KEN - Kenon: Outlining A Long Trade But Fundamentals Remain Troubling

Summary

• The Utilities sector has been a soft spot in 2023 as a risk-on mantra has persisted.
• Meanwhile, global shipping rates are on the fall, hurting firms with exposure to that volatile niche.
• I see shares of Kenon as expensive when price is compared to its revenue, but the chart shows a clear bullish pattern.

Utilities sector stocks have been a laggard in 2023. What’s more global shipping equities have struggled amid falling container rates. That is not a strong combination for one holdings company with exposure to both spots. There’s some downside momentum, and I see shares of Kenon (KEN) as still not a tremendous value despite a steep fall. But traders should watch this one, as the chart suggests a positive risk/reward play at hand.

Utilities With Negative Alpha YTD

Shipping Rates Continue To Plummet

According to Fidelity Investments, Kenon Holdings Ltd., through its subsidiaries, operates as an owner, developer, and operator of power generation facilities in Israel, the United States, and internationally. It operates in four segments: OPC Israel, CPV Group, ZIM, and Quantum. The company engages in the generation and supply of electricity and energy; development, construction, and management of renewable energy and conventional natural gas-fired power plants; manufacture of automobiles; and provision of container liner shipping services.

The company owns 55% of OPC (a leading owner, operator, and developer of power generation facilities in the Israeli and U.S. power markets), 21% of ZIM (– an international shipping company), and 12% of Qoros (a China-based automotive company). So, its exposure is primarily to the volatile power markets and, to a smaller extent, the global shipping market. There’s modest ownership in the also risky China EV market. Kenon has agreed to sell its remaining 12% interest in Qoros, though.

The Singapore-based $1.6 billion market cap Independent Power and Renewable Electricity Producers industry company within the Utilities sector trades at a low 1.1 trailing 12-month GAAP price-to-earnings ratio and pays a high 11.6% dividend yield , according to The Wall Street Journal. Back in November , Kenon reported GAAP EPS of $4.65 on revenue of $163 million – that was a more than 22% increase in sales from the same period a year ago. Unfortunately, with steeply falling global shipping rates (to which the firm is exposed despite it being an IPP name), I expect Kenon’s operations to continue to be challenged.

On valuation , the low GAAP and operating earnings multiples near 1 are deceptive. Notice in the valuation picture below that Kenon still trades at more than 5 times sales (Seeking Alpha shows at just 2.9 times last year’s revenues, though) and has only a near-median industry price-to-book ratio. What’s more, Seeking Alpha shows an EV/EBITDA multiple sky-high at 38. With a historically high price-to-sales multiple, I see shares as not an ideal value right now.

KEN: Expensive on the Sales Multiple, Generating Decent Free Cash Flow

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Thursday, March 30 BMO. The calendar is light on volatility catalysts in the near term.

Corporate Event Risk Calendar

The Technical Take

With a continued negative outlook despite a yoy revenue jump, how does the chart shape up? I actually see some opportunity for a favorable risk/reward play. Notice in the graph below that shares are forming a bullish descending wedge pattern. There’s support at $30 while upside resistance is seen near the $48 to $50 range.

I also see potential selling pressure coming into play in the low $40s based on where KEN stalled on a pair of occasions during the back half of last year. What’s also bearish for the stock is that it has not participated in the market’s snapback off the mid-October low. I issued a sell on shares right near the market low, and I was surprised to see that the call was right on since the macro timing was rather poor.

But long here with a stop under, say, $28 with a first target to $41 is a low-risk, high-reward trade.

KEN: Bullish Falling Wedge, Support at $30

The Bottom Line

While I like KEN for a long idea right now, the bigger picture valuation remains a concern.

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