Karachi, May 14, 2015 (PPI-OT): KEL: PkR22bn Sukuk a value catalyst
K Electric yesterday held a briefing regarding upcoming issue of its PkR22bn worth Sukuks (PkR15bn pre-IPO + PkR7bn inclusive of PkR2bn green-shoe for general public) where key highlights of the issue included: 1) lower spread of 100bps over 3M KIBOR (3M/6MKIBOR +300bps for retired facilities) keeping interest charges in check, 2) effective refinancing of previous debt load to a longer term duration (expiry date of 1QFY23 vs. 1QFY18 for retired debt) and 3) realigning of debt for planned investments compared to smaller tenor issues previously (Azm Sukuk’s of 1, 3 and 5 years).
Having calibrated the debt profile of KEL to include the current PkR22bn Sukuk issue affirms AKD Securities Limited’s bullish thesis where for FY15E financial charges are expected to taper by 16%YoY clocking in at PkR9.5bn. Similarly, weighted average cost of debt is likely to dip to 10.8% following the use of proceeds from the issue to pay-off cost heavy loans from ADB and IFC (PkR18bn of loans prepaid).
Backed by these AKD Securities Limited sees the Sukuk issue as being a pertinent catalyst for earnings growth, free cash flow generation and capital enhancement. With a Dec’15 TP of PkR13.5/share, and the scrip trading at a FY15E/16F P/E of 8.9x/6.2x, potential value at a bargain is hard to ignore.
Capital efficiency in play: Reduced credit risk, following on from a higher quality credit rating (JCR-VIS rating of AA+ vs. AA for AZM Sukuks) through partial securitization of receivables from 495 ‘prime industrial consumers’ under a diminishing Musharaka structure. A move that will reduce the cost of borrowing by allowing KEL to re-finance its debt and take benefit from its strong core receivables profile (~PkR2.5bn/mth collection from master collection account of prime consumers, ~15% of total monthly collections). A negative covenant, placing an entity level debt service coverage ratio at 30% of EBITDA to total debt is set.
Post-issue impact: A longer tenor allows KEL to match maturity with outlays, while benefitting from lower underlying rates. By paying off previous, more expensive debt with a shorter duration, KEL manages to hold financial charges lower in the short term (FY15E/16F PkR9.5bn/PkR9.6bn a change of -16%/-2%YoY). The resulting decline in the weighted average cost of debt to 10.8% in FY15E bodes well for valuations.
Investment Case: Re-iterating AKD Securities Limited’s investment case AKD Securities Limited flag: 1) on-going legal disputes with NEPRA on calculation of RORA (disputed amount of PkR10.2bn) and 2) inadvertent slide in the recovery ratio (91.9% in 9MFY15 vs. 93.0% in 9MFY14) as potential dampeners.
Conversely, going forward positives include: 1) recovery of PkR2-2.5bn in receivables from consumers under recent recovery scheme (including additional surcharges firming-up other income) and 2) higher than planned reduction in T and D losses (23.4% during 9MFY15 falling by 1.7%YoY). The latter is going to prop up the number of units billed, offering further upside to AKD Securities Limited’s already sturdy investment case. The scrip currently is trading at a FY15E/16F P/E of 8.9x/6.2x, with AKD Securities Limited’s Dec’15 TP of PkR13.5/share.