KAPCO: Defensive play; offering 14% D/Y

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Kot Addu Power Company

-The improved gas availability and rising circular debt (resulting in higher penal income) has led us to revise up FY14-15E earnings estimates for Kot Addu Power Company (KAPCO) by 4% each.
-In tandem, we also increase our dividend expectations by 3% each for FY14-15E. Consequently, we revise our target price for KAPCO to Rs66 (from Rs65 earlier).
-We anticipate the company to announce an EPS of Rs2.73 in 4Q (+41%YoY and +2%QoQ), which will take the full year FY14 EPS to Rs8.65 (+4%YoY).
-Moreover, KAPCO is currently in the process of conducting a feasibility study of setting up a 660MW coal based power project in Bhikki, Punjab . The project’s expected ROE is 27% and have a decent payback period of 3.7years.
-KAPCO is our preferred IPP play with (1) FY15F D/Y of 14%, and (2) lower than peer exposure to circular debt.

Kot Addu Power Company

FY14-15E earnings revised up by 4% each
The improved gas availability and rising circular debt (resulting in higher penal income) has led us to revise up FY14-15E earnings estimates for Kot Addu Power Company (KAPCO) by 4% each. In tandem, we also increase our dividend expectations by 3% each for FY14-15E. Consequently, we revise our target price
for KAPCO to Rs66 (from Rs65 earlier). KAPCO is our preferred IPP play with (1) FY15F D/Y of 14%, and (2) lower than peer exposure to circular debt. Moreover, (1) sharper than anticipated PKR depreciation, and (2) monetary easing in the future, poses an upside risk to our valuations.

4Q EPS anticipated to be Rs2.73
KAPCO is expected to announce its FY14 year end result on August 27, 2014, where we anticipate the company to announce an EPS of Rs2.73 in 4Q (+41%YoY and +2%QoQ). The YoY growth in earnings is primarily attributable to (1) higher capacity utilization resulting in higher fuel efficiency, and (2) increased penal
income. Along with the result, the company is anticipated to announce a cash payout of Rs5.0 that is in addition to Rs2.75 announced earlier in FY14. That said, it will take the full year FY14 EPS to Rs8.65 (+4%YoY) and DPS to Rs7.75 (+3%YoY).

Expansion plan with a 660MW coal project
KAPCO is currently in the process of conducting a feasibility study of setting up a 660MW coal based power project in Bhikki, Punjab. The project’s expected ROE is 27% and have a decent payback period of 3.7 years. However, it is too early to take into account the project’s impact on KAPCO’s profitability as the final decision
to take-up the project is yet to be taken. Note that KAPCO has shelved its expansion plan on its current facility few years back due to liquidity constraints amid circular debt issue.

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