Elixir Securities Limited – Elixir Insight

Karachi, May 16, 2018 (PPI-OT): Lalpir Power Limited – Low Capacity Utilization Uplifting EPS but will DPS Follow Suit?

We reiterate our Buy stance on LPL with a Dec-18 PT of PKR33/share offering 84% total potential upside (including 13% leading dividend yield)

Due to declining government preference towards furnace oil based generation, LPL’s utilization rate for 1Q2018 came down to 25%. As a result of low operations, fuel losses declined during the quarter thus pushing Gross profits up by 15%YoY.

Improvement in 1Q2018 EPS (up 19%YoY) on the back of low capacity utilization rate (25%) further increases our conviction on profitability growth story due to declining Fuel Losses. As new industry wide capacities come online, we expect utilization rate at 21% in 2018 vs. historical average of 56% over 2012-17. Going forward, we expect utilization rate to decline further but stabilize at ~25% post 2023.

LPL maintains a history of paying ~50% of its distributable profits (2015-17) as dividends. In 2018, we conservatively expect the company to pay DPS of PKR2.5 (i.e. 40% of distributable profits, on account of liquidity concerns).

The Demise of Furnace Oil is a Boon for Lalpir: As per NEPRA’s generation data for Mar-18, the current electricity generation capacity of Pakistan stands at 29,331 MW up 19%YoY. Based on the projected addition of new capacities (including those under CPEC projects), we project 4,300/8,900 MW to be added to the power grid by Dec-18/Dec-22.

With government’s preference continued to be tilted towards LNG, Hydel (Neelum Jhelum and Tarbela 4th Extension expected to come online in 2018) and Coal, we maintain that reliance on Furnace Oil is projected to come down from 33% in FY17 to 12% in FY22.

Considering Lalpir Power’s (LPL) low position in NEPRA’s Merit Order List (ranked 74 out of 119 Thermal based power plants), we expect the company’s utilization rate to average at 21% for 2018, vs 46% in 2017 and an average of 56% over 2012-17. While the utilization is projected to remain erratic over 2018-23 (complete closure during low demand winter season), we have assumed an average utilization of 25% post 2023. Resultantly, we expect average fuel losses over 2018-21 to decline by 59% over those realized from 2014-17.

Fuel Losses Projected to Decline by 44%YoY in 2018: As per 1Q2018 detailed financial accounts, LPL reported a YoY EPS growth of 19% to PKR1.0 on the back of low utilization rate of 25% owing to industry wide curtailment in furnace oil based generation. Since the company actually consumes more than benchmark fuel consumption of 229 gms/kWh, our estimates suggest that lower utilization allowed LPL to post Fuel Losses of PKR168mn, down 11%YoY and lower by 18% when compared to average of preceding 8 quarters. This bumped LPL’s Gross Profits by 15%YoY during the quarter.

On annual basis, we project Fuel Losses to culminate at PKR516mn (down 44%YoY), which should further ease to PKR383mn by 2020F (vs Fuel Losses of PKR922mn in 2017).

Projecting 2018F Dividend Yield of 13%: Eyeing a 5 year CAGR of 22%, we project lower Fuel Losses to allow the company to increase its EPS from PKR2.6 in 2017 to PKR6.9 by 2022. However lower utilization also increases the risk of delayed Capacity Payments by the government to LPL. Resultantly, we have assumed payout at 40% of distributable profits in 2018 (vs an average of 50% over 2015-17). This translates into DPS of PKR2.5 in 2018, which is projected to gradually increase to PKR3.75 by 2022 (vs annual payout of PKR2/sh over 2015-17).

Based on last closing price of PKR19.25, the stock offers 2018F Dividend Yield of 13%, in addition to a compelling 71% upside to our Dec-18 PT of PKR33 (which incorporates an additional risk premium of 150bps owing to risks on timely capacity payments).

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