Kot Addu Power Company Limited

Kot Addu Power Company Limited (PSX: KAPCO) is the country's largest independent power producer, and a significant contributor to the national exchequer. The IPP is involved in the ownership, operation and maintenance of a 1,600 MW nameplate capacity gas, furnace oil and diesel fired power station at Kot Addu in the province of Punjab, and to sell the electrical energy produced to its single customer, the Pakistan Water and Power Development Authority (WAPDA).
KAPCO was built by WAPDA in five phases between 1985 and in 1996, it was incorporated as a public limited company under the Companies Ordinance, 1984 with the objective of acquiring the Power Plant from WAPDA. On June 27, 1996, the firm was privatised. At the time of privatisation and following privatisation, WAPDA divested 36 percent of its shareholding in the company to the strategic investor. In 2013, the strategic investor sold its entire shareholding in the company to local corporate entities and individuals.
In 2005, the Privatisation Commission sold another 18 percent of WAPDA shareholding in the KAPCO to the general public. In 2005, KAPCO was formally listed on the Pakistan Stock Exchange, the Lahore Stock Exchange and the Islamabad Stock Exchange.
KAPCO's power plant is the largest combined cycle power plant, which comprises of 10 multi-fuel fired gas turbines and 5 steam turbines. The plant's combined cycle technology enables it to use the waste heat from the gas turbine exhaust to produce steam in the heat recovery steam generator, which in turn is used to run the steam turbines. It has the capability of using three different fuels to generate electricity: gas, light sulphur furnace oil and high speed diesel. It also has the ability to generate electricity for itself in case of a country wide blackout.
Shareholding Pattern and Share Price Around 46 percent of the firm is held by the associated companies, largely constituting of WAPDA. Banks and financial institutions like DFIs and NBFIs hold around 26.3 percent of the company's shareholding. Around 12 percent is held by the local public, whereas foreign companies have 3.7 percent shareholding.
KAPCO's share price has been underperforming the benchmark index which could most likely be due to lower margins in FY17. The firm also faces some cash flow risks of the power sector. However, HUBCO and KAPCO are better off when it comes to fuel supply guarantees. Also, its downward movement could be due privatisation delay and uncertainty regarding the renewal of PPA. Recently, its HUBCO share acquisition, which it announced in August 2017 was put on hold. This could be another reason for the share price performance.
Past Performance In FY14, KAPCO witnessed augmented plant utilisation, better fuel efficiency, and lesser liquidated damages. However, FY14 was filled with overhauls and repairs for the most IPPs including KAPCO. And thus the profitability that picked up right after the settlement of circular debt, remained stunted in fiscal year 2014. Overall, FY14 profitability for the IPP was affected by three factors; revenue growth due to greater generation and higher rupee depreciation; gross margins squeezed by repair and maintenance costs; and circular debt settlement resulting in reduced penal income.
Despite better availability and improved load factors, KAPCO's revenues witnessed a decline of 10 percent year-on-year in FY15, due to low oil prices. Gross margins due to lower input cost in low oil price environment.
The financial performance in FY16 remained subdued with earnings declining by seven percent year-on-year. Revenues fell by over 36 percent year-on-year. And with increasing selling, general and administrative costs, net earnings came down by over 7 percent.
During the year, the company had a cumulative load factor of 55.8 percent - overall commercial availability of 94.6 percent; and thermal efficiency of 44 percent as per the Director's Report. During the year, three major overhauls were completed; 15 combustion inspections and two hot gas path inspections were made.
KAPCO in FY17 and beyond KAPCO's financial performance in FY17 was better with revenue accretion of over 28 percent, year-on-year. During the year, the power company sold 7,335GWh of electricity to its customer, with a cumulative load factor of 62.4 percent versus 56 percent of FY16; the overall commercial availability of the plant was 96 percent and thermal efficiency was 43.7 percent.
The increase in the topline came from improvement in generation levels in a rising input cost environment. The IPP's consumption of furnace oil has come down due to the availability of RLNG to the power plant. During the period, the furnace oil prices were up by around 28 percent year-on-year, whereas RLNG prices were higher by 22 percent.
The power company's earnings were up by 4 percent, year-on-year. Despite higher sales, disproportionate increase in cost of sales pressed gross margins, while net margins too took a thumping due to high finance cost and other operating expenses. Conversely, lower administrative expenses and higher other income (penal income) supported the decline in the bottomline.
The first quarter revenues were also up due to higher furnace oil prices and better generation with a load factor of 63.8 percent. Although RLNG has become available to the plant, furnace oil has been the major source of fuel generation for the quarter. While the rise in FO prices coupled with a higher load factor increased the topline, it also simultaneously chipped away at margins on account of a higher generation cost. As a result of squeezed margins and increased finance cost, KAPCO's bottomline went down by 6 percent year-on-year.
Outlook The firm continues to face WAPDA's payment default. And so does the matter of liquidated damages with the power purchase continue to persist.
An important development in late 2017 for KAPCO was its bid for the acquisition a 17.4 percent stake in the Hub Power Company Limited (PSX: HUBC), which included 14.9 percent of the stake being divested by Dawood Hercules group, whereas the remainder being offered by other shareholders.
Though the acquisition has been put on hold subject to some required corporate and regulatory approvals, the transaction is likely to be a plus for KAPCO in the form of higher other income.

