Hubco owes Rs81 billion to PSO

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Hubco, the largest independent power producer in the country, owes a huge amount of Rs81 billion to Pakistan State Oil on account of supply of fuel. In fact, WAPDA and National Transmission and Dispatch Company Limited (NTDC), have withheld payment of over Rs100 billion to Hubco that has left the company with no other choice, but to delay payment to PSO. WAPDA alone owes a massive amount of Rs97.40 billion while NTDC is supposed to make payment of Rs8.42 billion to Hubco. This has been disclosed in a research report of the Arif Habib Research.
Due to delayed payments from WAPDA and NTDC, Hubco was forced to avail its running finance facilities that has put extra financial burden on the company. The company receives penal interest from WAPDA, at State Bank of Pakistan (SBP’s) discount rate plus 2 per cent per annum compounded semi-annually.
In its 1QFY12 unconsolidated results, Hubco posted profit after tax of 1.241 billion, depicting flat Year-on-Year earnings. Although, gross profits improved by 61 per cent YoY but a massive 218 per cent growth in financial charges curbed the growth in company’s bottom line. This growth in financial charges was mainly led by 47 per cent YoY increase in short terms borrowings which settled at Rs17.571 billion as of Sept 11. During the period under review the Hub plant operated at an average load factor of 74 per cent whereas the plant availability stood at 87 per cent.
On the other hand Narowal plant has been operated on an average load factor of 77 per cent with plant availability at 77.5 per cent. Both the plants generated total 2,377 Gwh of electricity in 1QFY12. Debt due to soaring circular-debt, the company’s financial cost increased by 218 per cent on year-on-year basis, from Rs559 million to Rs1,779 million in 1QFY12.
Capital market analysts believe that company’s earnings will likely emanate from rising PCE component along with indexation factor (Narowal expansion and Laraib Project, operational commencement Jun’13 estimated).
This in our opinion will likely push company’s earning to the tune of Rs6,805 million (EPS: PKR 5.88) and will pay a dividend of Rs5.9 per share in FY12. This will translate into a dividend yield of 16.0 per cent in FY12. According to the Power Purchase Agreement (PPA), company has a dollar based IRR of 17.05 per cent whereas in Pakistani rupee term, company has an IRR of 19.31 per cent.
The analysts Dividend Discount Model (DDM) based target price for June 2012 works out to be Rs49.9 per share, which offers an upside potential of 36 per cent from its last closing price of Rs36.82 per share. Beside attractive upside potential, the stock offers FY12F dividend yield of 16 per cent, making it one of the best defensive play in the market.