1

Highlights

Attractive Upside: We initiate coverage with a BUY rating on HUBCO on our DDM-based

target price of PKR 44.13. The stock is currently trading at a 2010 P/E of 7.65x, offering an

upside potential of 20% on the current price of HUBCO PKR 36.72.

Best Bet among IPPs: Unlike new IPPs, HUBCO has a U-Shaped tariff structure and its

Project Company Equity (PCE) is indexed to both PKR devaluation and US CPI (while other

IPPs only have exchange rate protected PCE). Furthermore, the GoP backing for fuel supply to

the company is expected to extenuate the shock of circular debt.

Resolution of Circular Debt to Boost Investor Buoyancy: Complete withdrawal of the

power subsidy through gradual increase in power tariff by 2.2% per month during the period

November 2010 to June 2011, would ease HUBCO’s counterparty risk. The move would

brace expected dividend yield and payout, thereby, uplifting investor confidence in the stock’s

returns.

Expansion to Augment Dividends: With the expansion of Narowal, Company has entered

into a growth phase, increasing its capacity by 20% and adding value of PKR 11.31 to our

target price.

This report is published for educational purposes

only by students competing in the CFA Institute

Global Investment Research Challenge.

HUB POWER COMPANY

Cherry Picking

November 26, 2010

Table 1: Market Profile

52 Week Price Range PKR 28.6 - PKR 37.01

Average Daily Volume 1.812 mn

Beta 0.703

Dividend Yield (Estimated) 13%

Shares Outstanding 1,157 mn

Market Capitalization PKR 42,490 mn

Book Value Per Share PKR 24.13

Debt to Total Capital 3.48x

Return on Equity 16%

8000

8500

9000

9500

10000

10500

11000

11500

15

20

25

30

35

40

40

11

9

40

14

1

40

16

4

40

19

0

40

21

1

40

23

3

40

25

4

40

27

7

40

29

8

40

31

9

40

34

0

40

36

1

40

38

2

40

40

3

40

42

4

40

44

9

40

47

0

40

49

2

Figure 1. HUBCO Vs KSE

HUBCO index

Source: Karachi Stock Exchange

Ticker: HUBC Recommendation: BUY

Price: PKR 36.72 Price Target: PKR 44.13

2009 2010 2011E 2012E 2013E 2014E

Turnover (PKR mn) 82,784 99,694 101,369 123,568 126,826 129,573

Net Profit (PKR mn) 3,645 5,557 4,692 6,281 7,010 7,182

EPS (PKR) 3.15 4.80 4.05 5.43 6.06 6.21

DPS (PKR) 2.35 4.49 4.62 5.97 6.47 6.46

BVS (PKR) 24.05 23.98 24.13 23.69 23.56 23.79

ROE 12% 19% 16% 22% 25% 26%

PER (x) 11.66 7.65 9.06 6.77 6.06 5.92

ROA 4% 5% 4% 5% 5% 6%

HUBCO Financial HighlightsTable 2: HUBCO Valuation Summary

2

17%

12%

9%

14%

35%

13%

Figure 2: Shareholding Structure of HUBCO

National power Xenel Fauji Fondation

Individuals FI Others

Source: Company Data

Plant Name

Installed

Capacity

(in MW)

Type of

Plant

Hub 1200 Thermal

Narrowal *214 Thermal

Laraib Energy *84 Hydel

Total 1498

Source: Company Data

*Narrowal COD expected in April 2010

*Laraib COD expected in June 2013

Table 3. Capacity Mix of HUBCO

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Figure 3: Supply and Demand of Electricity in

Pakistan (MW)

Expected Available Generation

Demand (Summer Peak)

Source: PPIB

Business Description

The Hub Power Company, first private sector infrastructure project and second largest

Independent Power Producer in Pakistan, commenced operations in 1991 as a public

limited company. The sponsors include UK based International Power, Xenel of Saudia

Arabia, IHI of Japan and K&M of USA. The company is listed on Karachi, Lahore and

Islamabad stock exchanges and its global depository receipts are traded on Luxemburg

stock exchange.

