Written as on June 15, 2012
Highlights
• Narowal revised tariff impact: Bottomline to grow by 23%
• Rupee depreciation, another supporting factor
• Recommendation- Buy with Dec-12 TP at Rs49/sh
In today Value Seeker, we describe the impact of the Narowal’s revised tariff on the Hub Power Company’s (HUBC) bottomline coupled with our revise target price and recommendation for the company scrip.
Revised tariff to yield incremental 13% YoY bottomline growth in FY12
The Hub Power Company (HUBC) is again in the limelight after the approval of the Narowal’s revised tariff coupled with the on-going PKR depreciation. It was a long-awaited decision (Narowal project’s revised tariff), which has now materialized, as National Electric Power Regulatory Authority (NEPRA) has finally approved the revised tariff for HUBCO's Narowal venture.
With the revised tariff structure for the Narowal project, we estimate massive addition of ~Rs0.77 (+13% incremental to the base case) to HUBC’s EPS in FY12. Likewise, from FY13 onward, the impact is expected to be in the range of Re0.16 to Re0.20 on company’s EPS (+3-4% incremental on average). After incorporating this development into our financial model for the company, we have revised our target price for HUBC to for Dec-12 is Rs49/sh from Rs47/sh earlier, a jump of 4%.
Rupee depreciation, another supporting factor
Recent deprecation in the PKR against USD is expected to result in even better margins for the power sector companies in general, and HUBC in particular, since the tariff structure is indexed to USD while company’s reporting and distribution is in PKR terms. The Capacity Purchase Price (CPP) component of the tariff, which is indexed with PKR (PKR depreciation 4.1% YoY) which is a key component, company’s topline should therefore have positive impact due to this development.
Recommendation: ‘Buy’ with Dec-12 TP at Rs49/sh
With the revised tariff of HUBC’s Narowal plant and depreciation in PKR against USD, we expect the company will be able to add a significant amount to its bottomline, going forward. However, no concrete development towards limiting circular debt issue will continue to dent the company’s earnings as the liquidity issue urges the company to borrow funds from the financial institutions thereby increasing the financial burden. With the revised Dec-12 target price of Rs49/share, we recommend 'Buy' on the scrip which provides an upside of 18% while offering an attractive FY12 dividend yield of 14.8%.
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