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KAPCO - Financial Ratios

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Profitability                    FY12      FY13     FY14     FY15      FY16    FY17

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Gross margin                    11.2%     13.7%    10.8%    14.9%     20.9%   17.3%

Operating margin                18.3%     19.4%    14.0%    20.7%     26.4%   22.6%

Net margin                       6.0%      7.5%     6.8%     9.7%     14.1%   11.5%

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Liquidity

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Current ratio                    1.20      1.47     1.25     1.30      1.36    1.29

cash to current liabilities      0.5%      1.2%     5.3%     1.1%      1.0%    0.8%

Debt to equity                  18.0%      9.1%     5.5%     3.1%      1.2%    0.0%

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Activity & Investment

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Fixed asset turnover             5.50      5.71     7.19     7.23      5.08    7.57

Total asset turnover             1.01      1.57     1.19     1.05    166.18    0.71

EPS (Rs per share)                6.9      8.35     8.78    11.13     10.31   10.73

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Source: Company Account

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Kot Addu Power Company Limited - Pattern of Shareholding

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Categories of Shareholders as on June 30, 2017

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Particulars                                   Percentage

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DIRECTORS, CEO, SPOUSE & CHILDREN                   0.43

ASSOCIATED COMPANIES                               45.73

BANKS, DFI & NBFI                                  26.31

INSURANCE COMPANIES                                 2.59

MUTUAL FUNDS                                        1.98

PUBLIC SECTOR COMPANIES AND CORP                    1.49

GENERAL PUBLIC (LOCAL)                             12.00

GENERAL PUBLIC (FOREIGN)                            2.31

OTHERS                                              1.63

MODARABAS                                           0.00

FOREIGN COMPANIES                                   3.70

APPROVED FUND                                       1.84

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Source: Company Accounts

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KOT ADDU POWER COMPANY LIMITED

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                          IQFYI8        IQFYI7       YoY

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Net Sales                 21.571        17.725       22%

Cost of Sales             18.127        14.387       26%

Gross Profit               3,443         3,339        3%

Administrative Expenses      128           102       25%

Other Operating Income     1,399         1,078       30%

Profit from Operations     4,714         4,314        9%

Finance Cost               1,598           955       67%

PAT                        2,181         2,318       -6%

EPS (Rs)                    2.48          2.83       -6%

Gross margin               16.0%         18.8%

                                   down 288bps

Net margin                 10.1%        13.1%

                                  down 297 bps

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