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1
Highlights
Attractive Upside: We initiate coverage with a BUY rating on HUBCO on our DDM-based
target price of PKR 44.13. The stock is currently trading at a 2010 P/E of 7.65x, offering an
upside potential of 20% on the current price of HUBCO PKR 36.72.
Best Bet among IPPs: Unlike new IPPs, HUBCO has a U-Shaped tariff structure and its
Project Company Equity (PCE) is indexed to both PKR devaluation and US CPI (while other
IPPs only have exchange rate protected PCE). Furthermore, the GoP backing for fuel supply to
the company is expected to extenuate the shock of circular debt.
Resolution of Circular Debt to Boost Investor Buoyancy: Complete withdrawal of the
power subsidy through gradual increase in power tariff by 2.2% per month during the period
November 2010 to June 2011, would ease HUBCO’s counterparty risk. The move would
brace expected dividend yield and payout, thereby, uplifting investor confidence in the stock’s
returns.
Expansion to Augment Dividends: With the expansion of Narowal, Company has entered
into a growth phase, increasing its capacity by 20% and adding value of PKR 11.31 to our
target price.
This report is published for educational purposes
only by students competing in the CFA Institute
Global Investment Research Challenge.
HUB POWER COMPANY
Cherry Picking
November 26, 2010
Table 1: Market Profile
52 Week Price Range PKR 28.6 - PKR 37.01
Average Daily Volume 1.812 mn
Beta 0.703
Dividend Yield (Estimated) 13%
Shares Outstanding 1,157 mn
Market Capitalization PKR 42,490 mn
Book Value Per Share PKR 24.13
Debt to Total Capital 3.48x
Return on Equity 16%
8000
8500
9000
9500
10000
10500
11000
11500
15
20
25
30
35
40
40
11
9
40
14
1
40
16
4
40
19
0
40
21
1
40
23
3
40
25
4
40
27
7
40
29
8
40
31
9
40
34
0
40
36
1
40
38
2
40
40
3
40
42
4
40
44
9
40
47
0
40
49
2
Figure 1. HUBCO Vs KSE
HUBCO index
Source: Karachi Stock Exchange
Ticker: HUBC Recommendation: BUY
Price: PKR 36.72 Price Target: PKR 44.13
2009 2010 2011E 2012E 2013E 2014E
Turnover (PKR mn) 82,784 99,694 101,369 123,568 126,826 129,573
Net Profit (PKR mn) 3,645 5,557 4,692 6,281 7,010 7,182
EPS (PKR) 3.15 4.80 4.05 5.43 6.06 6.21
DPS (PKR) 2.35 4.49 4.62 5.97 6.47 6.46
BVS (PKR) 24.05 23.98 24.13 23.69 23.56 23.79
ROE 12% 19% 16% 22% 25% 26%
PER (x) 11.66 7.65 9.06 6.77 6.06 5.92
ROA 4% 5% 4% 5% 5% 6%
HUBCO Financial HighlightsTable 2: HUBCO Valuation Summary
2
17%
12%
9%
14%
35%
13%
Figure 2: Shareholding Structure of HUBCO
National power Xenel Fauji Fondation
Individuals FI Others
Source: Company Data
Plant Name
Installed
Capacity
(in MW)
Type of
Plant
Hub 1200 Thermal
Narrowal *214 Thermal
Laraib Energy *84 Hydel
Total 1498
Source: Company Data
*Narrowal COD expected in April 2010
*Laraib COD expected in June 2013
Table 3. Capacity Mix of HUBCO
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
Figure 3: Supply and Demand of Electricity in
Pakistan (MW)
Expected Available Generation
Demand (Summer Peak)
Source: PPIB
Business Description
The Hub Power Company, first private sector infrastructure project and second largest
Independent Power Producer in Pakistan, commenced operations in 1991 as a public
limited company. The sponsors include UK based International Power, Xenel of Saudia
Arabia, IHI of Japan and K&M of USA. The company is listed on Karachi, Lahore and
Islamabad stock exchanges and its global depository receipts are traded on Luxemburg
stock exchange.
