Electrifying returns on offer

Transcription

1 D e c e m b e r 2 7, Power Sector POWER GENERATION & DISTRIBUTION Pakistan Electrifying returns on offer Promising returns ahead despite recent underperformance Power sector has underperformed the benchmark KSE-100 index by 23% during 2016TD vs. KSE-100 return of 42%. We believe the power sector has unexploited opportunities with our JS IPP cluster forecasted to provide lucrative dividend yield of 11% in the next one year. The sector in Pakistan, currently surrounded by China Pakistan Economic Corridor (CPEC), is expected to remain under limelight owing to (1) expansion projects, (2) resolution of energy crisis, (3) change in fuel mix tilting towards coal and (4) potential softening of circular debt, going forward. Out of seven stocks under our coverage in Pak Power space, five companies are set to expand or convert fuel source for electricity generation under the CPEC. In addition, potential Pak Rupee depreciation against the Greenback and rise in US CPI would further strengthen sectors bottom-line. We recommend BUY stance on (1) Pakgen Power (PKGP TP: Rs47), (2) Lalpir Power (LPL TP: Rs46), (3) K- Electric (KEL TP: Rs14), (4) Nishat Power (NPL TP Rs81), (5) Kot Addu Power Company (KAPCO TP: Rs107), (6) Nishat Chunian Power (NCPL TP: Rs59) and whereas we present a HOLD stance on Hub Power Company Limited (HUBC TP: Rs120). Upcoming capacity additions to end rolling blackouts CPEC, a joint venture of Pakistan and China under the larger One belt one Road plan is expected to add 17,045MW (worth ~US$33bn of power projects) to the national grid by 2030, where 10,400MW being in the priority projects list (worth ~US$20bn) would come online by Pakistan is currently the third lowest energy consumption country across the globe (0.47MWh consumption per capita vis-à-vis global average of ~4.01MWh), implying enormous potential for capacity additions. The country is experiencing severe power shortages, wherein electricity demand has reached a high of ~25,000MW while supply hovers around 19,000MW, resulting in a demand-supply deficit of more than ~6,000MW. Interesting to note, electricity demand has increased by a CAGR of ~2.7% over the past five years while only 1,481MW (~1.2% CAGR) were installed during the same period. Moreover, lower power load on inefficient GENCOs (efficiency: 18%-34%), has kept power generation below available capacity. Note that, during FY15, actual availability for National Transmission and Dispatch Company (NTDC) system and K-Electric averaged at around 94% and 81%, respectively. Improved transmission network to overcome inefficiencies During FY16, the NTDC system has been enhanced by the addition of 4,200 MVA and 3,680 MVA of transformation capacity at 500kV and 220kV grid stations, respectively. While, under medium term projects (expected to be completed by FY17), 1,800MVA and 3,430MVA is expected to be added at 500kV and 220kV, respectively. Further, 1,637km and 426km of 500kV and 220kV transmission lines, respectively to support this plan will also be laid, going forward. Under long-term projects (expected completion by the end of FY20), 4,500MVA transformation capacity at 500kV and 6,000MVA at 220kV grid stations are to be added. A further network of 1,099km at 500kV and 543km long 220kV transmission lines are also envisaged under the long-term plan. Moreover, in order to reduce losses, control Mehwish Zafar mehwish.zafar@js.com Ext: 3096 Recommendation Summary Stock Rating TP Upside LPL BUY % PKGP BUY 47 93% KEL BUY 14 51% NPL BUY 81 39% KAPCO BUY % NCPL BUY 59 6% HUBC HOLD 120-4% Source: JS Research Sector FY17/2017E Relative Valuation Stock PE DY LPL % PKGP % KEL % NPL % KAPCO % NCPL % HUBC % Source: JS Research Completed on Dec 27, 2016 Distributed on Dec 27, 2016 All prices are as of Dec 26, Research is available on Bloomberg, Thomson Reuters, CapitalIQ & Please refer to the important Disclaimer on the last page Research Entity Notification Number: REP-084

2 theft, improvement of service delivery to consumers and effective revenue recording, authority plans to introduce smart/prepaid meters for all DISCOs. CPEC Energy Projects MW Est. Cost (US$ mn) Category 1 Port Qasim Electric company Coal fired, Sindh 1,320 1,980 Priority 2 Sahiw al 2x660 MW Coal-fired Pow er Plant, Punjab 1,320 1,600 Priority 3 Engro Thar 4x330 MW, Sindh 1,320 1,000 Priority Surface mine in Block II of Thar Coal field, 6.5mpta, Sindh 860 Priority 4 Gw adar Coal Pow er Project, Gw adar Priority 5 HUBCO Coal pow er plant 660MW, Balochistan Priority 6 Rahim Yar Khan Coal Pow er Project, Punjab 1,320 1,600 Priority 7 SSRL Thar Coal Block 6.5mpta, Sindh 1,300 Priority SSRL 2x660MW mine mouth pow er plant 1,320 2,000 Priority 8 Quaid-e-Azam 1000MW Solar Park, Punjab 1,000 1,350 Priority 9 Daw ood 50MW w ind farm, Sindh Priority 10 UEP 100MW w ind farm, Sindh Priority 11 Sachal 50MW Wind Farm, Sindh Priority 12 Sunnec 50MW Wind Farm, Sindh Priority 13 Suki Kinari Hydropow er Station, KPK 870 1,802 Priority 14 Karot Hydropow er Station, AJK 720 1,420 Priority 15 Matiari to Lahore Transmission Line 1, Matiari to Faisalabad Transmission Line 1,500 A Total (Priority) Projects (MW) 10,400 19, Gadani Pow er Park Project (i) 2x660 MW 1,320 3,960 Actively Promoted (ii) Jetty + Infrastructure 1,200 Actively Promoted 18 HUBCO coal pow er plant Actively Promoted 19 Salt Range Mine Mouth Pow er Project including mining Actively Promoted 20 Kohala Hydel Project 1,100 2,397 Actively Promoted 21 Pakistan Wind Farm II (Jhampir, Thatta) Actively Promoted 22 Thar mine mouth oracle 1,320 1,300 Actively Promoted 23 Muzaffargarh Coal pow er plant 1,320 1,600 Actively Promoted 24 Gas Pow er Plant 525MW Actively Promoted B Total (Actively promoted) 6,645 12,927 Total (energy projects) A+B 17,045 32,803 Source: Planning Commission of Pakistan Circular debt - Where does it stand? Following the clearance of circular debt arrears (Rs480bn) back in 2013, which incurred from (1) delayed government subsidies, (2) major reliance on imported fuels and (3) expensive power generation mix; GoP has maintained stock of circular debt within ~Rs300bn over the past 2 years. Note that, thermal fuel source contributes more than 60% to country s generation pie, within which oil, gas and coal make up ~37%, ~27% and ~0.14% respectively. Nevertheless, we highlight changing fuel mix of country, where majority of upcoming power projects are coal and LNG based (cheaper fuel sources) would potentially curtail the curse of Circular Debt going forward. While liquidity position of some IPPs such HUBC and KAPCO has remained immune to the curse of circular debt as these companies have been able to partially transfer the burden to fuel suppliers via guaranteed Fuel Supply Agreements (FSA), other IPPs falling under 2002 policy do not enjoy this benefit given their inability to fuel on credit. Easing circular debt should relieve the liquidity crunch however, it could potentially trim power producers penal income, as most of the IPPs record a positive spread on mark-up applicable to receivables and payables. Power generation by source 25,000 20,000 15,000 10,000 5,000 - FY11 FY12 FY13 FY14 FY15 Wind Nuclear Thermal Hydel Source: SOI 2015 Page 2

