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Market Report – 5th November 2021


Faida Research - November 15, 2021 - 0 comments

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Features of the week:

The following are the features of the week. Read more in the weekly report.

Kenya Power Rebounds to Profitability in After Tax Profits for FY2021

  • Kenya Power rebounded to profitability in FY2021 with after tax profits of KES 787.0 million from an after tax loss of KES 396.0 million reported in FY2020. The improvement in profitability was primarily owing to higher revenue from contracts with customers, lower transmission and distribution costs as well as a dip in finance costs.
  • Revenue edged up marginally by 8.2% y/y to KES 144.1 billion. This was attributed to an increase in electricity revenue predominantly driven by a 4.9% y/y in unit sales to 8,571 GWh. According to management, this was due to an expanded customer base and increased economic activity. Non-fuel power purchase costs on the other hand remained relatively flat at KES.11.2 billion (FY2020: KES 11.1 billion).
  • Cost of sales grew by 7.7% y/y to KES 94.2 billion. As a result the gross profit margin rose by 9.0% y/y to KES 49.9 billion.
  • Other income declined by 4.6% y/y to KES 7.1 billion. Transmissions and distribution costs dipped by 16.7% y/y to KES 39.9 billion. According to management, this was due to lower provisions as a result of enhanced revenue collection, prudent cost management and resource optimization initiatives implemented during the year.
  • Interest income edged up by 32.5% y/y to KES 163.0 million. Finance costs decreased by 27.5% y/y to KES 9.1 billion. According to the company, this was owing to:
    • partial conversion of overdrafts
    • continued repayment of commercial loans
    • prudent planning of foreign exchange transactions
    • Management did not recommend the payment of a dividend.

Commentary

  • The improvement in bottom-line performance sees the company buck the downward trend in profitability from FY2017 to FY2020.
  • We note that the growth in revenue is an improvement from the first half of the year where revenues had dipped (-0.9% y/y to KES 69.0 billion) due to slow recovery of electricity demand. We opine that with the easing of pandemic restrictions demand should improve further.
  • We also note positively the improvement in transmissions and distribution costs during the year (1H2021: -18.7% y/y to KES 18.7 billion). We note that higher finance costs and higher distribution and transmission costs had previously been among the main reasons for the dip in profitability over the years. We expect KPLC’s partnership with Safaricom on smart electricity meters to lower the transmission losses further. The company was in October 2021 declared by the government to be a “Special Project” with an inter-ministerial team set up carry out forensic audit and oversight the company with an aim to reduce system losses including the theft of power. This should also help reduce the system losses.
  • In as much as the company’s current liabilities improved by 1.2% y/y and current assets grew by 16.4% y/y, the negative working capital position remains an area of concern. The current assets are significantly lower than current liabilities by KES 66.5 billion, which affects the company’s ability to meet short-term obligations. We recommend a speculative buy.

 

