Market Commentary:
- The All Share Index eased by 0.1% w/w to close the week at 165.39. The NSE 20 Share Index however edged up by 1.4% w/w to close at 1,915.68 as majority of the constituent counters posted price gains. Overall market turnover gained by 28.4% w/w to KES 3.2 billion as the volume of shares traded increased by 10.5% w/w to 80.5 million shares. Safaricom remained unchanged w/w (most actively traded counter) to close at KES 38.75.
- The banking sector also saw price dips on some key counters which we attribute to profit taking after the recent price increases; (KCB -1.9% to KES 38.75, Equity – 1.4% to KES 37.90, DTB -2.1% to KES 69.25).
- Nation Media Group (NMG) rallied during the week (+23.4%) closing at KES 16.10. This was on the back of an announcement that the company would be buying back 10.0% of its issued shares. Details such as the method and price are yet to be disclosed. The transaction also has to receive approvals from the regulator and shareholders. We expect price stability in the coming week.
News Highlights:
KenGen Posts a 38.1% Decline in After Tax Profits for 1H2021
KenGen registered a 38.1% y/y decline in after tax profits for 1H2021 to KES 5.1 bn (1H2019: KES 8.2 bn). The lack of a tax credit was the primary reason for lower earnings; KenGen received a tax credit of KES 1.9 bn in 1H2020 after the commissioning of 165 MW Olkaria V geothermal plant.
Aside from the impact of the absence of the tax credit, KenGen’s performance in 1H2021 showed improved performance — pre-tax profits advanced by 9.4% y/y to KES 6.9 bn.
Net revenues advanced by 8.7% y/y to KES 20.6 bn buoyed by a 64.2% y/y decline in reimbursable expenses to KES 3.4 bn but weighed down by total revenues which eased by 2.5% y/y to KES 21.8 bn.
According to the company, the decline in total revenues was attributable to reduced fuel revenue charge following the displacement of thermal generation (revenues from thermal operations eased by 49.4% y/y to KES 2.7 bn).
Total revenues were however supported by a 14.5% y/y growth in revenues from geothermal operations to KES 14.1 bn — the company attributed the growth to increased generation capacity from Olkaria V and revenue diversification from the Ethiopia project.
KenGen’s other income dipped by 62.4% y/y to KES 180.0 million and the company attributed the reduced income to the negative impact of COVID-19 on consultancy, geothermal spa and carbon credit revenues.
Owing to the weakening of the Kenya Shilling and other currencies, the company realized other net losses of KES 382.0 million from a gain of KES 246.0 million in 1H2020.
Total operating expenses grew by 1.2% y/y to KES 13.1 bn, driven by higher operating expenses (+4.6% y/y to KES 5.8 bn) as steam costs eased by 8.1% y/y to KES 1.5 bn.
Finance income rose by 14.7% y/y to KES 829.0 million predominantly due to interest on delayed electricity receivables while finance costs rose by 7.6% to KES 1.2 bn mainly on the back of forex fluctuations (attributable to the aforementioned weaker currencies).
Notably, cash and cash equivalents increased by 106.4% y/y to KES 10.8 bn largely supported by a 56.5% y/y rise in cash generated from operations to KES 13.8 bn.
Commentary
KenGen noted that energy sales increased by 4.6% y/y to 4,274.0 GWh in 1H2021 characterized by gradual growth in national electricity demand; peak demand hit 1,976.0 MW in 1H2021 compared to 1,882.0 MW in 1H2020. With the easing of COVID-19 restrictions and the continued re-opening of the economy, we continue to anticipate increasing electricity demand to support electricity revenues.
The company is on course to commission 83.3 MW Olkaria I Additional Unit 6 geothermal plant in FY2022 (September 2021) this should also boost electricity revenues (capacity and energy). However owing to the review of tax allowances from a maximum of 150.0% to 50.0% of capital investment, going forward KenGen may not benefit as much from tax credits when commissioning plants as it did in the past.
KenGen also plans to continue its revenue diversification initiatives and with the reducing impact of COVID-19 (due to the increasing roll-out of vaccines globally and locally) we expect the revenues from diversification efforts to improve in FY2021.
