Markets & Finance
Old Mutual revises KenGen’s outlook over slow growth
Thursday April 17 2014Old Mutual Securities has downgraded power producer Kenya Electricity Generating Company’s investment outlook following its marginal growth in revenue and expected fall in net profit.
The brokerage house said KenGen’s share price may rise up to Sh14.08 and not Sh22.25 as it had predicted before the financial results for the half year to December 2013 were released.
“We revise our recommendation on KenGen from ‘strong buy’ to ‘accumulate’ with a target price of Sh14.08 and 19.3 per cent above the current market price,” said the Old Mutual Securities report.
The company said that the revision was informed by flat year-on-year electricity revenue as a result of marginal new capacity addition.
In the first half of the year the company had Sh8.48 billion in revenues while net profit fell by 41 per cent to Sh1 billion from Sh1.7 billion over the corresponding period last year.
READ: KenGen profit falls 38.6 per cent on high costs
On Wednesday, the share price stood at Sh11.70, which was 10 cent less than on Tuesday.
KenGen was supposed to add 350 megawatts in the current financial year which ends in June but only 70 megawatts came through in February.
Half of the 280 megawatts is expected from the geothermal complex to be commissioned in September.
“We anticipate decreased earnings before interest and taxes in financial year to Sh5.5 billion on the back of increased depreciation costs. Increased finance costs will also lower profit before tax to Sh2.8 billion,” said Old Mutual.
However, Standard Investment Bank analyst Eric Musau said that KenGen was likely to perform better in the second half of the financial year.
“We see the profit rising in the second half, but the expectation of a rights issue has the potential to depress the price,” he said.
“The pricing of a rights issue is normally at a discount so this could just affect the price as we move towards the issuance of the rights.”
The Old Mutual analysis assumed that the rights issue would come either later this year or next year. It also said that it expected the share price to improve as the firm increases capacity, especially from geothermal wells which offer a higher return.
The government plans to increase installed electricity capacity by 5,000 megawatts by 2018 amid concerns that the economy may not have the absorption capacity. KenGen is expected to bring on board 60 per cent of the new capacity.
“Experts have raised concerns that Kenya lacks the capacity to absorb such massive amounts of electricity given the rate of economic growth, delays in rolling out Vision 2030 projects and a poorly performing manufacturing sector,” said Old Mutual Securities.
The economy is growing at 5.1 per cent but the International Monetary Fund said the rate would need to double for the economy to fully utilise the power in 2030 at the earliest.
The broker said that raising Sh430 billion needed for the investments was a key challenge that would require an intricate balance between equity and debt.
“The ever-increasing average debt metrics greatly affects the net earnings, affecting income levels,” Old Mutual Securities said, estimating KenGen debts would increase from Sh81 billion in June last year to Sh142.6 billion in 2017.
The broker said the capex would be financed through increased profit retention, halving dividend payout from 60 cents per share last year to 30 cents per share in June next year.