HubPowerCompany

Beinsafehands
FridayJanuary11,2013

BUY
TargetPriceJun13:PKR52
CurrentPrice:PKR45
Bloomberg

HUBC.PA

Reuters

HPWR.KA

MCAP(USDmn)

535

12MADT(mnsh.)

2.2

SharesOutstanding

Hubcoemergesasourfavoritepickinthepowersectorashighlightedinourstrategy
report titled Pakistan Market Outlook 2013:Scaling New Heightscombining an
irresistibledividendyieldwithatremendousgrowthstory

Theprofitabilityofthecompanyisallsettogrowonthebackof1)depreciatingPak
rupeeandincreaseincompanysProjectCompanyEquity(PCE)component

Despite fresh concerns over the companys cashflows, we keep our assumptions
intactandexpectthecompanytopayPKR6.5/shinFY13withthehelpofshortterm
borrowingsandfundsreleasedfromNTDC

Laraib Power project, the second expansion inline is expected to bode well for the
company due to its attractive USD internal rate of return (IRR) of 17% and relative
immunityfromcirculardebt(hydelbased)

At our Jun13 TP of PKR 52/sh, the stock offers an upside of 16% alongwith an
irresistibledividendyieldof15%BUY!

1,157

Valuations

2011A

2012F

2013F

EPS

7.1

7.3

7.8

DPS

6.0

6.5

7.0

Hubco emerges as our favorite pick in the power sector as highlighted in our strategy
report titled Pakistan Market Outlook 2013:Scaling New Heightscombining an
irresistibledividendyieldwithatremendousgrowthstory.

HUBCvs.KSE100RelativeChart
KSE100Index

Profitabilitytogrow

HUBC

180
160
140

TheprofitabilityofthecompanyisallsettogrowinFY13too(EPS:PKR7.3/sh)giventhe
currenteconomicscenario.Thegrowthinprofitabilityisexpectedtobeprimarilydriven
by the 1) devaluation in Pak Rupee 2) increasing revenue stream from Narowal and 3)
~1.5%increaseinthecompanysinbuiltProjectCompanyEquity(PCE)component.

Whataboutcashflows?

120
100
Dec12

Oct12

Nov12

Sep12

Jul12

Aug12

Jun12

Apr12

May12

Feb12

Mar12

Jan12

80

HUBC Profile: The Hub Power Company Ltd.

wasincorporatedinPakistanonAugust1,1991.
The principal activities of the company are to
develop, own, operate and maintain power
stations.TheCompanyownsanoilfiredpower
station of 1200MW (net) in Balochistan (Hub
Plant) and a 214MW (net) oilfired power
station in Punjab (Narowal Plant).The company
also has a 75% controlling interest in Laraib
Energy Limited, a subsidiary company which
owns an under construction hydel power
projectof84MW.

TheCODofNarowalbroughtaboutariseinthecompanysprofitabilityhowever;alldid
not go as planned. The Narowal project faces severe liquidity problems as National
Transmission and Dispatch Company (NTDC) continues to fall short of its obligations.
Furthermore,itismandatoryfortheplant(establishedunderthe2002policy)topayin
advanceforthefuelsupply,failingtodosoresultsinplantclosure,furtheraddingtothe
liquidity woes of HUBC (Narowal). We do not see any out of the box solution for the
circulardebtissuethisyear.However,fundsreleasedbythegovernmentwilleasesome
pressureoffthemountingreceivables,webelieve.

PowerSubsidyexhaustedgoodnewsforIPPs!
The government of Pakistan has exhausted the entire amount of power subsidies
(PKR170bn)allocatedfortheyearduringthefirstfivemonthsofFY13.Thisisindicativeof
thegovernmentsinsistencetoreleasefundsinordertominimizepoweroutagesinthe
election year. We believe the second largest power producer in the country, HUBC, is
likelytobenefitfromsuchdisbursementsalongwiththeentireenergychain.

Anenticingdividendyieldof15%
ZoyaAhmed
zoya.ahmed@bmacapital.com
+92111262111Ext:2053

Despite fresh concerns over the companys cashflows, we keep our assumptions intact
andexpectthecompanytopayPKR6.5/shinFY13withthehelpofshorttermborrowings
andfundsreleasedfromNTDC.Evenifthecompanyskipsitshalfyearpayoutasindicated

bythemarket,theresultantdepressioninstockpricewouldpresentawonderfulbuying
opportunity to the investors. Furthermore, we believe the management would
compensateitsinvestorsinthefullyear.

Laraib:theotherNarowal?
Laraib Power project (84MW), the second expansion project (Hubcos stake: 75%), is
expectedtocomeonlinesoonerthanscheduled(midCY13),accordingtosources.Asthe
projectishydelbased,webelievetheexpansiontobodewellforthecompanyduetoits
relativeimmunityfromcirculardebtunlikefurnaceoilbasedNarowal.Nottoforget,the
governmenthaslaidoutanevenhigherindicativeUSDIRRforhydelgenerationat17%;
wherecurrentlyHUBCOistheonlycompanythatissettingupahydelplant.However,we
havenotincorporatedtheearningsfromLaraibinourfinancialmodelasweawaitCOD
andfinalizationoftariff.Thisremainsakeyupsiderisktoourvaluations.

Outlook:combininggrowthandvaluetogethertoyield31%!
Hubco emerges as our favorite pick in the power sector as it combines an irresistible
dividend yield with a tremendous growth story. Our TP for the scrip works out to
PKR52/shprovidinganupsideof16%fromthecurrentlevels.Andthisisnotall!Thestock
furtherpromisesacompellingdividendyieldof15%,farmoreattractivethananyother
investmentavenueBUY!