Tuesday, March 27, 2012

Equity Research Pakistan

In Focus
Electricity Overweight
HUBC - BUY Current Price: PKR 34 Dec-12 TP: PKR 48
Nurali Barkatali nurali.barkatali@bmacapital.com
Stock Statistics
Ticker Mkt Cap 12M ADT Shares Outstanding USD mn mn shares mn shares HUBC 439 1.5 1,157

HUBC: Concerns Post International Power Answered

In a recent development International Power Plc (IPR) has sold its 17.4% holding in the Hub Power Company (HUBC) to Dawood Group and Allied Bank Limited (ABL) at PKR31/share. IPR has also announced to increase its stake in gas based power plant in Pakistan We do not foresee a change in the dividend policy of Hub Power Company post acquisition as the acquiring business groups and institutions have been paying dividends from their current businesses The change in ownership of HUBC does not affect the power purchase agreement between The Hub Power Company Limited and the Pakistan Water and Power Development Authority. Hence, the new management of the company enjoys all the rights and benefits previously enjoyed by the predecessors given under the 1994 power policy International Power plc has decided to increase its stake in Uch 1 (a 551MW gross combine cycle gas turbine) power project by 20.1%. Post acquisition of additional stake IPR will own 94.6% in the Uch 1 power project. Hence, the recent divestment can be termed as an internal IPR decision HUBC at yesterdays closing price of PKR34.15 offers a dividend yield of 18% which is 480bps above recent cut-off of the 10 Yr PIB. The stock also offers 41% upside potential to our DDM based Dec12 target price of PKR48/share In a recent development International Power Plc (IPR) has sold its 17.4% holding in the Hub Power Company (HUBC) to Dawood Group and Allied Bank Limited (ABL) at PKR31/share. IPR has termed this as part of its optimization strategy. Nonetheless, IPR has announced to increase its stake in gas based power plant in Pakistan.
26 21 16 \ 11 6 1
Oct-11 Nov-11 Dec-11

Stock Performance
1M Absolute % Relative to KSE % 1% -5% 3M 8% -9% 12M 9% -6%

Price and Volume Graph

Volume mn(RHS) Price PKR(LHS)

37 35 33 31 29 27 25
Jun-11 May-11 Mar-11 Jan-12 Aug-11 Sep-11 Mar-12 Feb-12 Apr-11 Jul-11

The local business groups which now have large holdings in the HUBC include Dawood Group, Allied Bank, Fauji Foundation and banking institutions. Given the continuing nature of circular debt which has adversely affected the cash flows of entire energy chain, investors have shown apprehensions on this transactions where an international organization has divested its stake. In todays report we have attempted to reply the same. Will the new management be able to maintain historical dividend pattern? What difference would it be for HUBC being in local hands? We do not foresee a change in the dividend policy of Hub Power Company post acquisition as the acquiring business groups and institutions have been paying dividends from their current businesses. For example, Fauji group companies have maintained a dividend payout ratio of over 80%, on the other hand Engro Corporation and Dawood Hercules Corporation of Dawood Group paid out PKR6/share and PKR1/share during 2011. Hence, the transfer of company in local hands would not have any impact. Nonetheless, this entails confidence and optimism showed by local investors. It is pertinent to note that the board of HUBC is due to reconstitute its board of directors in September 2012. However, any casual vacancy of director post finalization of this transaction will be filled in accordance of the law and Memorandum of Article of the company. In an ideal scenario, the casual vacancy may be filled by new directors

HUBC vs KSE100 Relative Index Chart

KSE100 Index
120 115 110 105 100 95 90 85 80 May-11 Mar-11 Jul-11 Aug-11 Sep-11 Dec-11 Nov-11 Feb-12 Mar-12 Jun-11 Oct-11 Jan-12 Apr-11

HUBC

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.

Tuesday, March 27, 2012

Equity Research Pakistan

In Focus
Electricity Overweight

nominated by the new shareholder i.e. Dawood Group which holds 16.4% of the company. Does this acquisition by any means change the sovereign rights and obligations of HUBC? No, the change in ownership of HUBC does not affect the power purchase agreement between The Hub Power Company Limited and the Pakistan Water and Power Development Authority. Hence, the new management of the company enjoys all the rights and benefits previously enjoyed by the predecessors given under the 1994 power policy. This includes 1. 2. 3. 4. Guaranteed USD based IRR return where ROE component will continue to rise Generation bonus above 6,791MW of supply Guaranteed fuel supply from PSO and Power to call sovereign guarantee

What about Operations and Maintenance contract of the Project? As per a press release by International Power plc, the operations and maintenance (O&M) will continue to be carried out by an International Power subsidiary, thus addressing concerns related to the maintenance of the Hub Project. Has IPR left Pakistan? International Power plc, has decided to increase its stake in Uch 1 (a 551MW gross combine cycle gas turbine) power project by 20.1%. Post acquisition of additional stake IPR will own 94.6% in the Uch 1 power project. IPR also completely owns a 375MW under construction gas power project Uch 2. Hence, the recent divestment can be termed as an internal IPR decision. Outlook: Offers a dividend yield of 18%, 480bps higher the 10Yr PIB We maintain our buy stance on Hub Power Company amid stable business model of the company and its stable dividend paying history which has remained immune to the circular debt. The stock price of HUBC has underperformed the market on the back of recent transaction which took place at a discount to market price at PKR31/share. Given that the transaction is near completion (requires regulatory approval) the pressure should subside going forward. The stock at yesterdays closing price of PKR34.15 offers a dividend yield of 18% which is 480bps above recent cut-off of the 10 Yr PIB. The stock also offers 41% upside potential to our DDM based Dec12 target price of PKR48/share.

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111-262-111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.