3 Scaling Back of Power Subsidy; Circular Debt Easing (Rs mn) 500, , , , , , , , ,000 50,000 0 FY16 FY15 FY14 FY13 FY12 FY11 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Total Power Subsidy Power subsidy as % of GDP Source: Federal Budget Documents & Pakistan Economic Survey Demand-supply paradox, but with tables turned this time With a number of CPEC related power projects lined up, Pakistan may realize surplus energy (current deficit over ~5,000MW) by FY19. Consequently, NEPRA has put an embargo on existing imported coal based power projects beyond Oct 16. Note that coal power projects represent more than 70% of total priority additions under CPEC, where out of 7 coal priority projects, Port Qasim (~1,320MW) and Thar Power (~1,320MW) have already achieved their respective financial closures. While restriction on coal projects could potentially curb non-cpec related projects, we believe that any impact on CPEC related coal projects (including HUBC s CPHGCL ~1,320MW and KAPCO ~660MW) is unlikely given their high priority status. Moreover, NEPRA and PPIB have so far approved coal power projects with a cumulative capacity of ~8,433MW within which Sahiwal coal project (~1,320MW) is expected to come online by Dec Pakistan Electricity Demand-Supply Scenerio 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Source: SOI 2015 Generation Capability (MW) Demand during peak hours (MW) Surplus/(Deficit) as % of demand (RHS) FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F 20% 10% 0% -10% -20% -30% -40% Sector s sensitivity to change in dynamics Since, IPPs receive indexation for several macro dynamics including, Pak Rupee depreciation against US$, US CPI, KIBOR and changes in fuel cost, their profitability is sensitive to these dynamics. Please see below sensitivity of the aforementioned factors on JS Power Universe. Regional analysis Ticker P/E (x) D/Y (%) HUBC PA KAPCO PA NPL PA NCPL PA PKGP PA LPL PA KEL PA CH CH CH RPWR IN PTCIN IN MER PM EDC PM RATCH TB GLOW TB EGCO TB HK Source: Bloomberg, JS Research IPPs' sensitivity Dynamics HUBC KAPCO NCPL NPL PKGP LPL 5% dep in Pak Rupee 9.7% 11.4% 4.6% 6.3% 11.4% 11.3% 5% in FO prices -0.3% -1.1% 0.4% 0.7% -1.3% -1.8% 1% increase in KIBOR 0.4% 1.1% -0.5% 0.2% -2.2% -3.8% 1% increase in US CPI 3.3% 5.4% 0.4% 0.4% 2.3% 4.7% Source: JS Research Page 3

4 Pakgen Power Limited Higher efficiency and coal conversion to remain key triggers An attractive growth story ahead We recommend Buy on PKGP with a SoTP based Dec-2017 Target Price of Rs47 offering lucrative upside of 93% from current levels. PKGP offer a decent 2017E D/Y of 8%, while trade at a 2017E PE of 6.3x. The IPP is anticipated to witness growth in earnings primarily because of lower fuel losses owing to improved plant efficiency post turbine retrofit project. We anticipate PKGP s net earnings to grow at 5-yr CAGR of 6%, reaching Rs2.1bn (EPS Rs5.6) in We also highlight our optimism about the PKGP proposed coal conversion project, which is adding Rs10 to our valuation. We flag (1) sharp rise in FO prices, (2) increasing quantum of fuel losses and (3) lower than anticipated complex s efficiency with retrofitted turbine, as key risks to our investment thesis. Worst has passed We anticipate the power producer to post net earnings of Rs2.07/share in 2016, down 52% YoY, wherein we attribute lower earnings primarily to huge quantum of delta losses in the backdrop of better load factor (anticipated 62% vs. 8% in 2015), since the plant resumed operations earlier this year. PKGP currently operates below benchmark efficiency of 38.6%, at around 35-36%. Operating below the benchmark results in greater utilization of fuel against fuel consumption as identified in base tariff. This causes the IPP to incur fuel losses, hence hurting its bottom-line. Higher efficiencies to remain a prime growth drive The company s turbine retrofit project that involves the replacement of existing turbine rotor and blades with the improved design rotor and blades, came online in Oct 15. The projects have increased the complex s efficiency by around 1.1%-1.5% bringing in fuel consumption savings of around ~7gms/KWh from ~241gms/KWh previously. We believe, lower fuel losses owing to improved plant s efficiency would remain a key earning s detriment in the upcoming years, where we anticipate the IPP to incur fuel losses in range of ~Rs2.5/share as opposed to an average of Rs6.5/share over the past 5 years. Coal conversion to unbolt further upside NEPRA last year announced its reply to IPP s tariff petition for coal conversion of their exiting RFO based plant, which has been unduly accepted by the company. The approved tariff allows the IPP to keep receiving existing capacity payments until PPA expiration (~2027), reducing the probability of dividend curtailment, going forward. While working capital (WC) component would be paid under new tariff, keeping in view WC requirements for coal. The tariff offers 20% ROE which shall become effective from commercial operations (expected to be achieved by CY19). The company remains optimistic about proposed conversion despite of PPIB recent decision to put embargo on imported coal projects, as the projects are parts of CPEC and hence should not face any hurdles in respective executions. As per our initial working, assuming a debt to equity ratio of 75/25 with equity portion wholly debt financed, the proposed conversion project for PKGP would jack-up our TP by Rs10. However, we have not incorporated it in our current valuation, as we await the respective project s financial closure. BUY TP Revision Recommendation: Buy Current Price: Rs24.50 KATS Code: PKGP Target Price: Rs47 Mehwish Zafar mehwish.zafar@js.com Bloomberg Code: PKGP PA Reuters Code: PKPL.KA Market Price: Rs24.50 Ext: 3096 December 2017 Target Price: Rs47 Valuation Methodology: SoTP Market Cap: Rs9bn, US$87mn 1-yr Avg. Daily Volume: 0.2mn shares, Rs5mn, US$0.05mn 1-yr High/Low: Rs29.93 / Estimated free float: 4mn shares (20%) PKGP: Fuel Losses per share CY14A CY16A CY18E CY20E CY22E (1.0) (2.0) (3.0) (4.0) (5.0) (6.0) Source: SOI2015 PKGP PA POWER GENERATION & DISTRIBUTION Pakistan Page 4