On a positive note, KenGen’s cash flow position seems to be improving.
We are NEUTRAL on KenGen.
| KenGen Income Statement | 1H2021 | 1H2020 | Change |
| KES mn | KES mn | ||
| Total revenue | 21,801 | 22,361 | (2.5%) |
| Total reimbursable expenses | 1,234 | 3,447 | (64.2%) |
| Net revenue | 20,567 | 18,914 | 8.7% |
| Total other income | (202) | 725 | (127.9%) |
| Operating income | 20,365 | 19,639 | 3.7% |
| Depreciation and amortization | 5,738 | 5,708 | 0.5% |
| Steam costs | 1,527 | 1,661 | (8.1%) |
| Operating expenses | 5,825 | 5,569 | 4.6% |
| Total Operating Expenses | 13,090 | 12,938 | 1.2% |
| Operating profit | 7,275 | 6,701 | 8.6% |
| Finance income | 829 | 723 | 14.7% |
| Finance costs | 1,232 | 1,145 | 7.6% |
| Profit before income tax | 6,872 | 6,279 | 9.4% |
| Income tax credit (expenses) | (1,817) | 1,892 | |
| Profit for the year | 5,055 | 8,171 | (38.1%) |
Kenya Power Records an 80.1% Decline in After Tax Profits for 1H2021
Kenya Power’s after tax profits for 1H2021 declined by 80.1% y/y to KES 138.0 mn from KES 692.0 mn registered in 1H2020. The decline in profitability was primarily occasioned by higher finance costs and lower revenues.
Revenues from contracts with customers fell by 0.9% y/y to KES 69.0 bn despite a 0.7% y/y growth in electricity sales to 4,196 GWh. According to the company, the marginal growth in electricity sales was attributable to slow recovery in electricity demand following a sharp decline in energy consumption at the onset of the COVID-19 pandemic.
Cost of sales rose marginally by 0.1% y/y to KES 45.6 bn – weighed down by non-fuel power purchase costs which increased by 2.5% y/y to KES 38.1 bn (owing to additional costs resulting from the weakening of the Kenya Shilling).
However, fuel costs eased by 34.5% y/y to KES 4.6 bn due to less thermal generation.
Consequently, Kenya Power realized a gross profit of KES 23.4 bn (gross profit margin of 34.0%) reflecting a 2.7% y/y decline from KES 24.1 realized in 1H2020 (gross profit margin of 34.6%).
Other income decreased by 6.1% y/y to KES 3.6 bn.
As a result of cost management initiatives, transmission and distribution costs dipped by 18.7% y/y to KES 18.7 bn.
Finance costs surged by 110.1% y/y to KES 8.1 bn; the company attributed the steep rise to the depreciation of the Kenya Shilling against major currencies resulting in unrealized foreign exchange losses.
The company’s net working capital position improved marginally to KES 68.3 bn from KES 68.9 bn mostly due to a 1.7% y/y decline in current liabilities to KES 112.2 bn as current assets eased by 2.9% y/y to KES 43.9 bn.
Cash and cash equivalents became positive in 1H2021 rising to KES 1.7 bn from negative KES 6.0 bn in 1H2020 and this was mainly supported by a 42.1% y/y decline in cash used in investing activities to KES 4.2 bn (1H2020: KES 7.2 bn).
Commentary
As the economy continues to recover following the easing of COVD-19 restrictions and the anticipated roll-out of the vaccine, we expect rising economic activities to enhance electricity demand and consequently electricity sales.
Whilst we note the positive change in transmissions and distribution costs (-18.7% y/y to KES 18.7 billion), we opine that continued focus on operational efficiency is not a sustainable long-term strategy to boost financial performance. We believe that improved financial performance should be anchored on enhancing the top-line.
Additionally, whereas negative working capital positions is not unusual for capex intensive industries, our main concern is the rapid growth in Kenya Power’s negative working capital position (has risen from KES 23.8 bn in FY2017 to KES 68.3 bn in 1H2021). Given that most of these liabilities relate to trade payables (e.g., amounts owed to KenGen) and increased reliance on short term borrowing, these points to cash flow challenges.
Recommendations:
Kenya Re – HOLD