The company is mainly engaged in developing and operating power stations. It sells
power to Water and Power Development Authority (WAPDA), its only customer, under a
guaranteed minimum off-take contract. The company operates on the basis of four main
agreements including Power Purchase Agreement (PPA) with WAPDA, Fuel Supply
Agreement (FSA) with PSO, Operating and Maintenance Agreement (O&MA) with
International Power and Implementation Agreement (IA) with the Government of
Pakistan (GoP).
The company originated with a thermal power plant, based on residual fuel oil (RFO).
With a gross generation capacity of 1292 MW, the plant is located near Hub in the
province of Baluchistan. Subsequently, it expanded power generation capacity by
installing a 213 MW RFO power station at Narowal in the province of Punjab which is
expected to come online by the third quarter of this fiscal year. In 2008, the company also
established Laraib Energy Limited to construct an 84MW hydro power project near the
New Bong Escape in Azad Jammu and Kashmir. HUBCO has a 75.5% controlling
interest in Laraib which is the first private sector hydro project in Pakistan. The project is
expected to come online in the FY20.
Industry Analysis
Factors Fueling Growth
Demand to Outpace Supply
The power situation in Pakistan has been critical over the past few years and is expected
to aggravate in the future. Demand has grown at a CAGR of 5.2% during the past ten
years whereas the supply increased by 2.2%, this gap can mainly be attributed to deficit
capacity building.
Currently the electricity production per capita of Pakistan is 512 kWh, which is very low
when compared to the other developing countries like Malaysia, Iran and Turkey etc
having a production per capita of more than 2500 kWh. Although the government has
made strenuous efforts in resolving the existing issues, the measures were adhoc and
largely short-term. A long-term well thought out strategy is desperately needed for an
efficient resolution of the energy crisis in the country.
3
68%
30%
2%
Figure 4: Nominal Power Generation Capacity (MW)
Thermal Hydro Nuclear
Source: SOI Report 2010
52%
9%
9%
9%
21%
Figure 5: Electricity Generation by Company
2008-2009
WAPDA KESC HUBCO
KAPCO Other IPPs
Source: Pakistan Energy Yearbook 2009
Heavy Reliance on Thermal Power
The total nominal power generation capacity of Pakistan as on June 30, 2010 was 21,593
MW of which 14,576 MW (68%) was thermal, 6,555 MW (30%) was hydroelectric and
462 MW (2%) was nuclear. With a heavy reliance on expensive thermal capacity,
Pakistan has been unable to improve its energy mix over the years. Frequent water losses
due to limited storage capacity and depletion of gas reserves have compelled the country
to resort to thermal based power generation. Although Pakistan has sufficient potential
for alternate sources of energy like coal, wind and solar, no proper measures have yet
been taken to initiate such projects.
Stakeholders
Electricity production in Pakistan is mainly contributed by Water and Power
Development Authority (WAPDA), Karachi Electricity Supply Company (KESC) and
Pakistan Atomic Energy Commission (PAEC). The development of IPPs since 1994 has
significantly contributed to power production capacity. WAPDA and KESC are
integrated public sector utilities which are responsible for the supply of electricity to the
country through 220 kV double circuit transmission lines.
National Electric Power Regulatory Authority (NEPRA) is the power sector regulator
managing the issuance of licenses for generation, transmission and distribution of electric
power and determining of the tariff rates. PEPCO was the public sector distributor which,
after 18 years of operation, was dissolved by the government in October 2010 on account
of huge losses and management inefficiencies. Post closure of PEPCO, its nine
distribution companies were made independent.
Independent Power Producers
Most of the IPPs are thermal based since set up costs of such plants are lower compared
to hydel power units. Currently 19 IPPs with an installed capacity of 6,600 MW are
operating in Pakistan, providing more than one third of total energy generation.
Corporate Structure
IPPs are established through public-private ownership for generating electricity and
supplying to the sole buyer WAPDA. IPPs are operating under various project
agreements with the government in addition to the power policies of 1994 and 2002.