5 Financial Summary Pakgen Power Limited Income Statement (Rs mn) 2014A 2015A 2016E 2017F 2018F Net sales 34,923 6,523 17,065 22,067 24,586 Gross Profits 1,315 1,979 1,606 2,406 2,544 Admin Expenses Net Other Income / (Expense) (7) (89) (94) Earnings before interest & tax 1,191 1,920 1,382 2,021 2,139 Financial charges Earnings before tax 612 1, ,495 1,618 Earnings - net of tax 612 1, ,495 1,618 Balance Sheet (Rs mn) 2014A 2015A 2016E 2017F 2018F Paid up capital 3,721 3,721 3,721 3,721 3,721 Shareholder's equity 14,408 15,262 15,365 16,156 16,995 Long term liabilities & others - 1, Current liabilities 6,549 9,062 8,076 8,934 9,388 Total liabilities & equity 20,957 25,549 24,221 25,424 26,383 Non Current Assets 8,466 10,020 9,114 8,830 8,555 Current assets 12,492 15,529 15,106 16,594 17,828 Total assets 20,957 25,549 24,221 25,424 26,383 Key Ratios 2014A 2015A 2016E 2017F 2018F EPS (Rs) DPS (Rs) BVPS (Rs) Payout (%) 61% 47% 85% 50% 46% P/E (x) PBR (x) Dividend yield (%) 3.9% 7.9% 6.9% 7.9% 7.9% ROA (%) 3% 7% 3% 6% 6% ROE (%) 4% 11% 5% 9% 10% Gross Profit Margin (%) 3.8% 30.3% 9.4% 10.9% 10.3% Net Profit Margin (%) 1.8% 24.5% 4.5% 6.8% 6.6% Earnings Growth (%) -44.8% 161.2% -51.9% 94.4% 8.2% EBITDA Margin (%) 4.9% 38.4% 12.3% 12.0% 11.2% Current Ratio (x) Debt/Equity (x) Debt/Assets (x) Times Interest Earned (x) Source: JS Research, Company accounts Page 5

6 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 P a k i s t a n P o w e r S e c t o r D e c e m b e r 2 7, Lalpir Power Limited Avail enticing valuation discounts Strong outlook keeps us optimistic We recommend a Buy rating on LPL with a SoTP based Dec-2017 Target Price of Rs46, offering an upside of 110%. The stock also offers a decent 2017E D/Y of 10%, while trades at 2017F PE of 6.85x. LPL shares many features of PKGP where the IPP is also anticipated to witness profitability growth owed to decreasing fuel losses as the plant s efficiency is expected to improve post turbine retrofit project. We expect a 5-year earnings CAGR of 12% for LPL where LPL s proposed coal conversion adds Rs13 in our valuation. LPL bears similar risks of (1) increase in FO prices, and (2) lower than anticipated efficiency post retrofitted turbine to our investment case. Lower fuel losses to upbeat profitability Similar to PKGP, LPL also operates below its benchmark efficiency and incur fuel losses. LPL earlier in Oct 14 installed retrofitted turbine project, which has increased the plant s efficiency by ~1.5%, thus helping the IPP to significantly overcome its fuel losses. Going forward, we foresee the power producer to operate at an efficiency of ~37% vs. an average efficiency of 35-36% in last 5 years. As a result, fuel losses are expected to decline in-line with PKGP. Coal conversion remains a key trigger LPL also accepted the tariff petition received from NEPRA for its coal conversion. The coal conversion has the same features of PKGP s conversion project, which include (1) PPA expiration extended to 2027, (2) working capital (WC) component to be paid under new tariff, (3) 20% ROE on the project, (4) commercial operations expected to be achieved by 2019 and (5) the project being a part of CPEC. Assuming a debt to equity ratio of 75/25 with equity portion wholly debt financed, the proposed conversion project adds Rs13 in our valuation. LPL: Fuel Losses per share CY14A CY15A CY16A CY17E CY18E CY19E CY20E CY21E CY22E 2.0 BUY TP Revision Recommendation: Buy KATS Code: LPL Current Price: Bloomberg Code: LPL PA Reuters Code: LPLP.KA Market Price: Rs21.96 Target Price: Rs46 Mehwish Zafar mehwish.zafar@js.com Ext: 3096 December 2017 Target Price: Rs46 Valuation Methodology: SoTP Market Cap: Rs8bn, US$80mn 1-yr Avg. Daily Volume: 0.5mn shares, Rs11mn, US$0.1mn 1-yr High/Low: Rs30.00 / Estimated free float: 152mn shares (40%) LPL PA POWER GENERATION & DISTRIBUTION Pakistan - (2.0) (4.0) (6.0) Source: JS Research D/Y vs. T-Bill & PIB yield 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% LPL 3YR PIB 1YR T-BILL Source: JS Research Page 6

