Kenya Power & Lighting Company (Kenya Power) released its 1H16 results, recording a 16.4% y-o-y decline in EPS (-34.9% h-o-h) to KES 1.93. The company’s electricity sales were up 10.8% y-o-y to KES 41.7 BN in 1H16, impelled by 5.6% y-oy increase in units sold (less Rural Electrification Program sales) to 3,632 GWh.
Kenya Power’s Board of Directors announced an Interim DPS of KES 0.20.
Total revenue was down 3.1% y-o-y (-6.7% h-o-h) to KES 53.5 BN, as a result of a 55.4% y-o-y decline in fuel cost adjustment to KES 7.5 BN. Kenya Power’s electricity sales grew by 5.6% y-o-y to 3,632 GWh in 1H16, from 3,439 GWh in 1H15, as power consumption grew in tandem with Kenya’s GDP at circa 1.0x GDP. Intensified measures to increase electricity penetration rate appears to be bearing fruit, evidenced by 10.4% y-o-y increase in domestic consumer consumption to 1,062 GWh in 1H16. Large Commercial & Industrial customer consumption recorded 4.0% y-o-y increase to 2,019 GWh to see this category account for 55.6% in 1H16 (56.5% in 1H15).
The company’s gross profit margin improved by 293bps y-o-y to 32.7% in 1H16, with total electricity purchase costs declining 7.1% y-o-y to KES 36.0 BN. Power purchase costs, excluding fuel and forex costs, increased 24.5% y-oy to KES 25.0 BN, due to additional generation capacity charges by KenGen, Gulf Power and Triumph Power. The additional capacity into the grid saw units purchased increase 4.9% y-o-y to 4,532 GWh in 1H16. Despite an 87.7% y-o-y increase in forex charge due to the depreciation of the KES against the USD, fuel charge declined 52.9% y-o-y to KES 8.1 BN courtesy of a dip in the global oil prices and reduced reliance on thermal plants. Units generated from thermal plants decreased 38.2% y-o-y to 1,006 GWh (22.2% reliance) in 1H16 to see the blended purchase cost/unit decline 24.7% y-o-y to KES 13.00.
We believe the gradual shift to geothermal from the reliance of oil-dependent thermal energy as an emergency power supply, coupled with the global dip in oil prices for thermal energy will see power purchase costs grow modestly in FY16. We however note that system losses continue to be an issue for the company, with the transmitter’s system losses recorded at 19.9% in 1H16 (-53bps y-o-y).
We highlight that for every decrease in system losses by 1.0%, Kenya Power will save approximately KES 900.0m that directly seeps to the bottom line. Other income recorded 18.2% y-o-y growth to KES 3.2 BN, primarily driven by fiber optic lease charges and deferred income. Operating profit declined 12.3% y-o-y to KES 7.6 BN, resulting in the company’s operating profit margin shedding 149bps y-o-y to 14.2%: This was as a result of transmission and distribution costs increasing 24.9% y-o-y to KES 13.1 BN. The increase was mainly as a result of expansion of the company’s electricity network, implementation of system upgrade projects within the “Nairobi Ring” area. Depreciation charges also contributed to the operating expenses increase.
The company’s net finance costs recorded an increase, from KES 1.8 BN to KES 1.9 BN (+4.5% y-o-y). This was attributable to interest income growth (+48.3% y-o-y) outpacing interest expenses (+13.9% y-o-y). In FY15, Kenya Power received USD 25.0m loan from African Finance Corporation (AFC) for system upgrade, meant to enhance its reliability and reduce system losses and the amount is part of USD 150.0m unsecured syndicated loan.
The power transmitter also recently signed a USD 24.0m (KES 2.2bn) contract with ABB Group (a power and automation technology company based in Zurich, Switzerland), for the upgrade of Juja substation in the outskirts of Nairobi. Long term borrowing was up 42.6% y-o-y to KES 96.8BN, while short term debt increased 9.7% y-o-y to KES 15.2 BN. The company’s effective tax rate stood at 34.4% in 1H16, from 34.6% in 1H15 to see the company’s PAT record 16.4% y-o-y decrease to KES 3.8 BN.
Based on the today session’s VWAP (KES 11.40), Kenya Power trades at a trailing P/E of 3.3x and a P/B multiple of 0.6x (ROE of 11.6%) against the Asia/Africa median P/E and P/B multiples of 14.2x and 1.8x (median. ROE of 12.2%), thus providing a significant discount on a P/E basis. While the significant investment in network upgrade remains promising, we remain cautiously optimistic of the company’s near term growth prospects, given the need to create demand for the energy capacity expected to be introduced into the grid. We also would like to highlight that the Energy Regulatory Committee is expected to release End User Tariffs for the next 3 financial years and the revision outcome remains unclear at the moment. We therefore issue a Hold recommendation on Kenya Power.