LONG TERM BUY
We recommend a LONG-TERM BUY on KenGen. The counter is currently trading at a trailing P/E multiple of 3.87x (at a price of KES 4.64 as at 22nd January 2021).
KenGen recently released its 1H2019/2020 results showing a 98.1% y/y growth in after tax profits to KES 8.2 bn. The jump in after tax profits was predominantly due to a tax credit of KES 1.9 billion occasioned by capital allowances following the commissioning of 165 MW Olkaria V.
With the introduction of the Energy Act 2019 (which allows other players other than Kenya Power to sell electricity to consumers), KenGen has the ability to pursue direct energy sales. This would enhance KenGen electricity sales and open the door for similar direct sales especially for companies in the Special Economic Zones. The company is also actively pursuing a revenue diversification strategy.
Further, KenGen is actively pursuing its Revamped Horizon III Good-to-Great (G2G) Strategy that is largely focused on geothermal capacity expansion (totaling 439 MW). We note that with 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 as it did it in the past from the commissioning of new plants as it did it in the past.