Power: Debt vs Devaluation, who's the winner
Power: Debt vs Devaluation, who's the winner
Recent policy changes by the federal govt. have clear spillovers for IPPs - lowering their load factors in the short term while casting uncertainty over the long term performance and outlook of the power chain. While recent devaluation bodes well for the sector in general (5% additional deval leads to 5.3/8.3% uptick in HUBC/KAPCO earnings), we highlight that their payout streams solely depend on cash flow disbursements from the power purchaser (GoP through NTDC & WAPDA) to the entire energy chain. With outstanding receivables of HUBC/KAPCO standing at PkR72.21/80.13bn for 1QFY18 (adding PkR5.8bn/3.2bn FYTD), honoring the capacity payments remains key to sustained payouts for investors. Also, since both IPPs are classified as relatively inefficient (on FO basis for KAPCO), GoP might as well plan to run them at significantly lower load factors (less than annual 50%). This will in-turn create a burden on the total cost of generation (CPP+EPP) as mandatory capacity payments will be paid for HUBC/KAPCO as well as other plants which have been commissioned.
Payout sustainability is the elephant in the room: Earnings projections for HUBC/KAPCO go up by 5.3/8.3% for a 5% devaluation in PkR vs. US$ as Capacity Purchase Payments are US$ adjusted. Moreover, the ongoing FO crisis might compel the GoP to run HUBC/KAPCO at lower load factors given their inherent inefficiency. Importantly, point of concern remains the dividend stream, which we believe would stand lower in FY17 too (payout ratio of 81.1% vs historical three year average of ~100% for HUBC, partially attributable to its growth projects as well.)
Circular debt still harms the energy chain: Latest news reports indicate that circular debt has reached PkR421bn. Under this head, HUBC/KAPCO have receivables from WAPDA amounting to PkR72.21/80.13bn as of 1QFY18. As of June'17 debt levels stood at PkR330bn where the increase to current levels leads to current accretion level of ~PkR20bn/month. With intl. crude oil prices hovering around US$60/bbl and given fiscal/external side pressure, the debt stock is not expected to ease materially. That said, going forward the shift from FO based production (to RLNG and coal) will also not subdue liquidity woes for IPPs, as the GoP will be obliged to pay CPP to the existing power plants in addition to the energy payments to upcoming plants.
Investment Perspective: Notwithstanding any further adverse measures by the GoP, we believe FO based plants would continue to run for the time being (albeit on lower load factors) until new projects come online by FY20. The recent correction in this backdrop is unwarranted, particularly for KAPCO, which offers a decent dividend yield of 17.2/16.7% for FY18/19 (the highest in AKD Universe).
AKD Research
Kot Addu Power Co Ltd. Kot Addu Power Company Limited is a Pakistan-based power generation company. The Company's principal activities are to own, operate and maintain a multi-fuel fired power station with approximately 15 generating units with a nameplate capacity of 1,600 megawatts (MW) in Kot Addu, District Muzaffargarh, Punjab, Pakistan. The Company also sells the electricity produced therefrom to a single customer, the Pakistan water and power development authority. The power plant is a multi-fuel gas-turbine power plant using three fuels to generate electricity: gas, light sulfur furnace oil and high speed diesel. The plant's combined cycle technology enables it to use the waste heat from the gas turbine exhaust to produce steam in the heat recovery steam generator, which in turn is used to run the steam turbines.
AKD Securities Ltd. is one of the leading securities firm in Pakistan, providing a comprehensive range of investor focused services, including equity brokerage, economic and securities research, investment banking and financial advisory services. AKD Securities accounts for more than 6% of the average daily value of the Karachi Stock Exchange. AKD Securities was the first brokerage house to launch an online trading platform in Pakistan in November 2002 and now has the largest market share with over 6000 customers. This has helped diversify and expand the retail investor base in the country and ushered in a whole new universe of investors to the stock market.
AKD Securities Ltd. caters to a diversified group of domestic and international institutional investors, high net worth individuals and upscale retail clients, including expatriate Pakistanis. With high quality research, unparalleled execution and distribution capability for both regular and large block trades, AKD Securities Ltd. has earned an outstanding reputation in the Pakistani securities industry.Outside of commercial banks, AKD Securities Ltd. is one of the biggest capital market firms in the country. AKD Securities is the leader in raising and providing risk capital in underwriting, market making and mergers and acquisitions in Pakistan. Good corporate governance and professionalism are emphasized throughout the firm and AKD Securities Ltd. is amongst the very few companies to have introduced a firm-wide comprehensive CODE of ETHICS, overseen by an independent compliance manager.Ultimately, our success is based on the quality of service we provide to our customers and the trust and confidence reposed in us by them. Our focus, therefore, remains on customer satisfaction at all levels in the company.
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