KAPCO: 1HFY12 EPS expected at PKR3.05

Result expectation: Kot Addu Power Company is scheduled to announce its 1HFY12 financial results on February 15, 2012. We expect the company to post PAT of PKR2.68bn (EPS: PKR3.05), down 6% YoY and pay an interim dividend of PKR3/share. 1QFY12 EPS is expected at PKR1.68, down 18% YoY.

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CPP component for 2QFY12 up 2% YoY: Capacity Purchase Price (CPP) applicable for 2QFY12 is expected to increase by 2% YoY, driven by 4% rise in escalable component which houses equity holders’ returns amid 11% drop in non-escalable (debt) component of tariff. Rise in escalable component is expected on the back of 1% PKR depreciation and US CPI growth of 2.8% during FY11 (applicable for 1HFY12 revenues).

Net spread income to contribute PKR0.14/share: Net spread income on overdue receivables for the quarter is expected at PKR196mn (after tax earnings impact of PKR0.14/share), down 57% YoY mainly due to increased reliance on expensive fuel supplier credit.

Maintenance project completion to boost efficiency: We expect utilization of KAPCO to remain low at 50%, on account of maintenance project completion during the quarter. KAPCO is expected to realize efficiency gains during 2HFY12 onwards and thus FY13 EPS/DPS would increase by 19%/24%.

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Investment Perspective: KAPCO is currently trading at FY12 PER of 5.8x and offers dividend yield of 16% for FY12. The scrip currently offers an upside of 35% to our DDM based Dec-12 PT of PKR56/share and real USD IRR of 15% over the remaining term of the PPA.

CPP component for 2QFY12 up 2% YoY

We expect Capacity Purchase Price (CPP) for 2QFY12 to rise by 2% YoY, primarily on the back of 4% rise in escalable component as non-escalable debt component of tariff is expected to decline by 11% YoY. Escalable component houses shareholders’ returns of IPPs. Indexation factor applicable for 2QFY12 was the major contributor to the increase in escalable component as KAPCO has flat tariff profile. Indexation factor growth of 4% was driven by 1% PKR depreciation and US CPI growth of 3% during FY11 (applicable for 1HFY12 revenues).

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Net spread income to contribute PKR0.14/share

Overdue receivables of KAPCO are expected to have remained at 1QFY12 level of PKR65bn, as the company received PKR8-10bn monthly during the quarter. We thus expect net spread income on overdue receivables to clock in at PKR196mn (after tax earnings impact of PKR0.14/share), down 57% YoY. Decline in net spread income is expected on the back of increased reliance on fuel supplier credit with exhaustion of bank borrowing limits. KAPCO earns a positive spread of 1-2% on funding overdues via ST borrowings as compared to using fuel supplier credit as source of funding where it earns a negative spread of 2%.

Maintenance project completion to boost efficiency

Generation for the quarter is expected to remain low at 1,469Gwh, at a load factor of 50% due to completion of efficiency/maintenance project. Maintenance project completion would improve efficiency of KAPCO by 0.16pp (0.78gms/kwh) and thus KAPCO is expected to realize strong earnings growth during FY13. FY13 EPS and DPS are expected to grow at 19% and 24% respectively.

Economic & Political News

Fuel prices rise by up to 6%

Ogra has raised the per litre price of petrol by PKR5.37, High Speed Diesel (HSD) by PKR4.64, High Octane Blending Component (HOBC) by PKR6.29, kerosene oil by PKR2.78 and Light Diesel oil (LDO) by PKR3.43. The new per-litre price of petrol is PKR94.91, kerosene oil PKR92.02, HOBC PKR118.20, LDO PKR90.21 and HSD PKR103.46.
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