COVID-19 has had a significant impact on the World and its economy. For Kenya Power, it has resulted in critical questions being asked around its financial performance. This is following recent headlines stating that the utility company is looking to get out of Power Purchase Agreements (PPAs) through the force majeure clause and further declaring …
COVID-19 has had a significant impact on the World and its economy. For Kenya Power, it has resulted in critical questions being asked around its financial performance. This is following recent headlines stating that the utility company is looking to get out of Power Purchase Agreements (PPAs) through the force majeure clause and further declaring a profit warning for the financial year ended June 2020. As an investor in Kenya’s energy sector, such messaging is worrying as regards the utility’s stability and its expected performance on its long-term PPA agreements.
We have prepared a report that seeks to investigate and answer the question of whether investors in Kenya’s energy sector ought to be worried about KP’s ability to perform on its commitments, especially to the investors. The analysis looks at KP’s historical financial performance from 2008 – 2019 (the micro view) and the demand-supply dynamics in Kenya’s power sector (the macro view) in a bid to answer this key question.
The analysis finds that operationally KP has performed well. Total revenues and operational profitability as measured by the EBITDA margin (Earnings Before Interest Tax Depreciation and Amortization) have increased over the focus period. Revenues have increased by 93% over the period, with EBITDA margins almost doubling from 12% to 20%. Once finance costs (debts service costs) are taken into account, however, KP has performed dismally. Its net profit margins have reduced from 5% to 0.2% over the same period, no wonder its share price has plummeted over the period by 92%. While this is concerning, we believe it is something that the utility can address, especially bearing in mind it is a monopoly for all intents and purposes.
What should worry investors, however, is the macro view. While over the historical review period peak demand and installed capacity have been growing in tandem, the key risk for KP is the Government of Kenya’s ability to deliver on proposed mega projects and the Big Four Agenda. KP signs long-term PPA agreements upon reviewing the demand forecasts, which are very much a factor of the Government ability to deliver on key projects. If these projects are not implemented on time and to the forecasted scale, KP will be left exposed and as a result not perform on its obligations.