The NSE 20 share Index however eased by 0.2% to close the day 1,759.28 as majority of the constituent counters posted price declines. Overall, trading activity was relatively more balanced in today’s session with foreign and local investor participation at 51.5% and 49.5% respectively.
News Highlights:
Kenya Power Receives External Debt Relief
Kenya Power has obtained external debt relief from 14 foreign-based lenders.
According to management, the company received a one year moratorium on the foreign loans and is currently engaging local banks to reschedule its debt.
The government assisted Kenya Power in negotiating for the moratorium on the loans, which also has the possibility of being extended past one year.
Kenya Power is also engaging a financier to take on board commercial debt of about KES 60.0 billion so as to extend the loan repayment period.
Furthermore, the company is in talks with 5 commercial lenders to restructure its most significant debt to medium term loans (KES 68.3 billion as at June 2018). This is expected to help with the challenge of limited liquidity.
The company is looking to slow down on capital intensive projects, especially those with minimal returns. From 2016 till date Kenya Power has invested over KES 196.0 billion in putting up sub-stations and power lines. In the current financial year, the company is looking to reduce spending by about KES 5.0 billion.
Management stated that almost 67.0% – 70.0% of income collected by the company is paid out to power generators with about 30.0% remaining for operations and maintenance leaving the company in a negative position almost monthly.
The company issued a profit warning (the third in a row) due to reduced electricity consumption arising from Covid-19 control measures and the growing cost of buying wholesale power from firms such as KenGen.
According to the company, a government bailout would not be successful until the fundamental issues are addressed such as tariffs and demand. Kenya Power’s management recently re-engaged the Energy and Petroleum Regulatory Authority (EPRA) with the hope that the regulator will review an application it made last year seeking to increase electricity tariffs.
The company is keen on diversification through its fibre business and is currently undertaking restructuring efforts in order to enhance efficiency. As part of this restructuring, Kenya Power recently reorganized its board of directors.
Commentary
We expect the interest expenses saved by the company as a result of the moratorium and the debt restructuring efforts (if successful) to help buoy its financial performance going forward.
The restructuring is a huge undertaking but the efforts put in so far at improving its corporate governance are a step in the right direction.
Recommendations:
Long Term Buy- KCB, Equity, Absa, Stanbic, NCBA
Hold- Safaricom
Sell- Stanchart, Bamburi, HF