Written as on June 12, 2012
Highlights
• IPPs facing a rough ride with liquidity constraints
• Tariff indexation with USD to provide cushion to topline earnings
• Recommendation 'Buy' on HUBC and KAPCO
In today's Value Seeker we present our analysis on developments in power sector along with our recommendation on sector's blue chips.
IPPs facing a rough ride with liquidity constraints
With low funds outlay by National Transmission and Dispatch Company Limited (NTDCL), local Independent Power Producers (IPPs) are facing substantial shortage of working capital requirements. However on other side, current depreciation in PKR against USD is positive developments which will improve the bottom line of the power producers. With decline in international oil prices, we expect it will also facilitate the Gov't FY13 budgetary targets for power sector subsidies.
Tariff indexation with USD to provide cushion to topline earnings
A major factor pulling the topline of the sector IPP is the accelerated depreciation of the PKR in 2QMFY12 (+10.2% YoY) along with increased US CPI; both of which serve as components that power sector's revenues are indexed with. During this quarter USD appreciated by 4.1%QoQTD against PKR therefore, we believe the power sector to take benefit of this development.
Circular debt still a big challenge
With no concrete steps observed to limit circular debt in this year budget, Gov't seems to be more inclined towards fixing the circular debt issue with short term measures. As past measures shows the Gov't took make shift solutions most of the time with issuance of TFCs and PIBs, we expect this issue to mount further pressure on fiscal economic factors and will remain a major challenge for Gov't. The current decline in oil prices will also provide some breather to power companies as the low prices oil will be available for improving utilization.
Low subsidy allocation in FY13 budget intends further tariff hike
In budget FY13 the Gov't has proposed lower overall subsidies, out of which Power subsidies stand at ~Rs185bn this time round, down 60% YoY from revised estimates (PEPCO subsidy down 68% to Rs135bn, KESC's up by 11% to R50bn for FY13) from revised estimates of Rs464bn during FY12. Although decline in subsidies is expected to increase electricity charges substantially, it would improve cash flows of this sector.
Recommendation 'Buy' on HUBC and KAPCO
With the target price of Rs47/share we recommend 'Buy' on HUBC. The scrip is currently trading at PE ratio of 6.6x and 6.9 coupled with dividend yield of 15.1% and 14.5% for FY12 and FY13 respectively. Likewise, at current levels, KAPCO is offering an upside potential of 24% with our Dec-12 TP of Rs54/share. With the FY12 and FY13 PE and dividend yield of 7.0x and 8.3x and 11.5% respectively, we recommend 'Buy' on KAPCO as well.
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