Equity Analysis /

Hub Power: 9MFY20 analyst briefing takeaways

  • HUBC held its 3QFY20 Analyst Briefing today and has taken this opportunity to put to rest allegations against IPPs

  • The GoP will be conducting a forensic audit which would help clear any irregularities in IPP profits

  • While capacity payments may be delayed, it’s unlikely to lead to an impasse between the GoP and the IPPs

Yusra Beg
Yusra Beg

Senior Investment Analyst

Intermarket Securities
29 April 2020

Hub Power Company held its 3QFY20 Analyst Briefing today to discuss its financial performance. HUBC posted 3QFY20 consolidated NPAT of PKR7,201mn (EPS: PKR5.55), up 2.3x yoy, and 31%qoq. This takes 9MFY20 NPAT to PKR18,253mn (EPS PKR: 14.07), up 2.1x yoy.

HUBC’s performance 

During the 9M period, the Base plant, Narowal and Laraib operated at a load factor of 8.6%, 37% and 40% respectively while showing 90%+ availability.

Regarding project timelines, Thar Energy/TEL (330MW) will become operational in 2Q2021, Thal Nova/TNTPL (330MW) will achieve COD in 1Q2022. On the requirement of the Govt. the project execution began well ahead of the financial close. TEL has achieved financial close in Jan’20 with 55% construction activity while TNTPL will achieve financial close in 2Q2020 and has completed 23% construction activity.

TEL has begun to translate project management income to HUBC after achieving financial close on 30th Jan’ 2020.

Issues being faced by the Power sector

  1. Currently, all companies are in strict compliance with the contracts made with the GoP. The GoP will be conducting a forensic audit which would help clear any irregularities in profits made by IPPs in contravention of contractual agreements by IPPs.
  2. The second issue is regarding the rise in capacity purchase price (CPP or capacity payments). This problem has arisen after multiple new plants achieved commercial operations adding on to the pile of capacity payments to be paid by the Government. This was followed by a decline in economic activity (pre-dating Covid-19), leading to supply outpacing demand and resultantly increasing fixed costs. The GoP has approached IPPs to come to an agreement and IPPs are seemingly on board to aid the Government. However, the majority of the capacity payments arise from debt repayment (principal and interest) which is being addressed on a Government to Government basis since the loans are internationally procured (particularly for Chinese projects). Locally the banks are being approached for concessions. HUBC’s total outstanding CPP receipts stand at PKR38bn.

Focus on FO plants and allegations are overblown

HUBC management has claimed that certain allegations made in a report made public to the media are unfounded. The management is of the opinion that FO based capacity payments are less than PKR100bn out of the PKR600bn private power sector circular debt. The remaining capacity issues stem from inefficiencies in the distribution system and governance issues of Gencos, where 50% of the total power generation in Pakistan is through publicly owned plants. 17,000/18,000MW is required in peak summer months, which according to the management would require FO based plants to perform. 

Chinese lenders asked to provide relief on loan terms for CPEC projects

The Government has requested Chinese lenders to provide relief on terms of the loans provided to IPPs for CPEC projects. These include an extension in loan tenors from 10yr to 20yrs which may spread out the principle repayment burden and a reduction in the spread over LIBOR from 4.5% to 2.5%.

Contract with K-Electric should not impact the base plant’s ROE

HUBC is in detailed discussion with the GoP to convert two units (323MW x2) of its base plant (1200MW) under the MOU signed with KEL. This conversion would in no way affect the ROE of the base plant and would result in a win-win situation for the Government as half of the capacity burden would be borne by KEL.

We think the Analyst briefing should invite much confidence in the current environment. While capacity payments may be delayed, it is unlikely to lead to an impasse between the GoP and the IPPs, particularly with funds under the Energy Sukuk-II to be released mid-next month according to the management. HUBC trades at an undemanding FY20f P/E of 3.9x, where we have a TP of PKR134/sh on the name.