Kenya Power and Lighting Company Ltd (KPLC) announced a negative growth of 16.7 percent y/y in 1H19 EPS to 1.25 shillings despite a strong y/y growth in electricity sales
According to Genghis Capital, the electricity revenue was on strong growth of 21.4 percent y/y as a result of August 2018 power tariff review by the Energy Regulatory Commission.
Genghis also pegs the growth in electricity sales to the uptake of the 50 percent discounted tariff by large power users. Under this tariff, subject to meeting certain thresholds, the users pay a subsidized rate for power consumed during off-peak hours between 10 pm and 6 am.
The December season is also a factor as manufacturers tend to ramp up production during the 4th quarter to meet the high consumer spending during the holiday period.
Other key revenue lines for KPLC like the forex adjustment and fuel costs recovered, declined 82.0 percent y/y and 34.0 percent y/y respectively, driving total revenue to grow by a marginal 3.4 percent y/y.
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Cost management remains a formidable challenge with transmission costs rising 37.3 percent y/y. This is majorly on account of 100.0 percent y/y increase in provisions (2.46 billion shillings) and accelerated depreciation costs (+16.4 percent y/y).
Additionally, finance costs grew by 23.5 percent y/y. The current fundamental challenges noted in this note together with concerns raised by the Auditor General with regards to F18 results, which is why Genghis holds a SPECULATIVE BUY recommendation.
Another notable positive identified was the stronger gross margin of 38.9 percent. With the higher tariffs and the drop in fuel costs (34.0 percent y/y), gross margin settled above the 5-year average of 33.1 percent.
The displacement of thermal power by the recently connected Lake Turkana Wind Power coupled with upcoming renewable energy power should sustain the high level of gross margin in the long term.
Units purchased from thermal sources dropped by 54.6 percent y/y to 548 GWh while power purchased from wind generation grew 1,214.8 percent y/y to 355 GWh.
On the negatives, there was the operating costs, +37.3 percent y/y. Operating expenses rose steeply majorly worsened by provisions for receivables (+100.0 percent y/y) and accelerated depreciation (16.4 percent y/y).
Genghis still expects provisions to remain a major headwind but to ease going forward as the company aggressively pursues its debtors (electricity receivables fell to 14.1 billion shillings from 22.2 billion in FY18).
The finance costs stood at +23.5 percent y/y. Finance costs rose mainly due to a high reliance on overdraft and short-term funding which stood at 24.6 billion shillings from 28.9 billion in FY18.
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The effective cost of debt averages 6.5 percent compared to 6.2 percent in FY18 and a 5-year average of 4.2 percent. Long-term financing rose by 2.1 billion in what was attribute to renegotiated maturities on some short-term facilities.
Total debt levels declined to 123.6 billion from 125.9 billion shillings in FY18 and 130.8 billion in 1H18. It is expected that the management is still in discussions with lenders to restructure the debts to prolong maturities and ease pressure on working capital and finance costs on the P&L.
Also, the current ratio sits at acute levels, 0.5x from 0.8x in 1H18. The ratio has steadily been declining from 1.4x in FY15 due to higher short-term funding reliance occasioned by a cash crunch.
In the short-term, it will remain a challenge to achieving a good balance of 1.0x despite heightened efforts to boost cash collection and pay suppliers promptly.
However, the aggressive collection efforts are good indications and we expect that if the debt restructuring succeeds in moving a significant portion of the short-term to long-term debt, the current ratio will improve from current levels.
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