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Beaten with a Metal Rod – Kenya Power FY 2017/18 Results

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While revenue was not restated for the financial year ended 30th June 2017, total power purchase costs were restated upwards marginally by 1.9%. This is normally attributable to forex fluctuations, which must also be recognised retrospectively. Transmission and distribution costs were restated upwards by about 4%. Operating profit was therefore slashed by 17% to Kshs. 13.65 billion from Kshs. 16.5 billion.

Finance costs were not spared by the restatement, gaining 6.8% and this may be attributable to interest on delayed payables invoiced after the close of the financial year. Profit before tax was therefore chipped away to Kshs. 7.656 billion, almost a 30% downward revision. Income tax was cut by 34.8% to reflect the more lenient levy on the lower profit. EPS decompressed to Kshs. 2.71 from Kshs. 3.72 (-27%).

The opening book value was revised downwards from Kshs. 35.85 to Kshs. 32.45 (-9.48%). There was therefore a significant cleaning exercise on the books of the monopoly corporation to allow the new management to start from a clean slate. The auditors’ opinion and observations will be interesting to note, if not petrifying.

We shall now be comparing the most recent results to the restated results of the previous financial year.

Results

Revenue grew by 4.2% to Kshs. 125.85 billion. The gross profit margin for the financial year ended 30th June 2017 was 66.65%. It actually improved to 66.82% in the recently released results! However, transmission and distribution costs as a percentage of gross profit deteriorated to 94.9% from 86.29% in a similar period. This was attributable to the provision for bad debts in excess of 30 days increasing substantially from Kshs. 747 million in 2017 to Kshs. 6 billion in 2018, due to a more prudent approach in anticipation of the new financial standards that require higher credit provisioning for credit losses. Such provisions can be added back to profit if recovered. The company recently got the green light to auction a Kshs. 738.8 million KANU building over unpaid dues.

Operating profit therefore declined by 20.91% to Kshs. 10.796 billion. Operating profit margin ebbed to 8.58% from a healthier 11.31% in the financial year 2016/17. Finance costs surged 29% to Kshs. 7.8 billion.

EPS plunged 63.8% to Kshs. 0.98. Net profit margin was therefore a microscopic 1.52%, compared to a more palatable 4.37% in the previous period.

ROE was a paltry 3% from 8.6%. Asset turnover dipped slightly to 0.38 from 0.39. ROCE was 4.5% as compared to 5.57% in a similar period. The current ratio declined worryingly (for suppliers) to 0.5 from 0.78, using end year figures. However, negative working capital for KPLC occurs partly because it is often paid in advance for connections.

The new management seems to be working on streamlining operations since non-current liabilities went down by 12.1% and cash used in investing activities also decreased 30% to 27.7 billion from Kshs. 39.5 billion. However, the negative cashflow of Kshs. -7.6b from Kshs. -1.15b in a similar period withered away that positive sentiment. End year long-term debt to equity ratio decreased to 258.8% from 298.5%.

Price Target

While we advocate for purchase at the point of maximum pessimism, we slash our price target from Kshs. 8.45 to Kshs. 5.58 based on the latest EBIT. We would be inclined to look for a higher price if the management can work on improving earnings.

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