The company is mainly engaged in developing and operating power stations. It sells

power to Water and Power Development Authority (WAPDA), its only customer, under a

guaranteed minimum off-take contract. The company operates on the basis of four main

agreements including Power Purchase Agreement (PPA) with WAPDA, Fuel Supply

Agreement (FSA) with PSO, Operating and Maintenance Agreement (O&MA) with

International Power and Implementation Agreement (IA) with the Government of

Pakistan (GoP).

The company originated with a thermal power plant, based on residual fuel oil (RFO).

With a gross generation capacity of 1292 MW, the plant is located near Hub in the

province of Baluchistan. Subsequently, it expanded power generation capacity by

installing a 213 MW RFO power station at Narowal in the province of Punjab which is

expected to come online by the third quarter of this fiscal year. In 2008, the company also

established Laraib Energy Limited to construct an 84MW hydro power project near the

New Bong Escape in Azad Jammu and Kashmir. HUBCO has a 75.5% controlling

interest in Laraib which is the first private sector hydro project in Pakistan. The project is

expected to come online in the FY20.

Industry Analysis

Factors Fueling Growth

Demand to Outpace Supply

The power situation in Pakistan has been critical over the past few years and is expected

to aggravate in the future. Demand has grown at a CAGR of 5.2% during the past ten

years whereas the supply increased by 2.2%, this gap can mainly be attributed to deficit

capacity building.

Currently the electricity production per capita of Pakistan is 512 kWh, which is very low

when compared to the other developing countries like Malaysia, Iran and Turkey etc

having a production per capita of more than 2500 kWh. Although the government has

made strenuous efforts in resolving the existing issues, the measures were adhoc and

largely short-term. A long-term well thought out strategy is desperately needed for an

efficient resolution of the energy crisis in the country.

3

68%

30%

2%

Figure 4: Nominal Power Generation Capacity (MW)

Thermal Hydro Nuclear

Source: SOI Report 2010

52%

9%

9%

9%

21%

Figure 5: Electricity Generation by Company

2008-2009

WAPDA KESC HUBCO

KAPCO Other IPPs

Source: Pakistan Energy Yearbook 2009

Heavy Reliance on Thermal Power

The total nominal power generation capacity of Pakistan as on June 30, 2010 was 21,593

MW of which 14,576 MW (68%) was thermal, 6,555 MW (30%) was hydroelectric and

462 MW (2%) was nuclear. With a heavy reliance on expensive thermal capacity,

Pakistan has been unable to improve its energy mix over the years. Frequent water losses

due to limited storage capacity and depletion of gas reserves have compelled the country

to resort to thermal based power generation. Although Pakistan has sufficient potential

for alternate sources of energy like coal, wind and solar, no proper measures have yet

been taken to initiate such projects.

Stakeholders

Electricity production in Pakistan is mainly contributed by Water and Power

Development Authority (WAPDA), Karachi Electricity Supply Company (KESC) and

Pakistan Atomic Energy Commission (PAEC). The development of IPPs since 1994 has

significantly contributed to power production capacity. WAPDA and KESC are

integrated public sector utilities which are responsible for the supply of electricity to the

country through 220 kV double circuit transmission lines.

National Electric Power Regulatory Authority (NEPRA) is the power sector regulator

managing the issuance of licenses for generation, transmission and distribution of electric

power and determining of the tariff rates. PEPCO was the public sector distributor which,

after 18 years of operation, was dissolved by the government in October 2010 on account

of huge losses and management inefficiencies. Post closure of PEPCO, its nine

distribution companies were made independent.

Independent Power Producers

Most of the IPPs are thermal based since set up costs of such plants are lower compared

to hydel power units. Currently 19 IPPs with an installed capacity of 6,600 MW are

operating in Pakistan, providing more than one third of total energy generation.

