Dec 7, 2017 - (iii) save energy cost (estimated US$1.1-1.5bn p.a as per crude ..... the company clocks in at PKR8.56/9.7
Pakistan Pakistan Power
7 December 2017
Pakistan Power Big capacity addition to change industry dynamics
Power sector Performance 3M
6M
12M
Absolute %
-0.7%
-2.7%
2.1%
Relative to KSE %
-9.4%
-1.3%
-8.1%
Source: PSX
Power Sector vs. KSE100 Electricity
30%
KSE100 Index
20% 10% 0% -10%
Dec-17
Nov-17
Oct-17
Sep-17
Jul-17
Aug-17
Jun-17
Apr-17
May-17
Mar-17
Jan-17
Feb-17
-30%
Dec-16
-20%
Source: PSX
Valuation Snapshot NPL NCPL KAPCO HUBC
TP 41 36 57 135
Stance OW OW MW OW
*Terminal value of PKR22/sh,**USD
P/E 3 3.3 4.9 9.4
DY 10% 9% 16% 8%
IRR** 10% 9% 1.7* 15%
Source: PSX, BMA Research
The changed dynamics of Pakistan power mix, driven by supply addition, entails significant reduction in load factor and energy efficiency for the listed IPPs. We accordingly cut our estimates for NPL/NCPL by 3-8% and reduce earnings by PKR0.2-1.00/sh over FY18-21E. Whereas, For HUBC and KAPCO our estimates go up by 3-12%. We believe all is not lost for the IPPs and a worst case scenario for listed IPPs sustainably running at zero load factor is unlikely given our future projections and possibility of delays in select coal/hydro projects. We continue to rate HUBC, NPL and NCPL as Overweight and KAPCO as Underweight, post 18% correction in BMA IPPs Universe prices in 3M. Pakistan set to take big stride on capacity addition: A big upturn in investment in power projects in the past 3 years is finally bearing fruits with sizeable additions (3,880MW till FY17 or 19% of installed capacity in 2013). Projects update suggests another 14,213MW capacity addition is on the way by 2022. The progress on power additions has come ahead of consensus and our expectation. The supply addition, mainly in RLNG, coal and hydro, will (i) likely reduce government’s dependence on expensive fuel oil, (ii) help reduce power load shedding ahead of elections (could be zero in case of FO plants are operational), (iii) save energy cost (estimated US$1.1-1.5bn p.a as per crude estimates), and (iv) may enable an environment for sustainable economic growth ahead (supply deficit has ranged 23-30% of installed capacity at peak hours over FY11-FY16). Coal and RLNG likely to rise to the top of the ‘Merit Dispatch Order’ list: On average, we believe power demand from NTDC (excluding K-Electric) can grow at 4-year CAGR of 11% , well ahead of economic growth, as power outages are reduced and industry shifts back its dependence on grid energy. Given cost and efficiency curves of different fuel sources, coal and RLNG based project will likely top the list on merit order. The role of FO-based project will likely reduce to merely plugging the shortfall in winter/summer seasons post 2021/2022 as Pakistan’s big push on power generation on indigenous coal is materialized (7,097MW addition under construction or waiting financial close). Two key issues ahead: Investment in Transmission & Distribution system has lagged behind the addition in power supply and may prove to be a bottleneck. Secondly, the risk of low recovery and high T&D losses remains given likely focus on increasing power supply to rural areas. With zero load factor, we estimate PKR0.6-0.9/sh downside to our estimates for NPL & NCPL and upside of PKR1.01.2/sh for HUBC. How our covered stocks may fare? Lower load factor will likely result in loss of efficiency gains for small and efficient power projects. Just to highlight, IPPs operate under take or pay agreement with a fixed return regime. For small IPPs, this may result in 3-8% cut in earnings (now incorporated). For HUBC and KAPCO, however, lower load factor may work in their favor with estimated 3%/12% impact on earnings. HUBC is our top pick which has the capacity to offload receivable burden to fuel supplier as they have sovereign guarantee on fuel supply. Furthermore, future expansion plans also seem value accretive, in our view. Our revised TP for HUBC clocks in at PKR135/sh offering lucrative return of 41% from last closing. Dividend yield in FY18/19E is projected at 8.4/7.8%.
