Supreme Court decision in favor Hub Power Company

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  • As per the notice issued by the Hub Power Company (HUBC), the long over due case against the levy of withholding tax by Federal Board of Revenue (FBR) on issuance of shares to the sponsors has been decided in favor of the company.
  • We flag that this decision is likely to have a positive cash flow impact of Rs1.9bn (Rs1.7/share) which may enhance FY15 DPS.
  • That said, the company intends to (1) expand its power generation capacity with a 660MW coal power project, and (2) invest in Sindh Engro Coal Mining Company Limited (SECMC) which may restrict HUBC’s capacity to pay an additional payout.
  • We maintain our liking for HUBC where high payout expectation in FY15 is likely to be complemented by company’s expansion plans (not part of our base-case estimates), which is likely to deliver further profitability growth going forward.
  • We currently have a ‘Buy’ recommendation on the HUBC with the Target Price of Rs66, where the stock is currently trading at FY15F PE multiple of 7.9x and a D/Y of 12%.

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The decision may likely augment FY15 DPS

As per the notice issued by the Hub Power Company (HUBC), the long over due case against the levy of withholding tax by Federal Board of Revenue (FBR) on issuance of shares to the sponsors has been decided in favor of the company. Although, FBR retains the right of appeal against the Supreme Court’s decision. Nevertheless, we flag that this decision may likely have a positive cash flow impact of Rs1.9bn (Rs1.7/share) which may enhance FY15 DPS. Our base case assumption for FY14E/15F DPS is Rs5.50/7.25. That said, the company intends to (1) expand its power generation capacity with a 660MW coal power project, and (2) invest in Sindh Engro Coal Mining Company Limited (SECMC) which may restrict HUBC’s capacity to pay an additional payout.

Withholding tax on project development cost

To recall, the issue dates back to the start of the Hub power project, when the company issued shares to the sponsors against development costs of the project. At that time, the deputy commissioner of Income Tax made an assessment, under Income Tax Ordinance 1979, of Rs1.9bn stating that the company did not withhold tax at the time of issue of shares to sponsors against project development costs. In response, the company deposited tax amounting to Rs297mn against the above assessment and filed an appeal before the commissioner of Income Tax, however, the decision came against HUBC. Thereafter, the company filed an appeal before High Court, which also got dismissed. Later, the company’s management filed an appeal with the Supreme Court of Pakistan and made payment of Rs1.6bn in order to restrict the penal exposure of the company. 

Liking intact – Maintain ‘Buy’ on HUBC

We maintain our liking for HUBC where high payout expectation in FY15 is likely to be complemented by company’s expansion plans (not part of our base-case estimates), which is likely to deliver further profitability growth going forward. We currently have a ‘Buy’ recommendation on the HUBC with the Target Price of Rs66, where the stock is currently trading at FY15F PE multiple of 7.9x and offering a D/Y of 12%.

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