Hubco to continue electrify earnings after demerger

Hub Power Company (Hubco) is putting away its younger oil-fired power station. The firm’s willingness to de-merge its Narowal plant stems from its endeavour to improve administration and financial control.
Although Narowal plant roughly accounts for a 15-17 percent of Hubco’s earnings and total plant capacity, it is now proving a chink in Hubco’s armor; the unplanned outage of the Narowal plant during the third quarter of the current fiscal year (FY13) due to piling up of receivables diluted the overall generation by the IPP during 9MFY13.
Amid productivity headwinds, turnover of the firm - basically a combination of furnace oil prices and generation - climbed modestly by seven percent year on year in 9MFY13. This relative rise in Hubco’s top line accentuates higher generation from the base plant at Hub in Balochistan.
While around 2080GWh of electricity was produced by the Hub plant, a load factor of approximately 80 percent during 3QFY13, there were amber lights, too: Narowal productivity dissipated.
The rundown in generation from Narowal did not come until the third quarter of FY13 where the load factor remained close to the base plant (load factor of 75 percent during 1HFY13 compared to 73 percent of hub plant). However, the non-availability of fuel due to rising receivables and non-payment by power purchasers were not encouraging omens for 3QFY13 operational performance.
However, amid precarious times when such trends are expected to continue, Hubco’s earnings for 9MFY13 took a leap of 49 percent year on year. Besides the higher production by the base plant, the profits propelled on account of (a) indexation factors like depreciation and inflation (b) seven percent fall in finance cost primarily due to decreasing Narowal plant’s short term borrowings.
Sameer Zafar, an analyst at Optimus Capital Management, told BR Research that the proposed merger is a win–win situation for Hubco, whether it becomes a subsidiary or is put up for public offering. In case of an IPO, the company will be able to address its cash flow and financing issues. However, in a more likely case where Narowal becomes a wholly owned subsidiary of Hubco, the firm will continue to gain from Narowal production while the earnings will be reported in Hubco’s consolidated accounts.
Hubco’s stance through shutdown due to non-payment seems a prudent way to restrict receivables from piling up further. With no significant increase in the fixed costs during the third quarter of FY13 (when the outage occurred), the fears about Narowal existence can be dispelled for now.
Moreover, with where higher indexation making up for lower generation, Hubco’s top line has little threat as long as its main plant continues with current load levels.

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HUB POWER COMPANY LIMITED (HUBCO)

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Rs (mn)           9MFY13   chg   3QFY13    chg

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Turnover         132,494    7%   42,534    -4%

Gross Profit      12,724   20%    4,280    13%

Finance Cost       5,036   -7%    1,520   -11%

PAT                7,402   49%    2,661    35%

EPS (Rs)            6.40   49%     2.30    35%

Gross Margin         9.6%          10.1%

Net Margin           5.6%           6.3%

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Source: KSE Announcement

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