The Hub Power Company Ltd: 1QFY11 Result Preview

1QFY11E earnings up 19% YoY: HUBC is scheduled to announce its 1QFY11 results on 27th Oct 2010. We expect the company to post PAT of PKR1,315mn (EPS: 1.14), up 19% YoY. On QoQ basis, earnings are expected to rise by 4%.

PCE component down 4.8% QoQ, USD indexation up 1.8% QoQ: The PCE component has seen a decline of 4.8% in 1HFY11 in comparison to 2HFY10. The PKR/USD indexation will be up by 1.8%.

Finance Cost down 16% QoQ, up 32% YoY: Finance cost is expected to fall by 16% QoQ. Net finance cost (finance cost less penal markup income) is estimated to fall by PKR0.1/share QoQ owing to higher internal funds for funding overdue receivables.

Investment perspective: At yesterday’s closing HUBC is trading at FY11E P/E of 6.0x and dividend yield of 15%. Currently HUBC offers an upside of 41% to our DDM based June’11 PT of PKR48/share.

PCE component down 4.8% QoQ, USD indexation up 1.8% QoQ

As per defined tariff profile of HUBC, the Project Company Equity (PCE) component faces a decline of 4.8% HoH in 1HFY11, before rising by 4% HoH in 2HFY11. The PKR/USD indexation will be up 1.8% in 1HFY11, leading to 3% QoQ decline in indexed PCE for 1QFY11.

Finance Cost to fall 16% QoQ; up 32% YoY

Finance cost for HUBC will likely fall by 16% QoQ, as we expect the company to have relied more on supplier payables to fund Wapda receivables. However, finance cost shall still be 32% higher on YoY basis. Net finance cost (finance cost less penal markup income) will likely trim by PKR0.1/share over the previous quarter owing to higher amount of shareholder funds funding overdue receivables. FY10 final dividend (PKR2.9bn) was paid by HUBC on October 7, 2010.

Investment perspective

At yesterday’s closing, HUBC is trading at FY11E P/E of 6.0x and a dividend yield of 15%. While delay in commencement of Narowal cause some concerns (due to absence of any guidance from the company for commencement date), we maintain our liking for the scrip. HUBC currently offers an upside of 41% to our DDM based June’11 PT of PKR48/share comprising PKR46/share from core operations and PKR2/share from Narowal. BUY!

Economic & Political News

Large-Scale Manufacturing (LSM) growth witnessed a decline of 3.5% during August 2010 of the current fiscal year due to negative economic indicators and high interest rates. While in the first month of the current fiscal year, LSM growth was satisfactory and stood at 4%, but once again it is on decline and posted less than 1% growth in first two months, however a decline of 3.5% in August 2010. Battle on political front, poor law and order situation, high interest rate and negative economic indicators pushed the LSM growth in a downward slide.
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