Result Preview KAPCO: Company is expected to post EPS of PKR 2.02 in 3QFY17
The board of directors of KAPCO is expected to announce 3QFY17 results on April 20, 2017. We expect the company to post earnings of PKR 2.02/share in 3QFY17, down by 4% QoQ. Our estimates suggest that topline of the company would increase by 22% QoQ on account of higher dispatches (1,720 GWh; up 49%). Other income is projected to increase by 1% QoQ due to higher penal income on overdue receivables; PKR 69.7bn as of Dec’16. While finance costs may depict a probable upturn of 14% QoQ mainly because of higher reliance on short term borrowings; up by 14% as of Dec’16 to PKR 46bn.
During 9MFY17, sales are expected to increase by 7% YoY on the back of 25% jump in FO prices. Whereas other income is expected to increase by 20% YoY due to reasons aforementioned. Albeit, margins should remain dampened in light of with higher generation, as a result, earnings are expected to decline by 4% YoY to PKR 6.76/share.
KAPCO: 9MFY17 EPS foreseen at PKR7.66; DPS, PKR4.30
Tuesday, 18 April 2017
By: Al Habib Capital Markets (Pvt.) Limited
Kot Addu Power Company Ltd. (KAPCO) is all set to announce its 9MFY17 financial result on Apr 20, 2017. We foresee KAPCO reporting a profit after tax (PAT) of PKR6,739mn (EPS: PKR7.66) during 9MFY17 against a PAT of PKR6,204mn (EPS: PKR7.05) during 9MFY16, up 9pc, YoY. In line with trends, we do not foresee KAPCO announcing any dividend during 3QFY17 with the result that we see KAPCO’s DPS for 9MFY17 at PKR4.30.
During 9MFY17, we foresee KAPCO reporting a 10pc, YoY, surge in its Net Sales attributable to: (i) Higher electricity generated coupled with higher load factor, especially during 3QFY17; mitigated partially by: (ii) Lower fuel prices and hence drop in EPP element of KAPCO’s top-line
KAPCO’s 4QFY17E EPS to Clock in at PKR 2.64/share, down 19.1% YoY: Kot Addu Power Company’s (KAPCO) is scheduled to announce its financial results for FY17 on 22nd August, 2017. We expect the company to post EPS of PKR 2.64, down 19.1% YoY, on the back of higher fuel prices, higher generation and the higher earnings base set in 4QFY16 due to a lower effective tax rate.
Comparing estimated fuel revenue (Total Revenue – CPP – Variable O&M), with actual fuel cost, the plant is slightly inefficient. This sensitizes EPS to upwards movements in energy prices and higher utilization levels. Based on data released by National electric Power Regulatory Authority (NEPRA), 4QFY17 utilization levels of 86.4%, stood significantly higher than the 58.8% utilization level reported in 4QFY16. Higher utilization, coupled with 61% higher RFO prices (YoY), will potentially reduce earnings this quarter.
Lastly, lower effective tax rate of 38.15% in 4QFY16 set a higher earnings base. We expect an effective tax rate of 44.4% for 4QFY17 based on 31% statutory tax rate and 4% additional super tax.
On a full year basis we expect FY17 EPS at PRK 10.32 to post a marginal improvement over PKR 10.31 reported in FY16. Gross profit is expected to increase by 2.6% over the previous year as lower plant maintenance expense slightly offsets higher fuel cost. KAPCO incurred PKR 2.16bn in maintenance related expenditures in 9MFY16, which fell to PKR 1.5bn in 9MFY17.
In addition to an interim dividend of PKR 4.30/share, we expect KAPCO to declare a final dividend of PKR 4.50/share. Despite a significant FY18E dividend yield of 13.9%, we have a Neutral stance on the stock, with a Jun-18 PT of PKR 71/share. Capital downside of 6% to last close, is owing to a fast approaching PPA expiry in FY21, however a PPA extension could prove an upside risk to our investment case.
In today’s notice the company announced a potential acquisition of 17.4% stake in HUBC. Due to insufficient cash on the company’s books, we can not rule out a dividend cut if the company decides to go ahead with the transaction (For details on the notice, please refer to our flash note released earlier today).
Result Previews: FY17
KAPCO – Profitability to show a growth of 1% YoY
The board of directors of Kot Addu Power Company (KAPCO) is expected to announce its FY17 financial results on 22nd August 2017. We expect the company to post PAT of PKR 9,200mn translating into EPS of PKR 10.45 during FY17, up by 1% YoY. Net sales are expected to surge by 28% YoY on the back of higher generation, up 14.0% YoY (7,495 GWh: Load Factor 64%) along with higher FO prices, up by 29% YoY to PKR 43,324/ton. Meanwhile, our estimates suggest gross margins could decline by 414bps to 16.8% on the back of higher load factor during FY17. We also expect other income to grow by 21% YoY to PKR 4,897mn due to increased level of overdue receivables from WAPDA (Average levels - FY17: PKR 67bn, FY16: PKR 58bn). Finance cost is forecasted to grow by 34% YoY to PKR 4,338 in light of higher reliance on short term borrowings. Alongside the result, the company is anticipated to declare a cash dividend of PKR 4.70/share which brings full year payout to PKR 9.00/share.
