HUBC – CPHGC driving growth

Hub Power Company Limited’s (PSX: HUBC) coal investments are surely driving the profitability. The power company’s earnings have been growing where the share of profits from associates has been key in the growth witnessed in its bottomline.

The dividend from diversification started paying off in FY20 when HUBC’s associated company - China Power Hub Generation Company commenced generation in August 2019. The start of electricity generation from the 1320MW coal plant could not have commenced at a better time when thermal power generation has been dwindling in the country due to depleting natural gas as well as shift from furnace oil based generation to coal and hydel.

HUBC’s consolidated turnover in 1QFY21 was up by 12 percent year-on-year, which was primarily due to increase in generation from HUBC’s subsidiary – Narowal Plant. Load factor of the base plant at Hub was almost nil during 1QFY21 for reasons mentioned above. However, the rise in dispatches from Narowal in particular along with higher prices lifted the topline. Though the company’s gross profits increased, gross margins took a hit due to increased utilization and hence greater cost of sales.

Besides the topline growth, HUBC’s bottomline benefitted from a 38 percent year-on- year decline in finance cost as well as 86 percent higher profits from associated companies. The decline in finance cost was due to lower interest rates, while the higher share of profits from associates came from China Power Hub Generation Company. The share of profits from associated stood at a staggering 22 percent in 1QFY21 versus 13 percent in 1QFY20.

HUBC’s earnings for 1QFY21 rose by 45 percent year-on-year, which continued to follow the trend of FY20 where the company; 50 percent of the growth in the bottomline in FY20 was brought by the earnings from CPHGC. What is better in FY21 so far is the decline in finance cost as well as the growth in the topline. Also, what took many by surprise was the announcement of an interim cash dividend of Rs4 per share after no dividend announced for two years due to capital expenditure undertaken in coal power generation as well as liquidity issues from the rising circular debt. Also, what is making the stock attractive is the financial close reached for another associate company - ThalNova Power Thar (Pvt) Ltd (TNPTL) - a 330MW local coal-based power plant in Thar and scheduled to achieve commercial operations by March 2022.