Elixir Securities Limited – Elixir Insight

Karachi, December 31, 2018 (PPI-OT): Hub Power Company Limited – Rights Issuance on Cards?

The ongoing expansion projects are estimated to have an equity financing requirement of PKR34.6bn while loan commitments as at Jun-18 stood at PKR26.5bn – leading to a shortfall of around PKR8.1bn.

This, along with the recent increase in Authorized Share Capital and persistent cashflow issues, reveal that a Rights Share Offering cannot be ruled out to bridge the shortfall.

Assuming an Exercise Price of PRK70, the Rights Issuance (if materializes) can be around 10% of Issued Capital, translating into 116mn shares. Moreover, we have also run a sensitivity analysis to show a range of outcomes (Rights Issuance of 7-15% of the total outstanding shares).

With a potential capital upside of 69% from last close, we flag HUBC as our top bet in Elixir IPPs Universe.

Growth Intact but Financing Remains a Constraint: With its ongoing expansions in Coal power projects, Hub Power Company (HUBC) is all set to become a Power Hub of Pakistan. The company currently has 1) 26% stake in China Power Hub Generation, CPHGC (which it intends to increase up to 47.5% after regulatory and corporate approvals), 2) 60% ownership in 330 MW Thar Energy Limited (TEL) and 3) 8% stake in Sindh Engro Coal Mining Company (SECMC). In the latest development, the company also acquired 37% stake in ThalNova Power.

These projects are expected to improve HUBC’s consolidated earnings by 3x to PKR29.0 in FY21 (vs. PKR9.6 in FY18). However we estimate a financing shortfall to fund the equity component of these projects which hints towards the possibility of Rights Issuance (in addition to curtailment of dividends).

Rights Issue Likely at PKR70/sh: Based on the granular details on each of the upcoming project, we project the equity component of the Capex to stand at PKR34.6bn (this estimate is prone to upside risks due to ongoing devaluation in PKR).

As at the last annual report, the available loan commitments amounted to PKR26.5bn (Syndicate Term Finance Facility/Islamic Finance Facility: PKR21bn/ PKR5.5bn) thus translating into a shortfall of PKR8.1bn. Considering the tight cashflow situation due to piling up of receivables and with an already leveraged book, we expect the company to likely bridge this gap through Rights Issuance. The company has also increased its Authorized Share Capital in its FY18 accounts from PKR12bn to PKR17bn.

Assuming an Exercise Price of PRK70, the Rights Issuance (if materializes) can be around 10% of Issued Capital, translating into 116mn shares. Moreover, keeping PKR70/share as base exercise price, we have also run a sensitivity analysis to show a range of outcomes (Rights Issuance of 7-15% of the total outstanding shares).

Rights Issuance Should Actually Relieve the Pressure off the Stock Price: With FY18-21 (3 year) profitability CAGR of 45% and EPS/DPS set to more than double by FY21, we believe the growth story in HUBC is still intact, especially when most of the other sectors are feeling the pinch from economic slowdown. In fact, contrary to its traditional investment pitch as a “Yield Play”, we like the story as one of the best growth oriented plays.

The stock has nonetheless been under pressure (despite PKR devaluation) on market speculations of a possible Rights Issuance. We believe that if such an offering is made, it will actually put the speculations and fears to rest and will bring in more visibility on future cashflows. We maintain HUBC as the best bet from the Power Sector, with rolled forward Dec-19 PT of PKR145/share (offering capital upside of 69%).