KenGen Posts a 93.5% Decline in After Tax Profits for FY2021

  • KenGen reported a 93.5% y/y decrease in after tax profits for FY2021 to KES 1.2 billion (FY2020: KES 18.4 billion). The dip in profitability was mainly due an increase in taxation. This was attributed to the reversal of COVID-19 mitigation tax measures by the government.
  • The company’s profit before tax showed improvement, growing by 7.0% y/y to KES 14.8 billion.
  • Revenue edged up by 4.1% y/y to KES 45.9 billion. According to management, this was primarily driven by revenues from geothermal, hydro generation and diversification venture at Tulu Moye in Ethiopia – with the contribution of the ongoing geothermal drilling services in Tulu growing by 305.5% y/y to KES 1.8 billion.
  • Reimbursable expenses eased by 3.0% y/y to KES 4.2 billion. This was attributed to reduced dispatch from the thermal power plant due to enhanced hydro generation.
  • Revenue less reimbursable expenses edged up by 4.8% y/y to KES 41.7 billion
  • Other income rose by 4.7% y/y to KES 495.0 million. This was attributed to insurance compensation for various eligible claims.
  • Other (losses) gains- net forex and fair valuation of financial assets eased by 82.4% y/y to KES 1.1 billion. According to management, this was due to fair value gain on financial asset through profit or loss as a result of stability of the Kenyan shilling against other major currencies.
  • Depreciation and amortization fell by 4.2% y/y t KES 11. 5 billion. This was attributed to the impact of the 45MW Olkaria I geothermal power plant that is now fully depreciated.
  • Operating expenses increased by 18.3% y/y to KES 12.9 billion. According to the company, this was driven by cost of drilling operations in Ethiopia, power plants’ operation and maintenance and Corporate Social Investments (CSI) e.g. the Naivasha Level 5 County Referral Hospital
  • Steam costs grew by 4.2% y/y to KES 3.0 billion. KenGen attributed this to lower dispatch from the power plants utilizing steam from the third party owned wells.
  • Consequently, operating profit declined by 22.7% y/y to KES 15.9 billion (FY2020: KES 20.6 billion).
  • Finance income edged up by 31.4% y/y to KES 1.9 billion due to interest from delayed payment of receivables and interest earned from investing funds arising from deferred payment of on-lent loans under moratorium and Debt Service Suspension Initiative (DSSI).
  • Finance costs eased significantly by 63.0% y/y to KES 3.1 billion (FY2020: KES 8.2 billion). According to the company, this was owing to the stable Kenyan shilling which resulted in lower foreign exchange loss on foreign currency denominated borrowing (-88.2% y/y to KES 702.0 million).
  • Cash and cash equivalents rose significantly by 157.9% y/y to KES 13.9 billion mainly buoyed by a 53.7% y/y rise in cash generated from operations to KES 27.4 billion.
  • Management recommended a first and final dividend of KES 0.30 (FY2020: KES 0.30).

Commentary

  • The company noted that it is set to deliver Olkaria I Unit 6 geothermal plant which will add 83.3 MW to the national grid. We opine that this should support electricity revenues.
  • We note the continued improvement in cash flow (1H2021: +106.4% y/y to KES 10.8 billion). We also note that the company remains focused on revenue diversification through revenue streams such as drilling services and consultancies. We recommend a neutral to accumulate on Kengen.

 

CBK Invites Bids for newly issued FXD1/2021/5 and Re-opened FXD1/2019/20 Treasury Bonds

  • The Central Bank of Kenya (CBK) has invited bids for the newly issued FXD1/2021/5 and re-opened FXD1/2019/20 with the intention of raising KES 50.0 billion for budgetary support.
  • The features of the bonds are shown in the table below:
  FXD1/2021/5 FXD1/2019/20
Amount KES 50.0 billion
Tenor 5.0 years 17.5 years
Coupon rate Market determined 12.873%
Taxation 15.0% 10.0%
Period of sale 25/10/2021 to 09/11/2021
Redemption date 09/11/2026 21/03/2039

Source: CBK

  • We recommend bidding as follows:

FXD1/2021/5

  • Aggressive bids – 11.15% -11.25%
  • Non-aggressive – 10.95% – 11.10

FXD1/2019/20

  • Aggressive bids – 13.26% – 13.39%
  • Non-aggressive – 13.10% – 13.25%

 

Equities Market Summary:

Nairobi Securities Exchange Performance

The All Share Index (NASI) and the NSE 20 eased by 3.9% and 0.6% w-o-w to close the week at 170.94 and 1,948.87 respectively. We attribute the dip in the all-share index to a decline in Safaricom’s price by 6.1% w/w to KES 40.20. Equity turnover fell by 5.5% to KES 1.8 billion while the volume traded rose by 23.9% to 63.1 million. Notable price declines in the week included; BK (8.6% w/w to KES 26.50), Stanbic (7.4% w/w to KES 87.00), CIC (6.3% w/w to KES 2.40), Liberty (6.3% w/w to KES 7.50), Jubilee (4.5% w/w to KES 343.75) and Kenya Re (4.1% w/w to KES 2.32).  We expect focus to be on banks and Safaricom this week as they release third quarter and half year results respectively.

 

Recommendations:

KCB – Neutral

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