REP-005
www.jamapunji.pk
Research Analyst Rafia Hanif +92 111 262 111 Ext (2062)
[email protected]
www.bmacapital.com
Pakistan Pakistan Power
Reshaping dynamics; but all is not lost The changed dynamics of Pakistan power generation mix, driven by supply addition, entails significant reduction in load factor and energy efficiency for the listed IPPs. We accordingly cut our estimates for NPL/NCPL by 3-8% and reduce earnings by PKR0.21.00/sh over FY18-21E whereas, for HUBC and KAPCO our estimates go up by 3-12%. We believe all is not lost for the IPPs and a worst case scenario for listed IPPs sustainably running at zero load factor is unlikely given our future projections and possibility of delays in select coal/hydro projects. We continue to rate HUBC, NPL and NCPL as Overweight and KAPCO as Underweight, post 18% correction in IPP stock prices in Nov’17 (relative to KSE-100). Summary of change in BMA IPP Universe’s estimates Scrip NPL OverWeight NCPL OverWeight KAPCO Underweight HUBC OverWeight
TP
FY18E
FY19E
FY20
New
41
9.9
10.3
11.3
(Change)
-18%
-3%
-9%
-8%
New
36
8.6
9.7
11.2
(Change)
-17%
-3%
-5%
-3%
New
52
11.8
13.1
12.3
(Change)
-15%
4%
8%
4%
New
135
10.2
10.4
11.1
(Change)
1%
1%
3%
3%
Source: BMA Resource
Pakistan set to take big stride on capacity addition A big upturn in investment in power projects in the past three years is finally bearing fruit with significant addition (3,880MW in power capacity till FY17) over 20,774MW installed capacity (excluding KE) in 2013. Project update suggests another ~14,213MW capacity addition is on the way by FY22. The progress on power additions has come ahead of consensus and our expectation. The supply addition, mainly in RLNG, coal and hydro, will likely reduce government’s dependence on expensive fuel oil, help reduce power load shedding ahead of elections (could be zero in case of FO plants are operational) and save energy cost (estimated US$1.1-1.5bnp.a as per crude estimates) while enabling an environment for sustainable economic growth. Installed Capacity
Capacity Addition (MW)
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 -
Fuel Sources (MW)
FY17A
FY18E
FY19E
FY20E
FY21E
FY22E
Nuclear
1,295
1,295
1,295
1,295
1,295
1,295
FO
4,874
4,874
4,874
4,874
4,874
4,874
Hydel
7,115
7,599
9,030
9,871
9,871
10,591
Renewable
1,338
1,636
1,693
1,693
1,693
1,693
166
1,549
3,317
4,100
6,250
8,100
RLNG
1,094
3,431
4,727
4,727
4,727
4,727
Gas
6,147
6,147
6,147
6,147
6,147
6,147
Multi Fuel
2,624
2,624
2,624
2,624
2,624
2,624
24,654
29,155
33,708
35,332
37,482
40,052
Coal
2018
2019
Gas Coal Hydel
2020
2021
2022
Renewables RLNG
Source: Nepra, PPIB, WAPDA, BMA Resource
07 December 2017
Total
Source: Nepra, PPIB, WAPDA, BMA Resource
2
Pakistan Pakistan Power
Coal and RLNG likely to rise to the top of the ‘Merit Dispatch Order’ list On average, we believe power demand from NTDC (excluding K-Electric) can grow at 4-year CAGR of 11% , well ahead of economic growth, as power outages are reduced and industry may shift back its dependence on grid energy. In terms of supply addition, the latest project update suggests net addition of 1,578MW or 7% of FY17 base is set to enter the system. Given cost and efficiency curves of different fuel sources, coal and RLNG based project will likely top the list on merit order with the role of FO-based project being reduced to merely plugging the shortfall post 2021/2022 as Pakistan’s big push on power generation on indigenous coal is materialized (6,881MW addition under construction or waiting financial close). Current Fuel Price PKR/KwH
