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Kengen the pulse of Vision 2030: H1 06/2012 Earnings Analysis

Summary

Initial Coverage

Bloomberg Stock quote:  KEGC: KN

Rating:                            Buy with price target of Sh11

                                       Exit PE 9.7 Dividend Yield 4.5% PBV 0.35

 Kengen H1 06/2012

Financials

Total revenue increased by 18.2% y/y to stand at Sh7.8bn on the back of 12.8% increase in electricity revenue and a 6 fold increase in energy related income, EBIT Margins expanded by 4% y/y to stand at 28.9% despite increased  depreciation costs from their Tana and Kipevu plants. The company was able to contain costs during the period under review as indicated by an 11% y/y increase in operating expenses to Kes5.5bn while EBIT came in at Kes2.2bn vs. Kes1.6bn registered in the same period last year which represents a 37.5% y/y growth. NPM expanded by 200bps y/y to stand at 15.2% despite finance costs more than doubling to stand at Kes1.5bn due to interest payments on their bond.

Net cash generated from operating activities was flat y/y at Kes7.45bn due to high finance costs but its however good to note that cash generated from operating activities was able to cover the companies capital expenditure (Kes7.18bn) an event which should see the company borrow less in fact debt to equity ratio edged down from 92.4% to89.2% on less borrowing.

Operations

Source: Kenya Power

Source: Kenya Power

 On improved hydrology in H1 06/2012 electricity units sold increased by 5% to stand at 2,658 Gwh with thermal being the main source of power.

Outlook

Positive: On improved Hydrology and new capacity (Song’ro 28 Mw) in the second half of the current financial year.

Conclusions and Valuations

I was impressed by the double digit revenue growth and margin expansion in H1 06/2012 and I think all this investments of the past years are starting and will impact the companies bottom line positively going forward. It has rained cats and dogs in the first half of the year in Kenya and I expect those dams to be bursting to the seams right now an event which should see the company produce more electricity  which will ultimately be fed into the grid and translate into more units sold and more revenue.

For FY 06/2012 I’m expecting a 16% growth in revenue to Kes16.7bn driven by new capacity and improved hydrology, I expect PAT to come in at Kes2.53bn if their able to keep those NPM at 15.2% which is a 27% increase over last year, considering the long term picture looks bullish i.e increased power demand as Kenya implements Vision 2030 projects and the upcoming geothermal projects, my rating on Kengen is Buy with a price target of Sh11 which is +35% to the current price of Kes8.10 without factoring in the Kes0.50 dividend which translates to a dividend yield of 6.1% at the current price of Kes8.10 with downside risks to my rating being high finance costs arising from borrowings due to the need to meet  a high capital expenditure which is required to implement new projects and unpredictable weather patterns.

 Disclaimer: I hold Kengen shares.