Morning Call about Hub Power Company Ltd – Arif Habib Limited

Karachi: Blending Growth with Defense

Arif Habib Limited has rolled over Arif Habib Limited’s fair value for Hub Power Company Limited from December 2011 to Jun 2012.

According to Arif Habib Limited, using Dividend Discount valuation methodology (DDM) Arif Habib Limited’s target price for June 2012 works out to be PKR 48.9/share, offering an upside potential of 20% from its closing price (September 26, 2011) of PKR 40.67/share.

Going forward company’s earning will emanate from rising indexation factor, Narowal expansion and Laraib Project, which will commence its operations in June 2013. Arif Habib Limited expects company will post an earning of PKR 7,155mn (EPS: PKR 6.18) in FY12 and PKR 7,856mn (EPS: PKR 6.79) in FY13. According to Arif Habib Limited’s estimates company will pay a dividend of PKR 5.8/share and PKR 6.40/share in FY12 and FY13 respectively. This will translate into a dividend yield of 14.15% in FY12 and 15.61% in FY13. According to the Power Purchase Agreement (PPA), company has a USD based IRR of 16.20% whereas in PKR term, company has an IRR of 18.30%.

Higher earnings through with rising PKR Deprecation

Under the power purchase agreement, HUBC dollar based returns are hedged against PKR/USD parity. Since start of FY12 Pak Rupee has depreciated on average by ~2% to PKR 87.5. With the IMF repayments starting from 2012 alongwith an expected rise in oil imports will bring the USD/PKR parity under pressure. However keeping a conservative view Arif Habib Limited has assumed that Pak Rupee depreciation will average out at 87.17 against the green back in FY12. In the long run Arif Habib Limited has taken a base case assumption of 2.0% PKR depreciation against US$ p.a. till the remaining life of the project.

Sensitivity of PKR Depreciation on Earnings and Payouts


  EPS DPS    
FY12  FY13 FY12 FY13  
2% 6.18  6.79 5.80 6.40
3% 6.27 6.96 5.90 6.60
4% 6.36 7.14 6.00 6.70
5% 6.45 7.32 6.10 6.90
6% 6.72 7.87 6.10 7.10


Source: AHL Research

Sensitivity of PKR Depreciation on Earnings and Payouts

Narowal Project is expected to contribute 0.89/share in FY12 Narowal Project (initially targeted for March 2010) has finally commenced commercial operations on April 21, 2011. Based on current tariff Arif Habib Limited expects the project to contribute PKR 0.89/share in FY12 to the company’s bottom line. Arif Habib Limited will revise Arif Habib Limited’s earnings estimates for FY12 once NEPRA issues the post CoD Tariff for the plant.

Laraib Energy Limited

Hub Power is working on Laraib Hydel power plant which has a capacity of generating 84MW electricity. The CoD of the project is expected in June 2013. The plant is built near the New Bong Escape, in Azad Jammu & Kashmir under B.O.O.T basis and will be transferred to the government after 25 years. The project capital structure comprises of 75% debt and 25% equity. The project achieved its financial close in December 2009.

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