The Hub Power Company Ltd.

Transcription

1 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Aug-17 Sep-17 Pakistan Power Gen. & Distribution: HUBC Target Price: PKR Current Price: PKR Stock Data Price (PKR/Share) Reuters Bloomberg Website HPWR.KA HUBC PA 52-weeks High/Low (PKR) 138 /94 Dividend Yield 8% Market Cap (PKR bn) 129 Market Cap (USD mn) 1,230 Avg Daily Turnover (PKR mn) 141 Avg Daily Turnover (USD mn) 1.3 Shares Outstanding (mn) 1,157 KSE-100 Index Weightage (%) 3.7 Free Float 60 Source: PSX Share Price Performance 40% HUBC KSE100 Index 30% 20% 10% 0% -10% Source: PSX, BMA Research HUBC-Financial Highlights (PKR mn) FY17A FY18E FY19E Net Sales 101, , ,562 % change 10% 11% 7% Profit After tax 11,348 12,253 12,400 % change -9% 8% 1% To owners 10,689 11,651 11,748 EPS P/E DPS D/Y (%) 7% 7% 8% EBITDA 19,822 19,400 19,518 EV/EBITDA Source: Company Account, BMA Research The Hub Power Company Ltd. Company Report Materialization of future plans to augment growth Latest release of The Hub Power Company Ltd. (HUBC) detailed accounts provided clarity on its financing plans for expansion. With PKR21bn debt raised for the equity investment, HUBC is set to meet its ambition of doubling the capacity without resorting to further cut in payout, in our view. HUBC still retains the balance sheet flexibility to raise further risk capital. We have trimmed our DCF-based TP to PKR134 (down 2%) to account for funding cost and development on imported coal project and reiterate our Overweight stance. We base our thesis on: (i) stable earnings growth, (ii) upcoming triggers (coal power plant projects), and (iii) hedge to currency devaluation. At our new TP, the stock offers 20% upside from last closing, in addition to dividend yield of 7%. HUBC offers a PkR/USD IRR of 16/13% based on our estimates. Stellar performance by base plant given its age: Plant reliability and energy efficiency on base plant and other two major plants are the two big positives for HUBC which should allow the company to enjoy stable cash flows to maintain dividend at PKR8-11/sh in the mid-term. Base plant achieved thermal efficiency of 37.8% in FY17, close to benchmark. Similarly, efficiency on Narowal plant continues to remain ahead of target. We expect HUBC to continue working on plant efficiency, particularly on base plant (account for ~85% of company s earnings). Heightened focus on growth through expanding branches to bode well: With its sight on lifting capacity by 1650MW by FY20, HUBC is working on full pace to meet the targeted commissioning date of all its upcoming projects. Ground work on both imported (1320MW) and local coal (330MW) project has started even before their financial close. The requisite changes in shareholding in both the projects are unfolding with HUBC raising its stake to 47.5% in imported coal project, CPHGCL, a preferred IPP project under CPEC while dilution of stake in local coal project to optimum 60% is currently underway. HUBC s coal mining venture, Pakistan s first ever attempt to mine coal endowment in Thar, is scheduled to be operational by FY20 to produce 3.8mn tons in first phase. Future projects coupled with unique feature in base-plant tariff should allow HUBC to undergo 4-year earnings/dividend CAGR of 12/5%. Current Financial Health: As per the latest financials, HUBC s Return on Equity (ROE) is still above 30% mark with dividend payout of 80% (dip from average 96% in the last five years) however, financial leverage of the company stayed consistent at 28% even with uptick in long term borrowing. This supports our view of the company having sufficient cushion to enhance leverage. Sensitivity to PKR devaluation: HUBC offers a natural hedge to currency movement given tariff indexation to rupee devaluation for both existing and future projects. Likely depreciation of local currency against USD poses potential earnings upside to our thesis, where incremental 5% devaluation, may cause our earnings projection in FY18 to rise by ~0.52/sh (5% of FY18E EPS). Key risks to our investment thesis: (i) Energy efficiency: Significant dip in thermal efficiency will give birth to fuel losses for Narowal and enhance fuel losses of the base plant, (ii) delay in COD of upcoming projects may drag materialization of benefits to be reaped from them, and (iii) increase in interest rate which can raise financial cost for the debt raise to fund equity and may lower stock s attractiveness with respect to alternative assets. Research Analyst Rafia Hanif Ext (2062) rafia.hanif@bmacapital.com