Kot Addu Power Company Limited
Result Review: 1QFY18 Earnings of PKR 2.48/share
1QFY18 earnings depict decline of 6% YoY / 16% QoQ
Kot Addu Power company Limited (KAPCO) announced its 1QFY18 financial results today whereby the company posted a profit after tax of PKR 2,181mn (EPS: PKR 2.48), down by 6% YoY compared to PKR 2,318mn (EPS: PKR 2.63) during 1QFY17.
The company recorded net sales of PKR 21,571mn during 1QFY18, up by 22% YoY. The rise is attributed to higher FO prices (up by 21% YoY) and 9% YoY higher generation (1,865 GWh: Load factor 64%).
Gross margins have decline by 287bps to 16%; higher load factor is the prime reason behind this decline.
Other income increased by 30% YoY to PKR 1,399mn, due to higher overdue receivables from WAPDA (up by 31% YoY to PKR 76,896mn).
Finance costs increased by 67% YoY to PKR 1,598mn in light of higher reliance on short term borrowings (up by 12% to PKR 46,133 as of Jun-17)
Currently we have “HOLD” call on the stock, with a Jun’18 target price of PKR 64.6/share.
Stock Price Correction of 17%; Unjustified
The stock price of Kot Addu Power Company (KAPCO) has plunged by 16.7% in MTD to PKR 49.39/share (26.8% since Jun’17). Major reason behind this decline has been the fear of non-extension of power purchase agreement (PPA) which is set to expire in FY21. We view the nose-dive in price of KAPCO was unjustified given 1) flexibility to operate on RLNG, FO and HSD, 2) largest unit of country with capacity of 1,600MW, and 3) strategic location in the high load/demand center. We reiterate our buy stance on the stock with a DDM-based target price of 65.7/share, implying total return of 42.1% from last closing. The stock is currently trading at a FY19 PE(x) of 3.7x along with alluring dividend yield of 21.3%.
Fuel Mix Assumption
Given the availability of low cost electricity generating power plants (RLNG, coal) along with lower demand in winter season, the incumbent govt. has reduced power procurement from RFO-based plants. Going forward, with the changing energy mix, high cost FO-based plants will only be utilized as peaking plants in summer. However, KAPCO’s flexibility to operate on RLNG and FO will provide the company a competitive edge and with energy mix changing, we have assumed that plant will only be operated on RLNG rather than RFO (FO-based generation during FY17: 63%). Moreover, our discussion with KAPCO’s management suggests that 200mmcfd of RLNG has already been allocated to the company which would be sufficient enough to produce ~1,000 MW. To recall, the company had generated 2,515 GWh (287 MW) on gas in FY17 and we expect fuel mix of the company to completely tilt towards gas; electricity generation is expected to reach 6,307 GWh (720 MW) and 6,192 GWh (707 MW) in FY18 and FY19, respectively.
If Merit Order is followed, KAPCO will be Safe
As per NTDC’s latest merit order, three RLNG blocks of KAPCO are at 37th, 42nd and 51st position, respectively. Therefore, for the generation of 14.8k MW (cumulative capacity of 24k MW at an average load factor 62% including generation from all sources plus renewables), all blocks of the company (operating on RLNG) are expected to contribute to the country’s power generation. However, generation may be curtailed/reduced during winters and low demand season. Moreover, with the capability of operating multiple fired engines, KAPCO is well poised to rescue the national grid in case of certain standby situations; case in point: recent technical issue at Pak Gas Port Private Limited.
PPA Extension; Plant Life Favorable
The PPA of KACPO is set to expire in 2021 and the likelihood of its extension is uncertain given 7,555MW of upcoming capacities coming online from FY19 to FY21. However, with favorable multi fuel fired engines coupled with expected remaining useful life of the plant (11 years beyond 2021), we cannot rule out the possibility of extension in the PPA beyond FY21. However, due to ambiguity on the said issue and changing gov’t priorities to cheaper sources of generation, we have not assumed extension in the PPA for the company into our valuations. With this being the worst case scenario for the company (i.e. no extension in the PPA), KAPCO may sell electricity to 3rd parties on a take and pay mechanism. Our earnings forecast for FY18 and FY19 are set at PKR 9.2bn (EPS: 10.4) and 11.7bn (EPS: 13.3), respectively.