HUBC- Understated Narowal earnings to limit FY11 EPS to PKR4.81

Result Expectation: Hub Power Company is scheduled to announce its FY11 financial results on September 8, 2011. We expect the company to post PAT of PKR5.5bn (EPS: PKR4.81), up a mere 0.1% YoY and pay final cash dividend of PKR2.5/share, taking full year dividend to PKR5.0/share. 4QFY11 EPS is expected at PKR1.10.

Post COD tariff adjustment for Narowal is still pending: Income from Narowal is expected to be booked at old tariff which was notified prior to COD of Narowal by NEPRA. Earnings contribution from Narowal during 4Q is expected at negative PKR0.14/share which would be understated by PKR0.21/share.

Utilization similar to FY10, maintenance costs to increase: As per monthly generation data released by NEPRA, utilization of HUBCO’s old plant stood at 88% during 4Q, taking full year generation to 8,115Gwh, up a mere 1% YoY. Maintenance charges for 4Q are expected at PKR935mn, up 25% YoY, on the back of PKR163mn O&M costs of Narowal, taking full year maintenance costs to PKR3bn.

Net penal interest income to contribute PKR0.09/share with higher financial charges: HUBCO received payments of PKR60bn during May-11, which is expected to take ST borrowings to PKR8.5bn. Net penal interest income is thus expected to stand at PKR108mn (PKR0.09/share), down 35% QoQ. Financial charges for 4Q are expected at PKR1.2bn, up 75% QoQ, due to finance cost associated with Narowal debt (PKR578mn), taking full year finance costs to PKR3.1bn, up 73% YoY.

Investment Perspective: The scrip is currently trading at FY12 PER of 6.5x, offering a dividend yield of 13%. At current levels, HUBC offers an upside of 23% to our DDM based Jun-12 PT of 49/share and a real USD IRR of 15% over the remaining term of the Power Purchase Agreements.

Post COD tariff adjustment for Narowal is still pending

In case of IPPs under 2002 policy, at the time of project set up and filing of tariff petition, tariff is notified by NEPRA which is subject to adjustments at the COD. Final tariff that is notified after COD is applicable for that IPP. Similarly, for Narowal, COD was achieved on April 22, 2011, but final tariff with EPC cost adjustments is not yet notified. Therefore, earnings contribution from Narowal for 4Q is expected at negative PKR0.14/share (understated by PKR0.21/share), as tariff booked for 4Q will be based on previously notified tariff and the costs will be realized on the basis of actual costs. We expect the tariff adjustments to be completed during 1HFY12 and earning differential of PKR246mn (PKR0.21/share) shall be booked during the period.

Utilization similar to FY10, maintenance costs to increase

Monthly generation numbers released by NEPRA reveal that generation of old plant of Hubco for 4Q stood at 2,314Gwh, up 13% QoQ at a load factor of 88%, taking full year generation to 8,115Gwh, down a mere 1% YoY (utilization of 77%). Maintenance cost for 4Q are expected at PKR935mn, up 25% QoQ, of which maintenance expenditures of Narowal during 4Q are expected at PKR163mn. Full year maintenance cost is expected at PKR3.0bn, up 11% YoY.

Net spread income to contribute PKR0.09/share with higher financial charges

HUBCO received payments of PKR60bn during May-11, which is expected to limit short term borrowings to PKR8.5bn at year end. Net spread income for 4Q is thus expected at PKR108mn (PKR0.09/share), down 35% QoQ. Due to increase in project costs of Narowal and delay in COD, the finance costs associated with Narowal are expected to stand at PKR578mn, PKR303mn higher than PKR275mn allowed under earlier notified tariff. Finance cost for 4Q is expected at PKR1.2bn, up 75% QoQ taking full year finance cost to PKR3.1bn, up 73% YoY.

Economic & Political News

PSO demands bailout package

The Pakistan State Oil (PSO) has demanded the Ministry of Finance a bailout package, as the company is running short of funds to retire its payment obligations under the letters of credit (LCs), an official said on Monday. The current liabilities of the state-run oil company stand at PKR159.35bn, while the company’s receivables hover at PKR151.89bn.

Pressure tactics: PEPCO stops paying Normal Daily Payments (NDP) to IPPs

In a bid to pile pressure on independent power producers (IPPs) to withdraw their notices, Pakistan Electric Power Company (Pepco) has stopped paying routine dues to the nine IPPs which asked the government and the Central Power Purchasing Agency to release sovereign guarantees due to default on payment of PKR31bn by Pepco. Pepco for the last two days has held back the normal daily payments (NDP), which are almost 50% of the daily fuel cost whereas the IPPs that have not served notices are being paid normal daily payments without any hindrance. The nine IPPs which served notices included Atlas Power Limited, Attock Gen Limited, Liberty Power Tech Limited, Nishat Chunian Power Limited, Orient Power Limited, Nishat Power Limited, Sapphire Electric Company Ltd, Halmore Power Limited and Saif Power Limited.
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