Capital Structure
The minimum equity required for financing IPP in Pakistan is 20% of project capital cost
with at least 51% equity held by founder shareholders for up to 6 years from commercial
operation date. Moreover, 100% foreign shareholding is also possible.
Tariff Structure
The tariff structure of IPPs has two components namely; Energy Purchase Price (EPP)
and Capacity Purchase Price (CPP). Both these components are measured in per kWh.
The EPP deals with actual power generation and comprises of fuel and variable operating
and maintenance (O&M) costs that are indexed to inflation and exchange rate variation.
The CPP component is independent of the power generated and is based on base capacity
utilization. It is subdivided into escalable and non-escalable charges where the former
includes return on equity, fixed O&M and insurance costs (all indexed to inflation and
4
0
10,000
20,000
30,000
40,000
50,000
60,000
Source: PSO, Blaze Research
Figure 7: Furnace Oil Prices
Furnace Oil Prices(PKR/Ton)
exchange rate movements) and the latter accounts for debt servicing charges including
both principal and interest payments.
Lucrative Return Structure
IPPs have a very well defined return structure shielded from rising energy prices, interest
and operation costs backed by international and sovereign guarantees for fuel and energy
& capacity (E&C)) payments. The returns of IPPs are denominated in US dollars based
on a negotiated ROE with the government and assured cash flows over the project life.
Government Support to Stimulate Foreign Investment
The private sector has always received tremendous support from government in the form
of various incentives for the development of power. This is one major reason why
Pakistan’s power sector has always been eyed by foreign investors. Through the power
policy investors are guaranteed lucrative returns hedged against inflation and exchange
rate movements in addition to the government backing on trade debts.
Favorable Agreements and Tariff
Power Purchase Agreement (PPA)
PPA represents a contract between the IPPs and WAPDA whereby both the parties agree
upon conditions related to plant operation and tariff charges. So far there have been two
different PPAs signed in Pakistan with various IPPs: first under 1994 power policy of
Pakistan and second one under the 2002 Power Policy of Pakistan.
Implementation Agreement (IA)
The IPPs sign IA with the government which guarantees the performance of WAPDA in
terms of the conditions stipulated in the PPA.
Fuel Supply Agreement (FSA)
This agreement is signed between the IPPs and fuel contractors to ensure that fuel
requirements of the IPPs will be met. Unlike the first generation PPA, the second
generation PPA does not provide the guarantee of the government for fuel contract
obligations. However, this does not affect the financial health of the IPPs as the risk is
entirely passed on to the fuel supplier.
The Operation and Maintenance Agreement (O&MA)
The O&M Agreement between the IPPs and their respective contractors ensures that the
latter efficiently adhere the operations and performance standards of the IPPs plants.
Industry Threats
Energy Price Hike
Pakistan’s energy bill has surged due to escalating international oil prices coupled with
rupee devaluation. Over the last five years, furnace oil prices rose by a CAGR of 29%
from PKR 24,263/ton in 2006 to PKR 47,500/ton triggering an increase in electricity
prices. Against this backdrop, the rising inclination of private sector towards the RFO
based plants is not suitable for the Pakistan’s economy in the long run. The cost of
thermal energy has reached at its peak, due to which subsidy is provided by the
Revenue
•EPP: Fuel Cost +Variable CostCPP: Fixed Cost + Project Company Equity(PCE) + Principle Repayments + Interest Expense(IE)
Operating Costs
•Fuel Cost + Variable Cost + Fixed Cost
Operating Profit
•PCE + Principle Repayment + IE
Other Income
•Interest Income(I)
EBITDA
•PCE + Principle Repayments + I +IE
Non cash charges
•Depreciation + Amortization(A)
EBIT
•PCE +Principe Repayment - A + I + IE
Financial Charges
•IE
PAT
•PCE + Principle Repayment - A+ I
Source: Blaze Research
Figure 6: Tariff Structure
5
PEPCO Receivable 181 PEPCO Payable 211
Private 93 IPPs 111
KESC 38 Oi l Companies (PSO+APL) 27
Sindh Government 20 Wapda Hydel 45
Fed Government Tube wel l 5 Renta l Projects 9
Others 26 Gas Companies 20
Source: SOI 2010
(bn PKR)(bn PKR)
Table 4: Trade Debt Position of PEPCO
government. The major threat entailing the industry is the IMF’s conditionality to remove
subsidy.
