Market Report – 29th January 2020

Market Commentary:

• The All Share Index edged up by 0.5% w/w while the NSE 20 Share Index eased by 0.3% w/w to close the week at 155.59 and 1,881.91 respectively. Market turnover declined by 5.0% w/w to KES 2.5 billion while volume of shares traded increased by 10.6% to 88.3 million shares. We attribute the gain in the All Share Index to a 0.8% w/w gain on Safaricom to close at KES 35.85.
• EABL eased only marginally (0.2% w/w) to close at KES 149.75 despite a 47.2% y/y decline in profitability to KES 3.8 billion for 1H2021. The decline in profitability was mainly due to higher tax related provisions (c. KES 1.9 billion) and lower net sales (-3.0% to KES 44.5 billion). Net sales, however, recovered (+53.0%) compared to 2H2020. We opine that investors are optimistic about the company’s performance going forward (We will issue our recommendation in the coming week).
• The banking sector saw increased selling pressure on NCBA (-2.6% to KES 24.75), Equity (-1.9% to KES 36.50), ABSA Kenya (-1.5% to KES 9.32) and HF (-0.8% to KES 3.86). In the coming week, we expect continued focus on banking stocks, Safaricom and EABL.

News Highlights:

CBK Invites Bids for Re-opened FXD1/2013/15 and FXD1/2012/20 Treasury Bonds

• The Central Bank of Kenya (CBK), acting in its capacity as fiscal agent for the Republic of Kenya, has invited bids for the re-opened FXD1/2013/15 and FXD1/2012/20 with the intention of raising KES 50.0 billion for budgetary support.
• The features of the bonds are shown in the table below:

• The recent FXD1/2021/002 bond issue recorded an oversubscription of 244.60% with the government accepting KES 55.9 billion worth of bids (original amount offered: KES 25.0 billion).
• We note that the government’s appetite for borrowing may be lower, hence the 5-day period of sale on the current issue (recent IFB1/2021/16 and FXD1/2021/002 sale periods were 22 and 12 days respectively). We attribute this to the fact that the government accepted KES 81.1 billion worth of bids this month from the issue of the most recent infrastructure bond (IFB1/2021/16) which had a significant oversubscription of 250.95%.
• We recommend bidding as follows:
  1. FXD1/2013/15
     • Aggressive bids – 11.60-11.90
     • Non-aggressive – 11.30-11.50

1. FXD1/2018/20
   • FXD1/2012/20
   • Aggressive bids – 12.50-12.80
   • Non-aggressive – 12.10-12.40,

KenGen Posts a 133.1% Growth in After Tax Profits for FY2020

• KenGen recorded a 133.1% y/y growth in after tax profits for FY2020 to KES 18.4 bn (FY2019: KES 7.9 bn).
• The surge in profitability was predominantly attributable to a tax credit of KES 4.6 bn.
• KenGen’s bottom line was also supported by an 11.3% y/y growth in net revenues to KES 39.8 bn.
• Despite the operationalization of 165 MW Olkaria V KenGen’s operating expenses (excluding depreciation & amortization) grew marginally by 0.8% y/y to KES 14.0 bn indicating improved efficiency.
• The company declared a dividend of KES 0.30 (FY2019: KES 0.25); we opine that the reduced cash position may have partly influenced the low dividend payout of 10.8% (FY2019: 20.9%).

Commentary

• With the lifting of COVID-19 restrictions and the gradual reopening of the economy, we continue to expect increasing electricity demand to support electricity revenues.
• Furthermore, KenGen is on course to commission the 83.3MW Olkaria 1 unit 6 plant in 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. We note that the tax reliefs which the Company benefited from have been reversed (corporate tax rate is back to 30.0%) and thus going forward, KenGen’s performance will likely depend more on its initiatives (commissioning of new plants, revenue diversification) and power demand in the economy.
• We also note that with increasing trade receivables (from Kenya Power) KenGen’s cash flow position continues to remain constrained limiting its dividend pay-out ratio. (We have withdrawn the Buy and are currently reviewing the recommendation).

Recommendation:

Kenya Re – Hold