HUB POWER COMPANY

This report is published for educational purposes

only by students competing in the CFA Institute
Global Investment Research Challenge. Cherry Picking
Ticker: HUBC Recommendation: BUY
November 26, 2010 Price: PKR 36.72 Price Target: PKR 44.13

Table 1: Market Profile

Highlights
52 Week Price Range PKR 28.6 - PKR 37.01
 Attractive Upside: We initiate coverage with a BUY rating on HUBCO on our DDM-based
Average Daily Volume 1.812 mn 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.
Beta 0.703

Dividend Yield  Best Bet among IPPs: Unlike new IPPs, HUBCO has a U-Shaped tariff structure and its
(Estimated) 13% 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
Shares Outstanding 1,157 mn the company is expected to extenuate the shock of circular debt.

Market Capitalization PKR 42,490 mn  Resolution of Circular Debt to Boost Investor Buoyancy: Complete withdrawal of the
Book Value Per Share PKR 24.13 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
Debt to Total Capital 3.48x brace expected dividend yield and payout, thereby, uplifting investor confidence in the stock’s
returns.
Return on Equity 16%
 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.

Figure 1. HUBCO Vs KSE

HUBCO
Table Financial
2: HUBCO Highlights
Valuation Summary

40 11500 2009 2010 2011E 2012E 2013E 2014E

11000
35
30
10500
10000
Turnover (PKR mn) 82,784 99,694 101,369 123,568 126,826 129,573
25 9500
9000
Net Profit (PKR mn) 3,645 5,557 4,692 6,281 7,010 7,182
20
8500
15 8000 EPS (PKR) 3.15 4.80 4.05 5.43 6.06 6.21
40119
40141
40164
40190
40211
40233
40254
40277
40298
40319
40340
40361
40382
40403
40424
40449
40470
40492

DPS (PKR) 2.35 4.49 4.62 5.97 6.47 6.46

HUBCO index BVS (PKR) 24.05 23.98 24.13 23.69 23.56 23.79
Source: Karachi Stock Exchange
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%

1
 Figure 2: Shareholding Structure of HUBCO
Business Description
13%
The Hub Power Company, first private sector infrastructure project and second largest
17%
Independent Power Producer in Pakistan, commenced operations in 1991 as a public
limited company. The sponsors include UK based International Power, Xenel of Saudia
12% 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
35%
9% stock exchange.
14%
The company is mainly engaged in developing and operating power stations. It sells
National power Xenel Fauji Fondation power to Water and Power Development Authority (WAPDA), its only customer, under a
Individuals FI Others guaranteed minimum off-take contract. The company operates on the basis of four main
agreements including Power Purchase Agreement (PPA) with WAPDA, Fuel Supply
Source: Company Data
Agreement (FSA) with PSO, Operating and Maintenance Agreement (O&MA) with
International Power and Implementation Agreement (IA) with the Government of
Table 3. Capacity Mix of HUBCO
Pakistan (GoP).
Installed
Type of
Plant Name Capacity
Plant The company originated with a thermal power plant, based on residual fuel oil (RFO).
(in MW)

Hub 1200 Thermal With a gross generation capacity of 1292 MW, the plant is located near Hub in the
Narrowal *214 Thermal province of Baluchistan. Subsequently, it expanded power generation capacity by
Laraib Energy *84 Hydel installing a 213 MW RFO power station at Narowal in the province of Punjab which is
Total 1498 expected to come online by the third quarter of this fiscal year. In 2008, the company also
*Narrowal COD expected in April 2010
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
*Laraib COD expected in June 2013
interest in Laraib which is the first private sector hydro project in Pakistan. The project is
Source: Company Data
expected to come online in the FY20.

Figure 3: Supply and Demand of Electricity in

Industry Analysis
Pakistan (MW)
Factors Fueling Growth
45000
40000 Demand to Outpace Supply
35000
30000
25000
The power situation in Pakistan has been critical over the past few years and is expected
20000 to aggravate in the future. Demand has grown at a CAGR of 5.2% during the past ten
15000 years whereas the supply increased by 2.2%, this gap can mainly be attributed to deficit
10000
5000 capacity building.
0
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
Expected Available Generation 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
Demand (Summer Peak)
largely short-term. A long-term well thought out strategy is desperately needed for an
Source: PPIB
efficient resolution of the energy crisis in the country.

