Morning Call about Hub Power Company Limited – Arif Habib Limited

Karachi: HUBCO’s earning dipped by 2% (YoY) in 1QFY12

In its 1QFY12 unconsolidated results, the company posted profit after tax of PKR1, 241mn (EPS: PKR1.07), depicting flat YoY earnings.

According to Arif Habib Limited, although gross profits improved by 61%YoY but a massive 218% growth in financial charges curbed the growth in company’s bottom line. This growth in financial charges was mainly led by 47%YoY increase in short terms borrowings which settled at PKR17, 571mn as of Sept’11.

During the period under review the Hub plant operated at an average load factor of 74% whereas the plant availability stood at 87%, On the other hand Narowal plant operated an average load factor of 77% with plant availability at 77.5%. Both the plant generated total 2,377 Gwh of electricity in 1QFY12,

 

Financial Highlights (PKR million)1QFY121QFY11  % Chg.
Turnover40,71825,20062%
Operating Cost 37,62623,27462%
Gross Profits 3,0921,92661%
Other Income151051%
General and Admin Expenses87108 -19%
Finance Cost1,779 559218%
PAT1,2411,269-2%
EPS1.07 1.10-2%
Source: AHL Research

 

Increase in Financial Cost due to rising in Circular Debt

Due to souring circular-debt situation company’s finance cost increased by 218% YoY from PKR 559mn to PKR 1,779mn in 1QFY12. The company has to pay almost PKR 81bn to Pakistan State Oil (PSO) on the account of fuel supply. At the end of 1QFY12 company has receivables of PKR 97.4bn from WAPDA and PKR 8.42bn from National Transmission and Dispatch Company Limited (NTDC) pertaining to circular debt of which PKR 89.7bn and PKR 6.03bn respectively are classified as overdue. Due to delayed payments from WAPDA and NTDC the company was forced to avail its running finance facilities. The company’s receives penal interest from WAPDA at State Bank of Pakistan’s (SBP) discount rate plus 2% per annum compounded semi-annually.

Outlook

Going forward Arif Habib Limited expects company’s earnings will likely emanate from rising PCE component along with indexation factor (Narowal expansion and Laraib Project, operational commencement Jun’13 estimated). This in Arif Habib Limited’s opinion will likely push company’s earning to the tune of PKR 6,805mn (EPS: PKR 5.88) and will pay a dividend of PKR 5.9/share in FY12. This will translate into a dividend yield of 16.0% in FY12. According to the Power Purchase Agreement (PPA), company has a USD based IRR of 17.05% whereas in PKR term, company has an IRR of 19.31%

Arif Habib Limited’s Jun’12 target price of PKR 49.9/share offers an upside of 36%

Arif Habib Limited’s Dividend Discount Model (DDM) based target price for Jun 2012 works out to be PKR 49.9/share, which offers an upside potential of 36% from its last closing price of PKR 36.82/share. Beside attractive upside potential, the stock offers FY12F dividend yield of 16.0%, making it one of the best defensive play in the market. Thus Arif Habib Limited recommends BUY.

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