June 14, 2012 (JS Research)
FY12 has proven to be an eventful year for HUBC during which the two co-founders (Xenel Industries and National Power International Holding) took an exit from the company and the withholding tax matter on the issuance of shares to sponsors re-emerged. However, post COD Narowal tariff that is expected to be notified by NEPRA before the end of FY12 and the sliding PKR against USD (down 4.6% in 2012YTD) are to mitigate the negativity related to tax payment of Rs1,615mn, which translates into a cash outflow of Rs1.4/share. The Withholding Tax issue with the FBR may hamper its dividend paying ability for FY12. However, HUBC remains one of our top defensive picks in KSE due to its dividend yielding nature amid high earnings certainty. We currently have a ‘Buy’ call on the stock with the target price of Rs48.
Withholding tax issue and dividend payout
The issuance of shares to the sponsors against project development costs has been in the limelight lately due to non deduction of withholding tax on it. HUBC has recently decided to avail the scheme offered by FBR and pay Rs1,615mn which will waive off the penalties and any other charges related to late payment of withholding tax. The likely impact will be a cash outflow of Rs1.4/share which may hamper its dividend paying ability in its final year announcement of FY12. Previously, we were expecting a final dividend of Rs3/share in addition to Rs3/share paid as an interim dividend. However, with this development we may see a drop in final dividend payout to Rs2/share.
Impact on earnings
As per the management, this cash outflow may not impact the earnings until the final decision of Supreme Court in this regard. To recall, HUBC has filed an appeal in Supreme Court against the decision of Islamabad High Court after its dismissal by the later. The company may continue to report the cash outflow as receivable from FBR until the case is in progress.
Narowal tariff to be notified by NEPRA
The post Commercial Operation Date (COD) tariff is expected to be notified soon by NEPRA. The finalization of tariff for Narowal project is expected to result in enhanced earnings of ~Rs1/share in FY12 that will somewhat offset the negative impact of withholding tax issue on the earnings in case the Supreme Court decision comes against the company.
PKR depreciation against USD
As HUBC’s tariff payments are dollar based, its earnings are sensitive to exchange rate movements. Therefore, it is likely to benefit in the depreciating PKR environment as the PKR has depreciated 4.6% in 2012YTD.
Outlook
We believe the pending withholding tax issue may end up hampering the dividend paying ability of the company for FY12. Nevertheless, we remain positive on the stock, as it is still one of our top defensive picks owing to its dividend yielding nature amid high earnings certainty. Moreover, based on its rising Project Company Equity (PCE) component of the Capacity Purchase Price (CPP) and generation bonuses (in the midst of power supply shortfall in the country) the earnings stream also has a growth element attached to it. We currently have a ‘Buy’ call on the stock with the target price of Rs48.
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