Hub Power Company Limited's (HUBCO) principal activities are to own, operate and maintain an oil-fired power station with a net capacity of 1,200 MW. The plant is located at the Hub River estuary in Balochistan. Water and Power Development Authority (WAPDA) continues to be the major consumer of the power generation business of HUBCO.
The Hub Power Company is listed on Karachi, Lahore, Islamabad and Luxembourg stock exchanges and has the largest market capitalisation of any private company in Pakistan. HUBCO has over 17,000 Pakistani and international shareholders.
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COMPANY SNAPSHOT
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COMPANY NAME HUB POWER COMPANY LIMITED
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Business Utilities- Electric Power Supplier
Ticker Symbol HUBCO
Earnings per Share(Mar31,2010) Rs 3.71
Share Price(6-07-2010) Rs 34.92
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In the year 2006, the company adopted a new motto - growth through energy. This evolution marks the change from being a partner of the government and the people of Pakistan working for the progress of the country through producing and supplying electricity, to becoming a company that seeks to enhance its contribution to growth. This is done through production of even more energy to feed a burgeoning demand.
FINANCIAL PERFORMANCE 3Q10
Power and oil sector has been caught in vicious circular debt, which has severely impacted the industry and Hubco's situation is not different. Currently, the WAPDA owes Rs 58 billion to Hubco under their Power Purchase Agreement. In addition, WAPDA has not yet arranged the Letter of Credit for Rs 12.31 billion for 2009-10 as required by the Power Purchase Agreement. Similarly HUBCO owes Rs 49 billion to Pakistan State Oil for fuel supplied to the power station.
During 3Q10, Hub Power Plant operated at an average load factor of 77.1% and an average complex availability (ACA) of 83%. Electricity sold to Wapda was 6,085 GWh. Sales for the period was Rs 71,746 million (2009: Rs 67,355 million) and operating costs were Rs 65,971 million (2009: Rs 62,553 million) resulting in a gross profit of Rs 5,774 million compared to Rs 4,802 million in the corresponding period last year. The company earned a net profit of Rs 4,291 million during the period resulting in earnings per share of Rs 3.71 compared to a net profit of Rs 2,965 million and earnings per share of Rs 2.56 in the same period last year.
The increase in profit is mainly because of currency devaluation, higher tariff profile and higher generation bonus partly offset by higher repair and maintenance expenses.
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SUMMARY HUBCO BALANCE SHEET
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UNCONSOLIDATED
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Rs in '000 June,2009 Mar,2010
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Deferred liabilities 15,001 26,330
NON-CURRENT LIABILITIES 11,355,914 23,654,916
Trade and other payables 43,970,160 53,214,079
CURRENT LIABILITIES 49,297,407 59,906,482
EQUITY 29,532,350 28,616,333
EQUITY AND LIABILITY 90,185,671 112,177,731
Property, plant and equipment 37,895,720 48,289,134
Assets subject to finance lease 637,023 637,023
Capital work-in-progress 656,459 2,610,118
NON-CURRENT ASSETS 39,195,727 51,541,701
Stock-in-trade 2,540,887 1,025,251
Trade debts 46,629,457 57,568,384
Cash and bank balances 1,033,791 1,380,571
CURRENT ASSETS 50,989,944 60,636,030
TOTAL ASSETS 90,185,671 112,177,731
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INCOME STATEMENT
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Rs in '000 9 months 9 months
Mar,2009 Mar,2010
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Sales 67,355,485 71,745,519
Operating Cost (62,553,018) (65,971,182)
Gross profit 4,802,467 5,774,337
Administrative expenses (242,289) (268,153)
Other operating income 122,840 37,026
Profit from operations 4,683,018 5,543,210
Finance cost (1,717,756) (1,252,032)
Workers' profit participation fund - -
Profit before tax 2,965,262 4,291,178
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Taxation
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Profit for the period 2,965,262 4,291,178
Earnings per share 2.56 3.71
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The unconsolidated revenue for HUBCO for the 3Q10 was 6.5% higher than 3Q09. It increased from Rs 67.35 billion to Rs 71.745 billion in FY10. The modest increase in overall revenue is attributed devaluation of Pakistani currency and increase in tariffs during the same period.
