The energy market is a vital component of the global economy especially the constant evolution of energy sources. As countries strive for energy security and sustainability, the market is witnessing a shift towards renewable energy sources, alongside traditional fossils.

This constant evolution not only impacts traditional energy stocks but also creates new opportunities in emerging sectors. It is important for investors to stay informed about market trends, regulatory developments, energy sector reports and technological innovations to effectively navigate the energy stocks landscape.

As such, the energy sector in Kenya released its 1H25 Results posting better margins for 1H25 profitability and stability of the shilling behind the performance for Kenya Power.

KENGEN 1H25

KenGen has posted a remarkable 79.0% year-on-year increase in net profit to KES 5.30 billion, up from KES 2.96 billion, signaling a significant improvement in its financial health. This surge is largely driven by effective cost optimization, which reduced operating expenses by 13.7% year-on-year to KES 17.66 billion, helping to mitigate a slight decline in overall revenues, which fell by 3.6% year-on-year to KES 27.50 billion.

KenGen’s recent performance in electricity generation reflects a steady growth trajectory, with power supply to the national grid increasing by 1.9% year-on-year to 4,291 GWh, up from 4,211 GWh in the first half of 2024. The overall national electricity generation for the six months ending December 31, 2024, rose by 6.0% year-on-year to 7,210 GWh, indicating a robust demand for electricity, particularly highlighted by a peak demand of 2,288 MW recorded on October 29, 2024.

The company’s operating profits surged by 49.4% year-on-year to KES 6.65 billion, driven by a significant 13.7% reduction in operating costs. This efficiency, combined with a notable increase in finance income (+30.5% year-on-year) and a decrease in finance costs (-23.8% year-on-year), propelled profits before tax to KES 7.95 billion, marking a substantial 64.7% year-on-year increase. After accounting for a tax charge of KES 2.66 billion, KenGen reported an after-tax profit of KES 5.30 billion, translating to earnings per share of KES 0.81. However, the board of directors opted not to recommend an interim dividend, mirroring the decision made in the previous year.

Source; SIB

This financial performance suggests that KenGen is becoming more efficient in its operations, which could lead to more stable and potentially lower energy costs in the future. As the company continues to manage its expenses effectively, it may be better positioned to invest in infrastructure and renewable energy projects, ultimately enhancing energy security in the country.

The rising demand for electricity in Kenya aligns with global trends, where energy consumption is expected to grow, driven by urbanization and technological advancements. KenGen’s strategic focus on optimizing costs while maintaining supply positions it well to navigate the challenges of a rapidly evolving energy landscape, potentially serving as a model for other emerging markets in Africa looking to enhance their energy infrastructure.

The cash position increased 15.8%y/y to KES 27.21bn with cash carried over being the main driver. At a granular level cash from operations almost halved – down 49.5%y/y to KES 7.94bn – with borrowings easing 47.7%y/y to KES 3.05bn.

‘’While typically revenue growth is a major driver of profitability, the impact of pass through costs such as foreign exchange adjustment and fuel are important considerations as they neither benefit the utilities nor the consumer. This was a key play in 1H25 numbers which saw a revenue fall but an improvement in profitability and overall margins – we instead focussed on the number of units growth which remains particularly healthy.’’ Eric Musau, executive director of research at Standard Investment Bank added, when asked about the topline shrink despite the significant increase in net profit.

KenGen is strategically positioning itself to enhance its operational capabilities by integrating innovative technologies such as Battery Energy Storage Systems (BESS). This initiative aims to store excess energy generated from variable renewable sources, which is crucial for load balancing and providing ancillary services to the national grid. The company is currently working on implementing its first BESS project, a 100MW/200MWh system, expected to commence operations in 2027.

Additionally, KenGen is exploring the potential of utilizing brine, which could open avenues for silica mining, thereby diversifying its revenue streams. However, this initiative may come with significant capital expenditure (capex) requirements, indicating a need for substantial investment upfront.

In the fiscal year 2024, management reported the transfer of KES 5.4 billion in contract assets from the Olkaria I AU & IV projects (totaling 280MW) to KETRACO, which helped offset the EIB on-let loan. This financial maneuver reflects KenGen’s proactive approach in managing its liabilities while positioning itself for future growth.

Looking ahead, the company anticipates a high capex expenditure in the medium term as part of its ambitious strategy to increase its installed capacity by 1,500 MW between 2024 and 2035. This expansion is crucial for meeting the growing energy demands in the region.

The stock has shown impressive performance, rallying to a year-to-date gain of 22.8%, closing at KES 4.47 as of yesterday. Over the past year, the stock has more than doubled, attracting positive sentiment from financial analysts who view KenGen as having a strong value proposition. The stock currently trades at a price-to-earnings (P/E) multiple of 4.3x, which suggests that it may be undervalued compared to its earnings potential, leading analysts to maintain a BUY recommendation.

A global energy stock that has exhibited a similar trend to KenGen is NextEra Energy, a leading player in the renewable energy sector based in the United States. Like KenGen, NextEra has experienced significant growth in its operational performance, driven by a strategic focus on renewable energy sources. In its recent financial reports, NextEra Energy reported a notable increase in electricity generation from renewable sources, reflecting a commitment to sustainability and efficiency.

NextEra Energy’s operating profits surged by over 20% year-on-year, largely attributed to a decline in operating costs and an increase in energy demand as more consumers and businesses shift towards renewable energy solutions. This aligns with the broader market trend where investors are increasingly favoring energy companies that demonstrate strong financial performance while also contributing to environmental sustainability.