HUBC held its Corporate Briefing session today to discuss the company's performance for 1HFY22. To recall, HUBC reported 2QFY22 consolidated NPAT of PKR4.8bn (EPS: PKR3.70), down 42% yoy and 35% qoq. The result came in much lower than consensus, with the deviation stemming from a c.PKR1.5bn loss from associate vs. PKR4.1bn profits SPLY. HUBC did not announce any interim dividend as per consensus expectation, having already paid out PKR6.5/sh in Jan 2022 following receipt of its second tranche from the GoP.
Key takeaways from the briefing session:
Update on CPHGC operations:
HUBC reported a PKR1.46bn loss on associates in 2QFY22 emerging from the transformer failure at Unit-I of CPHGC and scheduled outage at Unit-II which took place in Jul-21. As a result, availability dropped to 47% for 1HFY22. Unit-I returned to service on 6 January 2002. Losses due to the damage are estimated at US$70-80mn. Nearly US$50-60mn will be recovered through insurance which will be finalized by Mar'22 with some insurance receipts expected by Jun'22. The insurance proceeds from the incident would amount to c. US$50-55mn after deductibles.
Dividends from CPHGC are delayed due to conditionality related to tariff true-up, project completion date and reversal of WHT on dividend to 7.5%. The establishment of a revolving account is a major conditionality from Chinese lenders. These issues are likely to be resolved in the next 3-4 months. Tariff true-up, however, is not the determining factor for a potential dividend payout from CPHGC. The current overdue receivables on CPHGC balance sheet stand at PKR41bn, and PKR58bn is the outstanding payable.
Update on the Hub base plant:
HUBC received PKR57.9bn in two tranches from the GoP, of which PKR45bn was paid to PSO. PKR6.4bn was received by Narowal in its first settlement from the GoP. The tariff reduction will lead to a PKR1bn drop in the Base Plant's earnings in FY22 with PKR3-5bn over the next two years for both the Base plant and Narowal combined.
The base plant’s PPA is expiring in March 2027 with 5 years to go. The sovereign guarantees remain intact under the PPA; however, issues remain regarding change of leadership and potential re-use or termination payment by the GoP. In the meanwhile, the base plant will continue to maintain optimum availability.
Other project updates:
The penalties for delays in COD of TEL and TNTPL would be ascertained after the projects come online in Jun-Jul 2022 and Sep-Nov 2022 respectively. TEL is almost 86% completed while TNTPL is 65% completed. Remaining funding for these projects stand at US$40mn, which is fully arranged.
Laraib Energy did not negotiate any settlement with the GoP in exchange for tariff reductions as HUBC and Narowal have.
Thar Railway track connectivity is specifically designed for Phase-3 of CPEC projects. Pakistan Railway Authority, CPEC Authority, SECMC and IPPs. The process will take 1.5-2years for commissioning. The total capacity is 4bn tons of coal to be transferred in the first phase to IPPs.
We have a constructive view on HUBC, which is nearing the end of its legacy issues; liquidity constraints should ease with recent bailouts. The fate of the base plant still hangs in the balance; however, commitment from the GoP (guaranteed ROE under PPA irrespective of dispatch) should alleviate interim fears. We think better yields should emerge as penalties and overdues are settled and CPHGC commences dividend payout. We have a TP of PKR127/sh on HUBC which offers a 74% upside from here.