7 Financial Summary Lalpir Power Limited Income Statement (Rs mn) 2014A 2015A 2016E 2017F 2018F Net sales 30,917 22,079 16,705 20,390 22,219 Gross Profits 1,880 2,039 1,908 2,051 2,106 Admin Expenses Net Other Income / (Expense) 22 (235) Earnings before interest & tax 1,769 1,657 1,696 1,828 1,871 Financial charges Earnings before tax ,221 1,278 Earnings - net of tax ,221 1,278 Balance Sheet (Rs mn) 2014A 2015A 2016E 2017F 2018F Paid up capital 3,798 3,798 3,798 3,798 3,798 Shareholder's equity 12,298 12,386 12,996 13,457 13,861 Long term liabilities & others 1,832 1, Current liabilities 9,493 7,742 7,158 8,421 7,975 Total liabilities & equity 23,623 21,487 21,112 22,437 21,995 Non Current Assets 11,098 10,303 9,598 8,982 8,360 Current assets 12,525 11,184 11,515 13,456 13,635 Total assets 23,623 21,488 21,113 22,438 21,996 Key Ratios 2014A 2015A 2016E 2017F 2018F EPS (Rs) DPS (Rs) BVPS (Rs) Payout (%) 48% 89% 78% 72% 95% P/E (x) PBR (x) Dividend yield (%) 4.5% 9.1% 9.1% 10.4% 14.5% ROA (%) 3% 4% 5% 6% 6% ROE (%) 7% 7% 8% 9% 9% Gross Profit Margin (%) 6% 9% 11% 10% 9% Net Profit Margin (%) 3% 4% 6% 6% 6% Earnings Growth (%) 23% 7% 15% 25% 5% EBITDA Margin (%) 7.3% 10.8% 14.6% 12.5% 11.7% Current Ratio (x) Debt/Equity (x) Debt/Assets (x) Times Interest Earned (x) Source: JS Research, Company accounts Page 7

8 FY14A FY15A FY15F FY16E FY17F FY18F FY19F FY20F P a k i s t a n P o w e r S e c t o r D e c e m b e r 2 7, K-Electric Limited A superior option in reviving energy sector Efficiencies and expansions to keep driving growth We hold a BUY rating on KEL with a DCF-based Jun-17 Target Price of Rs14, providing a significant upside of 51% along with a FY17 PE of 6.85x. To wager at the revamping energy sector of Pakistan, we believe K-Electric (KEL) provides the best exposure, where the company has strong presence in transmission, generation and distribution segments across the energy chain, ensuring it to take full benefit from current and future policy incentives. We believe, the Power Utility s several initiatives to clip transmission and distribution (T&D) losses and increase fleet efficiency would keep driving profitability growth. We highlight several value accretive projects including coal conversion project by leasing out two units of its Bin Qasim Power Plant1 (BQPP1) plant to K-Energy along with 450MW LNG and 2x350MW coal fired power plants are underway, materialization of which would unlock further upside. We anticipate company s profitability to grow by 12% CAGR to ~Rs50bn (EPS Rs1.83) during FY17-FY20. Key risks to our valuation include (1) inability to reduce T&D losses, (2) delay in implementation of upcoming projects, & (3) hike in gas prices. Shifting focus towards cheaper fuels In order to reduce reliance on expensive FO based power generation, K-Electric is undertaking a coal conversion project by leasing 2 units of BQPP 1 plant to K Energy (for ~20 years). The generation license has already been granted by NEPRA and the project is expected to come online by Sep-18. The regulator has announced its decision for the tariff petition filed by K-Energy for which the petitioner has requested a review. KEL would be valuing these units at US$206mn for the determination of lease payments. As per our initial working, the power utility would earn around ~Rs2bn (Rs0.08/share) from the lease payments while valuation impact is likely to be in tune of Rs0.43/share. However, we await further clarification on the project before incorporating it in our model. Investment Plan for Public Sector Pow er Gen. Projects (KEL) ( to ) Name of the project KEL's Ow n Program Capacity Expected Year of (MW) Commissioning Est. Cost (US$ mn) 1 LNG Plant (w ith Engro) (IPP Model)* 375 (Net) Coal Conversion (IPP Model)* 370 (Net) MW Coal Greenfield (IPP Model)* 645 (Net) Plan to induct IPPs in KEL System 1 SNPC and SNPC Phase-II 100 (Net) June, FPCL 52 (Net) March, Source: Planning Commission of Pakistan, KEL Operational efficiencies contribute to profit growth The company has successfully clipped T&D losses to 22.8% 3QFY16 vs. 35.9% during FY09. Going forward, we believe KEL s several initiatives including aerial bundling cables, smart grids and up gradation of transmission network would run their course in further cutting T&D losses. That said we expect transmission losses BUY TP Revision Recommendation: Buy KATS Code: KEL Current Price: R9.20 Bloomberg Code: KEL PA Reuters Code: KELE.KA Market Price: Rs9.20 Target Price: Rs14 Mehwish Zafar mehwish.zafar@js.com June 2017 Target Price: Rs14 Valuation Methodology: DCF Ext: 3096 Market Cap: Rs254bn, US$2,423mn 1-yr Avg. Daily Volume: 16mn shares, Rs131mn, US$1.3mn 1-yr High/Low: Rs9.60 / 6.74 Estimated free float: 2,762mn shares (10%) KEL: T&D Losses (actual vs. forecasted) 27% 25% 23% 21% 19% 17% 15% KEL PA POWER GENERATION & DISTRIBUTION Pakistan Source: Company Accounts, JS Research Page 8