Circular Debt
Pakistan faces severe internal liquidity crisis especially in the energy sector with almost
every other company indebted to the government or consumer/supplier. Theft of
electricity in the country is major cause of circular debt with likes of KESC having 57%
collection ratio.
Out of the 9 electric distribution companies in the country, 5 have high transmission and
distribution losses. Transmission losses result in load shedding leading to low revenues
for these companies which aggravates the issue of circular debt. One of the main causes
for the inefficiency is the deteriorating distribution system which results in overload and
tripping of main power grids.
Net circular debt position decreased by 16.9% in June 2010 from PKR 216 billion in the
corresponding period last year. This was mainly possible through issuance of TFCs worth
PKR 80 billion and 82 billion in March and September respectively. However, this
proved to be short term measure as the level rose to PKR 235 billion in October 2010.
Power Price Hike to Reduce Circular Debt
Recently, the government has announced a gradual phase out of subsides through power
price hike of 17.6% during November 2010-June 2011 to reduce the disparity between
average cost of power generation and power tariff. We believe that this step will
considerably alleviate the circular debt levels of IPPs.
Healthy Payout despite Circular Debt
Circular debt significantly raised receivable and payable levels of IPPs. Nonetheless
companies particularly HUBCO and KAPCO seem to be indifferent, maintaining healthy
payout ratio in excess of 95%.
Risks
Possible Difficulty in Meeting Obligations Related To Financial Liabilities
The CPP and EPP charges of the company are passed on to WAPDA hence any delay by
WAPDA in this regard affects company’s payment obligations, mainly fuel and debt
servicing charges. The company manages its liquidity risk through running finance
facilities which cover short term funding needs triggered by delaying payments from
WAPDA. As far as payments to PSO are concerned they are compensated by delay in
payments by WAPDA.
Possible HUBCO Default on Numerous Obligations
The guarantee of GoP on the performance of WAPDA ensures the recovery of trade debts
and other receivables which minimizes the company’s credit risk to a great extent.
Exchange Rate Risk on FX Loans
6
Volatility in exchanges rates and unavailability of foreign exchange hamper the
company’s ability to cope with its debt obligations particularly towards off-shore lenders.
The PPA provides the company with the advantage of tariff indexation for any currency
depreciation on the foreign debt element (along with other factors), thereby, mitigating
the exchange rate risk. The government provides guarantee for the accessibility and the
hedging of total foreign currency liability.
Interest Rate Risk
Fluctuations in market interest rates may require the company to pay higher debt
servicing charges, thus reducing its net cash flow. This risk is mostly dealt with given the
fixed lending rates on company’s debt or alternatively through hedging arrangement at
the preference of the lenders.
Poor Performance of Plant
Revenues are highly dependent on plant performance which is determined by various
factors including heat rates, plant availability, dependable capacity and emissions. A
deficiency in any of these factors may lead to payment of penalties to WAPDA or PSO.
The risk of loss in revenues owing to poor plant performance is, however, low as the
company’s O&M contractor, International Power, is a well-reputed equipment supplier
which has also taken certain equity in the project. International Power is accountable as
per O& M Agreement for penalties in case of non-performance and bonuses for
efficiency.
Delays in Fuel Supply
HUBCO’s fuel input remains contingent to timely delivery of supplies by PSO. Hence,
any potential supply delays or bottlenecks will assume the added risk of paying penalty
charges to WAPDA as per PPA. These penalty charges can later be recovered via
payment of liquidated damages from PSO.
Inadequate Management Control by the Company
Any inefficiency on the part of company’s management can lead to improper monitoring
of the operator’s performance consequently affecting company’s cash flows. This risk is
mainly addressed by the current management structure consisting of highly skilled and
experienced staff; moreover, guarantees and Liquidated Damages (LDs) can be called
from EPC the O&M contractors on their poor performance.
