Pakgen offers return, with caution

Nishat Group is no stranger to Initial Public Offerings (IPOs) at the local bourse - and Pakgen Power Ltd is the latest feather in its cap. The offering is being tipped as a very lucrative one - which offers a 22 percent return on the offer price of 19 percent as per company projections, in addition to a highly handsome 22 percent dividend yield on the offer price.
Pakgen operates on a thermal power generation plant based on furnace oil under the IPP Policy 1994, which provides it the cushion of government guaranteed Fuel supply Agreement, IRR and capacity payments. Despite this, the companys profitability has been highly volatile in the past, largely due to load factor deviation and efficiency loss - barring the 2010 dip which was largely due to flood damage.
The companys guidance gives a massive 61 percent year-on-year jump in turnover in 2011, which partially relates to flood related insurance claims that are expected to materialise during the ongoing calendar year. Moreover, since the company has a deleveraged balance sheet, having paid its long term debt in 2009, it will receive a boost to its topline as debt payments are covered in tariff component.
Pakgen is no exception in the industry as regards being the victim of circular debt. But being clear from any long term debt, it only has to arrange for working capital financing through short-term borrowings. The company receives interest income from Wapda on account of late payment on its receivables, to finance its short-term debt and actually ends up earning a positive interest spread. So the debt spiral is not on top of the worry list.
The below par efficiency, however, is on the worry list as Pakgen receives payment on the benchmark fuel efficiency of 38.6 percent, whereas the actual efficiency has ranged between 37.5-38 percent, thus resulting in a considerable loss to the bottomline. The company is confident of shoring the problem through Rs1 billion investment in plant up-gradation.
In the longer run, lower, earnings are tipped to go down beyond 2013, as the predetermined tariff is set to decline once the debt payment period expires.
An interesting observation though, is that during the build-up of the IPO, Pakgens financials were continuously compared with the bigger players like Hubco and Kapco.
Pakgen is six and four times smaller than Hubco and Kapco in asset size. It is rather more comparable to the likes of Nishat Power and Nishat Chunian Power, which are more or less the same size and far more fuel efficient - yet trade on a much lower P/E ratio in the market.
A higher dividend yield is undoubtedly an attractive feature, but the share price may well settle in the P/E zone of the more comparable smaller peers than the bigwigs of Hubco and Kapco.

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PAKGEN POWER LTD

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Rs (mn)            CY06     CY07     CY08     CY09     CY10

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Revenue          12,540   14,301   24,732   21,843   20,507

Gross profit      2,915    2,973    3,319    4,756    2,559

Gross margin         23%      21%      13%      22%     12%

Finance cost        919      961      795    1,838      948

PAT               1,851    1,835    2,325    2,634    1,537

EPS (Rs)           4.98     4.93     6.25     7.08     4.13

DPS (Rs)           3.58     6.95     8.78     2.79     3.70

Net margin           15%      13%       9%      12%      7%

Payout ratio         72%     141%     140%      39%     90%

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Source: Pakgen offering document

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