9 to further decline by % annually, reaching 17% by FY20. Besides this, it is worth mentioning that company s operational performance is also boosted by fuel savings, as company s top-grade plants are operating at better-than-benchmark heat rates. KEL has successfully increased its fleet efficiency over time through timely maintenance of power plants (37.3% in 1HFY16 vs. 30.4% in FY09), while conversion of 2 open cycle units i.e. KGTPS and SGTPS to combined cycle units which are currently operational (adding 29MW), would further help the company grasping higher fuel savings, going forward. Extending transmission network ensures efficient supply Moreover, in order to successfully transmit higher power supply to market, KEL has signed a contract with Siemens Germany and Shanghai Electric, China for enhancement and rehabilitation of transmission infrastructure. To mention, the project s financial close has been successfully achieved and is expected to increase the company s existing transmission capability by 1000 MVA, reaching 5,700 MVA via EHT network 2018 onwards. Capacity expansions to help cater to growing market Keeping in view the growing energy demand in Metropolis city of Karachi (~5% annual demand growth), the company s management has entered into several ventures which are expected to materialize in the medium-term. We highlight significant progress in KEL s US$1bn 2x350 MW coal fired power plant at Port Qasim, a JV with China Datang Overseas and China Machinery Engineering Corporation (CMEC), where bank feasibility studies have been completed and project agreements are under advanced stages. The project is anticipated to achieve financial close by 2QFY17 with an expected COD by Dec Additionally, KEL has initiated development of 450MW LNG power plant with ENGRO and GE that is estimated to cost US$450mn with expected COD in Jan Furthermore, the company is currently pursuing power purchase options with Nooriabad Power Company (100MW) and Fauji Fertilizer Bin Qasim (52MW). To note, both plants are under final construction phase, where the power utility has already initiated PPA with Sindh Nooriabad Power Co. as of Febʼ16 while PPA negotiations with FFBL power have entered advanced stages. In addition, petitions have been submitted to NEPRA for tariff approval. Multi Year Tariff holds the key With the power utility s Multi Year Tariff (MYT) expiring in Jun 16, the company has filed a petition with NEPRA for its extension, wherein key propositions made include (1) increase of ~Rs0.66/KWh in O&M component, (2) change in calculation of O&M component s indexation, (3) increase of claw back formula thresholds to 15%, 18% and 20% and (4) introduction of new working capital component and force majeure clause in existing tariff. Keeping in view the expanding power demand of country s largest city, with KEL holding a monopoly position, we are confident about company s MYT extension. Transition of majority shareholders KES Power, the majority shareholder of KEL, has entered into a Sale and Purchase Agreement (SPA) with state-owned Shanghai Electric Power (SEP) to sell its 66.4% holding in KEL at Rs10.1/share (US$1.77bn). The transaction is expected to follow by tender offer for minority shareholders; where in-line with regulations we expect the offered price would be the same as deal price. We strongly believe the acquisition would lead to process of pending approvals with NEPRA and the government regarding expansion, coal conversion and tariff would take a swift pace. Page 9

10 Financial Summary K-Electric Limited Income Statement (Rs mn) FY15A FY16E FY17E FY18F FY19F Net sales 190, , , , ,636 Gross Profits 43,264 50,916 57,084 59,020 66,099 Admin Expenses 21,738 21,093 23,432 25,452 28,488 Other expenses 3,022 4,233 4,702 5,108 5,717 Other Income 6,333 7,235 9,200 11,558 14,922 Earnings before interest & tax 24,836 32,824 38,150 40,018 46,816 Financial charges 9,760 5,875 5,036 4,139 3,225 Earnings before tax 15,076 26,948 33,114 35,879 43,591 Earnings - net of tax 28,325 34,948 38,114 40,879 44,591 Balance Sheet (Rs mn) FY15A FY16E FY17E FY18F FY19F Share Capital 96,262 96,262 96,262 96,262 96,262 Shareholder's equity 128, , , , ,218 Long term liabilities & others 80,836 59,553 55,447 51,365 46,965 Current liabilities 158, , , , ,708 Total liabilities & equity 367, , , , ,891 Non Current Assets 228, , , , ,382 Current assets 138, , , , ,508 Total assets 367, , , , ,891 Key Ratios FY15A FY16E FY17E FY18F FY19F EPS (Rs) BVPS (Rs) Payout (%) 0% 0% 0% 0% 0% P/E (x) PBR (x) ROA (%) 8% 10% 10% 10% 9% ROE (%) 28% 27% 26% 22% 19% Gross Profit Margin (%) 23% 22% 23% 22% 22% Net Profit Margin (%) 15% 15% 15% 15% 15% Earnings Growth (%) 120% 23% 9% 7% 9% EBITDA Margin (%) 14.0% 14.5% 15.2% 14.7% 15.3% Current Ratio (x) Debt/Equity (x) Debt/Assets (x) Times Interest Earned (x) Source: JS Research, Company accounts Page 10

11 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 P a k i s t a n P o w e r S e c t o r D e c e m b e r 2 7, Nishat Power Limited Coal project; a game changer Attractive growth triggers to materialize We have a Buy rating on NPL with Dec-2017 TP of Rs81, offering 39% upside and an attractive DY of 14%. The scrip currently trades at FY17F PE of 5.7x. We flag NPL s expansion into coal-based generation contributes Rs17 to our valuation. Although in the longer-run we see some attrition in the O&M savings owing to plant s aging factor, we believe lower O&M expenditure on the back of in-house maintenance would provide a partial support to earnings thus, we anticipate O&M savings to rest within range of Rs3.4-Rs3.9/share in the coming 4-5 years. While the benchmark efficiency for the IPP stands at 45% vis-à-vis actual efficiency of 46-47% the plant enjoys higher fuel savings, which is expected to last a few more years owing to better thermal efficiency in early years. In addition, our base case incorporates relatively lower load factor post commencement of coal-based power projects post FY19 on the back of priority for cheaper fuel sourced power generation. Key risks to our investment thesis include (1) NPL s coal project might not materialize, (2) substantial decline in FO prices, shrinking the fuel savings (3) significant O&M expenditure, resulting in lower O&M savings and (4) existing liquidity damages (Rs816mn, Rs2.3/share) becoming payable. In-house maintenance to support fading O&M savings Post 36k hours of successful operations, NPL is on the verge of overhauling, where higher maintenance expenses would trim the IPP s O&M savings going forward. However, since NPL has not opted to renew O&M contract with Wartsilla Pakistan post expiration in Jan 16, we believe lower maintenance expenditure owing to inhouse maintenance would provide partial support to the bottom-line. Thus, we see O&M savings to rest within a range of Rs3.4-Rs4.0/share in the longer-run. On the other hand, we highlight lower fuel savings because of degrading plant s efficiency coupled with lower load factor of 60-65% (post FY20) to drag profitability in the longer-term. We estimate the power producer to generate fuel savings of Rs /share in the medium-term, reducing to Rs /share in the long term.. Expansion into coal to unlock beguiling returns NPL intends to expand into imported coal based power generation via a joint venture, namely Nishat Energy Limited (NEL), where NEPRA has recently admitted its application for generation license. The IPP would develop 660MW coal based project with a working stake of ~25%, followed on by TBEA Xinjiang Sunoasis Co Limited (~70%) and Nishat Mills Limited (~5%). Given ROE of ~27.2%, the imported coal project is anticipated to add ~Rs2.5/share to bottom-line post COD while it adds Rs17 to our valuation. while the venture also carries some inherent risks We do highlight that NPL s coal project might not be able to achieve attractive IRR as enjoyed by previous CPEC projects, given expiration of upfront tariff for imported/local coal projects and introduction of new coal power projects based on competitive bidding. In addition, the company might have to shift to local coal given the change in government s policy of putting ban on imported coal projects, which could result in project facing delay in reaching COD. BUY TP Revision Recommendation: Buy Current Price: Rs58.03 KATS Code: NPL Bloomberg Code: NPL PA Reuters Code: NISH.KA Market Price: Rs58.03 Target Price: Rs81 Mehwish Zafar mehwish.zafar@js.com Ext: 3096 December 2017 Target Price: Rs81 Valuation Methodology: SoTP Market Cap: Rs21bn, US$196mn 1-yr Avg. Daily Volume: 0.1mn shares, Rs7mn, US$0.1mn 1-yr High/Low: Rs61.12 / Estimated free float: 159mn shares (45%) D/Y vs. T-Bill & PIB yield 16% 14% 12% 10% 8% 6% 4% NPL PA POWER GENERATION & DISTRIBUTION NPL Pakistan 3YR PIB 1YR T-BILL Source: Company Accounts, JS Research Page 11

