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HUBC: Staying alive but finding it hard to thrive, (AKD Daily, Apr 26,2017)

HUBC announces earnings for 3QFY17E tomorrow, accompanied by its annual 'extra-large' pay-out (PkR5.5/sh), following management's new policy. We expect Profit Attributable to Holding Company to read PkR3.1bn (EPS:PkR2.68) up 2.1%YoY/19.0%QoQ on the back of lower YoY load factors for the base plant, worsening margins as non-pass through O&M costs climb and the IPP suffers from a higher debt burden (from planned expansion) made worse by a rising receivables scenario (receivables at 10.7X monthly revenue). PSO's analyst briefing gave direction regarding FO payments where barring a PkR15.4bn payment received from HUBC, the trade payable scenario for HUBC stands at a monthly average deficit of PkR1.71bn monthly for 10MFY17. Our TP of PkR146/sh incorporates CPHGC, which the current price seems to have discounted. However, an investment case on low beta, macro hedge characteristics can also be made, and that the IPP remains on the list of prospective entrants to the MSCIEM index

3QFY17 earnings preview: We expect Profit Attributable to Holding Company to read PkR3.1bn (EPS:PKR2.68) up 2.1%YoY/19.0%QoQ on the back of: 1) lower load factors for the base plant (60% vs. 74% for 3QFY16), 2) worsening margins as O&M/other costs rising 12/14%YoY, push Operating Costs higher by 36%YoY, and 3) finance costs rise significantly (up 82%YoY/73%QoQ) as the IPP suffers from a higher debt burden (planned expansion) made worse by a rising receivables scenario (receivables at 10.7X monthly revenue). Apart from the expected dividend of PkR5.5/sh the result has little else to offer, while developments on planned projects and equity outlay for the same make resolution of circular debt a clear flashpoint.

FO payments scenario: PSO in its 3QFY17 analyst briefing shed light on power sector receivables situation, where the monthly breakup between deliveries and receipts was tallied. We have combined reported number of trade payables by HUBC (including late payment dues incurred at DR+2%), with supply and receipt data shown by PSO. Barring a PkR15.4bn payment received from HUBC, the trade payable scenario for HUBC stands at a monthly average deficit of PkR1.71bn monthly for 10MFY17. With a 25%FYTD increase in FO prices, this gap has remained manageable, where any sharp rise could further strain liquidity.

Investment Perspective: With future projects hanging in the balance, the stock has remained flat CYTD, hovering near our fair value for current operations (PkR114/sh), failing to incorporate PkR32/sh value addition from the extension (1,320MW with 46% stake). Our TP adds the two, where HUBC's last close implies an Accumulate stance and mediocre yield proposition (FY17/18F D/Y of 7.7/8.5%). We make an investment on low beta, macro hedge characteristics can also be made, given market volatility. Moreover, the IPP remains on the list of prospective entrants to the MSCIEM index, furthering investor sentiment.