Kenya Power #ticker:KPLC will have to rely more on cheaper power sources to defend its margins, Standard Investment Bank (SIB) has said, adding that reduced electricity tariffs may put its revenues under pressure.
SIB says the State-owned power firm will increasingly have to rely on good weather patterns to purchase more units from less-costly sources such as hydro in order to mitigate reduced consumer tariffs.
“We have some concerns especially around the profitability performance in the second half of the year following the lower tariff that came in from November 2018,” says SIB.
“Our new proxy for profitability for Kenya Power at current tariffs becomes heavily hinged on adequate rainfall to support hydro power throughout the year.”
In half year result, the power distributor showed resilience in its revenue as electricity sales grew by 21.4 percent to Sh56.96 billion on increased consumption.
While number of units consumed are expected to rise, SIB doubts that the rise will fully compensate the power distributor due to the lower pricing.
It says the half year resilience may be masked by three tariffs that applied during the six months and may not be sustained in financial year 2019 especially if weather patterns do not stay in its favour.
“We however realise that a revenue underperformance is not entirely negative – especially if Kenya Power can take up an increasing supply of hydropower; which attracts the lowest tariff,” says the investment bank.
It adds that only increased share of hydro power may moderate this risk.
As at half year, the firm cut fuel costs by 44 percent to Sh6.88 billion due to reduced thermal power usage.
About 44 per cent of the power sold came from geothermal sources while 39 percent was sources from hydro. Wind contributed 15 percent while imports were five percent.
Net profit fell 16 percent to Sh2.46 billion. However, SIB says that in the absence of provisions, Kenya Power would have delivered a 36 percent jump in pre-tax profit.
With current liabilities being 1.9 times higher than the current assets, SIB expects the utility firm to ease off on capital expenditure and focus on improving its working capital position.
“Liquidity remains the key risk for us, although we think Kenya Power can consider looking at disposing some of the transmission assets to reduce its gearing.”