Equity Analysis /
Pakistan

Hub Power: Q3 FY 19 results: Notable improvement in profitability

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    30 April 2019

    Hub Power Company Ltd (HUBC) posted consolidated Q3 FY 19 NPAT of PKR3,161mn (EPS: PKR2.44), up 6% yoy and 29% qoq, taking 9M FY 19 NPAT to PKR8,578mn (EPS: PKR6.61), up by 4% yoy. Earnings growth was led by: (i) sharp PKR devaluation, and (ii) penal income markup on outstanding receivables, which helped offset the impact of high finance costs (on working capital requirements). HUBC skipped dividends, in line with expectations.

    Key highlights include:

    • Net sales came off by 31% yoy, but up 3% qoq to PKR13,398mn attributed to low dispatch levels at the base plant (7% in Q3 FY 19), which remained shut in March. Narowal also generated a low 24% in Q3. That being said, there is a marked improvement in sequential dispatch levels, where load factor is expected to rise in the peak summer season.
    • Gross profits rose an impressive 30% yoy, driven by the impact of sharp PKR devaluation (20% yoy, 3.4% qoq) on HUBC’s dollar-hedged ROE and penal income on overdue receivables. 
    • Finance costs ballooned to PKR1,998mn, up 83% yoy, 24% qoq likely led by high working capital financing requirements and debt financing for equity investment in HUBC’s upcoming investment projects.
    • Share of loss from associates rose to PKR128mn versus PKR87mn in SPLY.

    9M FY 19 results highlights:

    • HUBC saw a 4% yoy increase in earnings to PKR8,578mn (EPS: PKR6.61) in 9M FY 19. Earnings have, however, flattened due to low O&M savings amid a drop in generation levels. Nevertheless, persistent bouts of PKR devaluation have helped push upwards dollarised returns for the plant (gross profits up by 15% yoy) and penal income received on overdue receivables (2.4x yoy increase). HUBC utilised funds from the recent PKR200bn energy sukuk to retire outstanding payments with its fuel supplier. That being said, room for dividend payout in Q4 may emerge with the issuance of a second PKR200bn sukuk in early May.

    While payouts may remain under pressure due to high financing requirements of ongoing projects, we think HUBC’s case has altered from a defensive play to a high growth play over the long term. HUBC has shed 8.5% CYTD and trades at an FY 19/20f PE of 7.44/6.29x, where we have a TP of PKR132/sh on the name.