Updated on Mar 13, 2000
The KSE 100 Overview:
The KSE 100 continued to remain range bound over the week. Volumes
continued to remain robust, nearly touching the 300-mn mark on Wednesday. Though this
increased investor involvement warranted a high amount of volatility, entrance of foreign
funds helped the market to absorb any major movement.
The market continued gyrating between the 1900-1975 levels for the
better part of the week, finally closing at 1936.98 up 1.58% over the previous week. The
market witnessed increased foreign fund movement, though restricted to the blue chip
stock, primarily Hubco, PSO and PTCL.
Taking cue from the entrance by foreign funds, various domestic houses
were witnessed reducing exposure, mainly in PSO and Engro. The recent legal action
initiated by Engro to thwart a takeover bid continued to keep investor confidence shaky,
resulting in weakness even at quite attractive levels of PKR 86-90.
For the coming week, market sentiments are likely to remain under
influence by the various developments on the domestic and international political front.
Due to the inherent volatility, the market is likely to remain yet again range bound
between l920-2000 during the course of the week.
Hub Power Company
The commencement of an army operation at WAPDA is the first sign of
reform in the power sector. Success in the first few months has been impressive.
Consequently, we believe Hub Co can trade up over the intermediate term - Accumulate.
A final settlement of the tariff dispute is likely to be out of court,
although a time frame is still unclear.
In the long term, we doubt if power sector reform will be carried
through to its logical conclusion, privatization of WAPDA and other utilities. Political
considerations may weaken the government's resolve. Thus, our long term Neutral rating.
Hub Co's original PPA is unlikely to remain intact, as WAPDA is not in
a position to meet existing obligations. Debt rescheduling is the most likely outcome,
although Equity investors should expect to share some of the cost as well.
Actual off-take in 1999 was 51%, against guaranteed output of 64.6%
As expected no dividend was declared for FY 99, due to the ongoing
litigation with the government.
Net Profit at PKR 6705 was nearly 35% lower than our forecasted
numbers, a declining trend highlights the possibility of lower profitability in the
Tariff was also on the lower side, at PKR 3.9 Kw/H down by 13% y-o-y
Dividends continued to remain elusive, despite the fact that IRR for
the project is assured making dividends a very important number for investors.
The meeting of the board also voted in favour of invoking the GoP
guarantees to make good on payments.
Half Yearly Results-Cash Constrained Hubco
Hub Power announced its interim results for the first half of FY00.
Operating in a difficult operating scenario, the performance of Hubco continued to remain
In line with the declining tariff profile of the company, net earnings
were lower on a yearly comparison, with the average tariff being higher compared to 2HY99
due to a much lower plant load factor. The interesting, or rather worrying aspect of the
results is the serious condition of the company's cash flows, which continue to be under
strain thanks to WAPDA's recalcitrance in making payments as per the
A quick look at the cash flow For the period indicates that the company
had a net outflow of over PKR1 billion during the six-month period.
WAPDA continues to tighten the noose
As expected, WAPDA has not paid PKR 2.423 mn to Hub Co, which
represents over 83% of profits, or PKR 2.1/share. Taking a quick look at the Balance
Sheet, we find that trade debts have now risen to PKR 13.7 billion (PKR 11.86/share). This
to us is the million-dollar question; does WAPDA/the Government have the means to make
such a large payment in one go? Our take on the matter is based on basic mathematics,
which to us suggests that such an event is unlikely. Hence we continue to believe that the
whole dispute is not one of corruption etc., but only about the buyer's (WAPDA) ability to
pay for the power it is contracted to purchase from Hub Co. We also believe the small part
of equity returns in total tariffs rules out any solution to the problem consisting of
only lower equity returns, as such a move does not yield meaningful savings.
We maintain our view that Hub Co is likely to survive as a project
offering attractive equity returns, and a final resolution is likely to involve extensive
debt restructuring as well. Maintain Accumulate.