THE ELECTRICITY COMPANIES AT THE NSE-A FOCUS ON KENGEN AND KPLC



INTRODUCTION

KPLC is the only power distribution company in Kenya. The bulk of its power is bought from KenGen,the main power producer in Kenya. Kenya relies heavily on hydro-power for electricity generation (about 73% of electricity is generated via hydro-power). Thus,the power sector is facing serious challenges as a result of capacity constrains,exacerbated by poor hydrology during the year.



The country’s vast geothermal resources are highly under-utilized,with only 7% of the estimated geothermal potential of 3,000MW currently being harnessed. Majority of the geothermal power is produced by KenGen at 166 MW. The Independent Power Producers (IPPs) supplement the geothermal power production as follows:


Orpower 4,an IPP generates a total output of 48 MW of geothermal power equivalent to 2.3% of the energy produced in the country.
Oserian Development Company which generates 3MW of geothermal power to the national grid.



Other Independent Power Producers include: Iberafrica contributing 52.5MW and Mumias Sugar contributing 26MW.

The demand for electricity is estimated to grow at an annual rate of 6%. This is mainly due to the government backed Rural Electrification Program. The Rural Electrification Programme is set to increase electricity access in the rural areas from the current 10% to 20% by 2010 and further raise the access to 40% by 2020. It is worth noting that the country is currently operating at a reserve energy capacity of below 7%. (This is truly below the recommended reserve energy capacity of 15 %.)



Power Consumption Groups in Kenya








POWER USER



PERCENTAGE CONSUMPTION





Medium Commercial Industrial



44 %





Domestic



25 %





Small Commercial



18 %





Large Commercial Industrial



12 %





Off peak



0.7 %





Street lighting



0.3 %









The country’s peak demand for power is estimated at 1,079 MW with an effective capacity of 1258 MW. The total installed capacity stands at 1296 MW.



Normally,KenGen uses the cheaper hydro power during off peak hours and expensive sources (thermal power) during peak hours. With reduced water levels,the trend has reversed and the company is now forced to use expensive sources during off peak times. This has resulted in high electricity bills to consumers because when fuel oil is used to generate power,the fuel costs are surcharged to the consumer (pass-through component). This is a shift from reliance on hydro-power,which has been erratic due to unpredictable rainfall patterns.

The uppermost dam in the seven forks hydro system,Masinga dam,was recently closed due to water levels falling below the threshold 1,036m level.

KENGEN

KenGen is the leading power producer in the country supplying 1,050 MW into the national grid,which accounts for 80% of the total energy requirements for Kenya. In March 2009,Kengen began a search for a joint venture partner to build a Ksh 55.3B coal fired plant in Mombasa. The plant will consist of two units with a combined output of up to 300MW. The arrangement requires the joint venture partner to own a majority 60% equity stake in the project under a 25 year build,own,operate and transfer (BOOT) contract. The deal will also include port landing facilities and an interconnection facility to the national grid.

The country’s effective reserve energy capacity has fallen to below 7% due to a high rate of peak demand combined with reduced water levels in the dams feeding the hydro-power stations. This has lead to the use of thermal power during peak demand,which is expensive to produce and is highly responsible for rising power bills.

In June 2009,the two main power utilities,KenGen and KPLC Ltd signed a long term power purchase agreement. The tariff agreement stipulates a per unit payment of Kshs 2.42/KWh from Kenya Power (the monopoly distributor of electricity) to KenGen (its main supplier). The new tariff agreement is a departure from the previous arrangement between the two utilities and is capacity based,taking into account the marginal cost of power production,a required rate of return and the level of effective capacity. The new tariff will also allow for a fuel cost pass through and a foreign exchange rate adjustment.

Kengen is currently being faced with high finance costs; driven by exchange losses on its YEN denominated loans. The new tariff will ease cash flow generation for KenGen,which is in an expansion phase. It has plans to increase the installed capacity from 1,296 MW to 1,762 MW over a five year period at an approximate cost of USD 1 Billion. KenGen is expected to fund 30% of expansion plans from internally generated cash flow. The company is expected to launch a Kshs 15 billion corporate bond in the near future to finance the new power projects.

In July 2009,KenGen initiated a project that will inject an extra 11MW of electricity into the national grid in September 2009. The power will be produced from a wind power project located in the Ngong hills. Phase one of the project will produce 5.1 MW and an extra 5.9 MW will be available at the completion of the phase two of the project. The project is expected to provide power to an estimated 1,000 homes. The funding for the project is through internal revenues and a EUR 10m loan sourced from the Belgian government and on-lent to KenGen at 1.5%,to be repaid in 14.5 years. The national power distributor,KPLC has already finished an 11 KV transmission line from the site.



