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AKD Securities Limited Equity Research – Daily Report (September 26, 2022)

Karachi, September 26, 2022 (PPI-OT): HUBC: A new chapter!

We revise our target price for Jun’23 to PkR127.3/sh, offering an upside of 98% from last close and a D/Y of 12.4%.

We now incorporate an average US$/PkR parity of 245/265 for FY23/FY24 and a long-term annual depreciation of 7% (6% previously). Moreover, we foresee CPI inflation of 25% in FY23, 13%/10% in FY24/FY25, while keeping a long-term inflation rate of 9%. For Crude Oil, we estimate the price at US$95 for FY23, US$90/US$80 for FY24/FY25 and a long-term average price of US$70/bbl.

According to our projections, the two Thar coal plants coming online in 1HFY23 add PkR15.4/sh (holding in TEL: 60%) and PkR9.8/sh (holding in TNPTL: 38.3%) to HUBC’s value respectively.

We have an expectation of PkR8.0/sh in dividends for FY23 (D/Y: 12.4%), while FY24 is expected to yield 15.5%. Although the impact of our revised assumptions is significant, we have incorporated the build-up of circular debt for the sector as capacity payments increase, hence keeping the impact on our valuation modest as cash flow is hampered.

Revised projections:

We have updated our assumptions for the financial projections for HUBC owing to the macro-economic developments in the country. We now incorporate an average US$/PkR parity of 245/265 for FY23/FY24 and a long-term annual depreciation of 7% (6% previously).

Moreover, we foresee CPI inflation of 25% in FY23, 13%/10% in FY24/FY25, while keeping a long-term inflation rate of 9%. For Crude Oil, we estimate the price at US$95 for FY23, US$90/ US$80 for FY24/FY25 and a long-term average price of US$70/bbl. Owing to fluid macro- economic conditions, outlook on currency remains volatile. We will follow new developments closely, and continue to revise our assumptions accordingly.

New chapter in a long story:

HUBC’s recent investments in its organic growth shall start to bear fruit in FY23. The Thar Energy and ThalNova Power plants are expected to achieve commercial operations in the first half of the year. TEL has successfully synchronized with the grid, with the CPPA-G purchasing 33GWh from the plant in Aug’22. TEL’s twin, TNPTL is 85% complete according to the company’s latest analyst briefing, and the COD is expected in December.

Ac- cording to our projections, the two plants add PkR15.4/sh (holding in TEL: 60%) and PkR9.8/sh (holding in TNPTL: 38.3%) to HUBC’s value respectively. Furthermore, SECMC has completed the development of the mine for the second phase, after which total output capacity has doubled from 3.8mn tonnes per annum to 7.6mn.

Moreover, the acquisition of ENI Pakistan is pending final approval from the Government, after which Prime International Oil and Gas Company will take over operations. One thing to note, any net profits derived from ENI’s operations post Dec’19 will be accumulated into Prime International’s books, hence leading to a bumper quarter once the deal is complete.

Investment Perspective:

We revise our investment case for HUBC owing to updated macro- economic assumptions, now expecting the company to post EPS of PkR32.7/sh in FY23 and PkR37.7/sh in FY24. We have an expectation of PkR8.0/sh in dividends for FY23 (D/Y: 12.4%), while FY24 is expected to yield 15.5%.

Although the impact of our revised assumptions is signify- cant, we have incorporated the build-up of circular debt for the sector as capacity payments increase, hence keeping the impact on our valuation modest as cash flow is hampered. Our re- vised Target Price for Jun’23 is PkR127.3/sh, offering an upside of 98% from last close. However, hampered dividend payout capacity along with weak underlying market conditions may limit price discovery.

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