JSC "KEGOC" has published neutral financial results for Q4 2024. The company continues to show revenue growth amid increasing electricity consumption in the country. However, quarterly margin indicators declined compared to the previous year. Non-cash impairment of fixed assets due to revaluation negatively affected net income. Additionally, the EBITDA margin also decreased, although not as significantly as the net margin. Nevertheless, in terms of cash flow generation, the company demonstrates a positive trend, and the net debt level has reached its lowest point in over three years. This allows for dividend expectations of at least 80 KZT per share for the second half of the year, corresponding to a dividend yield of 11%. It is also worth noting the company's recent application to antitrust regulator for a 26% increase in two key tariffs starting this year. Considering this factor and the rise in energy consumption, we have made corresponding adjustments to the valuation model. On the other hand, an increase in the National Bank’s base rate has led to a rise in WACC. As a result, the target price per KEGOC share has been raised to 1,840 KZT, implying a 25% growth potential. Recommendation – "Buy."
(+) Continued revenue growth. The company's revenue for Q4 2024 grew by 10% YoY and 18% QoQ. A seasonal factor should be considered, as the fourth quarter is traditionally stronger than the third due to increased electricity consumption. The main growth driver was a 19% YoY increase in electricity transmission volumes, resulting in a 23% YoY rise in transmission revenues. Revenue from the use of the national power grid (NPG) and energy balancing services increased by 8% YoY, while dispatching revenue grew by 9.3% YoY. The growth in balancing revenue was driven by tariff increases, whereas for other services, the actual tariff growth was only 3–3.5%, indicating that volume growth was the primary factor.
(–) Margins decline. The company's quarterly gross margin decreased from 30.9% in 2023 to 26.9% in 2024 due to a more significant increase in cost of services compared to revenue. Service costs increased by 17% YoY, mainly driven by a 24% YoY rise in technological electricity losses. Almost all other cost components also grew compared to the previous year. The quarterly EBITDA margin fell from 42% in 2023 to 37.1%. The operating margin declined even more due to a net loss of 7 billion KZT in Q4, resulting from NPG asset revaluation. Nevertheless, the quarterly free cash flow increased by 14% YoY, primarily due to higher cash generation from operating activities. Capital expenditures decreased by 1.9% compared to Q4 2023. As a result, amid fixed asset impairment, the company's quarterly net profit declined by 16% YoY to 12.5 billion KZT, or 45.3 KZT per share. KEGOC's net margin dropped from 19% last year to 14%. However, for the second half of 2024, earnings per share reached 88.4 KZT, which is 19.5% higher than the same period in 2023.
Our opinion and valuation model changes. Overall, we assess KEGOC's financial report as neutral. The company's revenues continue to grow amid increasing electricity consumption. Non-cash asset impairment pressured net profit, but the company demonstrates positive cash flow dynamics. The margin decline is linked to rising electricity costs, increasing financial expenses due to technological transmission losses. However, KEGOC recently submitted an application to the antitrust regulator to raise two key tariffs by 26% starting in April, which will likely restore margins in the near future. In our valuation model, we partially factored in this sharp tariff increase and adjusted the electricity consumption forecast in Kazakhstan based on actual data, leading to a significant rise in expected revenue. At the same time, the recent base rate hike by the National Bank increased government bond yields and the risk-free rate, in turn raising the discount rate in our valuation model. Additionally, we expect dividends for the second half of the year of at least 80 KZT per share, considering the lowest net debt level since September 2021. Thus, total dividends for 2024 will reach 162 KZT, yielding 11% at the current price. All these valuation model changes resulted in an increase in KEGOC’s target price per share to 1,840 KZT, implying a 25% growth potential. Recommendation – "Buy."