KENGEN FINANCIALS-FOR 1ST HALF 2008/2009 VERSUS 1ST HALF 2007/2008








KEY INFORMATION



1ST HALF 2007/2008



1ST HALF 2008/2009



% CHANGE





PRE-TAX PROFIT



Ksh 2.33B



Ksh 1.57B



-32.8 %





ELECTRICITY SALES REVENUE



Ksh 5.8B



Ksh 5.9B



1.6 %





TOTAL REVENUE



Ksh 7.8B



Ksh 11B



40.9 %





EPS



Ksh 0.8



Ksh 0.5



-37.5 %







KenGen heavily relies on hydro-power generation for its operations. This means that,the company is as reliant on rainfall as agricultural stocks in the NSE. With the poor rains experienced,a lot of the power generation will be via fuel-oil being used. Although this is a pass-through component,the likelihood of power rationing means that the power generation will not be optimum,hence a case of supply not meeting demand. The sales revenue from electricity as such will be affected. The 38% decrease in earnings per share is also a worrying trend. This decrease in EPS will most likely be the same range come the end of the financial year.

The share is currently trading at a price of Ksh 14.90.Assuming a decrease of -37.5% for the full year results (2.19X0.625=Ksh 1.35). The share is thus trading at a forward P.E of 11. At the currently depressed market,this price would seem to be on the higher side. Also,the company is serious in need of capital to keep up the electricity generation demands of the country. Thus,it can be expected that most of its profits will be plowed back into the company,hence lower dividends.

The company remains a long term buy in light of the rising power needs of the country and it’s near monopoly in power generation,coupled with its expansion plans.

KPLC

The company has a monopoly in power distribution in Kenya. It has initiated strategies for expanding its customer base and investing in modern and innovative technologies to improve its customer service and revenue collection. Some of these initiatives include connection of about 200,000 additional customers annually,introduction of prepaid metering,installation of automatic meter reading and continued investment in the electricity network in order to improve the quality of power supply.

The management has eased bill payment through introduction of more payment points e.g. Post offices,local banks; and innovative payment methods i.e. through M-Pesa and Zap.

The company is facing a serious challenge in vandalism on its distribution lines and theft of electricity through illegal power connections.

Its is less affected by hydrological factors since fuel costs used to generate electricity by KenGen are passed on to the consumers in full.



KPLC FINANCIALS-FOR 1ST HALF 2008/2009 VERSUS 1ST HALF 2007/2008








KEY INFORMATION



1ST HALF 2007/2008



1ST HALF 2008/2009



% CHANGE





PRE-TAX PROFIT



Ksh 1.474B



Ksh 2.191B



49 %





ELECTRICITY SALES REVENUE



Ksh 12.089B



Ksh 18.608B



54 %





NON-CURRENT ASSETS



Ksh 28.3B



Ksh 39B



39 %





NET WORKING CAPITAL



Ksh 1.19B



Ksh 2.2B



46 %





NON-FUEL POWER PURCHASE COSTS



Ksh 6.148B



Ksh 9.305B



51 %





FUEL COSTS



Ksh 7.555B



Ksh18.075B



139 %





TRANSMISSION AND DISTRIBUTION COSTS



Ksh 4.704B



Ksh 6.959B



48 %





NET FINANCING COSTS



Ksh 229M



Ksh 400M



75 %





INTERIM DIVIDEND (PER ORDINARY SHARE)



Ksh 1.00



Ksh 2.00



100 %





EPS



Ksh 12.07



Ksh 18.51



53 %







During the period under review,the EPS was up by an enormous 53% compared to the half year results of the previous trading year. This was primarily as a result of rising retail tariffs,following a decision by the Electricity Regulatory Board. The increased revenue is highly needed to finance the network expansion necessitated by the Rural Electrification Programme.

The management during the release of the half year results stated that the full year results will most likely mirror the half year results. Thus,the full year EPS for 2009 may be estimated at Ksh 37.

At the current price of Ksh 140,the forward P.E is thus 140/37 = 3.8. This means the share has considerable room for price appreciation and capital gains are anticipated once the end of year results for the period ending June 2009 are announced around August 2009. This makes the company a good buy at prevailing market prices.

The company doubled its interim dividend from Ksh 1.00 to Ksh 2.00. If this trend is to hold,then the total dividends for 2009 would be Ksh 8.00 (final dividend of Ksh 6.00 for the 2nd half of the year).

It is however important to note that the company has preference shares owned by the government that are worth Ksh 15.9 B. Following the steep rise in profitability,the cash strapped government may demand dividend payment on this class of shares,which would have a dilutional effect on net profits. The situation arose when a debt amounting to Sh12.3 billion owed by KPLC to KenGen was reallocated into preference shares.

The strong demand for electricity throught the country means that the company KPLC has a very bright long term future.

Happy hunting.

Stocks master,you probably want to do some more detailed work at KPLC before sharing your views on valuation.