Corporate Structure

IPPs are established through public-private ownership for generating electricity and

supplying to the sole buyer WAPDA. IPPs are operating under various project

agreements with the government in addition to the power policies of 1994 and 2002.

Capital Structure

The minimum equity required for financing IPP in Pakistan is 20% of project capital cost

with at least 51% equity held by founder shareholders for up to 6 years from commercial

operation date. Moreover, 100% foreign shareholding is also possible.

Tariff Structure

The tariff structure of IPPs has two components namely; Energy Purchase Price (EPP)

and Capacity Purchase Price (CPP). Both these components are measured in per kWh.

The EPP deals with actual power generation and comprises of fuel and variable operating

and maintenance (O&M) costs that are indexed to inflation and exchange rate variation.

The CPP component is independent of the power generated and is based on base capacity

utilization. It is subdivided into escalable and non-escalable charges where the former

includes return on equity, fixed O&M and insurance costs (all indexed to inflation and

4

0

10,000

20,000

30,000

40,000

50,000

60,000

Source: PSO, Blaze Research

Figure 7: Furnace Oil Prices

Furnace Oil Prices(PKR/Ton)

exchange rate movements) and the latter accounts for debt servicing charges including

both principal and interest payments.

Lucrative Return Structure

IPPs have a very well defined return structure shielded from rising energy prices, interest

and operation costs backed by international and sovereign guarantees for fuel and energy

& capacity (E&C)) payments. The returns of IPPs are denominated in US dollars based

on a negotiated ROE with the government and assured cash flows over the project life.

Government Support to Stimulate Foreign Investment

The private sector has always received tremendous support from government in the form

of various incentives for the development of power. This is one major reason why

Pakistan’s power sector has always been eyed by foreign investors. Through the power

policy investors are guaranteed lucrative returns hedged against inflation and exchange

rate movements in addition to the government backing on trade debts.

Favorable Agreements and Tariff

Power Purchase Agreement (PPA)

PPA represents a contract between the IPPs and WAPDA whereby both the parties agree

upon conditions related to plant operation and tariff charges. So far there have been two

different PPAs signed in Pakistan with various IPPs: first under 1994 power policy of

Pakistan and second one under the 2002 Power Policy of Pakistan.

Implementation Agreement (IA)

The IPPs sign IA with the government which guarantees the performance of WAPDA in

terms of the conditions stipulated in the PPA.

Fuel Supply Agreement (FSA)

This agreement is signed between the IPPs and fuel contractors to ensure that fuel

requirements of the IPPs will be met. Unlike the first generation PPA, the second

generation PPA does not provide the guarantee of the government for fuel contract

obligations. However, this does not affect the financial health of the IPPs as the risk is

entirely passed on to the fuel supplier.

The Operation and Maintenance Agreement (O&MA)

The O&M Agreement between the IPPs and their respective contractors ensures that the

latter efficiently adhere the operations and performance standards of the IPPs plants.

Industry Threats

Energy Price Hike

Pakistan’s energy bill has surged due to escalating international oil prices coupled with

rupee devaluation. Over the last five years, furnace oil prices rose by a CAGR of 29%

from PKR 24,263/ton in 2006 to PKR 47,500/ton triggering an increase in electricity

prices. Against this backdrop, the rising inclination of private sector towards the RFO

based plants is not suitable for the Pakistan’s economy in the long run. The cost of

thermal energy has reached at its peak, due to which subsidy is provided by the

Revenue

•EPP: Fuel Cost +Variable CostCPP: Fixed Cost + Project Company Equity(PCE) + Principle Repayments + Interest Expense(IE)

Operating Costs

•Fuel Cost + Variable Cost + Fixed Cost

Operating Profit

•PCE + Principle Repayment + IE

Other Income

•Interest Income(I)

EBITDA

•PCE + Principle Repayments + I +IE

Non cash charges

•Depreciation + Amortization(A)

EBIT

•PCE +Principe Repayment - A + I + IE

Financial Charges

•IE

PAT

•PCE + Principle Repayment - A+ I

Source: Blaze Research

Figure 6: Tariff Structure

5

PEPCO Receivable 181 PEPCO Payable 211

Private 93 IPPs 111

KESC 38 Oi l Companies (PSO+APL) 27

Sindh Government 20 Wapda Hydel 45

Fed Government Tube wel l 5 Renta l Projects 9

Others 26 Gas Companies 20

Source: SOI 2010

(bn PKR)(bn PKR)

Table 4: Trade Debt Position of PEPCO

government. The major threat entailing the industry is the IMF’s conditionality to remove

subsidy.

