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Friday, August 26, 2005

KPLC announces 2004/5 Results

2004/5 vs 2003/4 (Year End is June 30)

Revenues + 7%
Profit after Taxes + 177%
Earnings per Share +177% (see comments below)

Under the terms of the Memorandum in 2003 in which Preference shares were issued to KenGen & Treasury, KPLC is required to pay KenGen & Treasury a dividend of 7.85% if KPLC announces a dividend on Ordinary Shares prior to 2009. It seems the government's need for cash has compelled KPLC to announce a dividend.

What the paid announcement on Oct 7 2005 does not reveal is the amount that KPLC has to pay out in preferred dividends. Since preferred dividends are paid AFTER taxes, this means the cost to KPLC is 11.2% on a pre-tax basis!

Considering current interest rates & the premium e.g. ARM is paying 1.75% + TBill so 11.2% isn't a bad deal for the Government & KenGen. KPLC should cheaper borrow funds from the market & redeem these Preferred Shares.

EPS overstated
Since the government will get a dividend of Shs. 962 Million the REAL profits for the Ordinary Shareholders is only Shs. 308 Million that equates to NETT EPS of Shs 3.90.

Caveat: KPLC might have cut a "deal" with KenGen & Treasury to pay less.

Bottomline:
Paying a dividend was a poor decision for KPLC. A zero dividend would have allowed KPLC to retain an additional Shs. 962 Million. Shareholders would have been much better off if KPLC "splits" the stock or issues a bonus to reward the shareholders.

The dividend is a mere 1% (after a 5% tax) of the stock's value (140/- on Oct 6 2005 & before the announcement). A bonus or split would be tax-free & if a shareholder needed cash, they could sell 1% of their holdings. The value of the 99% would gain substantially more in value with the retention of the Shs. 962 Million.

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