JSC "KEGOC" released a neutral set of results for Q1 2025. The company continues to show revenue growth driven by increasing volumes, but the growth rate has slowed due to a decline in non-core income. Moreover, margin indicators decreased compared to last year. However, the key event is the significant increase in tariffs for all major services starting from April 1 of this year. We view this hike as a very positive factor for KEGOC’s valuation. Already from Q2, the company will be able to improve its margin, and the new tariffs will ease the pressure from expected growth in capital expenditures for new projects. As a result, we reflected these important changes in our valuation model. Nevertheless, a significant increase in dividends is unlikely in the next couple of years, as the company is expected to face cash flow pressure due to elevated capex. Additionally, based on actual results, we raised our cost expectations. As a result, the target price for KEGOC shares was increased to KZT 2,090, implying 40% upside. Recommendation — “Buy.”
(=) Slower revenue growth. The company’s revenue for Q1 2025 increased by 3.4% YoY and by 0.6% QoQ. The modest revenue growth was primarily due to a sharp 44% YoY decline in revenue from balancing electricity sales. On the other hand, revenue from electricity transmission grew by 16% YoY, driven by a 13% YoY increase in volumes (measured in megawatts). The largest revenue component — services for the use of the National Electric Grid (NEG) — increased by only 2.7% YoY, reflecting a slight increase in volumes and tariffs. Two other key revenue lines posted more substantial growth: balancing services (+17% YoY) and dispatching services (+8.6% YoY), largely due to volume growth of 4.9% YoY and 9.7% YoY, respectively. Tariffs remained relatively unchanged over the year, except for balancing tariffs, which rose by 6.4% YoY.
(–) Decline in margin. The company’s gross margin fell from 35.6% in 2024 to 30.6% in 2025, as cost of services rose faster than revenue. Cost of services increased by 11% YoY, mainly due to a 37% YoY increase in technological electricity losses and a 171% YoY rise in balancing electricity purchases. The cost of technological losses continues to grow due to the sharp rise in market electricity prices. On the other hand, expenses for electricity purchases to compensate for cross-border flows dropped by 62%. Still, major cost components such as wages and depreciation and amortization also rose by 10% and 13% YoY, respectively. As a result, the company’s EBITDA margin declined from 46.6% in 2024 to 43.5%. Net income decreased by 13% YoY to KZT 18.6 billion, or KZT 67.4 per share. KEGOC’s net margin dropped from 25% last year to 21%. Quarterly free cash flow declined by 40% YoY, driven by an 81% YoY increase in capital expenditures, although cash from operations grew by 13%.
Our opinion and valuation model changes. Overall, we consider KEGOC’s financial report as neutral. The company’s revenue continues to grow, albeit at a slower pace. Margins declined in Q1 due to rising electricity prices, which are factored into the cost of services. However, the main positive development came from the new tariffs. The company officially increased its two key tariffs — for electricity transmission and NEG usage — by 22% starting April 2025. Moreover, another increase of 16–17% is expected from October 2025. This has had the strongest positive impact on the company’s valuation. Also noteworthy is the 30% increase in tariffs for balancing services and 22% for dispatching services, both effective October 1. These tariff hikes turned out to be significantly higher than our previous expectations, which had assumed a more modest increase after the tariff application. In the valuation model, we also raised capital expenditure expectations due to accelerating inflation and the substantial increase already seen in Q1. We note that the company is set to significantly ramp up capital investments in the coming years due to new projects, which will likely prevent dividend growth during this period. However, the new tariff levels will help absorb these cash outflows. In the longer term, a significant increase in cash generation for shareholders can be expected. We also updated our cost of services forecast based on actual data and slightly raised the discount rate in the model due to increased investment risk in equities. All of the above adjustments led to an increase in the target price of KEGOC shares to KZT 2,090, representing 40% upside. Recommendation – "Buy."