KenGen shareholders make inquiries ahead of the May 23 rights issue. PHOTO | FILE
The successful conversion of the Kenya Electricity Generating Company (KenGen) Sh20 billion government debt to equity will lower the power generator’s financing costs by up to 15 per cent to Sh2.5 billion, investment banks estimate.
KenGen’s Sh28.8 billion rights issue closes Friday with the firm having already reached an agreement with its majority shareholder (the government) to convert its 70 per cent or Sh20.2 billion debt to equity.
In a joint analysis, UK-based Exotix Partners and Equity Investment Bank say the debt relief will also lower the impact on KenGen’s cash flow, even as the firm indicated it will be drawing down Sh39 billion in new borrowing post issue.
“We have revised some of our forecasts, namely…. a decline in interest expense by 15.3 per cent to Sh2.5 billion owing to the conversion of $200 million worth of interest-bearing debt to equity. On the other hand, new debt drawn (Sh39 billion/$387 million) enjoys a 10-year grace period before interest is charged,” reads the analysis.
In the financial year ended June 2015, KenGen’s interest expenses stood at Sh3.01 billion, with the total debt load at Sh126.46 billion.
Power generation is a capital-intensive business requiring heavy upfront investment while returns are spread over a long duration. The maturity of projects also take time with geothermal plants requiring on average a 36-month period to set up.
The listed company begun selling 4.4 billion new shares at Sh6.55 to its existing shareholders on May 23.
On KenGen’s share, the analysts have issued a hold opinion based on a target price of Sh6.24, which is close to the stock’s prevailing price of Sh6.90 and rights offer of Sh6.55.
KenGen had fallen below the rights price in the days following the opening of the issue, raising fears that investors looking to raise their position on the stock would opt to buy from the open market instead of participating in the offer.
It has however climbed above the offer price, with Exotix saying that the effective share count dilution of 67 per cent came in lower than the expected 78 per cent dilution impact.
This was because the company issued only 4.4 billion shares of the 7.8 billion shares approved by shareholders for the cash call.
On the downside, the analysts have raised concern over the firm’s relatively low return-on-equity (ROE) compared to cost-of-equity (5.6 per cent versus 16.5 per cent), and the high debt ratio (debt to equity) which will remain above 80 per cent even after the rights issue debt conversion.
“Although high gearing ratios are not uncommon in high capex industries such as utilities, it’s unjustified given its low ROE position, in our view,” said the analysts.
KenGen has a number of geothermal and wind power projects in the pipeline, expected to come on-stream between next year and 2020.
The firm currently has a total installed 1617 megawatts (MW) out of the national capacity of 2300MW, translating to a market share of over 70 per cent.
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