Kot Addu Power Company (PSX: KAPCO) released its first quarter result for FY18 which was slightly below market expectations. The stock has continued to significantly underperform the market over the past year and yesterday's disclosure might do little to change that.
The trend of higher furnace oil prices which have increased by 21 percent year-on-year have helped to augment the company's topline. Another primary reason for the rise in revenue is the higher generation with a load factor of 64 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 has indeed increased the topline, it has also simultaneously chipped away at margins on account of a higher generation cost.
The company's 30 percent increase in other income comes on account of higher overdue receivables which have increased to almost Rs77 billion. Rao Amir at Arif Habib Limited (AHL) believes the pending receivables have also led KAPCO to a higher reliance on short term borrowings which have shown a 12 percent increase as of Jun-17 and constitute the majority of finance cost. This has bumped up the total increase in finance cost on a year-on-year basis to 67 percent.
As a result of squeezed margins and increased finance cost, KAPCO's bottomline has gone down by 6 percent. The stock's primary charm remains its dividend stream with the company paying Rs9.05 in FY17. Mehwish Zafar at JS Research expects a 17 percent expected dividend yield for the stock in FY18 and maintains the stock's primary charm remains its dividend stream. KAPCO paid Rs9.05 in dividends last year which translated into a dividend yield of 13 percent for the period.
An important development during the quarter has been KAPCO's bid for acquisition of a 17.4 percent stake in the Hub Power Company Limited (PSX: HUBC).
Almost 14.9 percent of the stake is being divested by Dawood Hercules group whereas the remainder is being offered by other shareholders.
Both Mehwish and Amir believe this will be a plus for KAPCO in the form of higher other income in the future if the deal goes through. HUBCO is expanding operations and expects to add 1650MW of additional capacity.
These projects are in their advanced stages of construction and are expected to result in an uptick in the company's bottomline.
Lastly, if market rumours are to be believed there is a reasonable probability that the company's power purchase agreement which is set to expire in FY21 will be extended.
However, that hinges on a host of factors which include the resolve of the government to wean the fuel mix off imported coal as well as the ranking in the merit order when it comes to plant efficiency.
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