Equity Analysis /
Pakistan

Hub Power: Q1 FY 20 preview: Earnings likely to improve from here

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

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    Intermarket Securities
    29 October 2019

    HUBC is expected to post Q1 FY 20 NPAT of PKR3,586mn (EPS: PKR2.76), up 21% yoy, and 34% qoq led by (i) first share of profit from associate CPHGC following commercial operations (c48% dispatch in Q1) and (ii) PKR devaluation resulting in higher PCE. We do not expect any dividends to be announced. 

    Highlights: 

    • Net sales are expected to come off 39% yoy to PKR10,900mn driven by two months shut down at HUBC’s RFO based plant (1200MW plant – load factor: c1% in Q1 FY 20 vs. c5% in Q4 FY 19) and modest generation at Narowal (load factor: c43% vs. c24% in Q4 FY 19). This was due to lower demand by NTDC for expensive fuel based plants, where imported HSFO was not procured following Jul’19. 
    • 9% qoq PKR devaluation during Jan-Jun’19 may lead to higher dollar denominated returns, while we expect higher penal income on overdue receivables during the quarter. Consequently, HUBC’s gross margins are expected to improve to 45% vs. 44% in Q4 FY 19.
    • HUBC’s associate CPHGC became operational in May’19, where dispatch during Q1 FY 20 stood at a decent c48%. We expect the first quarterly profit from associates to clock in at cPKR2.5bn 
    • This should help to significantly cushion the impact of higher (non-pass through) finance costs led by debt financing for equity investment in HUBC’s upcoming investment projects and high working capital requirements. The run rate for finance costs is nearing PKR2.5bn/quarter vs. less than PKR1.5bn SPLY. 

    We expect this quarter to be a turning point for HUBC’s profits due to the commencement of share of profit from associates (CPHGC). However, dividends may remain under pressure till late-FY 21, in our view, given debt covenants attached with CPHGC dividend and financing of other expansion projects. HUBC has shed 12% CYTD and trades at a FY 20f P/E of 3.4x, where we have a TP of PKR130/sh on the name.

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