AKD Securities Limited Equity Research – Daily Report

Karachi, June 28, 2018 (PPI-OT): Power: May ’18 Back to square one

Electricity generation during May’18 stood at 12.1TwH, up 10%YoY as the onset of summer season led to increased output from hydel sources (18.3%), while demand continued to soar on the back of hot weather and Ramadan. Major contribution of 2.90TwH (23.9%) came from RLNG, where generation on the same was skewed towards the recently commissioned plants (Bhikki, Balloki and Haveli Bahadur Shah combined generating 1.45TwH). However, Furnace Oil, having been regarded as an “expensive” fuel, saw its resurgence occupying the 2nd place with 2.33TwH of energy output (19.3%). HUBCO and KAPCO combined generated ~1.03TwH on FO. Cost wise, FO remained the most expensive source of generation with a per unit cost of PkR12.97 followed by RLNG at PkR9.33. Amongst our IPP universe, KAPCO still remains our top-pick with an attractive dividend yield of 16.8/16.3% for FY18F/19F and a capital upside of 15.8%.

Resurgence of Furnace Oil: Despite heavy claims of completely phasing out Furnace Oil, the GoP seemed to give in ever increasing demand spurred by hot weather and Ramadan. In this regard, FO took the 2nd spot in the overall generation list with 2.33TwH of energy output (19.3%). IPPs made up a major portion of the generation where HUBCO and KAPCO alone generated 1.03TwH of energy. As per our sources, all 4 units of HUBCO were made operational during the latter half of May after a gap of several months as demand crawled upwards. May also witnessed the highest ever generation on newly commissioned RLNG plants at Bhikki, Balloki and Haveli Bahadur Shah, where the 3 combined generated 1.45TwH of energy, while overall generation on RLNG was recorded at 2.90TwH (23.9%). Coal based generation made up 12.3% of the pie at 1.43TwH of electricity output.

Rising Electricity costs: Energy prices are marking their new highs on geopolitical tensions, and consequently, cost of generation is also moving north with overall per unit cost of PkR6.90/unit. Furnace Oil remained the most expensive source at PkR12.97/unit, followed by RLNG at PkR9.33/unit (barring import). Coal prices, dropping slightly during May’18 kept generation cost lower at PkR6.12/unit vs. PkR6.73/unit in the previous month. Hydel and Nuclear, on the other hand, remained the cheapest sources of generation at PkR0.114/1.02/unit.

Investment Perspective: Current demand supply scenario indicates that Furnace Oil should remain in heavy use till FY20 until coal based plants are commissioned and T and D network is improved. Based on this, we believe both base plant and Narowal of HUBCO will remain in operation at ~50% utilization rates for FY19F while the first unit of its coal based plant (CPHGC) is scheduled to achieve CoD in Dec’18. However, based on current levels, KAPCO remains our top-pick with a superior dividend yield of 16.8/16.3% in FY18F/19F along with a capital upside of 15.8%.

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AKD Securities Limited Equity Research – Daily Report

Karachi, June 28, 2018 (PPI-OT): Power: May ’18 Back to square one

Electricity generation during May’18 stood at 12.1TwH, up 10%YoY as the onset of summer season led to increased output from hydel sources (18.3%), while demand continued to soar on the back of hot weather and Ramadan. Major contribution of 2.90TwH (23.9%) came from RLNG, where generation on the same was skewed towards the recently commissioned plants (Bhikki, Balloki and Haveli Bahadur Shah combined generating 1.45TwH). However, Furnace Oil, having been regarded as an “expensive” fuel, saw its resurgence occupying the 2nd place with 2.33TwH of energy output (19.3%). HUBCO and KAPCO combined generated ~1.03TwH on FO. Cost wise, FO remained the most expensive source of generation with a per unit cost of PkR12.97 followed by RLNG at PkR9.33. Amongst our IPP universe, KAPCO still remains our top-pick with an attractive dividend yield of 16.8/16.3% for FY18F/19F and a capital upside of 15.8%.

Resurgence of Furnace Oil: Despite heavy claims of completely phasing out Furnace Oil, the GoP seemed to give in ever increasing demand spurred by hot weather and Ramadan. In this regard, FO took the 2nd spot in the overall generation list with 2.33TwH of energy output (19.3%). IPPs made up a major portion of the generation where HUBCO and KAPCO alone generated 1.03TwH of energy. As per our sources, all 4 units of HUBCO were made operational during the latter half of May after a gap of several months as demand crawled upwards. May also witnessed the highest ever generation on newly commissioned RLNG plants at Bhikki, Balloki and Haveli Bahadur Shah, where the 3 combined generated 1.45TwH of energy, while overall generation on RLNG was recorded at 2.90TwH (23.9%). Coal based generation made up 12.3% of the pie at 1.43TwH of electricity output.

Rising Electricity costs: Energy prices are marking their new highs on geopolitical tensions, and consequently, cost of generation is also moving north with overall per unit cost of PkR6.90/unit. Furnace Oil remained the most expensive source at PkR12.97/unit, followed by RLNG at PkR9.33/unit (barring import). Coal prices, dropping slightly during May’18 kept generation cost lower at PkR6.12/unit vs. PkR6.73/unit in the previous month. Hydel and Nuclear, on the other hand, remained the cheapest sources of generation at PkR0.114/1.02/unit.

Investment Perspective: Current demand supply scenario indicates that Furnace Oil should remain in heavy use till FY20 until coal based plants are commissioned and T and D network is improved. Based on this, we believe both base plant and Narowal of HUBCO will remain in operation at ~50% utilization rates for FY19F while the first unit of its coal based plant (CPHGC) is scheduled to achieve CoD in Dec’18. However, based on current levels, KAPCO remains our top-pick with a superior dividend yield of 16.8/16.3% in FY18F/19F along with a capital upside of 15.8%.

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