Political Risk
Tax Rate Changes
The company along with other IPPs is exempt from all taxes and duties. Any change in
this policy in future may reduce profitability; however, this contingency is also taken into
account in the Implementation Agreement.
Penalty on Delay in Narowal
The company is liable for the payment of liquated damages to WAPDA on a daily basis
by delaying the commercial operation date for Narowal project beyond September 2010.
This risk is, however, offset by passing these charges to the EPC contractor, MAN diesel.
RISKS RISK MITIGANTS
Change In IPP's taxation
pol icy
principle of change in Taxation
pol icy secured under the
implementation Agreement
Delay in COD of Narrowal
caus ing payment of
l iquidation damages to
WAPDA
Offset this ri sk by pass ing
these charges to EPC
contractor,MAN diesel
Table 5: Risk Profile
Delayed payment by
WAPDA caus ing financia l
constra ints
Company continues with
running finance faci l i ty to meet
working capita l requirement
Minimal exposure to
credit ri skGOP guarantee for recovery of
company's trade debts and
other receivables
Volata l i ty in Exchange
rates Hinder abi l i ty to
meet off-shore lender
debt obl igations
The PPA provides tarri f
indexation for currency
deprication on foreign debt
Volati l i ty in interest
rates led to higher debt
servicing charges and
reduced net cash flow
Overcome i t with fixed lending
rates and hedging
arangements
Delay in supply of fuel by
PSO leading to penalty
charges to WAPDA
Liquidation damages pa id to
WAPDA can later be fl ipped by
l iqudation damages pa id by
PSO
Inefficiency by the
company mangement
affecting cash flows
Highly ski l led management
s tructure
Poor performance of
plant resulting in
payment of penalties to
WAPDA
O&M agreement with
International Power Plc has
downs ize the risk
Source: Blaze Research
7
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Figure 8: Revenue Breakup (PKR mn)
Old Plant Narowal
Source: Company Data, Blaze Research
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
Figure 9: Return on Asset and Equity
ROE ROA
Source: Company Data, Blaze Research
0%10%20%30%40%50%60%70%80%90%
100%
Figure 10: Debt Mix
Long term debt to total debt Current liabilities to total debt
Source: Company Data, Blaze Research
Financial Analysis
Buoyant Revenues
With increased operational efficiency, HUBCO has become successful in reaching a
revenue level of PKR 99bn (EPS: PKR 3.15) for the FY10 in comparison to turnover of
PKR 82bn for FY09, a YOY increase of 20%. We expect the revenue to maintain an
increasing trend through FY15, despite a conservative assumption for load factor of 75%
of the existing plant. This expected growth in revenue is primarily attributed to Narowal
project and indexation against rupee depreciation as well as inflation. A Generation
bonus that company receives due to operational efficiency and load factor improvement
will also contribute to revenue. However, due to a conservative approach, we have not
incorporated this revenue head in our projections.
Strong Earnings Stream
HUBCO reported a net profit of PKR 5.5bn for FY10, growth of 52.5% over the
preceding year. ROE has shown significant growth over the past 3 years, hovering in the
range of 9%-19%. We expect a slight slump in the earnings for FY11 mainly due to
increased finance cost on amplified short term borrowings. Going forward, earnings are
projected to increase at a CAGR of 16% during FY12-15. A u-shaped PCE structure will
contribute to earnings growth in future.
Capacity Building to Enhance Balance Sheet Size
HUBCO has so far incurred a capital expenditure of PKR 21bn in setting up Narowal
plant and an additional PKR 2.7 bn will be invested in this project during FY11.
Furthermore, the company has invested PKR 2.6bn in Laraib Energy which will require
another US$23.7mn in the next 2 years. We expect asset utilization to maintain an
encouraging trend increasing from 0.81 in FY10 to 1.04 FY15.
Liquidity
The company has managed to maintain a satisfactory current ratio since the delay in
accounts receivable due to circular debt has been offset to a large extent by increasing
days payable. We expect the similar trends to continue through FY15.