The overall operating cost, which includes residual fuel oil, maintenance, depreciation, insurance, amortisation and miscellaneous increased 5.46% in 3Q10 to Rs 65.971 billion. Residual fuel oil, which amounts to Rs 61.818 billion only, accounts for 86% of the operating cost. Overall, revenue increased more as compared to expenses resulting in 20.24% increment in gross profit for PNSC group reaching Rs 5.774 billion.
In 3Q10, Hubco's administrative expenses increased considerably showing 10.67% reduction to Rs 268 million. Operating income of Hubco plunged from year back Rs 122 million to Rs 37 million showing a 67% decrease and alarming sign for the Hubco.
Earnings before interest and tax equalled to Rs 5.543 billion. Finance cost for the company decreased by 27.11% to Rs 1.252 billion. This apparent decrease could be attributed to decrease in Narowal's plant and acquisition cost for its subsidiary Laraib. However, the mark-up cost on long and short-term borrowing has increased. This apparent decrease in finance cost would be offset in coming year, once the circular debt issue gets resolved.
Profit before and after tax increased to Rs 4.29 billion from Rs 2.96 billion of last year, showing a 44% increase. Hubco did not pay any taxes after 3Q10. Comparing March 31, 2010 to June 30, 2009, it has been found that the non-current assets (93% property, plant and equipment) of the company increased by 31.5% amounting to Rs 51.547 billion and the current assets (94% trade debt) increased by 18.92% from Rs 50.989 billion to Rs 60.636 billion. Property, plant and equipment increased to Rs 48 billion. Trade debts (account receivables) increased to Rs 51 billion due to circular debt.
The current liabilities increased by 21.52% from Rs 49.297 billion to Rs 59.906 billion. The current liabilities comprise 88% of trade and other payables, 7% short-term borrowing and others. The non-current liabilities, which include long-term loans, deferred liabilities increased by 108% from Rs 11.355 billion to Rs 23.654 billion. Equity of the company slipped 3% to Rs 28.616 billion.
On analysing asset side further, it is found that property plant and equipment showed considerable growth increasing from Rs 37.895 billion to Rs 48.289 billion. Thus, Hubco's balance sheet has weakened due to increase in account payable. Receivables of the company have also increased.
Overall, profitability of the company slightly improved after the 3Q10 reports. Pre-tax profit margin was same as profit margin since no tax was paid in current period. The gross profit margin and profit margin of the group improved to 8% and 6% from 7.1% and 4.4% in the same period last year. Return on assets and return on equity position also ameliorated to 3.8% and 15% from 3.3% and 10% in the same period last year. This was reflected in increased earnings per share from Rs 2.56 to Rs 3.71.
Current assets and current liabilities both increased by 18.92% and 21.52%. Current ratio improved slightly to 1, but quick ratio, which contains liquid assets, devolved to 0.61 from 1.03. Networking capital also decreased considerably from a year earlier.
Activity ratio showed ineffective collection of receivables, increased payables and decreased inventory. By looking at asset management ratios, Hubco showed improvement since total asset turnover, fixed asset turnover, sales/equity improved but at the same time companies debt management ratios showed the situation might worsen for Hubco due to increase debt and heavy reliance on long-term loan to meet its day to day obligations.
From investors' point of view, company's price has increased overall the last year. P/E multiple of the company has also increased in 3Q10 to 9.2 from a year earlier.
