In the last year and more so the last month, the NSE Equities market has shown recovery from a prolonged slump. As T bills approach single digits returns, smart money has started flowing into the equities market which are still heavily discounted. Several counters have started approaching their true market value but a few still present opportunities for outsized returns. As money exits treasury bills and bonds, it will be seeking equities that can deliver similar returns to the 2024 interest rates of 15-18% (through mainly dividends but also potential capital gains)
The following are my picks for 2025 (in order of priority)

1. KCB (Current Price: Ksh 41.50; Target Price range Ksh 60-65 by Dec 31st 2025); About 50% Upside

Currently the most undervalued bank share, the bank is on course to report a net profit of Ksh 60bn (about Ksh 18 earnings per share) despite havings NPLs worth over 215bn as at 3rd quarter (18.5% of loan portfolio).The dividend policy for KCB is to distribute upto 50% of net earnings. A conservative dividend of 35% of net earnings could mean a dividend of Ksh 6.50 for 2024 (deduct Ksh 1.50 interim dividend for a potential final dividend of Ksh 5.00). It is also in the process of selling National Bank of Kenya, its subsidiary, to Access bank by March 2025. The value of the transaction as at Q3 2024 was 1.25 x 12bn (book value) = Ksh 15bn. By March 2025, the NBK value should be about 16bn, hence about Ksh 5 per KCB share which presents a possibility for a special dividend of about Ksh 2 (if 40% of the sale are distributed). Add half year interim dividend 2025 of about Ksh 1.50 - 2.00 , and this adds up to about 20% in potential dividends in the next 9 months.
The Ksh 215bn NPLs representing 18.5% of loan portfolio while presenting a risk to investment, also provides a major opportunity since a major recovery in this ratio would turbo charge profits for 2025.

2. UMEME (Current Price: Ksh 16.75; Target Price-Concession buy out price of Ksh 20 plus dividends/retained earnings of Ksh 5-10); About 50% upside within the next 90 days.

The 20 year Umeme Concession ends on 28th February 2025 and with the Uganda government having decided not to renew it, are bond by the concession agreement to pay Umeme for all unrecovered investments plus a 5% premium by 31st March 2025. Current estimates of the buy out amount ranges from USD 225M (Uganda Energy PS estimate in early 2024) to 255M (latest Uganda Govt estimate in Oct 2024) to 283M (Umeme Management Estimate). With 1.62bn shares, that works out to between Ksh 18 - 20.5 - 22.70 (Median of about Ksh 20.5). The company after the end of the concession will most likely delist from both the Nairobi and Uganda stocks exchanges. This means distribution of buy out amount and shareholders equity and 2024 earnings to the shareholders. (The company cleared all its long term debt by Dec 2023). Retained earnings as at June 2024 were worth about Ksh 10 per share and translation reserves about Ksh 4.50.As at Half year 2024, total shareholder equity was worth about Ksh 17 per share.
Depending on the direction the company decides to take after the concession lapses on 31st March 2025, the next 90 days could deliver some outsized returns to the shareholders. It is worth noting that any delay in payment by Uganda Govt after March 31st will attract an interest of 10% p.a btw days 30-45; 15% p.a btw days 46-90 days and 20% p.a after day 90 until the amount is settled in full.
It should however be noted that this is a highly speculative 90 day play that has many variables e.g the Auditor General of Uganda whose mandated to audit the Umeme Investments may refuse to recognize some of the investments hence reducing the buy out amount; African politics may come into play although almost a quarter of Umeme is held by the NSSF Uganda; lack of budget allocation to support the buyout (the amount was not captured in the June 2024-2025 budget hence indicating potential delays) etc., potential last minute renewal of the concession but at lower margins for Umeme (the 20% guaranteed returns were one of the issues the GoU had with the agreement and are hoping for a partner that can assure much less for cheaper elec).

