Corporate governance issues and dependence on debt financing are likely to weigh on the Kenya Power #ticker:KPLC stock at the Nairobi Securities Exchange (NSE) despite the share trading at a discount, analysts have warned.
The utility a week ago reported half-year to December 2018 results, which showed a 16 percent drop in half-year profit to Sh2.46 billion, largely due to higher expenses.
Dye & Blair Investment Bank head of research Linet Muriungi said in a coverage note on Kenya Power that although the firm is trading at a price-to-earnings and price-to-book multiples of 6.3 and 0.1 respectively, against sector median of 5.3 and 0.8, there remains concerns around the political interference in the affairs of the company and growing debt.
“We remain wary of Kenya Power’s current corporate governance issues due to excessive exposure to political figures, high leverage ratios, poor working capital management capacity primarily due to ballooning accruals and receivables due from government entities,” said Ms Muriungi.
“We, therefore, issue a hold recommendation, but issue a caveat that trading opportunities are present, courtesy of its value proposition.”
The share is currently trading at Sh4.02, down over 7.7 percent since the beginning of the year.
In its analysis, Genghis Capital said the firm ought to concentrate on restructuring debt from short to long term to address the problems of rising financing costs, which rose by 23.5 percent to Sh4.02 billion in the period.
Kenya Power’s total debt is Sh115.87 billion. While Sh16.8 billion is repayable in under 12 months, Sh99 billion has maturity period longer than a year.
“Fundamentals of the business are significantly weak but the new interim management has exuded a zeal in resolving the past corporate challenges. This will pay off in the long-term but the business should be in urgent need of managing working capital, cash flow and the debt levels,” said Genghis analyst Gerald Muriuki in the note.
The firm expected to reduce its heavy capital expenditure as it moves closer to its target of universal electricity connectivity by next year (currently at about 73 percent).
The upward revision of power tariffs effective July last year is also set to boost revenue as well as the lower power purchase costs due to a more favourable energy mix this year that has higher hydro, geothermal and now wind power at the expense of thermal generation.