2 Pakistan Revision in projection post release of detailed financials We tweak our estimates for Hub Power Company (HUBC) post release of detailed financials by trimming our EPS by 4-7% for FY18-FY20E. We now incorporate the impact of augmentation in long term borrowing by the company mainly driven by cash needed for investment in future projects. We have also lowered our DPS projection to PKR8.0 and PKR8.5/sh in FY18 and FY19 respectively, following lower payout by the company (81% from 99% in the last five years) in FY17. With the company expected to use a combination of internal cash flows and debt financing to account for future investments, we see continued likelihood of reduced payout for the next three years. After amendment to our assumptions, our new TP clocks-in at PKR134/sh (down 2% from the previous TP of PKR136/sh) led by up tick in finance cost and drop in HUBC s share in CHPGC by 1.5% to 46% holding. The stock offers lucrative IRR of 16%. Overall we maintain our Overweight stance on HUBC given (i) stable earnings growth, (ii) upcoming triggers (coal power plant projects), and (iii) hedge to currency devaluation. Financial Highlights (PKR mn) FY16A FY17A FY18E FY19E FY20E Net Sales 91, , , , ,766 % change -34% 10% 11% 7% 2% Profit After tax 12,501 11,348 12,253 12,400 13,163 % change 4% -9% 8% 1% 6% Attributable to owners 11,903 10,689 11,651 11,748 12,483 EPS P/E DPS D/Y (%) 10% 7% 7% 8% 8% EBITDA 20,826 19,822 19,400 19,518 19,588 EV/EBITDA Rise in debt for investment in coal projects Current energy mix FO 1517 Hydel 84 Total 1601 Future enerygy mix FO 1517 Hydel 84 Coal 1650 Total 3251 Source: BMA Research HUBC has entered into a long term financing agreement with various banks for PKR21bn with a mark-up of Kibor +0.25% to finance the equity portion of CPHGC, TEL and SECMC out of which drawdown of PKR1.6bn has been reported in FY17 accounts. As per our channel checks, management plans to raise PKR26.5bn in total for equity injection, out of which PKR21bn has been secured and the remaining (PKR5.5bn) amount will be raised by Islamic financing. Based on our initial estimates we believe the company may need debt financing of PKR19-22bn to payout somewhat consistent dividend while fulfilling its capex requirements. With financing of PKR21bn already on the cards, we reckon HUBC have sufficient cushion to manage current and upcoming financing needs. Future projects set to deliver earnings and payout growth With its sight on lifting capacity by 1650MW by FY20, HUBC is working on full pace to meet the targeted commissioning date of all its upcoming projects. The requisite changes in shareholding in both the projects are unfolding with HUBC raising its stake to 47.5% in imported coal project, CPHGCL, a preferred IPP project under CPEC while dilution of stake in local coal project to optimum 60% is currently underway. HUBC s coal mining venture, 2