There is about 16B in pref shares,pref dividends of 1.23B are payable should they make Profits of 2.8B which they will this year. However the KPLC is mostly a negative free cash flow generator which then leads you to quickly conclude that they cant afford 1.23B in dividends. Already the 16B looks set to be converted into ordinary equity am sure at 3 month avprice of about 120. This will then leave minorities with a 40% at most of what they own. This is a very likely event meaning than buying KPLC is a massive gamble and unless they are paying the entire 35 bob EPS as dividends for 2009,i wouldn't touch it with a pole.

On Kengen,they lost the plot a long time ago. Also they are carrying a likely asset write down of up to 1B,for ghost assets. Productions has dried up,so what are you telling us to buy,a brand perhaps! I rather buy a bond than Kenya government owned utulities.

Thank u very much for the analysis.

KPLC makes sense lakini Ken...wacha ikae..

If EPS is going down then just forget about that company... Go for companies that can grow ur investment otherwise waiting for a 'Long Term' when u know the co. is not performing is just gambling with ur money.... Read this from ZACKS.cOM

Stop the Bleeding Strategy:-

This strategy is so simple,yet so hard for most investors to do. So,I'm going to beat it into your head...for your own good of course ;-)

Sell All Companies with a Negative Earnings Surprise

Yes,sell it immediately. Even after it falls at the open. Even if it is for a substantial loss. Why? Better to take a 10-20% loss in the short run than a 20 to 40% loss in the long run.

Keep in mind how earnings estimates are created. Both company executives and brokerage analysts are doing their best to create conservative estimates that the company should easily beat. And when they fall short of those watered down estimates then it points to one of two serious problems.



Industry conditions have deteriorated and thus they missed their forecasts. This problem will most likely not correct itself in the near-term,leading to further disappointment.

Company leaders are incompetent. Meaning that they are no good at estimating their own earnings. Or that their strategies for growth are ineffective.


Either reason should give you ample cause to abandon the stock now and move on to greener pastures.

Now you have agiven a spoiler alert...i did the analysis and KPLC steep rise was meant to be surprise to many....i acquire the shares....but now the secret is open...

This counter is awesome....the only downside will be if gov gets rids of kplc monopoly and this one cant happen anytime soon...i am holding on to this counter for 2 years and lets review its performance by then...


Failure inspires winners...winners are made not born

Firstly thanks stockmaster for the piece. The forum has missed your in depth stock analysis to counter-balance a lot of the other filler.
Every stock-analysis must take into account the macro (LEPEST) as micro (firm-specific) portions of a firm. This double analysis is especially necessary in a frontier stock market like ours. The micro-analysis is what I consider you’ve done above.
· KenGen: I am not sure how you can recommend KenGen on the basis of the information you’ve posted above. It has cash flow issues,needs more funds (a Ksh15bn bond will require interest rate of around t-bill +1.50% to entice investors) and for the sheer fun of it,has taken on a fx-denominated loan. Hasn’t Eddie Njoroge ever heard of East Africa Portland? The revenue generation is seriously constrained by the rainfall patterns which can’t be resolved until we resolve Mau settlements and other tree-depleting activities. KenGen produces 72% of its power from HO2.
· KPLC: Things have improved. But note that the ESP benefit is a one-off from better tariff arrangements. Beyond that? When is it going to reduce transmission losses which still stand at around 23% of 1mw it buys? Then is its electricity demand inelastic? That is,will customers indefinitely accommodate higher power costs (which are already among the highest in Africa)? Clearly not as demonstrated by the excellent kaigangio thread on substitutes.
· Time: I am always weary of stock analysis that has targets that are not timebound. They are lazy because its easy for me to say KenGen will rise to Ksh30 in the long-run. My son might retire before KenGen gets to that price!
On macro issues. Investors,please start factoring in 2012 into your stock considerations. If we don’t change direction politically,2012 won’t be pretty.
Finally,these two firms are parastatals. It won’t take much to have a donkey running one of them. Cue machozi.
Do your own research however.

www.mjengakenya.blogspot.com

Great analysis. I hope you can be doing this more.

When we pray in praise to God,he makes a difference in our lives.

KenGen's expected new proposed tariffs for all new projects (in the PIBO prospectus) are considerably higher (particularly for hydro & geothermal)...since the emphasis is on building geothermal capacity,KPLC will have to pay more in the future for every unit it buys...you just have to look at the negative net working capital & finance costs in 2009 to see how strained they're in maintaining cashflows to meet current fuel costs...the last time these two items this high was in 2003 when the interim PPA was signed. I believe KPLC's future will rely on its ability to manage its debts...dividend policy will remain conservative and KPLC is going to go further into debt to afford the higher tariffs and cost push pressures from fuel costs. They'll continue to make money as long as consumers don't revolt!


The process by which banks create money is so simple that the mind is repelled.