Kenyan power sector stocks have left investors reciting Socrates, " It is always darkest before dawn", waiting for a spark to ignite the rallying fire for both KENGEN and KPLC. Yet the pandemic environment was not the best to juggle falling knives – reduced power demand, expensive PPAs, pressure to reduce power tariffs and KENGEN's underachieving sibling who does not pay their debts. Both counters have recently received almost similar investors' sentiments with a YTD loss of 5.01% (KENGEN) and 9.71% (KPLC). KPLC is currently trading at a PE of 2.1x below the current market valuation of 11.4x while KENGEN is trading in high waters of 21.5x. Our fillers in the market can sense investors prayers' for KPLC to do well. However, the company has to exorcise the demons of underachievement and welcome the angels of commercial viability. We hope that the sweeping reforms recommended by the PPA task force will facilitate a turn around for both companies and subsequently lead to their share prices discovering their true north.
KENGEN: The company has come under substantial scrutiny owing to internal revelations and challenges facing the power sector. With KPLC being the single off taker of power challenges within KPLC have spilled over to KENGEN in the form of aged receivables and threat of PPA renegotiation, We however continue to see pockets of value on the counter hence our BUY recommendation informed by a fair value of KES 5.30, translating to a 33.10% upside on its current price of KES 3.98.
KPLC: We issue a HOLD on KPLC informed by a fair value of KES 1.78 representing a 12.73% upside on the current price of KES 1.58. With the ghost of the past ( Rights issue leading to ownership dilution) already forgotten we still observe, albeit from a distance, some form of value on the counter given the new push for power sector reforms playing into the companies growth story. However, the management has a mountain of work to do to put the companies ducks in a row given the perennial underperformance, ironic for a monopoly.
