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

Karachi: Arif Habib Limited reiterating its Buy stance on the stock of Kot Addu Power Company Limited (KAPCO) with Dividend Discount Model (DDM) based June 2012 target price of PKR 49.80/share.

According to Arif Habib Limited, at the closing price of PKR 45.02/share, the Scrip offers an upside potential of 10.6% from its target price. Beside attractive upside potential, the scrip offers highest dividend yield, making it one of the best defensive stocks in capital market and in AHL universe. On the basis of free cash flows available to the Company, Arif Habib Limited expects KAPCO to pay a dividend of PKR7.1/share in FY12, whereas for FY13 Arif Habib expects a dividend of PKR7.7/share. This translates into strong dividend yield of 15.8% for FY12 and 17.1% for FY13 and a real USD IRR of 13.63% over the remaining life of Power Purchase Agreement (PPA).

Higher returns with rising PKR Deprecation
Under the power purchase agreement, KAPCO dollar based returns are hedged against any change in PKR/USD parity. Arif Habib Limited has assumed PKR depreciation rate of 2.0% p.a. till the remaining life of the project. In last 4 years, Pak Rupee has depreciated by 42% till FY11 whereas in FY12 alone it has deprecated by 1.84% to stand at PKR87.55. This decline is on the back of economic turmoil arising out of high oil and commodity prices and rising trade deficit leading to severe financial crunch. This has pushed Pakistan to avail facilities from IMF to the tune of USD11.3bn; the repayment of this loan is due from February 2012. Moreover, under agreement with IMF facility, the government has transferred all payments for import of crude and refined products to the banking system. Under these circumstances, Arif Habib Limited expects PKR to remain under pressure against the greenback.

Earnings are expected to rise by 3.6% YoY in FY12
In FY11 Company’s top line declined by13% YoY mainly due to lower production compared to corresponding period last year, however 133% higher other income helped the company in posting 28.2% higher net earnings compared to FY10. Company also announced a dividend of PKR6.5/share in FY11. However going forward for FY12, Arif Habib Limited expects the company’s top line to improve with the improvement in its production, depreciation of PKR against US Dollar and with increase in US CPI. Arif Habib Limited expects company will earn a profit of PKR 6.76bn (EPS: PKR7.68) in FY12 and will pay a dividend of PKR 7.1/share in FY12.

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