Circular Debt

Pakistan faces severe internal liquidity crisis especially in the energy sector with almost

every other company indebted to the government or consumer/supplier. Theft of

electricity in the country is major cause of circular debt with likes of KESC having 57%

collection ratio.

Out of the 9 electric distribution companies in the country, 5 have high transmission and

distribution losses. Transmission losses result in load shedding leading to low revenues

for these companies which aggravates the issue of circular debt. One of the main causes

for the inefficiency is the deteriorating distribution system which results in overload and

tripping of main power grids.

Net circular debt position decreased by 16.9% in June 2010 from PKR 216 billion in the

corresponding period last year. This was mainly possible through issuance of TFCs worth

PKR 80 billion and 82 billion in March and September respectively. However, this

proved to be short term measure as the level rose to PKR 235 billion in October 2010.

Power Price Hike to Reduce Circular Debt

Recently, the government has announced a gradual phase out of subsides through power

price hike of 17.6% during November 2010-June 2011 to reduce the disparity between

average cost of power generation and power tariff. We believe that this step will

considerably alleviate the circular debt levels of IPPs.

Healthy Payout despite Circular Debt

Circular debt significantly raised receivable and payable levels of IPPs. Nonetheless

companies particularly HUBCO and KAPCO seem to be indifferent, maintaining healthy

payout ratio in excess of 95%.

Risks

Possible Difficulty in Meeting Obligations Related To Financial Liabilities

The CPP and EPP charges of the company are passed on to WAPDA hence any delay by

WAPDA in this regard affects company’s payment obligations, mainly fuel and debt

servicing charges. The company manages its liquidity risk through running finance

facilities which cover short term funding needs triggered by delaying payments from

WAPDA. As far as payments to PSO are concerned they are compensated by delay in

payments by WAPDA.

Possible HUBCO Default on Numerous Obligations

The guarantee of GoP on the performance of WAPDA ensures the recovery of trade debts

and other receivables which minimizes the company’s credit risk to a great extent.

Exchange Rate Risk on FX Loans

6

Volatility in exchanges rates and unavailability of foreign exchange hamper the

company’s ability to cope with its debt obligations particularly towards off-shore lenders.

The PPA provides the company with the advantage of tariff indexation for any currency

depreciation on the foreign debt element (along with other factors), thereby, mitigating

the exchange rate risk. The government provides guarantee for the accessibility and the

hedging of total foreign currency liability.

Interest Rate Risk

Fluctuations in market interest rates may require the company to pay higher debt

servicing charges, thus reducing its net cash flow. This risk is mostly dealt with given the

fixed lending rates on company’s debt or alternatively through hedging arrangement at

the preference of the lenders.

Poor Performance of Plant

Revenues are highly dependent on plant performance which is determined by various

factors including heat rates, plant availability, dependable capacity and emissions. A

deficiency in any of these factors may lead to payment of penalties to WAPDA or PSO.

The risk of loss in revenues owing to poor plant performance is, however, low as the

company’s O&M contractor, International Power, is a well-reputed equipment supplier

which has also taken certain equity in the project. International Power is accountable as

per O& M Agreement for penalties in case of non-performance and bonuses for

efficiency.

Delays in Fuel Supply

HUBCO’s fuel input remains contingent to timely delivery of supplies by PSO. Hence,

any potential supply delays or bottlenecks will assume the added risk of paying penalty

charges to WAPDA as per PPA. These penalty charges can later be recovered via

payment of liquidated damages from PSO.

