Morning Call about Hub Power Company – Arif Habib Limited

Karachi, November 01, 2012 (PPI-OT): Earnings witnessed a massive 70% YoY growth

Hub Power Company (HUBC) announced its 1QFY13 financial results on October 31, 2012.

According to Arif Habib Limited, the profit after tax of PKR 2,114 million (EPS: PKR 1.83) was quite in line with Arif Habib Limited’s expectations of PKR 2,217 million (EPS: PKR 1.92). The earnings registered a growth of 70% YoY as compared to PKR 1,241 (EPS: PKR 1.07). Arif Habib Limited believes this growth to stem from an improved load factor of 85% in 1QFY13 as compared with 74% in 1QFY12 and commencement of Narowal power plant.

Financial Highlights
PKR million

1QFY13

1QFY12

YoY

4QFY12

QoQ

Sales

48,316

40,718

19%

50,894

-5%

Cost of Sales

44,297

37,626

18%

45,890

-3%

Gross Profit

4,020

3,092

30%

5,004

-20%

Administrative Expenses

91

87

4%

89

3%

Profit from Operations

3,933

3,019

30%

4,893

-20%

Finance Cost

1,818

1,779

2%

1,972

-8%

Profit before taxation

2,115

1,241

70%

2,921

-28%

Profit after taxation

2,114

1,241

70%

2,925

-28%

Earning per share (PKR)

1.83

1.07

2.53

Source: Company financials and AHL Research

Laraib Project Update

Hubco has controlling interest in Laraib Energy Limited which is setting up 84MW hydro project in Azad Jammu and Kashmir. The company is required to achieve commercial operations from hydro project by the middle of 2013. However, Arif Habib Limited believes the company to move a step ahead and start commercial operations a little earlier than schedule.

FY13 another year of striking dividend

Hubco’s base plant has an ROE portion (Project Company Equity) in tariff, which is set to grow by ~2.2% YoY in FY13. Coupled with this, the newly functional Narowal plant is likely to provide operation and maintenance (O and M) savings and fuel efficiencies. The combined effect will be further magnified by PKR depreciation (~7% in FY13E) and likely hike in fuel prices. On these grounds, Arif Habib Limited expects the company to earn a profit after tax of PKR 8,322 million (EPS: PKR 7.19) depicting a humble growth of 1.6% YoY. Arif Habib Limited is hopeful that the company will maintain its policy of healthy payouts, leading to a dividend of PKR 7/share in FY13.

Recommendation

Based on dividend discount model, Arif Habib Limited’s Dec-12 target price for Hubco works out at PKR 56.6/share, offering a 23% upside from last closing. Arif Habib Limited expects the company to pay a dividend of PKR 7/share in FY13, culminating into an attractive 15% dividend yield. Handsome dividend yield coupled with strong upside potential and growth opportunities make the stock one of the most attractive bets in the market. Thus, Arif Habib Limited maintains Arif Habib Limited’s BUY stance for the scrip.

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