Investment Letter #001
- Project #001: KenGen (NSE: KEGN) | Is cheap the same as undervalued? | November 2026
This letter shares my research process. It is not investment advice and not a buy or sell recommendation.
The question
If I had KSh10 million today, would I put a meaningful part of it into KenGen at today’s price? Why or why not?
That question has driven six public posts and now this letter. I want to show how I got to my answer, including where my evidence is thin.
The short answer
KenGen is cheap against its assets. I have not yet shown that it is undervalued.
The business has real barriers to entry, but on my simplified numbers it earns a low return on the capital behind them. Until I can show that returns are improving, or explain why the market price is wrong, I treat KenGen as interesting but unproven.
The business
KenGen is a Kenyan power generator led by geothermal energy. It sells electricity mainly to Kenya Power (KPLC) under power purchase agreements (PPAs). That detail matters because it shapes how much control KenGen has over the price it receives.
Why it looks cheap
KenGen trades at roughly 0.25x book value, at about KSh10.75 a share. In plain terms, the market values the company at about a quarter of the accounting value of its equity.
That is the headline that makes KenGen look like a bargain. The rest of this letter tests whether it is one.
The moat
I examined five possible barriers to entry:
- Infrastructure (strong). KenGen has an operating generation system that took years and heavy capital to build. A new entrant would need to find a resource, develop a site, drill, finance, connect to the grid, obtain approvals and test before earning meaningful revenue.
- Capital (strong). Geothermal needs large upfront spending and carries drilling risk, since a well can fail to deliver the expected output. Maintenance, refurbishment and expansion need capital on an ongoing basis.
- Expertise (potentially strong). Decades of experience in reservoirs, drilling, operations and project development are hard to buy quickly. This is a learning advantage, not just a group of good employees.
- Resource (potentially very strong, not yet proven). The key question is whether good geothermal resources in Kenya are scarce or plentiful. If competitors can easily access equally good sites, this is a weak barrier. I have not yet verified the evidence.
- Regulation (a lesser barrier). Licences, permits and approvals add time, cost and complexity, but a well-funded competitor can also obtain them. I treat this as supporting, not central.
Together these make a legitimate moat hypothesis. I do not call it proven.
The contradiction
Here is what made me slow down.
- Total assets: roughly KSh500B
- Profit: about KSh10.35B
- My simplified ROIC: about 2.7% (How efficiently a company turns the capital invested in the business into effective operating profit)
Strong barriers to entry, and a weak return on the capital behind them.
There are several possible explanations, and I do not yet know which is closest to the truth:
- KenGen has a genuine moat, but power generation is inherently a low-return, capital-heavy business.
- KenGen’s assets are temporarily earning below their potential.
- Regulation and PPAs stop KenGen from capturing the full value of its position.
- My simplified ROIC calculation does not tell the whole story.
- The moat is real operationally but does not translate into attractive shareholder returns.
A moat protects a business from competitors. It does not guarantee the business earns well.
Profit versus cash
KenGen’s operating cash flow is about KSh29.88B, against profit of about KSh10.35B. That is a large gap. In a business with heavy depreciation, a gap like this is often expected, but I have not yet confirmed what drives it here. I will not assume the cause until I have checked the cash flow statement.
Pricing power
KenGen sells mainly to one customer under PPAs. If KenGen produced more electricity tomorrow, it could not simply charge KPLC whatever it wanted. How the PPA terms and tariffs work decides how much of its moat KenGen can turn into profit. This is the most important open question in my research.
Capital allocation
In a capital-hungry business, every new shilling of spending has to earn more than it costs to fund.
The Olkaria I rehabilitation is a useful example. It raises the station from 45 MW to 63.3 MW. That is 18.3 MW of extra capacity, about 41% more, from an existing site, with a life extension of 25+ years. Upgrading equipment on a known site avoids some of the risk of starting from zero.
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What I have not verified yet is the project’s cost per MW compared with a new build, and how much of the extra output already earns revenue. Those two numbers decide whether this is a real improvement in returns or simply a good headline.
The data centre story
A $1B geothermal-powered data centre announced in 2024 raised hopes of new demand for Kenyan geothermal power. It has reportedly stalled, and Microsoft’s Africa Development Centre in Nairobi is reportedly set to close. Microsoft says it will keep operating in Kenya, and nothing has been formally cancelled, so I treat this as lost optionality, not a confirmed loss. It is a reminder that the analysis should work without announced growth.
Bull case and bear case
The bear case (value trap). Low price-to-book can be a fair price for low returns. If each shilling of assets earns less than it costs to fund, a shilling of assets is worth less than a shilling. KenGen sells mainly to one buyer, must keep spending just to stay in place, and has not yet shown that growth announcements turn into earnings.
The bull case. Projects such as the Olkaria I rehabilitation lift returns on existing assets. Returns on capital rise toward the cost of capital. Cash flow converts into dividends and growth that shareholders can see.
What would change my mind
- Evidence that PPA terms give KenGen more pricing power than I assumed
- Rising returns on capital over several reporting periods
- A rehabilitation cost per MW clearly below the cost of new capacity
- A clear explanation of the gap between profit and operating cash flow
- Dividends that grow in line with cash generation
Verdict
Cheap is not the same as undervalued. KenGen’s price is low against its assets, its barriers to entry look real, and its returns on capital are low. I cannot yet show which of those facts the market has priced correctly.
So my answer to the opening question is: not yet. This is a company to keep studying, not a company I would size a position in today. That could change as the open questions above are answered.
Not a buy or sell call. Just the process.
Appendix: figures and their status
Figure
Value
Status
Price-to-book
~0.25x
From my research; date to be confirmed before publishing
Share price
~KSh10.75
From my research; date to be confirmed before publishing
Total assets
~KSh500B
From my research; financial year to be confirmed before publishing
Profit
~KSh10.35B
From my research; financial year to be confirmed before publishing
Operating cash flow
~KSh29.88B
From my research; financial year to be confirmed before publishing
Simplified ROIC
~2.7%
My own simplified calculation, not an incremental ROIC
Olkaria I capacity
45 MW to 63.3 MW
From my research; the 41% increase is simple arithmetic (18.3 / 45)
Life extension
25+ years
From my research
CAPEX, debt, dividends, PPA terms, cost of capital
Not yet gathered
Needed before the valuation section can be completed
