HUBCO profit after tax for FY15 expected to rise by 42 percent

Hubco PlantThe Hub Power Company (HUBCO) is scheduled announce full year financial results. The holding company is expected to report consolidated profit of Rs11.08 billion (EPS: Rs9.17) up by 42%YoY. 4QFY15 earnings is likely to remain stagnant at Rs2.25 billion (EPS: Rs1.95) YoY basis.

Profitability in the final quarter is likely to be driven by: 1) post overhaul efficiencies and the absence of overhaul costs, despite a load factor decline in the base plant/Narowal in fourth quarter, 2) improved liquidity driven by lower input costs (RFO prices in 4QFY15 down 33%YoY) and lower cost of borrowing and 3) stability on the macroeconomic front keeping indexation factors in check.

The announcement accompanies an expected final payout of Rs4/share. Investors should keep an eye on 1) financial close of 1320MW coal power brownfield investment 2) capital consolidation with an eye on acquisition of debt and structuring of new ventures and the newly established Hub Power Holdings Ltd.

Investors are advised to keenly watch developments on the new ventures front, particularly the financial close of 1,320MW brownfield coal plant. Key features of the process include 1) acquisition of debt by the partners of the JV (HUBC & China Power International), headway on which is imminent, with news reports of Industrial and Commercial Bank of China (ICBC) extending US$4.3 billion in financing and 2) structuring of current operations (including a post demerger Narowal) amongst the newly formed Hub Power Holdings Limited.

According to a report by AKD Securities with payout expectations and ‘flight to yield’ brought on by monetary easing being priced in, at current levels the scrip remains largely unattractive. The investment case for HUBCO is expected to be re-invigorated post financial close of planned projects. In the meantime, further upside could be delivered through movements in indexation factors, where the base plant’s U-shaped tariff is expected to deliver consistent incremental gains in profitability.

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