Equity Analysis /
Pakistan

Hub Power: FY 19 preview: Flat earnings growth, no payout expected

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    6 September 2019

    HUBC is expected to post Q4 FY 19 NPAT of PKR2,717mn (EPS: PKR2.09), down 2% yoy, taking FY19 NPAT to PKR11,294mn (EPS: PKR8.71), up 2%yoy. We do not expect any dividends to be announced, alongside results (none announced during the year). 

    Net sales are expected to come off 53% yoy to PKR12,210mn driven by low dispatch levels at both of HUBC's RFO-based plants (Base plant: 5% in Q4 FY 19 vs. 58% in SPLY; Narowal: 24% vs. 99% in SPLY). This was due to lower demand by NTDC for expensive fuel-based plants. To put into context, overall RFO-based power generation was down 60% yoy during the period.

    PKR devaluation of 5% qoq during Q4 should lead to higher dollar-denominated returns, while delays in PKR200bn Sukuk issuance should result in better cash-flows and higher penal income on overdue receivables during the quarter. 

    This should help offset the impact of higher (non-pass through) finance costs due to high debt financing for equity investment in HUBC's upcoming power projects and high working capital requirements. The run rate for finance costs has doubled to PKR1.8bn/quarter vs. PKR1.1bn in the same period last year.

    Note that this will be the first year since 2000 when HUBC will skip dividends in a year. In anticipation of this, the stock has corrected 23% in the past 12 months. While near-term payouts may remain under pressure, we think HUBC's case has evolved from defensive to a high growth play (huge capital upside), while dividends should also resume albeit with a small lag. HUBC trades at undemanding valuations (FY 20f PE of 3.2x), where we have a Buy stance and a TP of PKR130/sh on the name.

    Risks: (i) Higher-than-expected delays in dividend payouts on higher capital requirements for expansion projects, (ii) inability to meet debt/asset ratio criteria for sharia compliance, (iii) continued circular debt pile up, (iv) delays in COD of new projects.