Umeme: Farewell To The Concession, Hello To Arbitration

The market closed the session on a mixed note with the NASI gaining 0.2%. On the other hand, the N10 and NSE 25 retreated by 0.3% and 0.2%, respectively, while the NSE 20 remained largely unchanged.

Equity turnover more than doubled to USD 4.7m (+118.8%). Local investors dominated market activity, accounting for 57.1% of the turnover levels, down from 82.4% yesterday.

Safaricom dominated market activity, accounting for 37.7% of the day’s turnover. The counter’s price function inched upwards 0.9% to KES 23.70 on foreign buying.

Of the top traded banking stocks, Co-op Bank advanced by 0.9% to KES 16.50 while Stanbic and Equity Group gravitated to positions of relative stability, remaining unchanged at KES 160.00 and KES 46.10, respectively. KCB, on the other hand, eased by 1.4% to KES 43.55.

Centum, a surprise top mover, was the day’s worst perfoming top mover having erased 4.2% on its price to KES 11.50.

BK Group was the day’s top gainer, up 10.0% to close at KES 33.60. Eaagads shed 9.2% to KES 11.30, closing as the leading laggard.

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Foreign investors remained bullish with net inflows of USD 410.3K. Safaricom led the buying charge while Centum led the selling charge.

Umeme’s 20-year electricity distribution concession in Uganda officially ended on 31st March 2025, following the government of Uganda’s decision not to renew its concession agreement with Umeme. Post concession, Umeme’s distribution assets and operations were to be handed over to the state-owned Uganda Electricity Distribution Company Limited (UEDCL) following a buyout, but the road to the buyout has been rocky and is the beginning of a potentially long and arduous journey of arbitration in London expected to take one to three years.

We see an opportunity for risk-on investors to unlock north of c. 175.8% returns (less contractual interest). While clarity on the process following the international arbitration route is hopeful, but not fully clear, we opine that the current market price is at a discount to the estimated buyout value, thus a BUY recommendation for investors willing to wait through the arbitration – which we think management has the upper hand in the interpretation of the buyout amount.

The implied value per share of the USD 118.4m already paid is KES 9.48 (20.4% below the current share price). Shy of arbitration costs and contractual interest, the value in dispute is an estimated KES 23.35 – likely to be higher on contractual interests. This brings the estimated buyout price north of KES 32.82 which is an upside of at least 176% from the current market price in the best-case scenario for shareholders.

We have our reservations about the materialization of alternative business opportunities in the near term, which, even on possible prospects, will have high capital requirements unless the services are restricted to technical advisory. Management highlighted the scouting of potential concessions in Ghana, Sierra Leone and Zanzibar, which remains subject to shareholder approval in the next AGM or EGM.

We remain cognizant of the likelihood of a special dividend following the buyout process and foresee the bulk of the buyout proceeds channeled towards a special dividend offering. Our rationale is in part informed by the top 10 shareholder structure of the company, mainly composed of fund managers, who, in our view, may likely incline towards closing the concession as opposed to pursuing alternative ventures (unless the proposition is compelling – and Umeme is best positioned to pursue the endeavor). There is a case for a portion of the buyout proceeds being settled ahead of the completion of the buyout arbitration process.

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