12 Penal income to dwindle as circular debt eases Circular debt has remained a major concern for power producers, where long cash conversion cycles create working capital issues, thus forcing the energy players to shift reliance towards short-term borrowings. However, NPL benefits from a positive spread of ~2.5% on trade receivables in shape of net penal mark-up income. We believe, as new energy projects come online, the quantum of NPL s penal return can potentially normalize, however at the same time would improve the IPP s liquidity. NPL: Penal Income to potentially normalize FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Source: JS Research Page 12

13 Financial Summary Nishat Power Limited Income Statement (Rs mn) FY15A FY16A FY17E FY18F FY19F Net sales 22,314 13,896 16,316 18,665 20,622 Gross Profits 4,692 3,887 4,381 4,664 4,911 Admin Expenses Net Other Income / (Expense) Earnings before interest & tax 4,548 3,718 4,291 4,565 4,805 Financial charges 1, Earnings before tax 3,117 2,851 3,613 4,034 4,427 Earnings - net of tax 3,117 2,851 3,608 4,028 4,421 Balance Sheet (Rs mn) FY15A FY16A FY17E FY18F FY19F Paid up capital 3,541 3,541 3,541 3,541 3,541 Shareholder's equity 11,613 12,251 13,380 14,398 15,455 Long term liabilities & others 8,376 6,858 4,652 2, Current liabilities 3,040 1,966 3,187 3,561 4,442 Total liabilities & equity 23,030 21,075 21,219 20,480 19,941 Non Current Assets 12,321 11,660 10,808 10,113 9,420 Current assets 10,709 9,415 10,411 10,368 10,521 Total assets 23,030 21,075 21,219 20,480 19,941 Key Ratios FY15A FY16A FY17E FY18F FY19F EPS (Rs) DPS (Rs) BVPS (Rs) Payout (%) 68% 75% 79% 79% 80% P/E (x) PBR (x) Dividend yield (%) 10.3% 10.3% 13.8% 15.5% 17.2% ROA (%) 13% 13% 17% 19% 22% ROE (%) 28% 24% 28% 29% 30% Gross Profit Margin (%) 21.0% 28.0% 26.9% 25.0% 23.8% Net Profit Margin (%) 14.0% 20.5% 22.1% 21.6% 21.4% Earnings Growth (%) 6.8% -8.5% 26.5% 11.6% 9.8% EBITDA Margin (%) 24.9% 33.0% 31.1% 28.7% 27.2% Current Ratio (x) Debt/Equity (x) Debt/Assets (x) Times Interest Earned (x) Source: JS Research, Company accounts Page 13

14 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 P a k i s t a n P o w e r S e c t o r D e c e m b e r 2 7, Kot Addu Power Company Limited Cash in the hidden value Several key triggers to unbolt significant upside With an impressive upside of 39%, we have a Buy recommendation on KAPCO with a Jun-17 Target Price of Rs107, where upcoming coal project value stands at Rs32. The scrip offers an attractive FY17E dividend yield of 15% vs. current 10-year PIBs yield of 7.9%. With the divestment of residual government stake of 354mn shares (40.25% of paid up capital) in KAPCO expected in 2017, we believe government may extend the power purchase agreement (PPA) which is set to expire in FY21. The US$956mn 660MW coal power plant is expected to come online by 3QFY20. We believe the current stock price only accounts for valuation of current base plant and 1-2 years of PPA extension, where (1) financial closure of upcoming coal plant, (2) materialization of sale of 40.25% WAPDA stake in the company and (3) years extension of current PPA would unlock notable upside in the scrip. We expect the company s profitability to grow at a 5-year CAGR of 9% to PKR13.6bn (EPS Rs15.5) in FY21. Strong case for PPA extension, but no progress until 2021 With 10 years of useful life remaining post PPA expiration, we believe the government would extend the company s PPA despite of KAPCO being one of the inefficient power plants of the country. However, no material steps are expected until the plant nears the end of current PPA. Our assumption of PPA extension lies on (1) KAPCO s power generation materially contributing to the country s energy pie (~6% of total demand), (2) lower capacity payments by the government compared to new projects with debt front-loaded tariffs and (3) gas availability through increasing LNG imports in the country. As per our working, extension of the current PPA, working to 100% of the current Escalable Component, may add ~Rs6.7/year to the company s intrinsic value. However, we feel KAPCO might not be able secure such an attractive tariff as several power projects are already in pipeline, and will start contributing to the national kitty FY17 onwards. 10 year PPA extension based on current tariff Value addition (Rs/sh) Extended PPA ROE is equal to current ROE 67 Extended PPA ROE is 75% of current ROE 44 Extended PPA ROE is 60% of current ROE 30 Extended PPA ROE is 50% of current ROE 21 Source: JS Research Government to take exit from KAPCO The government has expressed its interest of divesting its remaining stake of 40.25% in KAPCO and has sought financial advisors for the same. At current market price, the deal is worth ~Rs27.8bn. We pin a high probability to the government to materialize commitment of gas supply to KAPCO in order to attract investors towards the secondary offering. As per our initial discussions with the management, we understand that the GoP may provide a letter of comfort to the potential buyer/buyers regarding the plant s PPA extension. BUY TP Revision Recommendation: Buy Current Price: Rs77.11 KATS Code: KAPCO Target Price: Rs107 Mehwish Zafar mehwish.zafar@js.com Bloomberg Code: KAPCO PA Reuters Code: KAPCO.KA Market Price: Rs77.11 June 2017 Target Price: Rs107 Valuation Methodology: SoTP Market Cap: Rs68bn, US$647mn Ext: yr Avg. Daily Volume: 0.7mn shares, Rs61mn, US$0.6mn 1-yr High/Low: Rs93.00 / Estimated free float: 440mn shares (50%) D/Y vs. T-Bill & PIB yield 18% 16% 14% 12% 10% 8% 6% 4% KAPCO PA POWER GENERATION & DISTRIBUTION Pakistan KAPCO 3YR PIB 1YR T-BILL Source: Company Accounts, JS Research Page 14

