The Power sector of Pakistan has been in the limelight for the past couple of years due to its inability to supply power and settle dues of the energy chain. This has triggered many adjustments in the country’s energy mix and proved costly to some and indirectly beneficial for others. Consequently, it is believed that power sector woes have opened investment opportunities at the local bourse. For example, FFC and FFBL in the fertiliser sector have performed in the last couple of months due to urea price hike amid gas rationalisation by the government. Similarly, we see a window of opportunity in the power sector mainly in Hub Power Company (HUBC) and Kot Addu Power Company (KAPCO), said Naveed Tehsin at JS.
Their Power Purchase Agreement (PPA) with the government makes their business model resilient to changes in consumer power tariffs, PKR/USD parity and the US CPI.
Furthermore, the generation bonuses and guaranteed tariff structure also acts as an added advantage for investment in the sector. Moreover, the recent 150bps cut in DR and the market expectations of further easing in the policy rate going forward also bodes well for the high dividend yielding stocks of the power sector.
Hub Power Company:
riding on power shortage
He said HUBC is their top pick in the power sector due to its rising Project Company Equity (PCE) component of Capacity Purchase Price (CPP) and generation bonuses amid supply shortfall in the country. Moreover, addition of the Narowal power project will further improve the top line of the company. In addition, HUBC has invested in Laraib power project and currently holds 75 per cent of shareholding. It is expected to be operational by June 2013 and will provide more fuel to profitability.
‘Our liking for HUBC is also based on its attractive dividend yield of 16.1 per cent which offers a spread of 390bps and 420bps over the 10 year PIB and 1 year T-Bill respectively,’ he added.
Kot Addu Power Company:
resilient earnings
Compared to HUBC, KAPCO lacks up-tick in its tariff structure. However, the indexation factor that provides protection against the devaluation of rupee against dollar and US CPI imply a low risk profile for the company. Although, the company has shelved its expansion plan for the time being, we do not rule out a reversal in decision after the resolution of circular debt issue, he added. KAPCO also seems attractive at current levels as it trades at a FY12E PE of 6.4x and offers a dividend yield of 14.5 per cent compared to JS Universe PE and dividend yield of 6.4x and 8.4 per cent, respectively.
