Concern over Kenya Power’s share price

Nairobi Securities Exchange staff monitors trading. FILE PHOTO | NMG 

By CHARLES MWANIKI

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Summary

• Genghis Capital and Dyer & Blair Investment Bank say they have issued a “hold” recommendation on the stock following Kenya Power’s announcement of a 30.3 per cent drop in net profit to Sh2.93 billion for the six months to December 2017.
• Dyer issues a hold on a stock if the expected price gain or fall in a set period is in the range of -10 per cent to five per cent in the next 12 months.
• Genghis analyst Gerald Muriuki says concern remains on the company’s working capital, which could necessitate a debt restructuring.

Concern over working capital and increasing financing costs has cast a shadow over Kenya Power’s

share price on the Nairobi Securities Exchange (NSE), with two investment banks seeing limited headroom on the stock’s price that has already fallen 11.5 per cent this year.

Both Genghis Capital and Dyer & Blair Investment Bank say they have issued a “hold” recommendation on the stock following Kenya Power’s announcement of a 30.3 per cent drop in net profit to Sh2.93 billion for the six months to December 2017.

The firm’s financing costs rose by 42.7 per cent to Sh3.3 billion, with a negative cash position of Sh7.7 billion.

Genghis analyst Gerald Muriuki says concern remains on the company’s working capital, which could necessitate a debt restructuring.

“The price to earnings ratio (P/E) of 2.3 times is below the sector average of 5.4. However, we see this reflective of the above-average debt levels (181.1 per cent of equity) against peers’ 113 per cent and higher capital expenditure/sales at 32.2 per cent against an average of 12.2 per cent. On this backdrop, we maintain our hold recommendation at a target price of Sh8.45,” says the Genghis analyst.

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“We are concerned of the short-term asset-liability mismatch which has moved current ratio to record low levels (0.8 times) and below the ideal of one.

“This has led to higher short-term borrowings, partially the reason for the year-on-year growth in finance costs.”

The stock was trading at Sh7.80 on Monday compared to Sh9.10 at the beginning of the year. Dyer & Blair, in their report, also issued a hold recommendation saying that the stock is expected to have a return of -6.9 per cent in the next 12 months.

Dyer issues a hold on a stock if the expected price gain or fall in a set period is in the range of -10 per cent to five per cent in the next 12 months.

For Genghis, a hold recommendation means that the price of the stock is projected to range between -15 per cent and 14 per cent over a 12-month period.