2
 Figure 4: Nominal Power Generation
Capacity (MW) Heavy Reliance on Thermal Power
2%
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
30% 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
68% 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.
Thermal Hydro Nuclear

Source: SOI Report 2010 Stakeholders

Figure 5: Electricity Generation by Company Electricity production in Pakistan is mainly contributed by Water and Power
2008-2009
Development Authority (WAPDA), Karachi Electricity Supply Company (KESC) and
Pakistan Atomic Energy Commission (PAEC). The development of IPPs since 1994 has
21%
significantly contributed to power production capacity. WAPDA and KESC are
integrated public sector utilities which are responsible for the supply of electricity to the
9%
country through 220 kV double circuit transmission lines.
9%
52%
National Electric Power Regulatory Authority (NEPRA) is the power sector regulator
9%
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,
WAPDA KESC HUBCO after 18 years of operation, was dissolved by the government in October 2010 on account
KAPCO Other IPPs of huge losses and management inefficiencies. Post closure of PEPCO, its nine
Source: Pakistan Energy Yearbook 2009 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

3
 Figure 6: Tariff Structure
Revenue
•EPP: Fuel Cost +Variable Cost
CPP: Fixed Cost + Project Company
Equity(PCE) + Principle Repayments +
Interest Expense(IE)
Operating Costs
•Fuel Cost + Variable Cost + Fixed Cost
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
Operating Profit
of various incentives for the development of power. This is one major reason why
•PCE + Principle Repayment + IE 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
Other Income rate movements in addition to the government backing on trade debts.
•Interest Income(I)
Favorable Agreements and Tariff

Power Purchase Agreement (PPA)

EBITDA
•PCE + Principle Repayments + I +IE 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
Non cash charges Pakistan and second one under the 2002 Power Policy of Pakistan.
•Depreciation + Amortization(A)
Implementation Agreement (IA)

EBIT The IPPs sign IA with the government which guarantees the performance of WAPDA in
•PCE +Principe Repayment - A + I + IE terms of the conditions stipulated in the PPA.

Financial Charges Fuel Supply Agreement (FSA)

•IE 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
PAT
obligations. However, this does not affect the financial health of the IPPs as the risk is
•PCE + Principle Repayment - A+ I
entirely passed on to the fuel supplier.

Source: Blaze Research The Operation and Maintenance Agreement (O&MA)

The O&M Agreement between the IPPs and their respective contractors ensures that the
Figure 7: Furnace Oil Prices
latter efficiently adhere the operations and performance standards of the IPPs plants.
60,000
50,000 Industry Threats
40,000
30,000 Energy Price Hike
20,000
10,000 Pakistan’s energy bill has surged due to escalating international oil prices coupled with
0 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
Furnace Oil Prices(PKR/Ton) 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
Source: PSO, Blaze Research

4
 government. The major threat entailing the industry is the IMF’s conditionality to remove
subsidy.

Circular Debt
Table 4: Trade Debt Position of PEPCO
(bn PKR) (bn PKR) Pakistan faces severe internal liquidity crisis especially in the energy sector with almost
PEPCO Receivable 181 PEPCO Payable 211 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%
Private 93 IPPs 111
collection ratio.
KESC 38 Oil Companies (PSO+APL) 27
Sindh Government 20 Wapda Hydel 45 Out of the 9 electric distribution companies in the country, 5 have high transmission and
Fed Government Tube well 5 Rental Projects 9 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
Others 26 Gas Companies 20
for the inefficiency is the deteriorating distribution system which results in overload and
Source: SOI 2010 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

5

Table 5: Risk Profile
RISKS
Del a yed pa yment by
WAPDA ca us i ng fi na nci a l runni ng fi na nce fa ci l i ty to meet
cons tra i nts
Mi ni ma l expos ure to
credi t ri s k
Vol a ta l i ty i n Excha nge
ra tes Hi nder a bi l i ty to
meet off-s hore l ender
debt obl i ga tions
Vol a til i ty i n i nteres t
ra tes l ed to hi gher debt
s ervi ci ng cha rges a nd
reduced net ca s h fl ow
Poor performa nce of
pl a nt res ul ting i n
pa yment of pena l ties to
WAPDA
Del a y i n s uppl y of fuel by
PSO l ea di ng to pena l ty
cha rges to WAPDA
Ineffi ci ency by the
compa ny ma ngement
a ffecting ca s h fl ows
Cha nge In IPP's ta xa tion
pol i cy
Del a y i n COD of Na rrowa l Offs et thi s ri s k by pa s s i ng
ca us i ng pa yment of
l i qui da tion da ma ges to contra ctor,MAN di es el
WAPDA
Source: Blaze Research
RISK MITIGANTS
Compa ny continues wi th
worki ng ca pi ta l requi rement
GOP gua ra ntee for recovery of
compa ny's tra de debts a nd
other recei va bl es
The PPA provi des ta rri f
i ndexa tion for currency
depri ca tion on forei gn debt
Overcome i t wi th fi xed l endi ng
ra tes a nd hedgi ng
a ra ngements
O&M a greement wi th
Interna tiona l Power Pl c ha s
downs i ze the ri s k
Li qui da tion da ma ges pa i d to
WAPDA ca n l a ter be fl i pped by
l i quda tion da ma ges pa i d by
PSO
Hi ghl y s ki l l ed ma na gement
s tructure
pri nci pl e of cha nge i n Ta xa tion
pol i cy s ecured under the
i mpl ementa tion Agreement
thes e cha rges to EPC
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.
6
 Figure 8: Revenue Breakup (PKR mn)
Financial Analysis
160,000 Buoyant Revenues
140,000
120,000 With increased operational efficiency, HUBCO has become successful in reaching a
100,000 revenue level of PKR 99bn (EPS: PKR 3.15) for the FY10 in comparison to turnover of
80,000 PKR 82bn for FY09, a YOY increase of 20%. We expect the revenue to maintain an
60,000 increasing trend through FY15, despite a conservative assumption for load factor of 75%
40,000 of the existing plant. This expected growth in revenue is primarily attributed to Narowal
20,000 project and indexation against rupee depreciation as well as inflation. A Generation
0 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.

