Morning Call about Kot Addu Power Company Limited – Arif Habib Limited

Karachi: Profitability may jump by 31% in FY11

 

Kot Addu Power Company (KAPCO) will be announcing its FY11 financial result on Monday 5th, September 2011.

According to Arif Habib Limited, Our estimates for the company’s profitability for the period works out to PKR 6,691mn – (EPS of PKR 7.60), depicting a growth of 31% YoY. This growth is emanating from lower maintenance cost and higher interest income earned on delayed payments from WAPDA. For 4QFY11 alone, we expect the Company to report PAT of PKR 1,437mn (EPS: PKR 1.63), exhibiting a rise of 2% QoQ. We expect that company will also announce a final dividend of PKR 3.5 / share, taking the total dividend for the year to PKR 6.5 / share.

 

  4QFY11 3QFY11 QoQ FY11 FY10 YoY
Net Sales 22,599 18,740  21% 71,376 85,935 -17%
Operating costs 20,363 16,353 25%  60,888 76,011  -20%
Gross Profit  2,236 2,388  -6% 10,488 9,924  6%
General and Admin Expenses 95 109  -13% 433 631 -31%
EBIT  2,141 2,279  -6% 10,055 9,293  8%
Financing Cost  2,391 2,129 12%  8,684  5,336 63%
Other Income 2,439  2,012 21% 8,819 3,774  134%
EBT  2,190 2,162  1% 10,190  7,731 32%
Taxation  753.1 758.0  -1% 3,500 2,641 32%
Net Profit 1,437 1,404 2% 6,691 5,089 31%
Earnings per Share 1.63 1.59 2% 7.60 5.78  31%
Source: AHL Research            

 

Maintenance cost is likely to come down by 2x QoQ

According to NEPRA’s data, due to non availability of gas, the plant was mainly operated at expensive LSFO and Diesel. With a load factor of 56% the plant generated 1,626 Gwh of electricity in last quarter, with major overhaul done in 3QFY11, repair and maintenance cost is expected to come down by 2.05 times in 4QFY11 to PKR 242mn. This would take FY11 O&M expense to PKR 1,137mn, a decline of 39% YoY when compared to PKR 1,856mn recorded in FY10.

Effect of higher financial charges to be offset by other income

Due to piling receivables from WAPDA, company is expected to record other income of PKR 8.82bn (up 134% YoY) in FY11, mainly earned through higher markup earned on delayed payments from WAPDA. We believe this increase in other income will help in offsetting the effect of soaring financial charges on short term borrowing and penal interest charges payable to PSO’s receivables. We expect the financial charges to grow by 63% YoY to reach at PKR 8.68bn in FY11.

Recommendation

Our Dividend Discount Model (DDM) based target price for Dec 2011 works out to be PKR 51.40 per share, which offers an upside potential of 20.1% from its last closing price of PKR 42.8 per share. Besides attractive upside potential, the stock offers FY11E dividend yield of 15.2%, making it one of the best defensive play in the market. Thus we recommend Buy.

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