15 Coal project to unlock bumper returns The company is undergoing an expansion to set up 660MW coal plant in Punjab that would be a part of the China-Pakistan Economic Corridor (CPEC). The company has given Industrial and Commercial Bank of China Limited (ICBC) the mandate for the debt portion of the project. The project would be under a wholly owned Special Purpose Vehicle (SPV) set up under the name of KAPCO Energy (Pvt.) Ltd. In addition, KAPCO has recently received Letter of Support (LoS) from the Private Power and Infrastructure Board (PPIB) for the same. The anticipated cost of the project is US956mn and the management expects to achieve the financial close by 4QFY2017. The company is considering different options for equity financing, while we have assumed 100% debt financing for equity portion. With expectations of the project to come online by 3QFY20 and assuming a 75/25 debt to equity, the coal power plant adds Rs34/share to our valuations. Key risks Key risks to our investment thesis include (1) increase in FO prices, resulting in higher quantum of fuel losses, (2) ease in circular debt, denting the penal mark-up income and (3) unfavorable terms for PPA extension. Page 15

16 Financial Summary Kot Addu Power Company Limited Income Statement (Rs mn) FY15A FY16A FY17E FY18F FY19F Net sales 101,481 64,178 66,594 70,931 75,549 Gross Profits 15,146 13,408 15,903 17,096 16,554 Admin Expenses Other Income 6,321 4,041 4,548 4,861 4,990 Earnings before interest & tax 21,036 16,921 20,035 21,524 21,093 Financial charges 6,248 3,237 3,691 3,665 3,763 Earnings before tax 14,788 13,684 16,344 17,859 17,331 Earnings - net of tax 9,799 9,072 11,282 12,502 12,131 Balance Sheet (Rs mn) FY15A FY16A FY17E FY18F FY19F Paid up capital 8,803 8,803 8,803 8,803 8,803 Shareholder's equity 29,728 30,955 37,616 39,554 40,903 Long term liabilities & others 4,060 2,942 2,926 2,463 2,463 Current liabilities 62,473 58,312 62,011 66,198 67,829 Total liabilities & equity 96,260 92, , , ,195 Non Current Assets 14,893 12,755 11,901 11,103 10,304 Current assets 81,367 79,454 90,651 97, ,891 Total assets 96,260 92, , , ,195 Key Ratios FY15A FY16A FY17E FY18F FY19F EPS (Rs) DPS (Rs) BVPS (Rs) Payout (%) 79% 87% 88% 86% 89% P/E (x) PBR (x) Dividend yield (%) 11.3% 11.7% 14.6% 15.9% 15.9% ROA (%) 10% 10% 12% 12% 11% ROE (%) 35% 30% 33% 32% 30% Gross Profit Margin (%) 15% 21% 24% 24% 22% Net Profit Margin (%) 10% 14% 17% 18% 16% Earnings Growth (%) 27% -7% 24% 11% -3% EBITDA Margin (%) 22.8% 29.8% 33.4% 33.4% 30.8% Current Ratio (x) Debt/Equity (x) Debt/Assets (x) Times Interest Earned (x) Source: JS Research, Company accounts Page 16

17 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 P a k i s t a n P o w e r S e c t o r D e c e m b e r 2 7, Nishat Chunian Power Limited Recommending Buy on a high yielding scrip Attractive DY to garner investors interest We hold a Buy rating on NCPL with a TP of Rs59. We highlight the company s lucrative DY of 14% vs. IPP cluster DY of 11%, keeping the stock under investors radar. Similar to NPL, we expect NCPL s O&M and fuel savings to stretch a little longer enabling the IPP to offer attractive payout in the next few years. However, evaporation of O&M savings and lower thermal efficiency as the plant ages could trim the company s profitability over the long run. Nevertheless, we do call attention to the company s ability to keep O&M expenditure at manageable levels owing to in-house maintenance post expiration of O&M contract with Wartsilla Pakistan. Key risks to our investment thesis include (1) substantial decline in FO prices resulting in lower fuel savings, (2) significant O&M expenditure and (3) existing liquidity damages (Rs958mn, Rs2.6/share) becoming payable. Stable O&M savings to keep providing support While the benchmark efficiency for NCPL stands at 45%, the plant has operated at an average efficiency of 46-47%, thus enjoying higher fuel savings in the past. However, since plant is aging, we eye a marginal degradation of around 0.1% per annum in thermal efficiency, normalizing at benchmark levels. Moreover, NCPL has historically maintained 80-85% utilization levels, taking full advantage of fuel savings. Going forward, we believe the companies would not be able to display high utilization levels, as several China Pakistan Economic Corridor (CPEC) energy projects start coming online by FY19, which are largely tilted towards cheaper fuel sources i.e. coal and LNG. Therefore, we have incorporated lower load factor, averaging at 60-65% (FY20 onwards). In the past few years, IPP s annual efficiency gains averaged at Rs0.9/share, where we estimate it to decline to an average of Rs0.5/share after incorporation of gradual degradation in plant s efficiency and lower load factor, going forward. However, since the O&M contract with Wartsilla Pakistan has expired and the company has not opted for renewal, we believe the company s in-house maintenance would provide a partial support to its fading O&M savings given the plant s aging factor. No accretive projects in the pipeline as yet Earlier this year, NCPL submitted Pre-Qualification Document (PQD) for approval before Private Power Infrastructure Board (PPIB) for development of MW RLNG based power plant in Faisalabad. However, in Jun 16, the project was declared technically non-qualified by the authority. Although, the company has not announced any expansion project so far, we believe the power producer can offer further upside to our valuation once it starts chasing value accretive projects like NPL. BUY TP Revision Recommendation: Buy Current Price: Rs55.78 KATS Code: NCPL Target Price: Rs59 Mehwish Zafar mehwish.zafar@js.com Bloomberg Code: NCPL PA Reuters Code: NCPL.KA Market Price: Rs55.78 June 2017 Target Price: Rs59 Valuation Methodology: DDM Market Cap: Rs20bn, US$195mn Ext: yr Avg. Daily Volume: 0.2mn shares, Rs11mn, US$0.1mn 1-yr High/Low: Rs58.03 / Estimated free float: 180mn shares (49%) D/Y vs. T-Bill & PIB yield 30% 25% 20% 15% 10% 5% 0% NCPL PA POWER GENERATION & DISTRIBUTION NCPL Pakistan 3YR PIB 1YR T-BILL Source: Company Accounts, JS Research Page 17

