PAKISTAN INSIGHT

APRIL 09, 2024

Pakistan Power
HUBC PA: On growth trajectory
HUBCO has always been on the hunt for new opportunities, with a history of Hub Power Company Ltd.
timely investments in good projects. After Narowal and Laraib, HUBCO has
taken advantage of 2015 power policy, CPEC and upfront coal tariffs by BUY HOLD SELL
making a cluster of investments which includes: i) China Power Hub We recommend BUY wi th Dec 2024 SOTP ba s ed Ta rget
Generation Company (CPHGC – stake 46% via HPHL); ii) Sindh Engro Coal Pri ce of PKR180/s h, provi di ng 43% Ups i de
Mining Company (SECMC – stake 8%); iii) Thar Energy Limited (TEL - stake Current Price PKR/sh 126
60%); and iv) ThalNova Energy (TNPTL - stake 38.3% via HPHL). These Target Price PKR/sh 180
projects have turnaround company's profitability, with its earnings posting a Market cap PKRmn 163
5-year CAGR of 39% (FY18-FY23). reforms. Market cap US$mn 582
Free Float Market cap US$mn 436
Recently, company’s two coal mine mouth IPPs, TEL and ThalNova came
30-day Avg. turnover m Shares 2
online in Dec’22 and Mar’23, respectively. These ventures have significantly
30-day Avg. turnover PKR m 262
fueled the company's growth, as evident by a notable increase in profitability.
Shares Outstanding m 1,297
To highlight, company’s profitability has clocked in at PKR32.3bn (EPS:
Free float % 75%
PKR25.0), up by 44.8% YoY in 2HFY24 vs. profitability of PKR22.3bn (EPS: Major Shareholder Mega Congl omera te Pvt. Ltd.
PKR17.3) in SPLY. We expect the company to post EPS of PKR51.9/58.0 in Bloomberg Ticker HUBC PA
FY24/FY25 alongside DPS of PKR20.0/22.0, translating into DY of
16.5%/18.1%, respectively. The stock is currently trading at a attractive PE of Financials (PKRmn) FY23 FY24F FY25F
2.3x/2.1x for FY24/FY25 earning.
Sales 114,263 131,360 144,442
We reiterate our ‘BUY’ stance on largest IPP of the country “HUBC” with Gross Profit 52,778 70,055 72,635
Dec’24 SOTP based TP of PKR180/sh, providing capital return of 43% along Financing cost 19,323 26,642 19,118
with an dividend yield of ~17%. Our liking for the stock stems from i) Strong Share of associates 34,316 42,597 40,494
presence in domestic power space, ii) Priority on merit list due to lower cost PBT 70,418 86,356 94,749
of generation from thar Coal, iii) Resolution of circular debt to free up PAT 62,007 74,171 83,051

cashflows, iv) Higher payout due to no major CAPEX ahead, v) Establishing its
Key Ratios FY23 FY24F FY25F
presence in the E&P sector and vi) Diversification in battery storage and
other ventures to generate new revenue streams. EPS 44.4 51.9 58.0
DPS 30.0 20.0 22.0
Key risks to our valuation thesis include i) Downward adjustment in tariff, ii)
BVPS 109.5 141.4 177.4
Decline in load factor, iii) Delays in receivables from govt. & accumulation of
Div. Yield 23.9% 15.9% 17.5%
circular debt, iv) Lower than estimated devaluation of PKR, and v) Abrupt
P/E 2.8 2.4 2.2
changes in regulatory regime.
ROE 40.5% 36.7% 32.7%
Powering growth through coal power plant Source: Company Accounts, Insight Research

HUBCO operates three coal power plants with a total gross capacity of
1,980MW, two of which utilize indigenous coal. TEL and TNTPL each have a SOTP valuation PKR/sh % Contribution Stake %

gross capacity of 330MW. To highlight, TEL and TNPTL commenced Base Plant 36.9 21%
NEL 9.2 5% 100%
operations in Dec’22 and Mar’23, respectively. We anticipate TEL and TNPTL
LEL 21.9 12% 75%
to contribute PKR26.8/sh and PKR14.9/sh to HUBCO’s target price, CPHGC 56.9 32% 46%
respectively based on future cashflows. Dividend payments from these two TEL 26.8 15% 60%
plants are expected to commence from FY26, depending on the fulfillment of TNPTL 14.9 8% 38%
necessary conditions. SECMC 6.7 4% 8%
Prime 6.6 4% 50%
CPHGC: China Hub Power Generation Company runs on imported coal and it Total 180
has a gross capacity of 1,320MW. Plant has achieved its COD in Aug’19. In Scource: Company accounts, Insight research

Asad AliAC
REP-147 Type INSL <GO> to reach our research page on Bloomberg.
Asad.ali@insightsec.com.pk
Analyst certifications and important disclosures are in the end.

