Morning Briefing for Mar 26, 2012 – Standard Capital

Karachi: HUBC material information

The group companies of Dawood Hercules (DAWH) and CYAN has informed Karachi Stock Exchange (KSE) that they have acquired holdings in HUBC from National Power International Holdings BV at a price of Rs 31/sh.

According to Standard Capital,

The break up is as follows:

• HUBC’s 35.48mn shares went to DAWH and
• 102.26mn shares went to DH Fertilizers Ltd.
• CYAN – formerly Central Insurance Company has also acquired 32.26mn shares

The exit of UK based National Power of UK does poses a concern for those long term investors who used to consider HUBC a long term defensive play. They used to cash into its dividend stream i.e. dividend yield used to hover at 14% – 15% above any bank deposit return. Hence it used to be considered as a hedge against inflation.

Now with the exit of National Power, the fear is that this dividend may not be paid in the same customary manner as it used to be during the earlier project life of the company. Since early 90’s till today, the dividend stream used to be designed like U-shaped tariff that used to go along with US$ – PKR parity and US CPI. Standard Capital expects the stream of dividend should continue to go in the similar manner.

Standard Capital thinks DAWH group, which is also renowned in Pakistan, shall allay those fears of the investors.

Red flags
Technically speaking, the change of hand of shares from one party to another does not pose a risk but in the context of Pakistan, this deal does add lot of connotations. They include DAWH’s own situation which is marred by frequent non-supply of feedstock gas from SNGPL network. Some of the other companies of the group are also affected through these frequent disruption issues wherein HUBC too is engulfed with circular debt issue wherein its huge receivables may be to the tune of Rs 70 or more have been stuck up with PEPCO and in return it is plaguing Pakistan State Oil (PSO) who supplies fuel oil to HUBC.

The exit of National Power of UK is also a bad thing for Pakistan since it shows foreign investors disgust over lingering circular debt problem wherein government of Pakistan (GoP) is still unable to resolve non-payment issue which is very much related to restructuring of PEPCO and Wapda.

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