Leverage
Total debt to assets ratio of the company is expected to remain in the range of 78-80%
during FY11-15. Short term liabilities will comprise 8 to 10% of total debt resulting from
sharp increase in accrued accounts payable triggered by circular debt issues. We expected
the issue to be resolved post FY15 based on a conservative approach. The company is
compensated for any mark-up on accrued payables by WAPDA, hence nullifying the
effect of such liabilities on interest cost. Furthermore, the debt position reflects the fact
that despite aggressive expansion the company has managed to restrain the share of long
term debt in total debt.
8
Investment Summary
We recommend a BUY on HUBCO based on its strong revenue growth, healthy payout
and attractive dividend yield. A U-shaped PCE and protection against US CPI inflation
and PKR devaluation will feature as key investment considerations. Ongoing capacity
expansions will further add value to the stock.
Inflation and Devaluation Cover: An Added Advantage
HUBCO’s tariff profile insulates its earnings against inflation and exchange rate
devaluation. We have assumed an annual Rs/$ devaluation of 2.8% and US CPI as
forecasted in the Labor Bureau of Statistics for FY11-20 at 2.4%.
The sensitivity with respect to change in US CPI inflation and PKR devaluation has
significant impact on our fair valuation for HUBCO’s stock. A change of 50 basis points
in our assumption of PKR devaluation and US CPI inflation will result in approximately
2% and 1.5% change in the fair value respectively.
PCE in Growing Phase
Besides a hedge against inflation and exchange rates, the earnings of shareholders are
also supported by the in-built growth in PCE. The U-shaped PCE is currently in a growth
phase and this upward trend will continue to support HUBCO’s earnings over the entire
life of the project. PCE will grow in real terms at a CAGR of 2.2% during FY11-FY15.
Robust Payout
The company has maintained strong payout ratio in excess of 70% over the past, (in
some years in excess of 100%). According to our estimates, the company will maintain
an average payout ratio in excess of 100% through FY15.
Expansion Endeavors to Fuel Growth
With the Narowal project the company has entered a growth phase, increasing its
capacity by 20%. Moreover the acquisition of 75% stake in Laraib Energy will add value
to the company, although we have not incorporated it in our calculations.
Surety of Payments from WAPDA
HUBCO’s cash flow streams are deteriorating due to delay in payments by WAPDA,
which is a key consideration for investors eyeing for a dividend yielding stock.
Payments from WAPDA are guaranteed by Government of Pakistan, thus easing the
company’s cash flow position and ensuring the future consistency of dividend yields.
Generation Bonus
The PPA rewards the company with a generation bonus on a higher load factor (in
excess of 60% base utilization). However, we have not incorporated the values of
generation bonus in our earnings expectations. Given the growing trend of the load
factor over the recent year, returns from production bonus are inevitable.
-10%
0%
10%
20%
30%
40%
50%
-
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
Project Company Equity (In Millions)
Project Company Equity (in millions) growth rate
Source: Company
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2005 2006 2007 2008 2009 2010
Return on Equity and Payout
ROE Payout Ratio
Source: Blaze Research
9
Particulars Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 ….. Terminal Value
Period(n) - 1 2 3 4 5
Dividend Paid (PKR mn) 5,349.13 6,905.63 7,485.43 7,475.10 8,409.39 9,552.23 …..
4.62 5.97 6.47 6.46 7.27 8.25 ….. 0
DDM Value (PKR) 44.13
Upside Potential 23%
Risk free rate 14%
Market risk premium 5%
Beta 0.703
Cost of Equity 17%
Table 5: Valuation Summary
Valuation
We have valued HUBCO by using the Dividend Discount Model because of the high
payout ratio of IPPs. We discounted all the dividends of the company throughout the life
of the project. The cost of equity is assumed at 17%, by taking 5-year PIB return of
13.75% as risk-free rate, a market risk premium of 5% and a beta of 0.703. Based on this
discount rate, we have valued HUBCO at a target price of PKR 44 per share showing
upside potential of 23% based on the price of PKR36.72 as of 24 November 2010.
