KOHINOOR ENERGY LIMITED KEL

MARIAM NASIR
Manager Research
Aug 06 - 12, 2007

COMPANY DESCRIPTION - INCORPORATION AND BUSINESS

Kohinoor Energy Limited (KEL) was incorporated in April 26 1994, to take part in the prosperity of the country through power generation. It has started commercial operation from June 20, 1997. KEL is a joint venture of Saigols Group of Companies and Toyota Tsusho Corporation of Japan. The company is situated at 35-KM Link Manga Raiwind Road Lahore. It is one of the pioneer projects of Independent Power Producers in Pakistan. The principle activity of the Company is to own, operate and maintain a furnace oil power station operating in two segments which are Energy Payments and Capacity Payments. The net capacity of the furnace oil plant is 124MW at the end of 2006 whereas it was 120MW in 2005. The additional 4MW capacity enhanced during 2006 was done by optimizing existing facilities of the plant. The main equipment at power complex includes three ABB 63 MVA Step-Up Transformers converting the Electrical Output from 11 kV to 132 kV, Eight WARTSILA Diesel 18V46 Type Diesel Generators having rated capacity of 15.68 MW each and a Combined Cycle Heat Recovery System capable of delivering an output of 8 MW through Peter Brotherhood Steam Turbine.

EXPANSION OF THE POWER PLANT

Owing to mounting need of electricity for both domestic and commercial purposes, country is facing a severe shortage of power supply. KEL is working on fast track capacity extension; in this regard the company has swiftly completed its preparatory work and have field the Bid to the PPIB for expansion. At the same time has planned to extend the gross generation capacity of the power plant to more than the double of the existing capacity. The requisite land for the expansion has been procured and soil-filling work has been started.

FINANCIAL RESULTS THIRD QUARTER

The power plant in overall dispatched 229,297MWH of electricity to WAPDA describing a load factor of 84.44% during the third quarter of FY07 as against 184,057MWH of electricity, a load factor of 67.78%. This translated into sales revenue growth of 11.6% to Rs.1.42bn as against Rs.1.27bn in the same period of last fiscal year. However, cost of sales and administration expense have risen more in proportion to that of sales. The major reason for the rise in cost was due to declined in pre-structured tariff and spending on major maintenance of engines. As a result of rising cost, the gross margins of the company decline from 24.2% to 23%.

RS. IN 'MN

3Q/FY06

3Q/FY07

CHANGE %

9M/FY06

9M/FY07

CHANGE %

Sales Revenue

1,274

1,422

11.6%

3,387

3,936

16.2%

Cost of sales

966

1,095

13.4%

2,486

3,091

24.3%

Gross profit

309

327

5.9%

901

845

-6.2%

Administration expenses

29

57

98.2%

102

163

60.1%

Operating profit

280

270

-3.6%

799

682

-14.6%

Other income

7

5

-36.8%

31

14

-55.2%

Financial charges

32

26

-18.4%

100

76

-24.2%

Profit before taxation

255

248

-2.7%

730

620

-15.1%

Provision for taxation

-

-

-

4

4

10.8%

Profit after taxation

255

248

-2.7%

727

616

-15.2%

Financial Ratios

3Q/FY06

3Q/FY07

Change

9M/FY06

9M/FY07

Change

Earnings per share (Rs.)

1.51

1.47

(0.04)

4.29

3.64

(0.65)

Gross Margins (%)

24.2%

23.0%

-1.2%

26.6%

21.5%

-5.1%

Operating Margins (%)

22.0%

19.0%

-3.0%

23.6%

17.3%

-6.3%

Net Margins (%)

20.0%

17.5%

-2.6%

21.5%

15.7%

-5.8%

Administrative expenses increased by 98% to Rs.57m, which resulted in a decline in operating margins from 22% to 19%. Even though the company is undergoing expansion its financial charges has been declined by 18% to Rs.26m. On the whole the company earned Rs.248m (EPS: Rs.1.47) as against Rs.255m (EPS: Rs.1.51) in the same period of last fiscal year.

DIVIDEND DISTRIBUTION

The company pays out a handsome dividend out of its earning which during the past four years (FY02-FY06) averaged around 54%. However, the same averaged around 66% during (FY02-FY05). The major reason for the decline in payout in FY06 was because of the fact that the company is expanding its generation capacity.

FUTURE PLANS

The company has planned to go for expansion by extending its power plant to more than double of its existing generation capacity, expecting once the bid is approved, KEL will be the first Independent Power Producer (IPP), which will go through the expansion program. Higher dispatch coupled with increase in generation capacity of the plant will definitively add good returns in profitability of the Company in future.