Source: Nepra, BMA Research
Fuel mix to change going forward A significant shift in fuel mix is projected going forward where heavy dependence on FO is projected to go down. As per our analysis, thermal share in the energy mix accounted for 70% in FY13 where FO was the leader within the thermal segment with 30% share in the mix. Going forward, generation from thermal plants may dominate however FO share may go down to 16%/6% in FY18/19. Fuel mix in FY13 Fuel mix in FY18E
Complete halt in FO generation unlikely Source: Nepra, BMA Research 07 December 2017
3
Pakistan Pakistan Power
As per our analysis, local refineries are in the capacity to produce 1.5-2.0mn tons of FO. This cannot be put on hold as FO is the byproduct of crude cracking and to meet the domestic demand of HSD and petrol, local refineries may continue to produce FO. This has to be absorbed by the energy sector hence, even though the govt. has room to completely shut down generation from FO based plants, this may never happen to protect the interest of local refineries. Power Generation Fuel Sources (MW)
FY18E
FY19E
FY20E
FY21E
FY22E
Nuclear
907
907
907
907
907
FO
779
719
719
418
-
3,799
4,515
4,936
4,936
5,296
573
593
593
593
593
Coal
1,084
2,322
2,870
4,375
5,670
RLNG
2,401
3,309
3,309
3,309
3,309
Gas
2,766
2,459
2,459
2,459
2,459
983
983
983
983
983
14,968
16,001
16,961
17,979
19,216
Hydel Renewable
Multi Fuel Total
Source: Nepra, BMA Research
Two key issues ahead Investment in Transmission & Distribution system has lacked behind the addition in power supply and may prove to be a bottleneck ahead. Secondly, the risk of low recovery and high T&D losses remains given likely focus on increasing power supply to rural areas. Additionally, if FO generation is put on halt from FY20 onwards our earnings projection for efficient plants in BMA universe may plunge by PKR0.6-0.9/sh over the next three years whereas for inefficient plants earnings may boost by PKR1.0-1.2/sh. Different outcome for inefficient Vs efficient plants We believe inefficient FO plants may gain from the complete shutdown scenario as currently they bear the cost of fuel losses (lower thermal efficiency than the benchmark approved). Furthermore, overdue receivables for FO plants may go down as capacity payment accounts for 30-40% of their revenue and the main contributor to hike in circular debt is rise in fuel prices, in our view. To note, IPPs have take or pay contract with NTDC whereby they have sovereign guarantee on payment if their plant is available for production. Hence in case of complete shut down due to lower demand from NTDC they have a right to capacity payment. On the other end of the line are efficient plants (higher thermal efficiency than benchmark), that may observe dip in their earnings due to lower fuel savings led by lower production level. However, overdue receivable may face the same fate for efficient plants as inefficient plants and this may lower their working capital requirement as the pace of hike in overdue receivables may go down. Changing power dynamics’ impact on BMA IPP universe Recent newsflow of halt in FO supply to power plants have caused adverse impact on IPPs’ stock performance across the board. This in our view is unjustified, as demand in summer may go up. As per our channel checks, Nishat Chunian Power Ltd (NCPL) and th Nishat Power Ltd (NPL) were not operating since 14 -Nov’17 however, with govt. being pressurized by the refineries and PSO they have once again started their operations whereby lower generation from hydel also played its due role.
