Summary Background of the Company
Umeme took over the distribution system for the distribution and supply of electricity in Uganda from Uganda Electricity Distribution Company Limited (UEDCL) under the Concession for a period of 20 years, commencing 1 March 2005. Under the Concession, Umeme is also required to repair, upgrade, and expand the Distribution System within Uganda and such contiguous areas as Umeme and Electricity Regulatory Authority (ERA) may agree
Through the Concession, Umeme operates as the primary electricity distribution company in Uganda, responsible for distributing electricity to Ugandan residents and commercial entities. UEDCL owns the Distribution Network that has been leased to Umeme under the Privatisation Agreements
Key shareholder information
Umeme Limited became a public company under the Companies Act on the 28 June 2012.Umeme Holdings Limited sold 39.92% of its holding to the public through an Initial Public Offering and listing on the Uganda Securities Exchange (USE) on the 30 November 2012 and a cross listing on the Nairobi Securities Exchange (NSE) by introduction, on 14 December 2012. Umeme is 60.08% owned and controlled by Umeme Holdings Limited, an investment holding company domiciled in Mauritius. Umeme Holdings Limited is fully owned by Actis Infrastructure Umeme Limited which is 97.77% owned by Actis Infrastructure 2 LP.
The Company is a major investment of Actis Infrastructure 2 LP. Actis Infrastructure 2 LP is a leading private equity manager of investment funds specializing in emerging markets, with investments in Africa, Asia and Latin America. Actis Infrastructure 2 LP has specialist teams dedicated to private equity, energy and real estate and has a track record in building capital growth across its sectors and markets. CDC is the largest investor in Actis Infrastructure 2 LP and, as such, continues as an indirect investor in the Company
Financial Highlights
Umeme announced impressive FY 2013 results. Revenue was up 12% to KES 34 bn resulting to a rise in PAT 45% to KES 3 bn. The balance sheet had an impressive growth as follows:
| Income Statement (KES mn) | Dec-12 | Dec-13 | Y/Y 2013 |
|---|---|---|---|
| Revenue | 30,698 | 34,491 | 12% |
| Cost of Sales | (22,294) | (24,138) | 8% |
| Gross Profit | 8,404 | 10,353 | 23% |
| Other Income | 178 | 488 | 175% |
| Finance income | 537 | 625 | 16% |
| 9,119 | 11,467 | 26% | |
| Repair and maintenance | (645) | (619) | -4% |
| Admn expenses | (3,763) | (4,721) | 25% |
| Foreign exchange Gain/loss | (480) | - | -100% |
| Other expenses | (80) | (18) | -78% |
| Operating profit before Amort | 4,151 | 6,109 | 47% |
| Amortisation | (795) | (1,185) | 49% |
| Operating Profit | 3,356 | 4,923 | 47% |
| Finance Cost | (1,181) | (806) | -32% |
| PBT | 2,176 | 4,117 | 89% |
| Tax | (136) | (1,129) | 729% |
| PAT | 2,040 | 2,988 | 47% |
| Balance Sheet (KES mn) | Dec-12 | Dec-13 | Y/Y 2013 |
|---|---|---|---|
| Equity | 8,552 | 10,206 | 19% |
| Non Current Liabilities | 7,576 | 7,982 | 5% |
| Current Liabilities | 10,870 | 13,558 | 25% |
| Total Equity & Liabilities | 26,998 | 31,747 | 18% |
| Non Current Assets | 15,451 | 17,305 | 12% |
| Current Assets | 11,547 | 14,441 | 25% |
| Total Assets | 26,998 | 31,747 | 18% |
Share Offer by Private Transfer
Umeme Holdings which owns 60.08% of the issued ordinary shares of Umeme Limited has applied for and received approval from CMA to sell 45.1% of its share holding and to retain the balance 15% with a lock in period of 2yrs.
Up to 162,000,000 ordinary shares comprising of 10% of issued ordinary shares of Umeme Limited will be available to selected investors with CDSC accounts in Kenya. The offer price will be determined through a book building process closing on 8th May 2014. Announcement of allocation will be done on 9th May 2014 and settlement is due on 14th May 2014 as per indicative time table.
Investment Consideration
Positives
- Expected growth in power demand at double the growth rate of economic activity
- Low electrification rate (12.0%) provides for vast opportunities from higher expected penetration
- Umeme’s monopolistic positioning with a dominant market share (+95.0%) provides competitive advantage
- Continued system loss reduction via network upgrades will improve margins currently at 24.30% from 26% in 2012.
- EBITDA growth supported by fixed 20.0% USD contracted return on investment (capex) will drive ROaE going forward
- Umeme is currently trading on the NSE at KES 13 and hence a P/E of 7 while KPLC currently trades at 6.8
Risks
- Potential delays in capacity expansion and over-reliance on hydro power
- Regulatory changes may pose a future risk on concession renewal
- Lag in tariff adjustment
We recommend participation in the Umeme book building to have exposure in Uganda power sector that is poised to benefit from improved economic activities expected mainly due to ongoing oil discovery in the country.
We recommend taking a short position if successful with a target return of 25%.
