HUBC – good things adding up

Hub Power Company Limited’s (PSX: HUBC) has been benefitting from its diversification strategy in times when IPPs have been pushed lower in the merit order for furnace oil fired power plants. And its coal investments have been driving profitability since FY20 when HUBC’s associated company - China Power Hub Generation Company commenced generation from 1320MW coal-fired power plant in August 2019. The power company’s earnings have been growing and the share of profits from associates has been key in lifting the IPP’s bottomline.

HUBC’s consolidated turnover in 1HFY21 was up by 9 percent year-on-year. Compared to similar period last year, utilization levels of HUBC plants were better in 1HFY21; load factor for Hub plant was 2 percent versus 1 percent in 1HFY20, while that of Narowal and Laraib plants were 27 and 61 percent versus 24 and 41 percent respectively in 1HFY20. Load factor for CPHGC was also higher in 1HFY21 at 63 percent versus 7 percent in 1HFY20.

Apart from that, the consolidated profits benefited from the rise in earnings from the share of profit from China Power Hub Generation Company (CPHGC), lower finance cost as well as currency depreciation. The rise in share of profits from associated was 48 percent, while the fall in finance cost was due to lower interest rates. HUBC’s consolidated earnings for 1HFY21 rose by 48 percent year-on-year.

The company’s dividend announcement the second time consecutively in FY21 so far comes after no dividend announced for two years due to capital expenditure undertaken in coal power generation as well as liquidity issues from the rising circular debt. HUBC announced Rs 3 per share in addition to Rs4 per share interim dividend. The reason for dividend resumption was mostly likely due to the recently signed agreement with CPPA which will bring payments against past circular debt. Following the MoU signed, the company and the government’s aim to resolve the circular debt as well as the power purchase agreement. Also, better liquidity position could be another reason for the IPP to announce dividend, which would also be a key factor in driving dividends in the future. As per the new agreement, payments of overdue receivables will be paid to HUBC in two installments of 40 (within 30 days) and 60 percent (in 6 months).

What is also making the stock attractive is the CoD of Thar Energy Limited expected a year from now (Mar-22) as around 60 percent of the construction work is completed. Also, ThalNova is expected to reach CoD by Jun-22 with over 34 percent of construction done.