Morning Call about Hub Power Company Limited – Arif Habib Limited

Karachi: Offering 25% earnings growth and 15% Dividend yield – BUY

Hub Power Company Limited (HUBC) posted an unconsolidated profit after tax of PKR 2,998mn (EPS: PKR 2.59) in 1HFY12 compared to PKR 2,843mn (EPS: PKR 2.46) in 1HFY11, reflecting an increase of 5% YoY.

According to Arif Habib Limited, the company also announced an interim cash dividend of PKR 3.0/share along with the 1HFY12 financial results. During the period company’s gross profit registered a growth of 62% YoY due to higher generation bonus, efficiency gains and 1.9% deprecation of PKR against green back in 1HFY12. However a massive 206% YoY jump in financial charges curbed the growth witnessed at gross profit level.

 

Financial Highlights PKR million
2QFY12 1QFY12 %Chg. 1HFY12 1HFY11 %Chg.
Turnover 38,730 40,718 -5% 79,448 49,202 61%
Operating Cost 34,951 37,626 -7% 72,577 44,954 61%
Gross Profits 3,779 3,092 22% 6,871 4,248 62%
Other Income 16 15 10% 31 16 97%
General and Admin Expenses 100 87 14% 187 206 -9%
Finance Cost 1,938 1,779 9% 3,716 1,216 206%
PAT 1,757 1,241 42% 2,998 2,843 5%
EPS 1.52 1.07 42% 2.59 2.46 5%
DPS 3.00 3.00 2.50 20%
Source: AHL Research

 

During the period under review the Hub plant operated at an average load factor of 69.5% whereas the plant availability stood at 77.5%, On the other hand Narowal plant operated an average load factor of 76.7% with plant availability at 79.7%. In 1HFY12, total 4,406 Gwh of electricity was produced out of which 2,377 Gwh of electricity was produced in 1QFY12.

Finance cost has jumped by 206% YoY due to rising circular debt

In 1HFY12 company’s financial charges have increased by 206% from PKR 1,216mn in 1HFY11 to PKR 3,716mn, on the back of increased short term borrowing and higher financial cost associated with Laraib Energy Limited, as its equity portion was financed through debt by the HUBC. Due to souring circular debt situation, company’s short term borrowing has increased by 88% to PKR 21.9bn in 1HFY12. By the end of 1HFY12 company had receivables of PKR 124.8bn from WAPDA whereas it had to pay almost PKR 104.4bn to Pakistan State Oil (PSO) on the account of fuel supply. However on February 22, 2012 the company received PKR 34bn from GoP under circular debt swap whereas it has paid PKR 18.75bn to PSO.

Earnings to revise upwards after approval of CoD tariff of Narowal project

HUBC is calculating Narowal returns on the basis of reference tariff since NEPRA is yet to notify post CoD tariff. Consequently, the company returns from the project are under reported, while financing cost including interest. Currently Arif Habib Limited expects project to contribute PKR 0.95/share in HUBC’s consolidated earnings in FY12. Arif Habib Limited will revise Arif Habib Limited’s valuation once NEPRA approves the post CoD tariff for Narowal project.

Outlook

Going forward Arif Habib Limited expects that the company’s earnings will likely emanate from rising PCE component along with indexation factor (Narowal expansion and Laraib Project, operational commencement Jun’13 estimated). This in Arif Habib Limited’ opinion will likely push company’s earnings and dividend to the tune of PKR 6,805mn (EPS: PKR 5.88) and PKR 5.9/share, respectively in FY12. This will translate into a dividend yield of 15.3% in FY12.

Target price of PKR 51.4/share, offers an upside of 34%

Based on Dividend Discount Model, Arif Habib Limited’s Dec-12 target price for HUBC works out to PKR 51.4/share, which offers an upside potential of 34% from its last closing price of PKR 38.44/share. Beside attractive upside potential, the stock offers FY12F dividend yield of 15.3%. Thus Arif Habib Limited recommends BUY.

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