HUBC buoyant in FY16

Hub Power Company Limited's (PSX: HUBC) stock outperformed the benchmark index through most of FY16, and its financial performance also posted steady growth in FY16. The stock price rally has been partly due to increased operational efficiency and lower operational and maintenance costs of the IPP.

HUBC's earnings over the few years have been dented by operations and maintenance (O&M) activity; however, the power companys decision to outsource O&M services to Hub Power Services Limited last August (August 2015) seems to have done the trick.

In FY16, though the revenues continued to slide due to lower furnace oil prices, the IPP was able to report over 600 basis point increase in gross margins due to better load factor in the fourth quarter, lower furnace oil prices, and 39 percent year-on-year lower operating costs, and hence higher O&M savings. HUBC's base plant at Hub is expected to have operated at a higher efficiency of over 70 percent in 4QFY16 compared to 65-66 percent in 4QFY15.

The positive impact of these cost savings along with 32 percent year-on-year fall in finance cost due to lower interest rate environment inflated the bottom line by 17.5 percent year-on-year. The company announced cash dividend of Rs3 per share in addition to the interim cash dividend of Rs4.5 per share.

But thats the entire reason for HUBC's continued share price rally in FY16; the increased investor interest was mostly due to the progress being made on the firms 1320MW coal based project with integrated jetty at Hub site as well as $20 million investment in SECMC with 8.5 percent equity. The coal project cost is estimated at $2.4 billion, and it is a joint venture under CPEC between Hub Power Holdings Limited (HPHL), which is a subsidiary of HUBC and China Power International (Pakistan) Investment Limited; a Hong Kong based company formed by China Power International Holdings Limited.

Key developments in this regard include the selection of EPC contractors along with China Development Bank (CDB) as the lead financer of the project. The COD of the project is expected to be around 2018.

Also, Elixir Securities highlight that a possible addition of a further 330MW mine mouth project could jack up the IPP's future earnings.