FINANCIAL PERFORMANCE 2002-09
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SUMMARY RATIOS
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HUBCO
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PROFITABILITY RATIOS
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Gross profit margin (%) 7.1% 8.0%
Pretax Profit Margin (%) 4.4% 6.0%
Profit Margin (%) 4.4% 6.0%
Return on Assets (%) 3.3% 3.8%
Return on Equity (%) 10.0% 15.0%
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LIQUIDITY RATIOS
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Quick ratio 1.03 0.61
Current Ratio 0.98 1.00
Net Working Capital (Rs) 1,692,537 729,548
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ACTIVITY RATIOS
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Inventory Turnover(Days) 15 6
Day Sales Outstanding (Days) 249 289
Day Payable outstanding(Days) 253 290
Operating cycle (Days) 264 294
Cash Conversion Cycle (Days) 11 4
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ASSET MANAGEMENT RATIOS
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Total Asset Turnover 1.34 1.56
Fixed Asset Turnover 0.56 0.67
Sales/Equity 2.28 2.51
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.67 0.74
Debt to Equity Ratio 3.05 3.92
Times Interest Earned 0.37 0.23
Long Term Debt to Equity 0.38 0.82
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MARKET VALUE RATIOS
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Earning per share(Rs) 2.56 3.71
Price/Earnings Ratio 8.1 9.2
Book value per share(Rs) 25.52 24.73
No of Shares Issued (millions) 1,157,154 1,157,154
Market prices (Rs) 20.62 34.27
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Sales of the company have been increasing steadily over the time since 2005. In FY09 it registered an increase of 33% from Rs 62 million to Rs 83 million. This increase was mainly attributed to currency devaluation, generation bonus and higher tariff profile. The plant continued to supply reliable and uninterrupted electricity and during the year, the company was able to supply 8,257 GWh, which is a record for the company.
Profitability ratios have been on the decline and remain low in comparison to the earlier years 2002-05. Gross profit margin, net profit margin and return on assets remained unchanged in FY09 at 7.36%, 4.57% and 4.19%. Return on common equity increased to 12.80% in FY09 from 9.13% in FY08. This increase is mainly on the back of 45% increase in the net profit of the company for FY09.
It is noteworthy that the financial expenses rose by 7 percent to Rs 2 billion; led by higher short-term borrowing. However, mark-up on WAPDA's overdue receivables somehow mitigated the impact of higher financial charges.
During FY09, the company availed a long-term loan of Rs 5 billion for Narowal project, which was partly used to pay off short-term borrowings. It was believed that higher dividend payout depicts a management optimism of resolution of circular debt by the end of August 2009.
The current ratio of the company has been on the decline since FY05. In FY09, the ratio remained unchanged at 1.03. The 81% increase in the current assets was offset by 83% increase in current liabilities. WAPDA's liquidity problems remain in spite of the Federal government's circular debt mechanism in March 2009 by which Hubco received Rs 35 billion of which Rs 31 billion were immediately paid to PSO.
Debt to asset rose from 54.6% in Jun 08 to 67.3% in FY09. The reason for this increase was the rise in current liabilities owing mainly to the rise in trade and other payables by 274%. Finance cost was higher by 7% for the financial year 2009 when compared against the corresponding period last year 2008. Times Interest Earned ratio rose slightly 2.81 in FY09 as against 2.32 in FY08 long-term debt to equity to 38.54% in FY09 from 25.66% in FY08. This was at the back of 56% increase of long term loans. The company is leaning towards more leveraged financing and with the unresolved issue of circular debt this could be a cause of concern for future profitability.
Pakistan's economy suffered major credit crunch during the period FY09, especially banks faced difficult times hence many businesses had to face an expensive lending situation. Inventory turnover was higher because of the stock of oil and higher trade debts owed by WAPDA. Day sales outstanding rose drastically by 41% from 143 days in FY08 to 203 days in FY09. This resulted in longer operating cycle for the company, meaning that it took the company 214 days in FY09 to convert its raw material into cash from sales as compared to 152 days in FY08.
Earnings per share improved to Rs 3.27 in FY09 from Rs 2.25 in FY08. The company also announced Rs 2 per share cash dividend with the results taking cumulative dividend to Rs 3.35/share for FY09 (payout ratio stood at 102%).