07 December 2017
4
Pakistan Pakistan Power
Additionally, Hub Power Company Ltd (HUBC) and Kot Addu Power Company (KAPCO) never ceased operations but were operating at a very low load factor. To note, HUBC was operating at ~25% load but due to recent power disruption demand from NTDC has gone up, enhancing the utilization to ~50%. Furthermore, we believe cut in load factor may provide stability to the cash base of IPPs as capacity payment accounts for 30-40% of their topline whereby major driver of circular debt is fuel cost. With cut in fuel cost driven by lower load factor further pileup of overdue receivable is not projected and IPPs may make use of this scenario that have been facing severe cash crunch driven by enhanced working capital requirement. We changed our assumption for BMA IPP universe to account for change in industry dynamics, details for individual companies are provided from next page:
07 December 2017
5
Pakistan Pakistan Power
#1 Hub Power Company Ltd: Lower utilization of base plant to benefit the company Change in estimates PKR
FY18E
New EPS
10.2
Old EPS
10.07
% Change
1%
New DPS
8.1
Old DPS
8.0
% Change
1%
HUBC may be the net beneficiary of the changing fuel dynamics, as the base plant which contributes 70-75% to the bottom-line is an inefficient plant whereby lower FY19E FY20E load factor may boost the bottom-line. On the other hand, Narowal plant is an 10.4 11.1 efficient plant but contributes only a fraction to the company’s performance when compared to the base plant. Hence lower fuel savings from the Narowal plant may not 10.15 10.79 dent the overall performance of the company significantly. HUBC remains our top pick 3% 3% within the BMA IPP Universe whereby our new TP for the stock clocks in at PKR135/sh 8.6 9.2 offering lucrative return of 43% from last closing. Dividend yield in FY18/19E is 8.5 9.0 projected at 8.5/9.1%. Our liking for the stock stems from (i) stable dividend outlook, 1% 2% (ii) upcoming triggers (ground work on coal plants have already started ahead of financial closure), and (iii) natural hedge to PKR devaluation. Furthermore, as per our Source: BMA Research channel checks, the base plant operated at 37.8% efficiency in FY17 which is close to benchmark. Stellar performance of base plant given its age and unique tariff structure, which offers higher PCE (Project Company Equity) component in later years gives an upper edge to the company and may enhance its bottom-line significantly from FY22 onwards, in our view. Additionally, if FO generation is put on halt from FY20, bottom-line of the company may enhance further by PKR1.0-1.2/sh over the next three years. Valuation Snapshot PKR mn
FY16A
FY17A
FY18E
FY19E
FY20E
Net Sales
91,595
101,188
80,362
66,001
67,308
% change
-34%
10%
-21%
-18%
2%
12,501
11,348
12,406
12,707
13,571
4%
-9%
9%
2%
7%
11,903
10,689
11,805
12,055
12,892
EPS
10.29
9.24
10.20
10.42
11.14
P/E
9.33
10.39
9.40
9.21
8.61
DPS
11.00
7.50
8.10
8.60
9.20
D/Y (%)
11%
8%
8%
9%
10%
EBITDA
20,826
19,822
19,036
18,887
19,069
7.05
7.74
8.05
7.75
7.35
Profit After tax % change Attributable to owners
EV/EBITDA
Source: Company Accounts, BMA Research
07 December 2017
6
Pakistan Pakistan Power
#2 Nishat Power Limited: Lower load factor to dent NPL’s bottom-line Change in estimates PKR
FY18E
FY19E
FY20E
New EPS
9.9
10.3
11.3
Old EPS
10.2
11.3
12.4
% Change
-3%
-9%
-8%
New DPS
3.0
3.8
4.2
Old DPS
4.0
4.3
4.9
% Change
-25%
Nishat Power Limited (NPL) is one of the efficient plants in our BMA IPP universe whereby change in fuel supply dynamics impacts its bottom-line negatively. Our old assumption projected the plant may operate at historic levels however now with change in our industry analysis, we expect NPL’s plant to operate at 50% load factor in FY18 which may drop to 35% in FY21. This takes our earnings estimates for NPL to PKR9.93/10.27/sh in FY18/19E. As lower load factor leads to lower fuel savings for the company our free cashflow based DPS for the company clocks in at PKR3.00/3.80 for FY18/FY19E.
