Equity Analysis /
Pakistan

Hub Power: FY 19 annual general meeting takeaways: Balance between expansion and payouts

    Yusra Beg
    Yusra Beg

    Senior Investment Analyst

    Intermarket Securities
    24 October 2019

    Hub Power Company Ltd (HUBC) posted consolidated Q4 FY 19 NPAT of PKR2,663mn (EPS: PKR2.05), down 4% yoy and 16% qoq taking FY 19 NPAT to PKR11,241mn (EPS: PKR8.67), up 2% yoy. Growth was driven by sharp PKR devaluation and penal income markup on outstanding receivables, which helped offset high finance costs. HUBC skipped dividends, in-line with expectation. 

    HUBC trades at a FY 20f P/E of 3.5x where we have a Buy rating with a Jun’20 TP of PKR130/sh on the name.

    Plans for the base plant and circular debt

    • HUBC management is striving for a balance between expansion and payouts; however, with multiple new projects (water desalination, base plant retrofit, remaining funding for Thal Nova), a clear payout policy is not yet chalked out, in our view.
    • The company does not foresee any working capital issues for the new plants, but they have still availed guarantee from the sponsor in case the banks refrain from lending.
    • HUBC is looking to convert two of the four RFO-based units of its base plant (1,200MW) to imported coal. This may entail a moderate capex, as per management, at about US$200mn per unit. Presently, HUBC is seeking approval from the government to undertake this project. The project will help in reducing the overall cost to the power purchaser and push the base plant up the merit order (enhancing its relevance), as the power purchaser is still liable to pay capacity payments (CPP) to the base plant.
    • HUBC management is actively pursuing three reverse-osmosis water desalination projects worth US$105mn cumulatively: (i) DHA project providing 5mn gallons/day, (ii) waste water treatment of 470k gallons released into the sea by the Sindh Govt. and (iii) reverse-osmosis for a smaller project.

    Expansion projects and SECMC 

    • There is a cushion against circular debt for the new plants. Because they are CPEC projects, the govt. has agreed with Chinese investors to set up an escrow account in which it will pay 22% of the accruing payments of the new plants.
    • Thar Energy Ltd’s (TEL) financial close is scheduled for Dec’19 and is on track to achieve COD by 30 Mar’21, where over 30% construction has already been complete. The project cost of this plant covers any liquidated damages that may occur in case of delays and will not eat into the ROE of the plant, when it comes online. This is in reference to news reports that HUBC will have to bear penalties for delaying the commissioning of the TEL project, in order to compensate the new transmission lines which have been laid down to cater to the plant.
    • SECMC’s Phase-I has achieved commercial operations and is catering to Engro’s coal plants. The coal produced from the second phase (expected to commence Dec’19) will supply to TEL and Thal Nova.

    Miscellaneous 

    • Withholding tax charge of 15% under the Finance Act 2012 is being contested and is likely to remain at 7.5% for new plants.

    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.