Hubco exceeds expectations
The merciless circular debt continues to grapple with the earnings of the energy sector, particularly the IPPs that have the highest exposure to this inter corporate debt crisis. Hub Power Company has been able to paddle its way through with slightly higher than expected results. Swelling furnace oil prices have led to the expansion in the Companys revenues by more than 60 percent during 1HFY12. However, another major contributor to the top line growth has been the Narowal Power Plant operational since April 2011. The plant is said to have added 22MW to the national grid, increasing the electricity generation capacity to 17 percent. With a proportionate increase in operating costs, gross profit margins have remained flat at 9 percent during the first half of FY12 and the second quarter ended FY12. This is primarily due to the residual fuel oil costs and the operation and maintenance (O&M) contract servicing. Unfortunately, the growth in the top line could not be carried down due to significantly higher finance costs associated with Narowal Power Plant. Subsequently, 5 percent YoY growth in the net profit in 1HFY12 could not replicate the growth in overall turnover. Adding to the brunt, circular debt also plagued the cash position of the Company. 2QFY12 portray a higher YoY growth in earnings of 12 percent versus 5 percent in YoY growth during 1HFY12. The interim dividend of Rs.3/share announced by the Company for the period under review is also higher than Rs.2.27/share, the average of the estimates by various brokerage houses. On the bright side, the high dividend stocks earnings might improve further once Nepra takes a stance on the commercial operation date (COD) tariff of Narowal Power Plant. Also, the government of Pakistan is expected to mop up the payables of IPPs by converting some portion of the circular debt into TFCs. According to Khurrum Shehzad of InvestCap, energy sector loans of Rs.138 billion (including fresh loans of Rs.28 billion) will be transferred to Power Holding Company at KIBOR plus 1 percent to 2 percent. This would follow fresh disbursements to IPPs including HUBCO. Hence it is likely to pacify the liquidity constraint on the Company to some extent. On the negative side, with no respite in the circular debt in the foreseeable future, the high dividend yielding stock might have to cut back dividends. Furthermore, the dividend paying ability of the company will be affected drastically if rumors about international sponsor and the O&M contractor named International Power divesting its shareholdings come true. In that case the company that has receivables of over Rs.10 billion would feel a further squeeze in its liquidity.