To note in 4QFY17 partial repayment was made by GoP along with timely payment by Source: BMA Research NTDC which allowed small IPPs to announce cash dividend in 4Q17. However the company opted to skip dividend payment in 1QFY18 as short term borrowings by NPL piled up to PKR2.2bn (up22%QoQ) in 1Q18 vs no borrowing in FY16; this debt has been taken out to manage working capital requirements, in our view. However with lower fuel payment projection we believe the company may be able to payout DPS of PKR3.00 in FY18. Going forward, we believe better working capital management by NPL, which in the past has opted for lower debt while maintaining stable payout. One off payment to clear out circular debt might give the much needed boost to NPL’s cashflow, in our view. -12%
-14%
After changing our assumption to account for changes in industry dynamics, our revised TP for NPL clocks in at PKR41.14 (old estimate PKR50/sh). The stock at new TP offers total return on 45%. We highlight, if the plant ceases operation from FY20 onwards our earnings projection for NPL may plunge by PKR0.6-0.9/sh over FY20FY23E. Valuation Snapshot PKRmn
FY16A
FY17A
FY18E
FY19E
FY20E
Revenue
13,896
15,042
16,064
14,828
15,337
% change
-38%
8%
7%
-8%
3%
PAT
2,851
2,886
3,517
3,636
4,017
% change
-9%
1%
22%
3%
10%
EPS
8.1
8.2
9.9
10.3
11.3
P/E (x)
3.7
3.7
3.0
2.9
2.6
DPS
6.0
3.0
3.0
3.8
4.2
D/Y (%)
20%
13.3%
10.0%
12.7%
14.0%
P/B (x)
0.9
0.8
0.6
0.6
0.5
ROE (%)
23%
21%
21%
20%
19%
3.9
4.2
3.1
2.3
1.7
EV/EBITDA
Source: Company Accounts, BMA Research
07 December 2017
7
Pakistan Pakistan Power
#3 Nishat Chunian Power Ltd: Inferior efficiency gain may translate into lower EPS Change in estimates PKR
FY18E
New EPS
8.6
Old EPS
8.8
% Change
-3%
New DPS
2.5
Old DPS
3.0
% Change
-17%
Just like its peer NPL, Nishat Chunian Power Ltd (NCPL) may take a hit to its earnings when load factor is reduced going forward. Resultantly, our earnings projection for FY19E FY20E the company clocks in at PKR8.56/9.75/sh in FY18/FY19E whereby lower fuel savings 9.7 11.2 is the major contributor to the dip in earnings. NCPL has also been the victim of 10.3 11.6 resurgence of circular debt whereby the company just like its peer skipped out on -5% -3% dividend payment during 1QFY18. However, we do not project extensive pileup of overdue receivables driven by lower fuel cost repayment and expect the company to 3.6 4.4 payout DPS of PKR2.00 during FY18. To note, currently the company has PKR59.4bn 4.0 4.8 overdue receivables recorded on its balance sheet and without oneoff payment by -10% -8% the govt. this amount may remain stuck up. Hence partial repayment may enhance Source: BMA Research cash base of the company, whereby the company may transfer certain benefit from it to the shareholder and may also use it to lower short term borrowing (currently PKR6.6bn reported in 1Q18). On the flip side, if demand from FO plants is put on halt from FY20 onwards, our earnings projection for NCPL may go down by PKR0.6-0.8/sh in FY20-FY23E. Our new TP for the stock works out at PKR36.33/sh (old estimate PKR44/sh) offering total return of 33% from current level. Valuation Snapshot PKRmn
FY16A
FY17A
FY18E
FY19E
FY20E
Revenue
13,854
16,148
15,897
15,186
15,740
% change
-39%
17%
-2%
-4%
4%
PAT
2,756
2,999
3,144
3,582
4,108
11%
9%
5%
14%
15%
EPS
7.5
8.2
8.56
9.75
11.18
P/E (x)
3.8
3.5
3.3
2.9
2.5
% change
DPS
7.3
2.5
2.5
3.6
4.4
D/Y (%)
25%
9%
9%
13%
15%
P/B (x)
1.4
1.1
0.9
0.8
0.6
ROE (%)
38%
33%
28%
26%
25%
4.6
4.6
3.9
3.1
2.5
EV/EBITDA
Source: Company Accounts, BMA Research
07 December 2017
8
Pakistan Pakistan Power
#4 Kot Addu Power Company Ltd: Change in fuel mix and lower utilization to benefit Change in estimates PKR
FY18E
New EPS
11.8
Old EPS
11.4
% Change
4%
New DPS
9.4
Old DPS
3.4
% Change
176%
Things might turn for the better for KAPCO, as lower demand may result in lower fuel losses given the plants age and lower thermal efficiency against benchmark. As per FY19E FY20E our channel checks, fuel mix of the company may change where instead of heavy 13.1 12.3 dependency on FO for power generation, the company may effectively utilize its short term contract with SNGPL to receive consistent gas supply. To note, on gas the plant 12.1 12.7 has been reported to run on its benchmark efficiency level hence shift in fuel mix is 8% -4% projected to work out in company’s favor. Aggregate demand from KAPCO may go 10.7 11.1 down as per our industry analysis which reflects multi-fuel plant may operate at 35% 2.4 2.5 utilization. This may also benefit the company in terms of lower fuel