Government Should Repurchase KenGen’s Shares

Published on 3rd April 2007

In early 2007, one of the Kenyan politician’s in his campaign trails warned that if elected president, he would be repurchase all shares that the present regime has floated in its divestiture program.  To many, the comments were in bad taste.  But from a corporate standpoint, they still hold water, politics aside.

KenGen so far still remains among the least priced stocks in the market.  With annual earnings of around Ksh. 2.8 billion, the stock is trading at Ksh. 17.80 and is likely to be depressed further due to a second share offering by the Kenyan government.  According to most analysts, the main reason for the share’s downfall is the disagreement between KenGen and its customer, the monopoly power supplier, Kenya Power and Lighting Company (KPLC).  This is from an anticipated bulk tariff of Ksh. 2.36 proposed by KenGen against the Ksh. 1.76 paid by KPLC.  Although the government had promised to pay up the difference of around Ksh. 0.60 cents, the amount may not be paid because the total amount is almost Ksh. 2 billion, an amount that the government may not be in a position to part with.

The major financial blow to the company may have come when it released its Annual Report and Audited Accounts last year.  The company had set aside Ksh. 80 million for the report and its Annual General Meeting (AGM). However, the company only paid investors Ksh. 0.55 cents in dividend per share.  Had they not used up this much, it would have afforded the investors a better value in form of dividends.  Up to now, some corporate investors would still not dare touch the stock, owing to the imminent risks in the counter- both technical and fundamental.

Last year, after KenGen announced the Ksh. 0.55 cents dividend (for the period to June 2006), an investor cracked a joke that the shareholders were going to be paid after the Japanese government advanced the cash to KenGen, probably after half an year.  True to his word, the dividend was sent to the shareholders in February 2007. 

Ideally, companies lose value in the stock market, and due to both systemic and non systemic reasons.  Although majority of our counters have lost in the recent past, this does not mean that KenGen is losing because of the price correction.  Indeed, the price should be going up because, although the revaluation of assets may have earned the company some additional income, its value still surpasses that of most listed entities at the Nairobi Stock Exchange (NSE).  The problem, I believe, arises from the government’s initial strategy in the Initial Public Offering and the results thereof.

To begin with, the corporate investors, who were so determined to get a major stake in the company were given equal slots to apply the same way individual investors were applying.  This resulted to massive refunds to the corporates who had committed huge sums of money.  They ended up getting a small stake of their anticipated gain. The masses, on the other hand, ended up owning small stakes in very many accounts.  With the ‘peculiar’ selling and buying habits of retail investors, the price has not reached a stable position.  A wrong corporate decision in the name of ‘giving the public a share of power production’!  That’s what Capitalism does not allow.

To KenGen’s corporate history, 2006 may still go down as the year when wrong irreversible decisions were made.  Eddy Njoroge, the current CEO has tough options: either go ahead with an offer for sale of new shares which will certainly be an absolute flop just like in the case for Mumias Sugar Company (MSC) or reconvene a meeting with the underwriting team and restrategize for the good of the major shareholders.

The company has many ongoing projects whose demand for cash is not immediate.  Consequently, they are still holding a lot of cash from foreign grants (Japan and the rest) and locally, from the shares. In reference to that therefore, a reverse action, the buyback of KenGen from the public would be feasible.  There are many reasons for suggesting this.

Let us look at one simple fact; the management proposed a dividend payment of Ksh. 0.45 which was a drop by Ksh. 0.10 cents compared to the previous payment of Ksh. 0.55 cents.  A company’s inconsistency in dividend payment is always considered as a negative signal to the shareholders because it is a sign of declining cash flows except under circumstances where retention rate is too high.  Efficient markets too consider uneven payment of dividends as a negative signal to a company’s future prospects.

Repurchasing of shares, on the other hand, is viewed by investors as a positive signal  that the share is undervalued. In so doing, the company will be able to send the right signal to the market.  Secondly, a large block of stock that may be keeping the share price down will be removed.

KenGen has over 2 billion issued shares.  For every demand available in the market at any price within the range (+-10%), there is always ready supply.  This has depressed the share price as more retail investors buy for speculative purposes. It does not however mean that shareholders must sell if a firm distributes cash by repurchasing the stock. Due to better priceS offered, small investors with ‘peculiar’ trading habits are phased out of the company’s register thus leading to price stability. 

It is right to argue that if KenGen had used the funds raised in the IPO for expansion as earlier stated, the firm’s future value would not be in question. Systems and structures generated from plans bear results which are visible from the day they are initiated.  It reminds me of the ‘smokeless smokestacks’ story told by Thornton OlGlove (Quality of Earnings).  Whenever we see KenGen in the news, it is always on the receiving end.  Recently, the company received Ksh. 2 billion for the production of additional power.  Repurchasing its shares would therefore stabilize its capital structure- they can resell the shares in future if they so wish. The management, one would argue, was reluctant to increasing the dividend because they knew that it would not be sustained. 

Although firms announce a repurchase program prior to its start, the shareholders may not fully understand the repurchase. The firm may pay too much for a repurchased stock which can be a disadvantage to the remaining shareholders… but the fact remains, the future value is always strengthened. 

Finance will always dictate the rules; corporates can act by them or make assumptions that still work.  For KenGen however, time is up for assumptions and this is the only time to make tough decisions – you owe it to the major and potential investors- patriotism aside.  The government should therefore consider buying back the shares and sell them back to the public in future.

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