This week, the hottest stock in the Nairobi Securities Exchange has been KPLC and for a good reason.
This week alone, the stock is up 23.1% and 15.9% Year To Date. In fact, since the news that Kiharu Member of Parliament Ndidi Nyoro had tripled his shareholding in KPLC, the stock has been the biggest gainer for the whole week, hitting the maximum allowed gain of 10% on most of the trading days.
With the news getting the attention of many local retail investors, it was expected that many would go on a buying frenzy majorly because Ndidi Nyoro is a close confidant of the Newly sworn-in President, His Excellency William Samoei Ruto.
This made people think that Ndidi Nyoro probably knew that the new government would steer the majorly government-owned company into a path of profitability.
Ndidi Nyoro On Investing in Kenya Power
In response to the news on his social media handles, Ndidi Nyoro said
“The investment has been accumulated over time. Several years back. We started off in stockbroking from our first year on campus (KU).
Thereafter running a firm in the sector. And later a Private Equity (PE) firm. This specific counter probably for the last 3 or 4 years.
GoK owns approximately 50.1% of Kenya Power. All directors are therefore appointed by the GoK. Our small stake is passive. We make zero decisions and therefore purely a silent, retail investor.”
Unlike what many thought that he had tripled his shareholding because of the change in guard of the government, Ndidi Nyoro has been a long-term investor, accumulating this counter and others over time.
On Why To Buy Kenya Power
His argument on why he has a large holding in Kenya power brought back the never-ending debate on whether KPLC is a value trap or a value stock.
“Like any other investment, you make decisions based on fundamentals and gut feeling. The stock is cheap, actually a penny stock. Currently trading at below Ksh 2.
With gross full-year revenues of approximately Ksh 150B, and assets of around Ksh 325B, probably Kenya power is undervalued. The market values the company at around 1% of its assets base—the current market capitalization being at around Ksh 3B.
However, investment decisions are two-sided. There are reasons why the market has undervalued Kenya power, including the high debt portfolio, huge unpaid bills, especially from GoK and inefficiencies stemming from being “government-run.”
Most investors, us included, are holding for long term with the hope that the sleeping giant can roar with a few streamlining measures.”
KPLC: A Value Trap Or A Value Stock?
According to Investopedia, A value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors. Simply put, this is an undervalued company.
On the other hand, a value trap is a stock that appears to be cheaply priced because it has been trading at low valuation metrics for an extended period. It is an investment that seems underpriced but may actually be a poor investment. This is more so in companies with unhealthy financial performances and little growth potential.
Kenya Power Stock Analysis
The core business of the company is transmission, distribution and retail of electricity purchased in bulk from KenGen, Independent Power Producers (IPPs), as well as imports from Uganda Electricity Transmission Company (UETCL), Ethiopia Electricity Utility (EEU) and Tanzania Electric Supply Company Limited (TANESCO).
A Hard Past
Kenya power has been trading below its All-Time High of Ksh 36.11, which was realized in January 2007. For a company with a revenue of over Ksh 150B, over Ksh 325B in assets, a lot has led to a market cap of about Ksh 3B.
Earnings have been declining by 40.6% per year over the past five years. This is until last year, when the company returned to profitability.
It has even taken the government to intervene and help them out of their poor financial position.
The treasury last year agreed to inject cash into Kenya Power and Kenya Airways in the financial year starting July 2022.
No bailout was allocated to the two firms in the current financial year, raising concerns that their worsening cash flow positions could hurt operations and slow down recovery in economic activity.
Poor Performance of Government Entities
With the government of Kenya owning approximately 50.1% of Kenya Power, the GoK oversees the running and management of the company.
With the leadership of a company being one of the critical determinants of a company’s performance, government-affiliated companies like KenGen, Kenya Airways and other companies not listed in the NSE have given investors a lot to worry about.
A Strong 2021; Path To Profitability?
For the year ended June 2021, Kenya Power recorded a historic 216% YoY growth in profit before tax of Ksh 8.2B compared to a loss before tax of Ksh 7.04B the year before.
In the 2021 annual report, the board chairman wrote,
“The strong performance was mainly driven by growth in sales and revenue, as well as a double digit reduction in cost and expenses.”
Revenue from electricity sales increased by Ksh 9.755 billion to Shs 125.925B an increase of 8.4%. The increase in electricity is mainly attributable to growth in unit sales by 400Gwh from 8171 Gwh the previous year to 8571Gwh.
Operation costs decreased by Shs 7.973B to Shs 39.861B, a reduction of 17%, while finance costs went down to Shs 9.05B from Shs 12.477B, a decrease of 27.5%. Kenya Power CEO Eng. Rosemary Oduor said,
“This is due to a decrease in loans and overdrafts as a result of a Shs 20.263B repayment of commercial loans which included the partial conversion of overdrafts into a term loan.”
A better metric to measure financial performance saw an increase in cash flows (cash and cash equivalents) at the year’s end from 4B to 6B.
The Future: Growth Potential Areas
With the future growth potential of a company being one of the critical indicators of how it is expected to perform, Kenya Power has some key areas that it’s trying to tap into.
As the CEO Eng Rosemary Oduor wrote,
“Kenya power is currently experiencing a major paradigm shift that could arguably be classified as one of the most significant transitions in our history.
Following the recommendations of the Presidential Taskforce, and based on stakeholder feedback, as well as ongoing developments on the energy front, the business is reinventing itself to become more responsive to customer needs.”
Kenya Power is seeking to grow sales by connecting more customers, accelerating the pace of connectivity and increasing the usage among customers.
Tackle Illegal Connection
Kenya Power is also setting up revenue protection activities to enhance system efficiency by cracking down on illegal connections in partnership with the National Government.
Moreover, they are seeking to deploy data analytics to curb electricity theft by commercial customers, intensify inspections to address meter bypasses, and expedite the replacement of faulty meters.
Lit Fibre Business
The company is also exploring the lit fibre business to increase the penetration of internet connectivity, particularly in rural areas. The company’s extensive fibre network presently offers dark fibre services to the country’s major ISPs to facilitate internet services to the end buyer in the retail and enterprise segments across the country and neighbouring countries.
The company is also positioning itself to drive the e-mobility agenda to increase the adoption of environmentally friendly electric vehicles and motorcycles.
As the CEO Said, “We are working closely with the government to enact laws that will subside the cost of these vehicles and the attendant infrastructure such as storage and charging points.”
Kenya Power can be said to be a sleeping giant. Its earnings have been dropping over the past five years, and it has only one year of profitability in the last five years.
Whether the company will overcome the effect of being “government-run” that has seen other significant companies fail remains to be seen.
With little competition risks, large asset size, the backing of the government, huge revenue and providing an essential service to the people of Kenya, the company can be undervalued.
But with the massive debt to equity ratio experienced in the last few years, a significant drop in earnings, poor service and losses due to power theft, faulty meters, and high costs of operation, among others, the company still has a lot of ground to cover before it can qualify to be a value stock.
Moreover, the Kenyan Government has to prove that it can effectively manage companies and steer them to a path of profitability.