3 Pakistan Pakistan s first ever attempt to mine coal endowment in Thar, is scheduled to be operational by FY20 to produce 3.8mn tons in first phase. Details have been provided below: 1# Slight change in shareholding of CPHGCL: HUBC as part of a joint venture (JV) has invested in China Power Hub Generation Pvt. Limited (CPHGCL), where last year management decided to increase its holding from 26% to 47.5%. Ground work for the project has already started to meet its targeted COD of Aug 19 even though Financial Closure (FC) has not been achieved. To note, FC for the project recently got extended to Dec 17 however, channel checks suggest chances of it to be achieved sooner (Oct 17). Furthermore, HUBC signed a Memorandum of Understanding (MoU) with its JV partners to allocate 3.0% (1.5% each) holding of the project free of cost to the Government of Baluchistan before the project s COD. This in our view, has been done to pay back to the province and put a hold on concerns raised by environmental protectionist earlier. Based on our initial estimates this project adds PKR30/sh to HUBC s valuation which has been downgraded from PKR34/sh (to incorporate the impact of lower share in earnings (46%) while maintaining the higher (47.5%) share in equity injection). Our estimates for this project is based on assumptions of (i) zero fuel and O&M savings, (ii) PKR devaluation of 4% annually, and (iii) equity portion to be financed by debt financing. 2# Inclusion of TEL to raise TP for HUBC: Significant progress has been made in Thar Energy Limited (TEL), which is a 300MW local coal based project; ground work for this project has also started where Coal Supply Agreement (CSA) and Power Purchase Agreement (PPA) has been signed in May 17and July 17, respectively. Assuming no fuel savings and equity fraction to be financed by debt, we estimate TEL has the potential to add PKR18/sh to our valuation. This has not been incorporated in our TP for the company as we await clarity on how much ground work has been completed. Upcoming Projects Project Cost Name Holding COD (USDmn) Plant's Life Financial Close Equity injection (USDmn) CPHGCL 48% FY20 2, years Awaiting 238 TEL 60% FY years Awaiting 75 SECMC 8% FY years Achieved 11 Project Wise Earning s Share Base Plants share Narowal Laraib CPHGC SECMC 100% 80% 60% 40% 20% 0% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 3

4 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Pakistan Stellar performance by base plant given its age Plant reliability and energy efficiency on base plant are two big positives in FY17 which allowed the company to fully benefit from the uptick in tariff on base plant. To note, base plant has been operational since 1997 and is currently running at 38% thermal efficiency (in-line with its tariff approved efficiency). Post major overhauling; earnings set to enhance Major overhaul of base plant (unit 1 and 3) was conducted in FY17, which caused dip in loadfactor (64% VS 72% in FY16) led by lower plant availability. However given that no scheduled shutdown is projected in FY18, we believe load factor shall go up which will give boost to the top-line of the company. Additionally, O&M expenses may also be on the lower end given no major overhauling scheduled for FY18. However incremental finance cost may dent the bottom line. To note, unique tariff structure of the base plant with rising Project Company Equity (PCE) component may significantly enhance HUBC s bottom-line from FY22 onwards. Generation Details Load factor (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17 Base Plant 77% 74% 73% 67% 65% 72% 64% Narrowal 13% 70% 44% 83% 76% 62% 71% Generation (GwH) Base Plant 8,115 7,770 7,673 7,087 6,810 7,547 6,693 Narrowal 237 1, ,562 1,418 1,162 1,334 Rising overdue does not impact HUBC s performance materially Overdue receivables recorded at PKR73.5bn in FY17 (up 5.3%YoY), which raises concern however, base plant has the luxury to delay payment to Pakistan State Oil (PSO) given that it has sovereign guarantee on fuel supply on the other hand Narowal plant does not have the same leeway and does face cash crunch just like other IPPs operating under 2002 policy. However with major contribution coming in from the base plant s performance, we believe hike in overdue does not impact HUBC much. Overdue receivables scenario Overdue from NTDC Overdue wapda Overdue to PSO Overdue from NTDC Source: BMA Research 4