New expansion plants to fire up the value
Narowal project has added PKR 11.31 to the stock price of HUBCO. Laraib subsidiary
will further add value to the price as Hydel project is providing an IRR of 17%, although,
we have not incorporated this in our valuation
Table 6 Value Drivers DDM Value from old Hub Plant
PKR 32.82
Value from Narowal pant
PKR 11.31
Target Price PKR 44.13
10
49.6147.95
46.3844.89
43.4742.12
40.84
30
35
40
45
50
55
0.155 0.16 0.165 0.17 0.175 0.18 0.185
Figure 13: Target Price Sensitivity
DDM Value
Source: Blaze Research
Risk To the valuation.
EPC contractor MAN diesel Germany was unable to meet the contractual COD of
Narowal and it was delayed twice initially. It is now expected to come online in April
2011 according to company sources. Under the PPA HUBCO is bound to pay the penalty
of delay to the WAPDA, although it is almost offset by the liquidity claims made to the
MAN diesel. Our calculations estimate that a further delay of three months in COD
would reduce the target price by 1.08/share.Sensitivity to discount rate
Sensitivity to discount rate
Valuation of HUBCO is sensitive to discount rate, with every change in 50 basis point
change in discount rate there is approximate 3.01% change in the target price
Target Price Sensitivity
2.40% 2.60% 2.80% 3.00% 3.20%
2.00% 41.81 42.58 43.37 44.17 44.99
2.20% 42.41 43.19 43.99 44.81 45.64
2.40% 43.02 43.81 44.63 45.45 46.3
2.60% 43.64 44.45 45.27 46.11 46.97
2.80% 44.27 45.09 45.93 46.78 47.65
Table 7: TARGET PRICE SENSITIVITYExchange Rate Devaluation
US
CP
I
11
APPENDIX
A. Balance Sheet (PKR mn) 2009 2010 2011E 2012E 2013E 2014E
ASSETS
NON-CURRENT ASSETS
Property plant and equipment 37,895.72 49,614.60 50,663.45 48,443.89 46,213.50 43,871.24
Intangibles 2.25 8.37 5.00 5.00 5.00 5.00
Stores and spares 637.02 637.02 637.02 637.02 637.02 637.02
Investment in subsidiary 656.46 2,610.12 3,617.25 4,624.50 4,624.50 4,624.50
Other assets (Long term Deposits and Prepayments) 4.28 4.13 60.00 60.00 60.00 60.00
39,195.73 52,874.24 54,982.72 53,770.41 51,540.02 49,197.77
CURRENT ASSETS
Inventory of Fuel oil 2,540.89 1,559.88 1,553.53 1,652.63 1,682.61 1,731.04
Trade debts 46,629.46 66,712.46 72,207.77 79,557.38 81,654.87 76,323.98
Advances, Prepayments and other receivables 785.81 739.63 1,189.76 1,189.76 1,189.76 1,189.76
Cash and bank Balances 1,033.79 809.31 927.60 1,101.47 1,129.12 1,157.48
50,989.94 69,821.28 75,878.66 83,501.25 85,656.36 80,402.26
TOTAL ASSETS 90,185.67 122,695.51 130,861.38 137,271.66 137,196.38 129,600.02
EQUITY AND LIABILITIES
SHARE CAPITAL AND RESERVES
Authorised 12,000.00 12,000.00 12,000.00 12,000.00 12,000.00 12,000.00
Issued subscribed and paid-up 11,571.54 11,571.54 11,571.54 11,571.54 11,571.54 11,571.54
Unappropriated profit 17,960.81 18,309.73 17,652.12 17,027.42 16,551.86 16,259.00
29,532.35 29,881.28 29,223.66 28,598.96 28,123.41 27,830.54
NON-CURRENT LIABILITIES
Long Term Loans 11,340.91 23,444.52 27,591.98 26,359.64 25,538.63 20,877.39
CURRENT LIABILITIES
Short term borrowings 3,582.25 6,743.60 5,779.85 7,006.58 8,586.09 9,859.43
Trade and other payables 43,970.16 59,595.33 65,711.80 69,745.69 71,361.79 67,228.51
Interest/mark-up accrued 765.94 1,317.96 1,331.14 1,344.45 1,357.90 1,371.48
Current maturity of long term loans 979.06 1,655.93 1,222.95 4,216.34 2,228.57 2,432.68
60,653.32 92,814.24 101,637.72 108,672.70 109,072.97 101,769.48
TOTAL EQUITY AND LIABILITIES 90,185.67 122,695.51 130,861.38 137,271.66 137,196.38 129,600.02
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B. Income Statement (PKR mn) 2009 2010 2011E 2012E 2013E 2014E
