@the deal, us the people in the Kengen bus do not take such words kindly. You alighted the bus keep way.

Alighting from a counter doesn't prevent a person from coming back,success in a stock market is not measured by how long you hang on to a share but how swiftly you can move across the market buying and selling at a profit.

Does this mean that the government will take up its rights without parting with any cash? How will Kengen be able to achieve its expansion goals with converted debt? I don't see the right issue being successful because the price will receive a good beating and this will affect the rights issue price.

The rights is a BS restructuring to allow Kengen to take up more external debt.

Govt will forego interest payments for the debt and possibly take a lower return on capital (dividend vs interest) by converting the debt into equity.

Kengen does not need to repay the principal sums of the debt to govt, saving on cashflows.

With the enormous tax credits from the new plants the interest expenses to goverment do not give any extra tax advantages.

It Means that the rights have already raised 70% even before starting. Now it is for Wanjikus to subscribe to the remaining 30%. How more successful can you get than that?

Good Afternoon,

Please find the attached:

Research Note: Utility Sector Update - Energy Realignment: The New Development Platform - Genghis Capital

Executive Summary

Our update on Kenya Power begins with a BUY recommendation on the stock based on a fair value estimate of KES 21.48 which indicates a 48.14% upside on current price levels. We project 10.51% growth in revenue FY14 boosted by better margins in the second half of the financial year and an EPS of KES 2.78 FY14F. Based on the dividend policy which pays out 20% of share capital, we expect the company to resume dividends of at least KES 0.5 per share FY14F. Our forward P/E and P/B multiples are 5.21x and 0.55x respectively suggesting the counter remains deep within undervalued territory.

Our aggregate fair value estimate of Kengen eased down to KES 15.40 justifying our prior long term BUY recommendation at current price levels which indicate a 32.76% upside. Our projections are a 1.47% growth in revenue and an EPS of KES 2.89 FY14. Based on historical 33% payout ratio, we anticipate dividend growth to KES 0.80 per share FY14. Our forward P/E and P/B multiples are 6.17x and 0.45x respectively.


Investment Story:

Valuations are attractive but financials exhibit some weakness As we update our analysis of the Kenyan Utility sector, we begin by presenting the notion that this industry is set to advance significantly in the coming years as the backbone of sustainable economic development in Kenya. Since our previous report in January 2012 (“Utilities Sector – Poised to be driven By Nature”), the nation has concluded peaceful elections clearing the runway for steady economic take-off. Kenya’s GDP growth rate in 2012 was 4.6%, above the average for SSA at 4.3%. World Bank GDP projections for Kenya concur with 5.0% (2013) and 5.1% (2014) indicative of a positive outlook for the growing economy. An overview of our analysis presents two state owned corporations strategically positioned in a vital growth industry that is energy. The story is great; valuations are attractive but the financials exhibit some weakness. Key among the figures are; operational efficiency, cash flow management and debt structure.

Budget allocations suggest financial support will be forthcoming The newly formed Government has recognized the importance of the Energy Sector and emphatically declared its intention to focus not only on increasing the supply of electricity to 5,000MW from the current installed capacity of 1,712MW by 2018, but to do so using cheaper renewable sources such as geothermal and wind power plants. As an illustration of its commitment, Treasury allocated KES 12.5 Billion for geothermal development and KES 23.8 Billion for power transmission in the 2013/14 national budget. This decision insinuates that electricity generation and distribution companies will be supported in the long term via considerate regulations and financial backing to enable achievement of set targets.

Contribution from thermal generation set to reduce Following this long term plan, we have observed the strategic shift from high cost diesel powered plants to cheaper renewable sources of electricity. The thermal plants are susceptible to unprecedented changes in international oil prices and volatile exchange rates which can increase the cost of electricity to the final consumer by up to 15%. In 2013, supply of thermal power by Kengen declined by 32.65% and we expect this trend to continue in the long term as geothermal, wind and hydroelectric capacity is expanded.

More users connected to the grid These ambitious plans are buoyed by the increasing demand for electricity in direct correlation to economic and population growth. The number of customers connected to the national grid has grown by a CAGR of 10.6% in the past 3 years while GoK estimates, project a 14% demand growth rate accelerated by; the enforcement of a devolved system of governance expected to foster more rapid rural electrification, growth in number of energy intensive industries and increasing urbanization rates.

GoK succumbs to tariff review pressures The ERC in response to repeated petitions revised fuel electricity tariffs downwards in November from KES 7.22/ Kwh to KES 5.42/Kwh (2013/14) and concurrently increased non fuel tariffs from KES 9.40/Kwh to KES 10.17/Kwh excluding taxes & levies. The drop in effective tariff rates is attributable to the expected decline in fuel cost charges as most diesel power plants are to be substituted for renewable energy. Keeping in mind future contribution will be highly skewed towards geothermal power sources; we project the net effect to be margin creation for the utility companies.





Regards,

Are you buying both KPLC and KENGEN or just KENGEN?

It's hard to disagree with you, especially on kengen. KPLc just speculatively ride to fair valuation (esp now that tarrifs were increased after all that noise)

Kengen trading at 10 bob today..what are your views on it @ deal ?

do not tell me the rights issue price will be lower than ten bob

i quess someone is playing dirty and buy into kengen for a song

I'm only buying KENGEN-the fundamentals are better than KPLC and with a good to great transformation mindset. I think KPLC has other flaws like an old distribution system and a poor dividend policy