A fairly stable dividend stream is expected the issue of circular debt reduced in the near future.
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HUBCO VS KAPCO
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BALANCE SHEET KAPCO HUBCO
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Rs in '000 June,2009 Mar,2010 June,2009 Mar,2010
Deferred liabilities 2,943,032 3,156,569 15,001 26,330
NON-CURRENT LIABILITIES 8,136,722 7,900,844 11,355,914 23,654,916
Trade and other payables 19,213,087 26,727,777 43,970,160 53,214,079
CURRENT LIABILITIES 28,739,296 40,944,020 49,297,407 59,906,482
EQUITY 23,083,236 21,123,734 29,532,350 28,616,333
EQUITY AND LIABILITY 59,959,254 69,968,598 90,185,671 112,177,731
Property, plant and equipment 18,504,118 18,183,279 37,895,720 48,289,134
NON-CURRENT ASSETS 18,796,425 18,514,589 39,195,727 51,541,701
Stock-in-trade 1,967,212 3,520,753 2,540,887 1,025,251
Trade debts 32,721,969 41,703,463 46,629,457 57,568,384
CURRENT ASSETS 41,162,829 51,454,009 50,989,944 60,636,030
TOTAL ASSETS 59,959,254 69,968,598 90,185,671 112,177,731
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INCOME STATEMENT KAPCO HUBCO
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Rs in '000 9 months 9 months 9 months 9 months
Mar,2009 Mar,2010 Mar,2009 Mar,2010
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Sales 52,977,703 62,879,801 67,355,485 71,745,519
Cost of sales (44,941,694) (55,599,526) (62,553,018) (65,971,182)
Gross profit 8,036,009 7,280,275 4,802,467 5,774,337
Profit before tax 6,420,756 5,718,079 2,965,262 4,291,178
Taxation (2,245,108) (1,999,947) - -
Profit for the period 4,175,648 3,718,132 2,965,262 4,291,178
Earnings per share 4.74 4.22 2.56 3.71
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SUMMARY RATIOS KAPCO HUBCO
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PROFITABILITY RATIOS
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Gross profit margin (%) 15.2% 11.6% 7.1% 8.0%
Pretax Profit Margin (%) 12.1% 9.1% 4.4% 6.0%
Profit Margin (%) 7.9% 5.9% 4.4% 6.0%
Return on Assets (%) 7.0% 5.3% 3.3% 3.8%
Return on Equity (%) 18.1% 17.6% 10.0% 15.0%
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LIQUIDITY RATIOS
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Quick ratio 1.36 1.17 1.03 0.61
Current Ratio 1.43 1.26 0.98 1.00
Net Working Capital (Rs) 12,423,533 10,509,989 1,692,537 729,548
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ACTIVITY RATIOS
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Inventory Turnover (Days) 16 23 15 6
Day Sales Outstanding (Days) 222 239 249 289
Day Payable outstanding (Days) 154 173 253 290
Operating cycle (Days) 238 262 264 294
Cash Conversion Cycle (Days) 84 88 11 4
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ASSET MANAGEMENT RATIOS
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Total Asset Turnover 1.13 1.11 1.34 1.56
Fixed Asset Turnover 0.35 0.29 0.56 0.67
Sales/Equity 2.30 2.98 2.28 2.51
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.62 0.70 0.67 0.74
Debt to Equity Ratio 1.60 2.31 3.05 3.92
Times Interest Earned 0.45 0.38 0.37 0.23
Long Term Debt to Equity 0.22 0.22 0.38 0.82
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MARKET VALUE RATIOS
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Earning per share(Rs) 4.74 4.22 2.56 3.71
Price/Earnings Ratio 7.7 10.7 8.1 9.2
Book value per share(Rs) 26.2 24.0 25.52 24.73
No of Shares Issued (millions) 880,253 880,253 1,157,154 1,157,154
Market prices (Rs) 36.29 44.97 20.62 34.27
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