Pearl Securities Limited – Hub Power Company Limited

Karachi, February 16, 2015 (PPI-OT): Synopsis

Hub Power Company Limited (HUBC) will be announcing financial results later today. Completion of plant overhaul and drastic reduction in input fuel, HSFO, is expected to improve power generation and gross margins to derive outstanding growth.

Improving core operations will be the main factor behind growth in the period under review. NPAT for 1H FY15 is expected to show triple digit growth of 101% YoY to clock in around PKR 5.9bn (EPS: PKR 5.1) against net income of PKR 2.9bn (EPS: PKR 2.5) achieved in the corresponding term last year. Pearl Securities Limited expects management to issue second interim cash dividend of PKR 3.5/share along with half year results.

Overhaul and maintenance to improve generation

After major overhaul at the Hub plant and completion of scheduled maintenance at the Narowal plant, HUBC showed improved load factor and electricity generation during 1Q FY15. Pearl Securities Limited expects the company to maintain this trend in 2Q FY15 and show load factor of 75% at the Hub plant and 87% at Narowal plant with respective generation levels of 1,989GWh and 408GWh.

Total power generation for 2Q FY15 is expected to be around 2,397GWh, greater by 18% YoY against 2,027GWh in the same period last year. 2Q FY15 revenue is expected at PKR 44.7bn, up by 12% YoY but lower by 2% on quarterly basis.

Overall 1H FY15 generation levels are expected to be around 4,852GWh, greater by 18% YoY against level of 4,100GWh (YoY). Accounting for better electricity production, Pearl Securities Limited estimates revenues to grow by 16% YoY in 1H FY15 to reach PKR 90.4bn.

Lower HSFO prices to elevate gross margins

Significant reduction of HSFO rates by as much 22% during 2Q FY15 are expected to have a positive impact on gross margins by controlling the ‘Fuel Cost’ component of operating costs. Pearl Securities Limited expects gross margin for 2Q FY15 to be around 13%, improving substantially by 692bps YoY and by 520bps QoQ. Overall half year margin is likely to be 10.4%, up by 363bps YoY. Gross profits are expected to grow by as much as 79% YoY in 1H FY15 and by 63% YoY and 79% QoQ in 2Q FY15. Investors must consider all positive factors including dividend yield of 10% and benefiting from higher generation units for sale with the lower P/Ex of 9.1x. TP@PKR92/share.

Financial Highlights (PRS in million)
2QFY15 %Change 1HFY14 1HFY15 %Change
Turnover 44,673 -2% 77,820 90,427 16%
Operating costs (38,874) -8% (72,592) (81,069) 12%
GROSS PROFIT 5,799 63% 5,228 9,358 79%
General and admin expenses (176) 7% (261) (341) 30%
Other income 9 37% 72 15 -80%
PROFIT FROM OPERATIONS 5,632 66% 5,039 9,033 79%
Finance costs (1,823) 40% (2,101) (3,129) 49%
PBT 3,809 82% 2,939 5,904 101%
Taxation (2) 293% (2) (2) 14%
PAT 3,807 82% 2,937 5,902 101%
EPS (PKR) 3.29 82% 2.54 5.10 101%

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