Inadequate Management Control by the Company

Any inefficiency on the part of company’s management can lead to improper monitoring

of the operator’s performance consequently affecting company’s cash flows. This risk is

mainly addressed by the current management structure consisting of highly skilled and

experienced staff; moreover, guarantees and Liquidated Damages (LDs) can be called

from EPC the O&M contractors on their poor performance.

Political Risk

Tax Rate Changes

The company along with other IPPs is exempt from all taxes and duties. Any change in

this policy in future may reduce profitability; however, this contingency is also taken into

account in the Implementation Agreement.

Penalty on Delay in Narowal

The company is liable for the payment of liquated damages to WAPDA on a daily basis

by delaying the commercial operation date for Narowal project beyond September 2010.

This risk is, however, offset by passing these charges to the EPC contractor, MAN diesel.

RISKS RISK MITIGANTS

Change In IPP's taxation

pol icy

principle of change in Taxation

pol icy secured under the

implementation Agreement

Delay in COD of Narrowal

caus ing payment of

l iquidation damages to

WAPDA

Offset this ri sk by pass ing

these charges to EPC

contractor,MAN diesel

Table 5: Risk Profile

Delayed payment by

WAPDA caus ing financia l

constra ints

Company continues with

running finance faci l i ty to meet

working capita l requirement

Minimal exposure to

credit ri skGOP guarantee for recovery of

company's trade debts and

other receivables

Volata l i ty in Exchange

rates Hinder abi l i ty to

meet off-shore lender

debt obl igations

The PPA provides tarri f

indexation for currency

deprication on foreign debt

Volati l i ty in interest

rates led to higher debt

servicing charges and

reduced net cash flow

Overcome i t with fixed lending

rates and hedging

arangements

Delay in supply of fuel by

PSO leading to penalty

charges to WAPDA

Liquidation damages pa id to

WAPDA can later be fl ipped by

l iqudation damages pa id by

PSO

Inefficiency by the

company mangement

affecting cash flows

Highly ski l led management

s tructure

Poor performance of

plant resulting in

payment of penalties to

WAPDA

O&M agreement with

International Power Plc has

downs ize the risk

Source: Blaze Research

7

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Figure 8: Revenue Breakup (PKR mn)

Old Plant Narowal

Source: Company Data, Blaze Research

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

Figure 9: Return on Asset and Equity

ROE ROA

Source: Company Data, Blaze Research

0%10%20%30%40%50%60%70%80%90%

100%

Figure 10: Debt Mix

Long term debt to total debt Current liabilities to total debt

Source: Company Data, Blaze Research

Financial Analysis

Buoyant Revenues

With increased operational efficiency, HUBCO has become successful in reaching a

revenue level of PKR 99bn (EPS: PKR 3.15) for the FY10 in comparison to turnover of

PKR 82bn for FY09, a YOY increase of 20%. We expect the revenue to maintain an

increasing trend through FY15, despite a conservative assumption for load factor of 75%

of the existing plant. This expected growth in revenue is primarily attributed to Narowal

project and indexation against rupee depreciation as well as inflation. A Generation

bonus that company receives due to operational efficiency and load factor improvement

will also contribute to revenue. However, due to a conservative approach, we have not

incorporated this revenue head in our projections.

Strong Earnings Stream

HUBCO reported a net profit of PKR 5.5bn for FY10, growth of 52.5% over the

preceding year. ROE has shown significant growth over the past 3 years, hovering in the

range of 9%-19%. We expect a slight slump in the earnings for FY11 mainly due to

increased finance cost on amplified short term borrowings. Going forward, earnings are

projected to increase at a CAGR of 16% during FY12-15. A u-shaped PCE structure will

contribute to earnings growth in future.

Capacity Building to Enhance Balance Sheet Size

HUBCO has so far incurred a capital expenditure of PKR 21bn in setting up Narowal

plant and an additional PKR 2.7 bn will be invested in this project during FY11.

