final girc hubco[1]
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THE HUB POWER COMPANY LIMITED
TEAM
SZABIST
CFA - GIRCDecember 13, 2010
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TABLE OF CONTENTS
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1. HUBCO Overview
2. Recommendation
1. Steady Dividend Yield
2. Low Risk
1. Key Investment Risks1. Circular Debt Issue
2. Delay in Narowal Project
3. Expansion Plans
4. Valuation
3. HUBCO & The Power Sector
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VIDEO
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Steady ividend ield
Low Risk
Expansion Plans
Valuation
RECOMMEN ATION
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KEY INVESTMENT RISKS
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Circular Debt Issue
Delay in Narowal Project
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CI CULAR
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Consumers
istribution Companies
Power Generation Companies
Fuel Suppliers
Refineries and International fuel suppliers
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Circular Debt
Cost of powergeneration exceeding
average electricitytariff
Distribution companiesnot able to fully
recover even the lowtariffs from consumers
Transmission anddistribution losses
REA ON OF CIRCULARDEBT
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EFFECTS OF CIRCULAR DEBT ON HUBCO
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Liquidity position of HUBCO is expected to stay stressed
Increase short term borrowing thus adding to financial
charges Hurt dividend paying ability
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RESOLVING CIRCULAR DEBT
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LOW RISK
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HUBCO have sovereign Guarantee of Govt. Of Pakistan
Receive guaranteed Tariff from WAPDA
Provides a direct hedge against rupee depreciation
Guards against inflation providing real returns
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EXPANSION PLANS
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Expansion
Narowal Laraib
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VALUATION
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We recommend our BUY on HUBC with Jun 11 Fair Value of PKR 46/Share based onDividend Discount Model Valuation trading at a discount of 27%.
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HUBCO & THE POWER SECTOR
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SECTOR REVIEW
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Deficient sector
Demand has increased at a CAGR of 5.8% over the last decade while the supply has
grown by only 2.25%
Power shortage of around 4000MW-5000MW
Introducing Independent Power Producers (IPPs)
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IPPS
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BRIDGING THE GAP
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Inducting Independent Power Producers
(IPPs)
Rent out Electricity from Rental Power
Projects(RPPs)
RPPs have 8-10% higher Tariff structure
than that of IPPs
Short-term nature of these power plants
Will allow the Government to focus oninitiating cheap source of Power
Generation
Ill-Planningof precedinggovernments
Lack ofstrategic
planning ofeconomic
plan
EnergyShortage
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Power: The Way towards GrowthPower: The Way towards Growth
y Expansion avenues
y Now more prone to external
shocks
y Increased quantum of differentialbetween the tariff and actual cost
y Tariff to match the cost by the end
of 2011
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POWER SECTOR OUTSHINING REGIONAL PEERS
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THANK YOU
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APPENDIX
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EP P
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EP
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TARIFF HIKE TRANSCRIPTION
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Eliminate the overall Power Subsidies from the Electricity System of the country
Electricity tariffs have been increased by more than 30%
Average Generation cost of NEPRA comes out to be PKR 10.2/KWh, end consumers pay
PKR 7.32/KWh
40% Increase is imperative for eliminating the Power Tariff Differential
Ease down the Receivables and Cash flow Position of the Power Companies and decrease
the Finance cost
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INVESTMENT CONSIDERATION
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The Tariff structure for the company is U Shaped as outlined in Power Purchase
Agreement(PPA).
The Tariff took a downfall till FY05 and then started rising.
Going forward the Project Component of Equity(PCE) is expected to rise.
This upswing in the PCE of the company is expected to induce growth in theCompanys bottom line in FY11 and onwards.
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HUBCO TARIFF PCE COMPONENT
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FINANCIALS
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