+92-21-32462541 Ext 113 1

PAKISTAN INSIGHT
APRIL 09, 2024

true-up tariff, NEPRA has revised down ROE component to PKR1.0034/KWh Pakistan's Electricity Genetration vs. Company power share

from PKR1.1872/KWh (Upfront tariff). Currently, this tariff adjustment is 180,000 Total Electricity Generation (GWh) Company's share as % (RHS) 9.0%
160,000 8.0%
suspended by a legal forum, and CPHGC continues to operate under the 140,000 7.0%
reference tariff. However, any adverse decision will pose a downward risk to 120,000 6.0%

our valuation. CPHGC contributes PKR56.9/sh to HUBCO’s target price 100,000 5.0%
80,000 4.0%
based on future cashflows. To highlight, CPHGC has disbursed its first 60,000 3.0%

dividend in Nov’23, thus we expect consistent dividend from thereafter. 40,000 2.0%
20,000 1.0%

SECMC: Sindh Engro Coal Mining Company (SECMC) is a pivotal venture for 0 0.0%

FY21
FY16

FY17

FY18

FY19

FY20

FY22

FY23

1HFY24
HUBCO, embodying its strategic expansion into the coal mining sector. The Source: Company Accounts, Insight Research

company has recently entered into an agreement with HBL to acquire its
holdings, effectively increasing HUBCO’s stake from 8% to 17.5%. Currently,
Plant wise electrcitiy generation (GWh)
SECMC production capacity stands at 7.6mn tons while 3rd phase of the 10,000
Base plant NEL LEL CPHGC TEL TNPTL
project is in process which will take production capacity to 11.2mn tons. With 9,000

plans for increasing its stake and ongoing efforts to enhance production 8,000

7,000
capacity, SECMC underscores HUBCO's commitment to diversified growth 6,000

and sustainable energy initiatives. The company commenced dividend 5,000

payouts, distributing PKR455mn (PKR0.4/sh) to HUBCO during FY23. We

4,000

3,000

expect SECMC to contribute PKR6.7/sh to HUBCO’s target price based on 2,000

future cashflows. 1,000

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
Base plant, Narowal & Laraib to continue contribution Source: Company Accounts, Insight Research

Since company’s two plants runs on RFO (Base plant and Narowal), their load
factors have declined over the years, from 65% and 71% in FY17 to 2% and
25% in FY23, respectively. Over the years, Pakistan’s fuel mix has changed Plant load factor
with the introduction of new and cheaper plants. For base plant, we have 100%
Base plant NEL LEL CPHGC TEL TNPTL 88%
assumed full capacity payment till its PPA expires (2027), without factoring in
90%
78% 76%
80%
72%
load factor adjustments due to the aforementioned reasons. Base plant 70% 63% 62%
57%
operations are expected to add PKR36.9/sh to HUBCO’s target price based
60% 53% 52%
50% 46% 47%

on future cashflows. 40%

30% 26% 25%

Despite the decline in Narowal's load factor, we project load factors of 17% 20%
12% 14% 12%
7%
10%
2% 2%
and 28% for FY24 and FY25, respectively, considering being efficient RFO
0%
0%
FY21

FY22

FY23

plant, particularly during peak seasons, places it higher in the merit order in 1HFY24
Source: Company presentations, Insight Research

contrast to other RFO plants. Narowal is expected to contribute PKR9.2/sh to

HUBCO’s target price. In contrast, Laraib benefits from a higher load factor as
the first hydel-based IPP, and our calculations suggest it will add PKR21.9/sh
to HUBCO’s target price based on future cashflows.
Base Plant Narowal Laraib CPHGC TEL ThalNova
Net Capacity (MW) 1200 214 84 1214 300 300
RoE/IRR- Benchmark 12% - IRR 15% - IRR >17% - IRR 27.2% - RoE 30.45% - RoE 30.45% - RoE
D:E 76:24 70:30 75:25 75:25 75:25 75:25
Fuel Source RFO RFO Hydel Imported Coal Thar Coal Thar Coal
Regenerative Reciprocating BULB Super Critical Sub Critical. Sub Critical.
Type of Technology
Steam Boilers Engines Turbines Pulveized Coal CFB CFB
Agreement Take or Pay Take or Pay Take or Pay- BOOT Take or Pay Take or Pay Take or Pay
Tariff Period 30 25 25 30 30 30
WHT reimbursement on dividendsYes Yes Yes No No No
Scource: Company accounts, Nepra, Insight research

2
PAKISTAN INSIGHT
APRIL 09, 2024

Venturing into E&Ps

Debt to equity drastically decreased

HUBCO entered in E&P space by acquiring ENI Pakistan's operations via its 180
Debt (PKRbn) Debt/Equity - RHS 1.80