REVENUES 82,783.92 99,694.26 101,368.60 123,567.85 126,825.65 129,573.26
OPERATING COSTS
Fuel Cost 71,894.69 86,246.92 84,389.50 86,330.46 88,402.39 90,524.04
Oper. & Maint. 2,360.43 2,707.22 2,340.15 2,434.81 2,535.71 2,641.21
Insurance 409.80 542.27 549.03 555.88 562.81 569.83
Misc. 330.27 812.36 548.93 565.03 580.20 592.29
Narowal Operting Cost - - 4,932.09 20,260.99 20,830.75 21,420.62
74,995.18 90,308.78 92,759.71 110,147.18 112,911.85 115,748.00
7,788.74 9,385.49 8,608.89 13,420.67 13,913.79 13,825.27
Admin and selling Expenses 342.94 367.73 383.38 426.57 476.90 535.73
EBITDA 7,445.80 9,071.02 8,225.51 12,994.11 13,436.89 13,289.54
Depreciation Charge 1,706.72 1,720.18 1,880.57 2,678.04 2,704.12 2,725.54
EBIT 5,739.08 7,350.85 6,344.94 10,316.06 10,732.77 10,563.99
Finance cost 2,094.50 1,793.59 1,653.43 4,035.13 3,722.89 3,381.76
PROFIT FOR THE YEAR 3,644.58 5,557.25 4,691.51 6,280.93 7,009.88 7,182.23
C. Cash flow Statement (PKR mn) 2009 2010 2011E 2012E 2013E 2014E
CASHFLOWS FROM OPERATING ACTIVITIES 15,113.85 3,912.89 6,880.89 13,822.43 12,751.18 16,223.13
CASHFLOWS FROM INVESTING ACTIVITIES (6,330.65) (14,885.41) (2,558.62) 1,212.31 2,230.39 2,342.25
CASHFLOWS FROM FINANCING ACTIVITIES (964.99) 6,437.80 (7,444.18) (12,349.79) (12,929.59) (12,919.26)
BEGINNING CASH BALANCE (9,217.77) (1,399.56) (5,934.29) (9,056.19) (6,371.25) (4,319.28)
ENDING CASH BALANCE (1,399.56) (5,934.29) (9,056.19) (6,371.25) (4,319.28) 1,326.85
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Disclosures:
Ownership and material conflicts of interest: The author(s) or a member of their household, of this report does not hold a financial interest in the security of this company.
The author(s) or a member of their household, of this report does not know of the existence of any conflicts of interest that might
bias the content or publication of this report.
Receipt of compensation: Compensation of the author(s) is not based on investment banking revenue.
Position as an officer or director: The author(s) or the member of the household, does not serves as an officer, director or advisory board of members of the subject
company.
Market Making: The author(s) does not act as a market maker in the subject company’s securities.
Ratings Guide: Banks rate companies as a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute
returns of 15% or greater over the next twelve months period, and recommends that the investors take a position above security’s
weight in the KSE 100 index, or any other relevant index. A SELL rating is given when the security is expected deliver negative
returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.
Investment Research Challenge and Global Investment Research Challenge Acknowledgement: CFA Pakistan Investment Research Challenge as part of the CFA Institute Global Investment Research Challenge is based on the
Investment Research Challenge originally developed by the New York Society of Security Analysts.
Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the
author(s) to be reliable, but the author(s) does not make any representation or warranty express or implied as to its accuracy or
completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This
information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any securities. This
report should not be considered to be a recommendation by any individual affiliated with CFA Pakistan, CFA Institute or the
Global Investment Research Challenge with regard to this company’s stock.
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