Furthermore, the company has invested PKR 2.6bn in Laraib Energy which will require

another US$23.7mn in the next 2 years. We expect asset utilization to maintain an

encouraging trend increasing from 0.81 in FY10 to 1.04 FY15.

Liquidity

The company has managed to maintain a satisfactory current ratio since the delay in

accounts receivable due to circular debt has been offset to a large extent by increasing

days payable. We expect the similar trends to continue through FY15.

Leverage

Total debt to assets ratio of the company is expected to remain in the range of 78-80%

during FY11-15. Short term liabilities will comprise 8 to 10% of total debt resulting from

sharp increase in accrued accounts payable triggered by circular debt issues. We expected

the issue to be resolved post FY15 based on a conservative approach. The company is

compensated for any mark-up on accrued payables by WAPDA, hence nullifying the

effect of such liabilities on interest cost. Furthermore, the debt position reflects the fact

that despite aggressive expansion the company has managed to restrain the share of long

term debt in total debt.

8

Investment Summary

We recommend a BUY on HUBCO based on its strong revenue growth, healthy payout

and attractive dividend yield. A U-shaped PCE and protection against US CPI inflation

and PKR devaluation will feature as key investment considerations. Ongoing capacity

expansions will further add value to the stock.

Inflation and Devaluation Cover: An Added Advantage

HUBCO’s tariff profile insulates its earnings against inflation and exchange rate

devaluation. We have assumed an annual Rs/$ devaluation of 2.8% and US CPI as

forecasted in the Labor Bureau of Statistics for FY11-20 at 2.4%.

The sensitivity with respect to change in US CPI inflation and PKR devaluation has

significant impact on our fair valuation for HUBCO’s stock. A change of 50 basis points

in our assumption of PKR devaluation and US CPI inflation will result in approximately

2% and 1.5% change in the fair value respectively.

PCE in Growing Phase

Besides a hedge against inflation and exchange rates, the earnings of shareholders are

also supported by the in-built growth in PCE. The U-shaped PCE is currently in a growth

phase and this upward trend will continue to support HUBCO’s earnings over the entire

life of the project. PCE will grow in real terms at a CAGR of 2.2% during FY11-FY15.

Robust Payout

The company has maintained strong payout ratio in excess of 70% over the past, (in

some years in excess of 100%). According to our estimates, the company will maintain

an average payout ratio in excess of 100% through FY15.

Expansion Endeavors to Fuel Growth

With the Narowal project the company has entered a growth phase, increasing its

capacity by 20%. Moreover the acquisition of 75% stake in Laraib Energy will add value

to the company, although we have not incorporated it in our calculations.

Surety of Payments from WAPDA

HUBCO’s cash flow streams are deteriorating due to delay in payments by WAPDA,

which is a key consideration for investors eyeing for a dividend yielding stock.

Payments from WAPDA are guaranteed by Government of Pakistan, thus easing the

company’s cash flow position and ensuring the future consistency of dividend yields.

Generation Bonus

The PPA rewards the company with a generation bonus on a higher load factor (in

excess of 60% base utilization). However, we have not incorporated the values of

generation bonus in our earnings expectations. Given the growing trend of the load

factor over the recent year, returns from production bonus are inevitable.

-10%

0%

10%

20%

30%

40%

50%

-

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

Project Company Equity (In Millions)

Project Company Equity (in millions) growth rate

Source: Company

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2005 2006 2007 2008 2009 2010

Return on Equity and Payout

ROE Payout Ratio

Source: Blaze Research

9

Particulars Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 ….. Terminal Value

Period(n) - 1 2 3 4 5

Dividend Paid (PKR mn) 5,349.13 6,905.63 7,485.43 7,475.10 8,409.39 9,552.23 …..

