KAPCO: Efficiency capex to hurt near term earnings; add LT value

Maintenance project of USD14mn initiated: Recent press release by General Electric (GE) reveals that KAPCO has awarded contract of USD14mn to GE and its local partner Albario Engineering for the up gradation of four GE manufactured gas turbines. The project is expected to improve overall operational efficiency of KAPCO by 0.16%.

O&M cost to surge for 4QFY11 and 1HFY12: Our discussion with company management suggests that project work has already been initiated and is expected to be completed by the end of 1HFY11. Therefore, O&M cost is estimated to escalate to PKR520mn and PKR1.5bn for 4QFY11 and FY12 respectively as KAPCO shall be expensing the entire overhaul cost.

Efficiency savings to contribute from 2HFY12: The rationale of this maintenance project undertaken is deteriorating efficiency of KAPCO as reflected in decreasing EPP-fuel cost differential during FY08-10. Efficiency savings from the project are expected to materialize from 2HFY12 and contribute PKR333mn (PKR0.38/share) to earnings per annum.

Investment perspective: With increased maintenance cost, we have revised our final dividend expectation of FY11 to PKR3.6/share and also trimmed our EPS and DPS expectation for FY12 by PKR0.4. After incorporating earnings contribution from efficiency improvements, we have increased our Jun-12 PT by PKR1/share to PKR55/share. The scrip is currently trading at P/E of 5.5x and offers dividend yield of 16% for FY12.

Maintenance project of USD14mn initiated

According to a recent press release by General Electric (GE), KAPCO has undertaken up gradation project of four of its GE manufactured gas turbines at a cost of USD14mn. The project will be completed by GE and its local partner Albario Engineering. The project will increase dependable capacity of these four turbines by 12MW and will also lead to overall efficiency improvement by 0.16%.

O&M cost to surge for 4QFY11 and 1HFY12

Our discussion with company management suggests that work on up gradation project has already been initiated during 4QFY11 and is expected to be completed by 1HFY11. We expect that the O&M cost for 4QFY11 would increase to PKR700mn, up 41% QoQ as the new project would augment maintenance charges for the quarter. We expect the maintenance cost to limit FY11 EPS at PKR7.74. O&M cost for FY12 is expected to stand at PKR1.5bn, 75% of which is expected to be incurred in 1HFY12.

Efficiency savings to contribute from 2HFY12

Gradual decline in efficiency of KAPCO during FY08-10, reflected in the decline in EPP-fuel cost differential from PKR1bn to PKR139mn during the period, has led KAPCO to undertake the project to improve efficiency on LSFO. EPP-fuel cost differential during 9MFY11 reduced to negative PKR55mn which suggests further efficiency deterioration, as reliance on LSFO was more than 87% during 9MFY11. Efficiency savings are expected to contribute to earnings post 1HFY11. We expect efficiency savings for 2HFY12 to stand at PKR167mn (PKR0.19/share) at savings rate of 0.78gms/kwh at assumed load factor of 65% for the period as net annual efficiency savings are estimated at PKR333mn (PKR0.38/share).

Investment perspective

With increased maintenance costs during 4QFY11, we expect final dividend of KAPCO to stand at PKR3.6/share and have also trimmed our EPS and DPS expectation for FY12 by 5% and 6% respectively. However, after incorporating earnings contribution from efficiency improvements, our FY13-15 EPS/DPS rises by 3% – 5%, and we have thus increased our Jun-12 PT by PKR1/share to PKR55/share. The scrip is currently trading at P/E of 5.5x and offers dividend yield of 16% for FY12.

Economic & Political News

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Engro offers 27mn shares for sale

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