Old Plant Narowal Strong Earnings Stream

Source: Company Data, Blaze Research
Figure 9: Return on Asset and Equity
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.

0.07 0.35 Capacity Building to Enhance Balance Sheet Size

0.06 0.3
0.05 0.25 HUBCO has so far incurred a capital expenditure of PKR 21bn in setting up Narowal
0.04 0.2
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
0.03 0.15
another US$23.7mn in the next 2 years. We expect asset utilization to maintain an
0.02 0.1
encouraging trend increasing from 0.81 in FY10 to 1.04 FY15.
0.01 0.05
0 0 Liquidity

The company has managed to maintain a satisfactory current ratio since the delay in
ROE ROA 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.
Source: Company Data, Blaze Research

Leverage

Figure 10: Debt Mix Total debt to assets ratio of the company is expected to remain in the range of 78-80%
100% during FY11-15. Short term liabilities will comprise 8 to 10% of total debt resulting from
90% sharp increase in accrued accounts payable triggered by circular debt issues. We expected
80%
70% the issue to be resolved post FY15 based on a conservative approach. The company is
60% compensated for any mark-up on accrued payables by WAPDA, hence nullifying the
50%
40% effect of such liabilities on interest cost. Furthermore, the debt position reflects the fact
30% that despite aggressive expansion the company has managed to restrain the share of long
20%
10% term debt in total debt.
0%

Long term debt to total debt

Current liabilities to total debt

Source: Company Data, Blaze Research

7
 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

Project Company Equity (In Millions) HUBCO’s tariff profile insulates its earnings against inflation and exchange rate
30,000.00 50% devaluation. We have assumed an annual Rs/$ devaluation of 2.8% and US CPI as
25,000.00 40% forecasted in the Labor Bureau of Statistics for FY11-20 at 2.4%.

20,000.00 30% The sensitivity with respect to change in US CPI inflation and PKR devaluation has
15,000.00 20% 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
10,000.00 10% 2% and 1.5% change in the fair value respectively.
5,000.00 0%
- -10% PCE in Growing Phase
2008
2009
2010
2011

2013

2015
2016
2017
2018

2020

2022
2023
2024
2025

2027
2007

2012

2014

2019

2021

2026

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
Project Company Equity (in millions) growth rate 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.
Source: Company
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.

20% 180%
Return on Equity and Payout Expansion Endeavors to Fuel Growth
18% 160%
16% 140% With the Narowal project the company has entered a growth phase, increasing its
14% capacity by 20%. Moreover the acquisition of 75% stake in Laraib Energy will add value
120%
12% to the company, although we have not incorporated it in our calculations.
100%
10%
80% Surety of Payments from WAPDA
8%
60%
6%
40%
HUBCO’s cash flow streams are deteriorating due to delay in payments by WAPDA,
4%
which is a key consideration for investors eyeing for a dividend yielding stock.
2% 20%
Payments from WAPDA are guaranteed by Government of Pakistan, thus easing the
0% 0%
company’s cash flow position and ensuring the future consistency of dividend yields.
2005 2006 2007 2008 2009 2010

ROE Payout Ratio

Generation Bonus

Source: Blaze Research 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.

8
 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.

Table 5: Valuation Summary

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%

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
PKR 32.82
Hub Plant
Value from
PKR 11.31
Narowal pant
Target Price PKR 44.13

9
 Risk To the valuation.

Figure 13: Target Price Sensitivity EPC contractor MAN diesel Germany was unable to meet the contractual COD of
55
Narowal and it was delayed twice initially. It is now expected to come online in April
49.61 2011 according to company sources. Under the PPA HUBCO is bound to pay the penalty
50 47.95
46.38 of delay to the WAPDA, although it is almost offset by the liquidity claims made to the
44.89
43.47
45 42.12
40.84 MAN diesel. Our calculations estimate that a further delay of three months in COD
40
would reduce the target price by 1.08/share.Sensitivity to discount rate

35 Sensitivity to discount rate

30
Valuation of HUBCO is sensitive to discount rate, with every change in 50 basis point
0.155 0.16 0.165 0.17 0.175 0.18 0.185
change in discount rate there is approximate 3.01% change in the target price
DDM Value
Target Price Sensitivity
Source: Blaze Research

Table 7: TARGET PRICE SENSITIVITY

Exchange Rate Devaluation
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
US CPI

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

10
 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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