Pearl Securities Limited – Power in focus

Karachi, January 29, 2015 (PPI-OT): Synopsis

Kot Adu Power Company Limited (KAPCO) is scheduled to announce financial accounts for 1H FY15 on the 18 th of Feb’15 where Pearl Securities Limited expects strong recovery against the same term last year. Operating at an improved load factor, the company is expected to post NPAT of PKR 4,982mn (EPS: PKR 5.66) in 1H FY15, a significant increase of 75% YoY against net income of PKR 2,844mn (EPS: PKR 3.23) in the corresponding term last year. 2Q FY15 earnings are expected at PKR 2,572mn (EPS: PKR 2.92), increasing by 49% YoY and 7% QoQ.

Performance in the previous year was stunted due to overhauling of primary generation engines which resulted in lower revenue and higher costs. Strong earnings recovery could encourage management to issue cash reward of PKR 3.75/share with half year results.

Improved load factor, better revenues

Due to major engine overhauls affecting generation potential in the previous year, the company derived notably lower revenues. This year, operating on a better load factor average, estimated at 73.4%, the firm is expected to have dispatched a total of 4,381GWh of electricity against 3,115GWh in the same term last year. During 2Q FY15, Pearl Securities Limited expects the firm to have sold 2,204GWh against 1,430GWh (YoY).

Strong sales are likely to enable 1H FY15 revenue to clock in around PKR 70.9bn, substantially greater by 24% YoY against net sales of PKR 56.9bn in the same period last year. 2Q FY15 revenue is expected around PKR 35.6bn, up by 20% YoY and marginally up against the previous quarter.

Margins to improve in absence of O and M costs

The firm incurred heavy expenditures in the previous year on account of maintenance of five engines (four gas turbines and one steam turbine) as well as various other inspections which elevated the O and M component in COGS. Due to higher COGS, the firm’s gross profit margin declined to just 8.1% in 1H FY14.

In the period under review, 1H FY15, in absence of O and M expenses, gross margins are expected to recover significantly against the previous year to reach 11.1%, showing a strong 313bps YoY recovery. Resultantly, with better core operations, the firm is expected to post 73% YoY gains in gross profits. Gross margin for 2Q FY15 is expected at 11.2% where gross earnings are expected to grow by 57% YoY.

Strong other income support and Outlook

KAPCO has been receiving strong other income support largely generated through markup income on outstanding payments from WAPDA. Pearl Securities Limited expects this trend to sustain in 2Q FY15 and ultimately generate a total amount of around PKR 3.2bn in 1H FY15 which greater by 105% YoY against income of PKR 1.6bn in the same term last year.

Strong other income is expected to supplement EPS by as much as PKR 3.66/share. Despite better performance overall in core business during 1HFY15, Pearl Securities Limited greats concern for future outstanding amount stuck with the system. Based on current fundamentals, Pearl Securities Limited maintains Pearl Securities Limited’s TP @PKR72 which shows premium at current levels.

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