IPPs: Liking intact over attractive dividend yields

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-We reiterate our liking for Pak IPPs, premised upon their healthy payouts. We flag Hub Power Company (HUBC) and Kot Addu Power Company (KAPCO) attractive FY15F dividend yields (D/Ys) of 11% and 14%, respectively.

-We revise down our FY15-16F earning estimates for HUBC by 2-3%, incorporating FY14 results. That said, we lift our FY15-16F dividend estimates by an average 3%. Our ‘Buy’ rating on HUBC remains intact with a revised Target Price of Rs67 (Rs66 earlier).
-For KAPCO, we revise up FY15-16F earning estimates by an average 1% but keep dividend estimates unchanged. We maintain ‘Buy’ on KAPCO with an unchanged Target Price of Rs66.
-In terms of risk, we flag lower than anticipated Pak Rupee (PKR) depreciation can lead to earnings deterioration.

Energy Sector

HUBC and KAPCO offering attractive FY15F D/Y
We reiterate our liking for Pak IPPs during current period of political and economic uncertainty, premised upon their healthy payouts. We flag Hub Power Company (HUBC) and Kot Addu Power Company (KAPCO) impressive FY15F D/Ys of 11% and 14%, respectively. We maintain our ‘Buy’ recommendations on HUBC with a revised Target Price of Rs67 (Rs66 earlier) and KAPCO with an unchanged Target Price of Rs66.

HUBC: Revised TP of Rs67; maintain ‘Buy’
HUBC reported 30% YoY lower FY14 earnings of Rs5.66/share, primarily attributable to major overhauling of its boilers. The same is likely to continue in FY15 as well. We revise down FY15-16F earning estimates for HUBC by 2-3%, incorporating FY14 results. That said, we lift our FY15-16F dividend estimates by an average 3%. Hence, we raise our DDM based TP for HUBC to Rs67 (Rs66
previously). Though (1) higher repairs and maintenance cost and (2) fuel efficiency losses have been major causes of concern, refurbishment of boilers is anticipated to result in efficiency improvement and higher load factor going forward.

Energy Sector
KAPCO: Unchanged TP of Rs66; maintain ‘Buy
KAPCO reported higher-than-anticipated FY14 earnings of Rs8.78/share, owing to
lower-than-expected maintenance cost. We believe higher gas availability during
the period also resulted in efficiency gains. However, KAPCO announced lowerthan-
anticipated cash dividend of Rs6.5/share for FY14. Post FY14 results; we
revise up our KAPCO’s FY15-16F earning estimates by an average 1% but keep
our dividend estimates unchanged. In terms of risk, we flag that lower-thananticipated
Pak Rupee depreciation can lead to earnings deterioration.

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