NPL – FY11 earnings with no payout a disappointment but respite could be near

FY11 EPS recorded at PKR5.31: NPL posted PAT of PKR1.88bn (EPS: PKR5.31), with no payout. PAT for 4QFY11 stood at PKR51mn (EPS: PKR0.14), down 92% QoQ.

Operational costs likely on the higher side: 4QFY11 gross profit was below our expectation by PKR1.57/share. We expected fuel and O&M savings to contribute PKR0.75/share for 4Q. While detailed accounts remain unavailable, lower utilization of 79% during 4Q highlights possibility of increased maintenance activity during the period. Also, penal markup on overdue receivables, expected at PKR0.80/share could possibly have not been booked during 4Q.

Stoppage in daily payments by PEPCO could have restricted payout: NPL, along with eight other IPPs invoked sovereign guarantee for the second time on August 25, 2011. In response, Pepco has stopped daily payments to NPL since August 30, 2011 which has further worsened cash flow situation of IPPs. NPL could possibly have withheld its dividends in order to fund fuel requirements during notice period.

Payout could occur as soon as liquidity issues are resolved: We expect NPL to pay dividends with 1Q or 2Q FY12 results after the liquidity crisis is resolved. Recent agreement by Ministry of Water & Power with IPPAC to resolve liquidity issues of IPPs has increased the likelihood of relief to IPPs in the near term.

Investment Perspective: At current levels, NPL offers an upside of 40% to our Jun-12 PT of PKR18.5/share with FY12 dividend yield of 32%.  However, we highlight the risk of worsening of circular debt, which could further create problems for NPL as the company is highly leveraged.

Operational costs likely on the higher side

NPL’s gross profit for 4QFY11 was below our expectation by PKR1.57/share. We expected O&M savings and fuel savings for 4QFY11 to contribute PKR0.55/share and PKR0.20/share respectively. Lower than expected gross profit could possibly have resulted from increase in operational costs for the quarter. Generation for the quarter stood at 338Gwh, at a load factor of 79%, against 88% during 9MFY11, indicating likelihood of increase in maintenance activity during the period. Also, penal markup on overdue receivables was expected at PKR0.80/share, which could possibly have been withheld by pepco and not booked during 4Q.

Stoppage in daily payments by PEPCO could have restricted payout

As per media sources, NPL along with eight other IPPs invoked sovereign guarantee for the second time on August 25, 2011 and Pepco has stopped daily payments of NPL since August 30, 2011 which account for almost 50% of the fuel costs. Average monthly fuel cost for NPL at current FO prices, stands at PKR1.7bn, thus, NPL could possibly have withheld its annual dividends in order to fund fuel requirements during the one month notice period up to September 25, 2011.

Payout could occur as soon as liquidity issues are resolved

We expect NPL to pay dividends with 1Q or 2Q FY12 results as the issue of payments of pepco is resolved and the company gets relief from liquidity crunch. Ministry of Water and Power has recently agreed with IPPAC (Independent Power Producers Advisory Council) to resolve issues of overdue amount of IPPs, indicating the likelihood of relief for the IPPs in the near term.

Economic & Political News

Inland Revenue collection target fixed at PKR1, 737bn

FBR has fixed Inland Revenue collection target as PKR1737bn and customs duty at PKR215bn to meet target of PKR1952bn.

Ministry agrees to resolve IPPs overdue amount

Ministry of Water and Power has agreed to resolve the issue of IPPs as it called Pepco to curtail the gradually increasing arrears of 9 IPPs up to PKR46bn.
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