losses. All these 346% 344% changes take our earnings projection for KAPCO in FY18 and FY19 to PKR11.80 and Source: BMA Research PKR13.1/sh respectively. Our DPS projection rises to PKR9.40/10.70 in FY18/FY19E. Furthermore, no development has been made so far on the acquisition of HUBC’s holding from Dawood Hercules and some other shareholder, after WAPDA directed the company to suspend its proceeding. While the transaction would have been earnings accretive, in terms of payout significant cut would have lowered investor’s interest in the stock. Hence we wait for management’s statement on this front. For now, extension of PPA will decide the fate of KAPCO however, with the country expected to have power surplus, extension of PPA might not happen and even if the company is able to persuade the govt. for its extension, it might not be on favorable terms. Post incorporation of new assumptions, our revised TP for the stock clocks in at PKR52/sh (old TP 61/sh which incorporated the impact of HUBC transaction that resulted in significant cut in DPS projection). Our new working now excludes the impact of HUBC transaction as for now it has been put on HOLD. Valuation Snapshot PKRmn
FY16A
FY17A
FY18E
FY19E
FY20E
Revenue
64,178
81,847
64,672
60,310
63,177
% change
-37%
28%
-21%
-7%
5%
PAT
9,071
9,447
10,395
11,521
10,808
% change
-7%
4%
10%
11%
-6%
EPS
10.3
10.7
11.8
13.1
12.3
P/E (x)
5.6
5.3
4.9
4.4
4.7
DPS
9.0
9.1
9.4
10.7
11.1
D/Y (%)
16%
16%
16%
19%
19%
P/B (x)
1.6
1.6
1.5
1.4
1.3
ROE (%)
29%
29%
31%
32%
29%
4.8
4.7
5.1
4.8
5.0
EV/EBITDA
Source: Company Accounts, BMA Research
07 December 2017
9
BMA Capital Management Limited | Pakistan
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Members of BMA Capital Management and/or their respective principals, directors, officers and employees may own, have positions or effect transactions in the securities or financial instruments referred herein or in the investments of any issuers discussed herein, may engage in securities transactions in a manner inconsistent with the research contained in this research report and with respect to securities or financial instruments covered by this research report, may sell to or buy from customers on a principal basis and may serve or act as director, placement agent, advisor or lender, or make a market in, or may have been a manager or a co-manager of the most recent public offering in respect of any investments or issuers of such securities or financial instruments referenced in this research report or may perform any other investment banking or other services for, or solicit investment banking or other business from any company mentioned in this research report. Members of BMA Capital Management Limited may have acted upon or used the information or conclusions contained in this research report, or the research or analysis on which they are based, before publication of this research report. Investing in Pakistan involves a high degree of risk and many persons, physical and legal, may be restricted from dealing in the securities market of Pakistan. Investors should perform their own due diligence before investing. No part of the compensation of the authors of this research report was, is or will be directly or indirectly related to the specific recommendations or views contained in the research report. By accepting this research report, you agree to be bound by the foregoing limitations.
Rating Investors should carefully read the definitions of all rating used within every research reports. In addition, research reports carry an analyst’s independent view and investors should ensure careful reading of the entire research reports and not infer its contents from the rating ascribed by the analyst. Ratings should not be used or relied upon as investment advice. An investor’s decision to buy, hold or sell a stock should depend on said individual’s circumstances and other considerations. BMA Capital Limited uses a three tier rating system: i) Overweight, ii) Market-weight and iii) Underweight (new rating system effective Feb 29’16) with our rating being based on total stock returns versus BMA’s index target return for the year. A table presenting BMA’s rating definitions is given below: Rating definitions Overweight
Total stock return > expected market return + 2%
Market-weight
Expected market return ± 2%
Underweight
Total stock return < expected market return - 2%
*Total stock return = capital gain + dividend yield 07 December 2017
Old rating system (discarded effective Feb 29’16) Buy
>20% upside potential
Accumulate
>=5% to