Thousands
1.60
subsidiary HPHL, holding a 50% stake in Prime. ENI has been in Pakistan since
160

140 1.40
2000 where the company has permits to operate in Bhit/Badhra (40%), 120 1.20

Kadanwari (18.42%), Latif (33%), Zamzama (18%) and Sawan (24%). 100 1.00
80 0.80
Additionally, the company has acquired another block, South West Miano III, 60 0.60

for which an exploration license will be awarded. Prime primarily generates its 40 0.40
20 0.20
revenue through gas sales. As of Jun’23, the company holds gas reserves of 0 0.00

FY21
FY16

FY17

FY18

FY19

FY20

FY22

FY23

FY24F

FY25F
~135BCF, translating into an estimated reserve life of ~9 years at current Source: Company Accounts, Insight Research

production levels. Based on our estimates of production and revenues, and

assuming a net margin of 40%, we expect ENI to add PKR6.6/sh to HUBCO’s
target price based on future cashflows.
Payout to increase in long run Consistent Payout likely
MARI gas production to continue in future
(mmcfd)

70 120%
With the majority of the company's equity commitments fulfilled, we
EPS Payout % (RHS)
60 100%
anticipate the resumption of dividend payouts, following a dividend of 50 80%
PKR30/sh in FY23. Pre-FY19, the company maintained an average payout 40 60%
ratio of 96% over the last 10 years. However, company's focus on repaying 30 40%

debt may impact its dividend payouts. Notably, the company has made total 20 20%

repayments of PKR2.3bn in 1HFY24, with total loans standing at PKR17.2bn 10 0%

in Dec’24 compared to PKR19.5bn in Jun’23. Moreover, the company is 0 -20%

FY24F

FY25F
FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
purchasing stake from HBL, further indicating its commitment to strategic
Source: Company accounts, Insight Research

investments and expansion opportunities. We expect the company to pay

dividends of PKR20.0/PKR22.0 in FY24/FY25, marking a dividend yield of
16.5%/18.1% in FY24/FY25, respectively. After the repayment of loans, the
company's dividend payout is expected to increase, as per company’s
historical trend of distributing surplus cash when there is no major CAPEX or Working capital efficiently managed (PKRbn)

investment opportunity planned. 180

Receivable+Inventory Payable+ST debt
Thousands

160

Overall cash position 140

120

HUBCO’s plants have higher rank in the merit order which will help them to 100

enhance its cash situation, with the government prioritizing payment to 80

60
ensure their continued operation. Additionally, being CPEC IPPs (TEL, TNPTL 40

& CPHGC) will facilitate relatively better clearance of dues compared to other 20

Non-CPEC IPPs. As per Dec’23 report, the company's trade debts stand at
0
FY11
FY10

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

PKR104bn, while overdue receivables amount to PKR79bn. HUBCO’s base Source: Company Accounts, Insight Research

plant overdue receivables stands at PKR55bn, while Narowal/Laraib/CPHGC

receivables stand at PKR8.5bn/7.5bn/93bn, respectively.

Partnership with BYD to open new avenues Ownership Structure (%)

HUBCO’s parent company, Mega conglomerate, has entered into a contract Committee of
8% Admin. Fauji
with BYD, an electric car manufacturer competing with Tesla on a global level, 25% 10%
Foundation
Allied Bank Limited
to open the first three BYD flagship showrooms in Karachi, Lahore, and
Islamabad in 2024. Notably, BYD (Build Your Dreams) surpassed Tesla to
Mega Conglomerate
19%
become the world's largest electric vehicle manufacturer in 2023. Given the Financial Instituions

high price points of other EVs like Tesla, Mercedes, Audi, or BMW, companies 38%
Others
like BYD offer hope to underdeveloped countries like ours to transition to
EVs. Moreover, in line with the growing focus on sustainable energy solutions, Source:Company Accounts, Insight Research

HUBCO is actively exploring opportunities in the application of Battery

Energy Storage Solutions (BESS), so having BYD in the electric car segment
can serve as vertical integration of the group. 3
PAKISTAN INSIGHT
APRIL 09, 2024

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• Relative Valuation (P/E, P/Bv, P/S etc.)

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Frequently Used Acronyms

TP Target Price DCF Discounted Cash Flows FCF Free Cash Flows

FCFE Free Cash Flows to Equity FCFF Free Cash Flows to Firm DDM Dividend Discount Model

SOTP Sum of the Parts P/E Price to Earnings ratio P/Bv Price to Book ratio

P/S Price to Sales EVA Economic Valued Added BVPS Book Value per Share

EPS Earnings per Share DPS Dividend per Share DY Dividend Yield

ROE Return on Equity ROA Return on Assets CAGR Compounded Annual Growth Rate

4
PAKISTAN INSIGHT
APRIL 09, 2024

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