HUBC – Efficiency performance of Narowal could be an upside

Operational efficiency of Narowal may lead to upside in earnings: Operational efficiency of newly listed IPPs (NPL and NCPL) has consistently outperformed benchmark performance levels. We believe HUBCO’s Narowal project could realize similar savings and have thus conducted a sensitivity analysis for the upside in earnings of HUBCO.

O&M and fuel savings may prop up EPS/DPS by PKR1.25: NPL and NCPL have realized fuel savings at an average rate of 5gms/kwh during 9MFY11 while their repairs and maintenance cost has averaged 25% of allowed cost as per tariff. If Narowal is able to realize similar operational efficiency gains, this could potentially add PKR1.25/share to FY12 EPS.

Investment Perspective: Our base case does not assume any operational savings for Narowal project. The scrip offers dividend yield of 13% for FY11 and FY12 and a real USD IRR of 14% over the remaining term of the Power Purchase Agreements. The stock is currently trading at P/E of 7.7x and offers an upside of 28% to our DDM based Jun-12 PT of PKR49/share.

Operational efficiency of Narowal may lead to upside in earnings

Newly listed IPPs (NPL and NCPL) have consistently outperformed benchmark operational efficiency levels, which have resulted in 75% savings in maintenance costs and fuel savings at rate of 5gms/kwh, making significant contribution to earnings. We believe that HUBCO’s Narowal project could potentially realize similar benefits on the back of operational efficiencies. We have thus conducted a sensitivity analysis for the upside in earnings of HUBCO that can be realized on the back of operational efficiency of the Narowal.

O&M and fuel savings may prop up EPS/DPS by PKR1.25

If operational efficiency of Narowal is able to match average levels of NPL and NCPL (5gms/kwh, 75% O&M savings), cumulative incremental upside in earnings and dividends for FY12 could be up to PKR1.25/share. Fuel savings can potentially contribute PKR0.35/share and O&M savings could add PKR0.90/share.

Investment Perspective

Our base case does not assume any operational savings for Narowal project. With final dividend expected at PKR2.5/share, the scrip currently offers dividend yield of 13% for FY11 and FY12 and a real USD IRR of 14% over the remaining term of the Power Purchase Agreements. HUBCO is currently trading at P/E of 7.7x, offering an upside of 28% to our Jun-12 ­PT of PKR49/share.

Economic & Political News

Budget 2011-12: current account deficit to be financed through FDIs

The government has decided to finance current account deficit in the FY 2011-12 through foreign direct investments (FDIs) ie amounts anticipated from Etisalat -around USD800mn–expected by the start of next fiscal year, grants and loans estimated at USD2.1bn and portfolio investment. For this, the government intends to formulate its medium-term debt policy with three important pillars: (1) reduction of budget (total deficit without interest) to around ‘negative’ 1 percent over the medium-term, (2) use of debt instruments that are low interest-yielding, including more reliance on national savings instruments, and (3) reduction of SBP borrowing to zero.
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