EVENT THIS WEEK:

MONETARY POLICY 1H/FY08

State Bank of Pakistan announced the Monetary Policy for the first half of FY08 maintaining its tight monetary policy stance. This was done in order to control the monetary growth and surging inflation. SBP set the monetary expansion growth at 13.7% for FY08, higher from 13.5% target set for FY07. For the last six consecutive years the State Bank had not been achieving its monetary growth targets. In financial year 2002 the target was 9.7% and the actual growth was 14.8%, in 2003 the target was 10.8% and it grew by 18%, in 2004 target was 11% and the actual growth was 19.6%, in 2005 the target was 14.5% and growth was 19.3% and in 2006 the target was 12.8% and actual was 15.2%. Along side increasing the discount rate by 0.5 percentage points, the SBP has recommended to the government that for the current fiscal that it would be prudent to (i) retire borrowings from SBP by Rs.62.3bn, (ii) adopt quarterly ceilings on budget borrowings from SBP, and (iii) adopt a more balanced domestic debt strategy.

In late July 2006 the SBP raised its benchmark lending interest rate by 0.5 percentage points to 9.5% in order to stem inflation; this was the first such rate rise in 15 months. However, once again this time round, the discount rate has been raised by 0.5 percentage points to 10%. The decision has been wisely taken in order to curb mounting inflation due to higher than targeted money supply in the economy, at the same time addressed issues of higher government borrowings from the central bank and to restrain the concessional credit at lower rates to strategic sectors. These actions are appropriate because the economy is already facing the threat of higher inflation.

Other measures announced beside the hike in discount rate are:

* The SBP raised the CRR requirement for banks from 5% to 7% on demand liabilities and the SLR requirement from 15% to 18%. However, the CRR requirements on time liabilities have been reduced from 5% to 3% to encourage mobilization of longer-tenor deposits.

* Banks are being advised not recover any charges from basic banking accounts (BBAs) and more than Rs50 per month from regular account holders on account of not maintaining the minimum balance, to encourage penetration of banking sector services in masses.

* The central bank will issue detailed instructions to Banks/ DFIs that restrict them from making unilateral changes on fixed rate loans, and to clearly spell out the pricing/ re-pricing frequency in the loan document.

* The regulator also called for disclosure of all fees, penalties, amortization schedules covering principal and mark-up at the time of signing the contract.

* The SBP will now provide only 70% of the refinancing to banks while the remainder 30% will be made by institutions from their own resources. This, revision will take place in a phased manner with banks to meet 15% of the refinancing by December 31, 2007 further enhancing it to 30% by June 30, 2008. The refinance rate to banks will remain below the 6-months T-bills rate and the lending rate to the exporters has been capped at 7.5%.

* The central bank also introduced Long Term Financing Facility (LTFF), under which the exporters can avail financing for fresh procurement of new imported and locally manufactured plant and machinery. The facility will be given to the export oriented projects with at least 50% sales constituting exports or annual exports equal to US$5m, whichever is less.

* The cash in hand and deposits with NBP of Islamic banks are being allowed to meet SLR requirements.

INFLATION

Reduction in inflation was the core issue that the SBP tried to address in the statement while elaborating the Monetary Policy statement. The SBP's policy seems successful in curtailing the core inflation (non-food, non-energy) to 5.5% in FY07 from 7.1% in FY06 while the CPI inflation remained high at 7.8% in FY07 due to food inflation.

POLICY REJOINDER

Soon after the announcement of Monetary Policy, SBP conducted a T-bill auction. There was only a 30 basis points upward shift in Karachi Interbank Offered Rates (Kibor) rate due to 50 basis points rise in State Bank's policy discount rate. The interbank market had already factored in tightening of monetary policy by the central bank due to the slippage in reserve money growth and the missing of inflation target at the end of last year. Three months Kibor went up from 9.56 to 9.93 percent; six months 9.96 to 10.26; and 12 months from 10.33 to 10.59 percent. Ten-year Pakistan Investment Bond (PIBs) yield have been improved by 12 basis points to 10.25%.

IMPACT ON SHARE MARKET AND SECTORS

The impact of the monetary policy statement seems neutral for the market in overall. Highly leveraged sectors are to become more burdened with the hike in discount rate as because of which the KIBOR rate has gone up. Cement, textile and fertilizer sector will be burdened as their financial charges which are linked with KIBOR would go up. However on the flip side, sectors with higher cash balances such as Automobile and E&P will benefit as the return on cash deposits would increase. CFS rate are capped at 1-Month KIBOR+10% and the increase in interest rates is expected to increase this limit. However, the exact rate prevailing in the market is largely determined by available liquidity and the CFS rate is therefore expected to behave neutrally to this change.