Stock Watch: Umeme Ltd

Umeme Ltd (NSE: UMME) announced their audited results for the period ended 31^st December 2014 on 30^th March 2015.

Recommendation: HOLD, Target Price – KES 18.3 (4.57% Upside)

Slowdown on the Top line Recording Mere 1.2% Revenue Growth to USH 977.66 Billion (KES 30.32 Billion)

Uganda electricity distributing company Umeme, registered slowdown in electricity sales revenue over the year despite increasing the customer base by 76,000 to 651,000 connected consumers. Units sold in Gwh also expanded 7.51% to 2,277 Gwh at an improved revenue collection rate of 99.1%. Based on these facts, our inference is that sales revenue may have been hampered by a reduction in price charged per unit. Ongoing is an appeal by Umeme Ltd at the Electricity Disputes Tribunal (EDT) against amendments implemented which adjusted electricity tariffs down. Umeme Ltd has simultaneously submitted a tariff adjustment application which if approved would significantly boost the companies’ top line. Gross profit margin has weakened slightly to 32.57%.

3.25% Dip in Operating Profits to USH 165.48 Billion (KES 5.13 Billion)

Operating profits were depleted by the 21.09% rise in cumulative operating expenses of USH 181.67 Bn (KES 5.63 Bn). Of the expenses foreign exchange losses jumped 100% to USH 29.91 Bn (KES 896.34 Bn) reflective on the inherent currency risk on business performance. The operating profit margin deteriorated slightly to 16.93% from 17.71% FY13. Over the year Umeme Ltd invested USH 268.84 Bn (KES 8.34 Bn) in Capex to expand operations which included completion of 2 substations – Queensway 2, Nagongera and line reinforcement to further reduce energy losses from 21.3% FY14. Capex was funded via debt draw down from Standard chartered bank, Stanbic bank Uganda and IFC which has shored up the company’s gearing ratio 1.70x (1.07x FY13) thus we anticipate an increase in financing costs going forward.

Pre-tax Earnings Dropped 11.80% to USH 101.67 Billion (KES 3.15 Bn) while Net Income shaved 15.75% falling to USH 70.49 Billion (KES 2.19 Bn)

In terms of profitability, Umeme Ltd stands at 10.40% pre-tax profit margin and 7.21% net income margin below listed peer company Kenya Power Company (NSE: KPLC) at a pre-tax and net income margin of 16.29% and 10.31% respectively FY14. Consequently return on equity (ROE) retreated to 23.52% from its peak at 32.95% FY11 and 31.86% FY13. Total DPS FY14 is USH 28.9 (KES 0.90) yielding an emphatic 5.14% at the current price of KES 17.50. Book closure for dividend payment is on 15^th June 2015. The counter is trading at a P/E of 13.20x above the industry average of 8.70x and an attractive p/b of 0.08x against the 2.58x sector mean.

Outlook: Taking into consideration how critical the electricity sector is to facilitate overall economic growth in Uganda, Umeme Ltd is well positioned to profit from increased connectivity and consumption within the country as it ponders going into crude oil refining by 2017. Lack of supportive regulations remains a key risk against the companies’ financial performance while high Capex requirements, a norm in this industry, raises the risk of rising financing costs and forex risk.