Breaking Down the Kenya Power Financial Results

Kenya Power registered a mere 1.51 percent increase in revenue, which was significantly hampered by a 51.09 percent decline in fuel cost recovery; a cost that is passed onto consumers based on changes in market price of fuel.

Non-fuel- revenue for the power provider rose by 11.88 percent, driven by domestic demand which contributes approximately 17 percent of the top line; industrial customers’ 55 percent and small commercials 17 percent increased marginally by 0.5 percent and 2.2 percent respectively.

Foreign exchange and non-fuel power purchase costs increased by 118.97 percent and 15.61 percent respectively, further suppressing top line growth.

Gross profit margin grew by 120 0bps to 35.16 percent, as adverse effects were capped by a 50.88 percent decline in fuel costs and the company switched from thermal energy sources (FY16: -27.6 percent), to geothermal (3yr CAGR: 42.3 percent) and hydro sources (FY16: +14.4 percent).

As expected the company’s transmission and distribution costs increased by 18.31 percent to 28.65 billion shillings as the company continues to expand its operations.

Similar to previous periods, operating expenses continues to pose a concern; with the lion’s share being attributable to support services (FY16: +25.1 percent) and infrastructure (FY: +10.9 percent).

With an expected increase in capital expenditure (FY16: 1.2 percent, 2yr CAGR: 36.1 percent), towards increasing customer, infrastructure, network management and loss reduction; Kenya’s sole electricity distributor needs to ensure all steps are taken to suppress these significantly-impacting costs.

Cash generated from operating activities declined by 7 percent to 25.68 billion shillings, showing that the company’s core business slumped in performance. Cash used in investing activities increased by 21.84 percent to 48.84 billion shillings.

Similarly, cash generated from financing activities also took a hit, erasing gains realized in the previous year, with a 98.72 percent decline to 438 million shillings. This resulted in a 205.12 percent decrease in cash and cash equivalents – from 21.2 billion shillings.

Kenya Power’s profitability ratios produced mixed results as gross profit and EBIT margins both increased by 12 percent and 5 percent respectively; while return on equity slumped by 8 percent, to 0.12x. The firm’s current ratio improved from an alarming -1.45x to -0.98x, showing the company still has problems meeting its current obligations through current assets.

Financial analysts and Researchers (Genghis Research) recommend a HOLD on the KPLC counter, with a target price of 10.2 shillings per share; thus, an upside of 13 percent.

While the counter has only managed to record a stable performance (32 percent increase in customers to +2% PAT) in a fairly favorable environment, we continue to peg future performance on its ability to meet project deadline; as the counter continues to access funds through grants, online government facilities, commercial loans and internally generated sources.

Efficiency also proves to be key, as system losses increased by 2 percent to 19.4 percent, losing an additional 2 billion shillings.