4.62 5.97 6.47 6.46 7.27 8.25 ….. 0

DDM Value (PKR) 44.13

Upside Potential 23%

Risk free rate 14%

Market risk premium 5%

Beta 0.703

Cost of Equity 17%

Table 5: Valuation Summary

Valuation

We have valued HUBCO by using the Dividend Discount Model because of the high

payout ratio of IPPs. We discounted all the dividends of the company throughout the life

of the project. The cost of equity is assumed at 17%, by taking 5-year PIB return of

13.75% as risk-free rate, a market risk premium of 5% and a beta of 0.703. Based on this

discount rate, we have valued HUBCO at a target price of PKR 44 per share showing

upside potential of 23% based on the price of PKR36.72 as of 24 November 2010.

New expansion plants to fire up the value

Narowal project has added PKR 11.31 to the stock price of HUBCO. Laraib subsidiary

will further add value to the price as Hydel project is providing an IRR of 17%, although,

we have not incorporated this in our valuation

Table 6 Value Drivers DDM Value from old Hub Plant

PKR 32.82

Value from Narowal pant

PKR 11.31

Target Price PKR 44.13

10

49.6147.95

46.3844.89

43.4742.12

40.84

30

35

40

45

50

55

0.155 0.16 0.165 0.17 0.175 0.18 0.185

Figure 13: Target Price Sensitivity

DDM Value

Source: Blaze Research

Risk To the valuation.

EPC contractor MAN diesel Germany was unable to meet the contractual COD of

Narowal and it was delayed twice initially. It is now expected to come online in April

2011 according to company sources. Under the PPA HUBCO is bound to pay the penalty

of delay to the WAPDA, although it is almost offset by the liquidity claims made to the

MAN diesel. Our calculations estimate that a further delay of three months in COD

would reduce the target price by 1.08/share.Sensitivity to discount rate

Sensitivity to discount rate

Valuation of HUBCO is sensitive to discount rate, with every change in 50 basis point

change in discount rate there is approximate 3.01% change in the target price

Target Price Sensitivity

2.40% 2.60% 2.80% 3.00% 3.20%

2.00% 41.81 42.58 43.37 44.17 44.99

2.20% 42.41 43.19 43.99 44.81 45.64

2.40% 43.02 43.81 44.63 45.45 46.3

2.60% 43.64 44.45 45.27 46.11 46.97

2.80% 44.27 45.09 45.93 46.78 47.65

Table 7: TARGET PRICE SENSITIVITYExchange Rate Devaluation

US

CP

I

11

APPENDIX

A. Balance Sheet (PKR mn) 2009 2010 2011E 2012E 2013E 2014E

ASSETS

NON-CURRENT ASSETS

Property plant and equipment 37,895.72 49,614.60 50,663.45 48,443.89 46,213.50 43,871.24

Intangibles 2.25 8.37 5.00 5.00 5.00 5.00

Stores and spares 637.02 637.02 637.02 637.02 637.02 637.02

Investment in subsidiary 656.46 2,610.12 3,617.25 4,624.50 4,624.50 4,624.50

Other assets (Long term Deposits and Prepayments) 4.28 4.13 60.00 60.00 60.00 60.00

39,195.73 52,874.24 54,982.72 53,770.41 51,540.02 49,197.77

CURRENT ASSETS

Inventory of Fuel oil 2,540.89 1,559.88 1,553.53 1,652.63 1,682.61 1,731.04

Trade debts 46,629.46 66,712.46 72,207.77 79,557.38 81,654.87 76,323.98

Advances, Prepayments and other receivables 785.81 739.63 1,189.76 1,189.76 1,189.76 1,189.76

Cash and bank Balances 1,033.79 809.31 927.60 1,101.47 1,129.12 1,157.48

50,989.94 69,821.28 75,878.66 83,501.25 85,656.36 80,402.26

TOTAL ASSETS 90,185.67 122,695.51 130,861.38 137,271.66 137,196.38 129,600.02

EQUITY AND LIABILITIES

SHARE CAPITAL AND RESERVES

Authorised 12,000.00 12,000.00 12,000.00 12,000.00 12,000.00 12,000.00

Issued subscribed and paid-up 11,571.54 11,571.54 11,571.54 11,571.54 11,571.54 11,571.54