3. KENGEN (Current Price: 3.64; Target Price Ksh 5.00); About 40% Upside

KenGen is currently trading at a dividend yield of almost 18%. The government policy that is partially responsible for government trading entities to pay at least 80% of earnings as dividends is still in place upto end of June 2025 and this was incorporated into the performance contracts of the CEOs of these parastatals. The company is also expected to get a windfall of over Ksh 4.1bn by end of 1st half of current financial year from selling about 70% of its carbon credits (the carbon credits amount adds up to almost same amount being paid as dividends for financial year ending June 2024). With stability of the Ksh versus dollar and a more liquid KPLC (paying its debts due to KenGen within their 40 day agreement; KPLC owed KenGen about 17bn as at June 2024 and paid fines for late payments amounting to 710mn for financial year ending June 2024). Shortage of power in Western Kenya has also seen the revival of KenGens Muhoroni Gas Turbines last month which will inject 60MW to the grid. This power purchase agreement with KPLC had expired in June 2023 and the plant had been subsequently shut. In November 2024, the plant has supplied 688,650 kWh in it first month after revival. Projects geared at increasing KenGens power generation capacity are also ongoing and should in the long term increase the electricity generation capacity of the company. It is also engaged in an Africa wide geothermal drilling which is earning the company additional revenue from its leadership in this market niche.
I anticipate at least a dividend of Ksh 0.65 for financial year 2025 which should propel the price towards the Ksh 5.00 – 5.50 by October 2025.

4. BAT (Current Price: Ksh 376; Target Price Ksh 450); About 20% upside

BAT has been heavily penalized by the market following the inability to acquire a license to start production of oral nicotine pouches despite having a factory to manufacture the same since 2019 (5 years old). This has forced the company to sell the machinery (from July 2024) and shelve the nicotine pouches idea.
BAT is currently trading at a dividend yield of 13.3%. Despite the half year 2024 EPS falling from Ksh 28.22 to Ksh 21.36, the interim dividend was retained at Ksh 5. The 24% drop in earnings was attributed to a 10% drop in net revenue, foreign exchange losses from its exports amid a strengthening shilling, and a 700M increase in costs of repaying loans due to the foreign exchange movements. The nicotine pouches issue clearly destabilized the company with capital tied up (the factory investment was reported at Ksh 2.5bn) and human resource that must have been scaled up for this operation. The 19th December 2024 communication to staff on imminent staff reduction exercise to drive efficiencies and optimize operations highlights this fact. With a 2024 EPS of about 43-45, and a policy of distributing 85-90% of earnings, a final dividend of Ksh 35-40 is likely. BAT has retained earnings of over 10Bn which can be tapped into to maintain dividends at similar levels to last financial year. The sale of the nicotine pouches factory machinery should also generate some salvage value of at least 1bn – 1.5bn from this investment). Should it maintain its dividends in the Ksh 45-50, the share should reclaim its true value of about Ksh 450 (10% dividend yield).

Happy Hunting in 2025

KCB are on track for at least a Ksh 60bn net earnings for 2025 and a further Ksh 15-16bn one off earnings from sale of NBK (having invested about 11bn in NBK hence some net gains from the NBK sale). It can keep 2/3rds of this earnings (50bn) and distribute 1/3rd which adds to about Ksh 6.50 per share.
Both Equity and KCB have eyed Ethiopia entry for a while and both have had representative offices in Ethiopia for some while, studying the market and developing networks with the Ethiopian business community. It would be wasted efforts if both do not capitalise on the legal changes in the Ethiopian financial sector that now opens a door to foreigner banks entry. The New Ethiopian law provides several market entry pathways either through acquiring minority ownership of an existing private bank or via opening branches if classified as a strategic investor (large foreign banks). I suspect both Equity and KCB will make moves this year towards Ethiopia. As Ethiopian financial sector opens up (even their stock exchange is just now starting), it presents opportunities to list the new entities so acquired or opened into the developing stock exchange. It's hard to ignore the emerging business potential presented by a neighbour with 130M population.

Happy hunting

Final dividend ksh.3 to bring total dividend to 4.5