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Bloomberg HUBC.PA

Reuters HPWR.KA

MCAP (USD mn) 535

12M ADT (mn sh.) 2.2

Shares Outstanding 1,157

Hubco emerges as our favorite pick in the power sector as highlighted in our strategy report titled Pakistan Market Outlook 2013:Scaling New Heightscombining an irresistible dividend yield with a tremendous growth story

The profitability of the company is all set to grow on the back of 1) depreciating Pak rupee and increase in companys Project Company Equity (PCE) component

Despite fresh concerns over the companys cashflows, we keep our assumptions intact and expect the company to pay PKR6.5/sh in FY13 with the help of short term borrowings and funds released from NTDC

Laraib Power project, the second expansion inline is expected to bode well for the company due to its attractive USD internal rate of return (IRR) of 17% and relative immunity from circular debt (hydel based)

At our Jun13 TP of PKR 52/sh, the stock offers an upside of 16% alongwith an irresistible dividend yield of 15% BUY!

Profitability to grow

Hubco emerges as our favorite pick in the power sector as highlighted in our strategy report titled Pakistan Market Outlook 2013:Scaling New Heightscombining an irresistible dividend yield with a tremendous growth story.

The profitability of the company is all set to grow in FY13 too (EPS: PKR7.3/sh) given the current economic scenario. The growth in profitability is expected to be primarily driven

by the 1) devaluation in Pak Rupee 2) increasing revenue stream from Narowal and 3) ~1.5% increase in the companys inbuilt Project Company Equity (PCE) component.

What about cash flows?

The COD of Narowal brought about a rise in the companys profitability however; all did not go as planned. The Narowal project faces severe liquidity problems as National Transmission and Dispatch Company (NTDC) continues to fall short of its obligations. Furthermore, it is mandatory for the plant (established under the 2002 policy) to pay in advance for the fuel supply, failing to do so results in plant closure, further adding to the liquidity woes of HUBC (Narowal). We do not see any out of the box solution for the circular debt issue this year. However, funds released by the government will ease some

pressure off the mounting receivables, we believe. Power Subsidy exhausted good news for IPPs!

The government of Pakistan has exhausted the entire amount of power subsidies (PKR170bn) allocated for the year during the first five months of FY13.This is indicative of the governments insistence to release funds in order to minimize power outages in the election year. We believe the second largest power producer in the country, HUBC, is likely to benefit from such disbursements along with the entire energy chain.

An enticing dividend yield of 15%

Despite fresh concerns over the companys cashflows, we keep our assumptions intact

and expect the company to pay PKR6.5/sh in FY13 with the help of short term borrowings and funds released from NTDC. Even if the company skips its half year payout as indicated

Hub Power Company

Be in safe hands

BUY

Target Price Jun 13: PKR 52 Current Price: PKR 45

Valuations

2011A 2012F 2013F

EPS 7.1 7.3 7.8

DPS 6.0 6.5 7.0

HUBC vs. KSE100 Relative Chart

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KSE100 Index HUBC

HUBC Profile: The Hub Power Company Ltd. was incorporated in Pakistan on August 1,1991. The principal activities of the company are to develop, own, operate and maintain power tations. The Company owns an oilfired power tation of 1200MW (net) in Balochistan (Hub

Plant) and a 214MW (net) oilfired power tation in Punjab (Narowal Plant).The company

also has a 75% controlling interest in Laraib Energy Limited, a subsidiary company which owns an under construction hydel power project of 84MW.

Zoya Ahmed

oya.ahmed@bmacapital.com +92 111 262 111 Ext: 2053

Friday January 11, 2013

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by the market, the resultant depression in stock price would present a wonderful buying opportunity to the investors. Furthermore, we believe the management would compensate its investors in the full year.

Laraib: the

other

Narowal?

Laraib Power project (84MW), the second expansion project (Hubcos stake: 75%), is expected to come online sooner than scheduled (mid CY13), according to sources. As the project is hydel based, we believe the expansion to bode well for the company due to its relative immunity from circular debt unlike furnace oil based Narowal. Not to forget, the government has laid out an even higher indicative USD IRR for hydel generation at 17%; where currently HUBCO is the only company that is setting up a hydel plant. However, we have not incorporated the earnings from Laraib in our financial model as we await COD and finalization of tariff. This remains a key upside risk to our valuations.

Outlook: combining growth and value together to yield 31%!

Hubco emerges as our favorite pick in the power sector as it combines an irresistible dividend yield with a tremendous growth story. Our TP for the scrip works out to PKR52/sh providing an upside of 16% from the current levels. And this is not all! The stock further promises a compelling dividend yield of 15%, far more attractive than any other investment avenue BUY!