18 Financial Summary Nishat Chunian Power Limited Income Statement (Rs mn) FY15A FY16A FY17E FY18F FY19F Net sales 22,575 13,854 14,839 16,213 18,063 Gross Profits 5,126 4,194 4,742 4,940 5,242 Admin Expenses Net Other Income / (Expense) (30) (64) Earnings before interest & tax 4,975 3,975 4,652 4,832 5,133 Financial charges 1,884 1,219 1,190 1,174 1,094 Earnings before tax 3,090 2,756 3,462 3,658 4,038 Earnings - net of tax 3,090 2,756 3,434 3,629 4,006 Balance Sheet (Rs mn) FY15A FY16A FY17E FY18F FY19F Paid up capital 3,674 3,674 3,674 3,674 3,674 Shareholder's equity 7,383 7,293 7,788 8,331 8,921 Long term liabilities & others 9,172 7,507 5,284 2, Current liabilities 7,692 6,881 8,363 10,157 11,987 Total liabilities & equity 24,247 21,681 21,435 21,440 21,149 Non Current Assets 13,398 12,824 11,932 11,249 10,591 Current assets 10,849 8,857 9,503 10,191 10,558 Total assets 24,247 21,681 21,435 21,440 21,149 Key Ratios FY15A FY16A FY17E FY18F FY19F EPS (Rs) DPS (Rs) BVPS (Rs) Payout (%) 89% 97% 86% 85% 85% P/E (x) PBR (x) Dividend yield (%) 13.4% 12.9% 14.3% 15.0% 16.6% ROA (%) 12% 12% 16% 17% 19% ROE (%) 43% 38% 46% 45% 46% Gross Profit Margin (%) 22.7% 30.3% 32.0% 30.5% 29.0% Net Profit Margin (%) 13.7% 19.9% 23.1% 22.4% 22.2% Earnings Growth (%) 6.5% -10.8% 24.6% 5.7% 10.4% EBITDA Margin (%) 27.1% 37.0% 36.5% 34.4% 32.4% Current Ratio (x) Debt/Equity (x) Debt/Assets (x) Times Interest Earned (x) Source: JS Research, Company accounts Page 18

19 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 P a k i s t a n P o w e r S e c t o r D e c e m b e r 2 7, Hub Power Company Limited A pure yield play HUBC PA POWER GENERATION & DISTRIBUTION Pakistan HOLD TP Revision Positives largely priced in We have a HOLD rating on Hub Power Company limited (HUBC), Pakistan s second largest Independent Power Producer with a DDM based Jun-17 Target Price of Rs120. As the stock has rallied 40% 2016TD, we believe the current market price broadly reflects the impact of upcoming coal projects, leaving limited room for further upside. However, IPP s anticipated decent dividend yield, going forward owing to improved liquidity post repayment of base plant debt and Narowal demerger would keep the scrip in limelight. We expect the company s profitability to grow at a 5-year CAGR of 7% to Rs16.4bn (EPS Rs14.18) in FY21. We highlight the power giant s attractive FY17F and FY18F dividend yield of 8% and 9.7%, respectively vs. 10-year PIB current yield 7.9%, while the scrip is currently trading at FY17E PE of 11.3x. Key risks to our investment thesis include 1) delay in 2x660MW coal plant COD and (2) lowerthan-expected cost savings via Hub Power Services Limited (HPSL). Accretive venture with Chinese, albeit with limited upside Amid times of ever-growing electricity demand in a country experiencing severe capacity shortages, HUBC has been at forefront for developing 2x660MW imported coal fired power plant along with a coal jetty under a JV with China Power International Holding (CPIH) namely, China Power Hub Generation (CPHGC) in vicinity of existing Hub plant. The US$2.4bn project (26% equity stake is expected to add EPS of ~Rs3.26 from FY21, while the project has a valuation impact to the tune of Rs19. Even though expansion into coal power project would prolong HUBC s operational life (Hub base plantʼs PPA expiring in 2027; while of CPHGC in 2050), the reduced stake of 26%, from 49% previously, would potentially limit the upside as it cannot adequately substitute the base plant s cashflows post PPA expiration. However, it is relatable to mention that HUBC holds the option to increase its stake back to 49% any time before COD, adding Rs15 further to our valuation. Backward integration ensures streamlining of coal supply In order to ensure efficient coal supply, HUBC is integrating backwards by investing US$20mn (~8% stake) in Sindh Engro Coal Mining Company (SECMC), a JV with Govt. of Sindh, Engro Corporation, Thal Limited, HBL, and CMEC. SECMC has mining capacity up to 6.5mtpa at Thar-block II and is expected to come online by FY20. Our initial estimates suggest that the project would jack up valuation by Rs3. Moreover, the power producer is also setting up a 330MW mine mouth power plant at Thar in partnership with other investors (details of which are unavailable as project is in infancy stages). The project is expected to cost US$500mn and would add Rs21 per share to our valuation assuming HUBC holding stake of 100%, in the 25% equity portion of the project. Easing liquidity position to support dividend stream Following the repayment of last tranche of base plantʼs long-term debt, we expect the liquidity position of the power producer to improve, thus resulting in higher dividend distribution in the years post FY20 as CPHGC JVʼs interest payments ease. Moreover, recent change in dividend policy from half-yearly to quarterly (first Recommendation: Hold Current Price: Rs KATS Code: HUBC Target Price: Rs120 Mehwish Zafar mehwish.zafar@js.com Bloomberg Code: HUBC PA Reuters Code: HPWR.KA Market Price: Rs June 2017 Target Price: Rs120 Valuation Methodology: SoTP Ext: 3096 Market Cap: Rs145bn, US$1,386mn 1-yr Avg. Daily Volume: 1.0mn shares, Rs113mn, US$1.1mn 1-yr High/Low: Rs / Estimated free float: 752mn shares (65%) D/Y vs. T-Bill & PIB yield 20% 18% 16% 14% 12% 10% 8% 6% 4% HUBC 3YR PIB 1YR T-BILL Source: Company Accounts, JS Research Page 19