5 Pakistan Demerger of Narowal Effective Apr 17, Narowal has been demerged into Narowal Energy Limited (NEL) and its earnings are reported in the unconsolidated statement till March 17 as profit from discontinued operations. Going forward we believe dividend income from NEL will become part of unconsolidated earnings. To note dividend income from IPPs is charged at a lower tax rate (7.5%) but this taxation is a pass through item and forms part of capacity payment. As per our sources, management has no intention to sell-off its holding in NEL as momentum of plans set out earlier is on track. Expanding of O&M segment Management seems keen on excelling in O&M segment, where inhouse operations have led to savings of USD7-8mn/annually for the base plant. We anticipate the management to take over O&M contract of Laraib Energy Limited (LEL) post expiry of current contract with Tenaga Nasional Berhad (TNB) REMACO Pakistan in Mar 18. The management seems to be on the right track to succeed in this segment; however with LEL we do not foresee a huge chunk of savings by conducting maintenance in-house given the plants lower generation capacity (84MW). Investment thesis We revise our TP for HUBC to PKR134/sh (down 2%) and maintain our Overweight stance with the stock offering upside of 20% from current level, in addition to dividend yield of 8%. Our liking for the stock is based on i) material progress being made on coal projects which are not only going to extend HUBC s life but shall also prove to be value addition, ii) stock performance and, iii) stable growth in earnings. Key risk to our thesis include (i) Energy efficiency: Significant dip in thermanl efficiency will give birth to fuel losses for Narowal and enhance fuel losses of the base plant (ii) Delay in COD of upcoming projects may drag materialization of benefits to be reaped from them (iii) Increase in interest rate which can raise financial cost for the debt raise to fund equity and may lower stock s attractiveness with respect to alternative assets. 5

6 Pakistan HUBC Financial Highlights (PKRmn) Income Statement FY15A FY16A FY17A FY18F FY19F Cashflow Statement FY15A FY16A FY17A FY18F FY19F Net Sales 137,846 91, , , ,562 PAT 12,010 12,501 11,348 12,253 12,400 Gross Profit 19,258 18,582 17,260 17,613 17,583 Non Cash charges 3,674 3,812 3,848 2,890 2,792 Operating Profit 18,181 17,320 15,894 16,381 16,652 Change in NWC 8,685 (2,171) 937 2,267 3,511 Other Income Oper. Cashflows 24,328 14,085 7,367 17,894 19,195 EBIT 17,859 17,014 15,974 16,510 16,726 Investing Cashflows (869) (1,726) (2,525) (1,924) (1,356) Finance Cost 5,690 4,135 4,081 3,790 3,826 Debt Payment (2,835) (4,902) (3,209) Tax Expense Financing Cashflows (12,351) (24,134) (10,500) (9,813) (14,373) PAT 12,010 12,501 11,348 12,253 12,400 Net Change in Cash 11,108 (11,774) (5,658) 6,157 3,466 Balance Sheet Key Ratios PPE 58,039 55,274 52,624 51,174 49,245 EPS (PKR) LT Assets 59,730 57,759 56,168 54,717 52,789 DPS (PKR) Current Assets 86,387 96, , , ,571 BVPS (PKR) Total Assets 146, , , , ,360 EBITDA 21,534 20,826 19,822 19,400 19,518 Equity 36,840 33,245 34,999 37,195 38,430 Gross Margins 14% 20% 17% 16% 15% ST Borrowing 10,963 16,540 24,847 24,896 24,037 Net Profit Margin 9% 14% 11% 11% 10% Current Portion 5,284 5,380 6,097 2,991 2,991 P/E ratio Current Liabilities 78,046 92, , , ,323 P/B Ratio LT Loans 28,329 25,843 21,333 21,576 18,367 EV/EBITDA LT Liabilities 36,840 33,245 34,999 37,195 38,430 Other Income Equity & Liabilities 146, , , , ,360 6

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8 Old rating system (discarded effective Feb 29 16) Buy Accumulate Hold Reduce Sell >20% upside potential >=5% to <=20% upside potential <5% to >5% potential <=-5% to >=-20% downside potential <-20% downside potential Valuation Methodology To arrive at our period end target prices, BMA Capital uses different valuation methodologies including Discounted cash flow (DCF, DDM) Relative Valuation (P/E, P/B, P/S etc.) Equity & Asset return based methodologies (EVA, Residual Income etc.)