Unappropriated profit 17,960.81 18,309.73 17,652.12 17,027.42 16,551.86 16,259.00

29,532.35 29,881.28 29,223.66 28,598.96 28,123.41 27,830.54

NON-CURRENT LIABILITIES

Long Term Loans 11,340.91 23,444.52 27,591.98 26,359.64 25,538.63 20,877.39

CURRENT LIABILITIES

Short term borrowings 3,582.25 6,743.60 5,779.85 7,006.58 8,586.09 9,859.43

Trade and other payables 43,970.16 59,595.33 65,711.80 69,745.69 71,361.79 67,228.51

Interest/mark-up accrued 765.94 1,317.96 1,331.14 1,344.45 1,357.90 1,371.48

Current maturity of long term loans 979.06 1,655.93 1,222.95 4,216.34 2,228.57 2,432.68

60,653.32 92,814.24 101,637.72 108,672.70 109,072.97 101,769.48

TOTAL EQUITY AND LIABILITIES 90,185.67 122,695.51 130,861.38 137,271.66 137,196.38 129,600.02

12

B. Income Statement (PKR mn) 2009 2010 2011E 2012E 2013E 2014E

REVENUES 82,783.92 99,694.26 101,368.60 123,567.85 126,825.65 129,573.26

OPERATING COSTS

Fuel Cost 71,894.69 86,246.92 84,389.50 86,330.46 88,402.39 90,524.04

Oper. & Maint. 2,360.43 2,707.22 2,340.15 2,434.81 2,535.71 2,641.21

Insurance 409.80 542.27 549.03 555.88 562.81 569.83

Misc. 330.27 812.36 548.93 565.03 580.20 592.29

Narowal Operting Cost - - 4,932.09 20,260.99 20,830.75 21,420.62

74,995.18 90,308.78 92,759.71 110,147.18 112,911.85 115,748.00

7,788.74 9,385.49 8,608.89 13,420.67 13,913.79 13,825.27

Admin and selling Expenses 342.94 367.73 383.38 426.57 476.90 535.73

EBITDA 7,445.80 9,071.02 8,225.51 12,994.11 13,436.89 13,289.54

Depreciation Charge 1,706.72 1,720.18 1,880.57 2,678.04 2,704.12 2,725.54

EBIT 5,739.08 7,350.85 6,344.94 10,316.06 10,732.77 10,563.99

Finance cost 2,094.50 1,793.59 1,653.43 4,035.13 3,722.89 3,381.76

PROFIT FOR THE YEAR 3,644.58 5,557.25 4,691.51 6,280.93 7,009.88 7,182.23

C. Cash flow Statement (PKR mn) 2009 2010 2011E 2012E 2013E 2014E

CASHFLOWS FROM OPERATING ACTIVITIES 15,113.85 3,912.89 6,880.89 13,822.43 12,751.18 16,223.13

CASHFLOWS FROM INVESTING ACTIVITIES (6,330.65) (14,885.41) (2,558.62) 1,212.31 2,230.39 2,342.25

CASHFLOWS FROM FINANCING ACTIVITIES (964.99) 6,437.80 (7,444.18) (12,349.79) (12,929.59) (12,919.26)

BEGINNING CASH BALANCE (9,217.77) (1,399.56) (5,934.29) (9,056.19) (6,371.25) (4,319.28)

ENDING CASH BALANCE (1,399.56) (5,934.29) (9,056.19) (6,371.25) (4,319.28) 1,326.85

13

Disclosures:

Ownership and material conflicts of interest: The author(s) or a member of their household, of this report does not hold a financial interest in the security of this company.

The author(s) or a member of their household, of this report does not know of the existence of any conflicts of interest that might

bias the content or publication of this report.

Receipt of compensation: Compensation of the author(s) is not based on investment banking revenue.

Position as an officer or director: The author(s) or the member of the household, does not serves as an officer, director or advisory board of members of the subject

company.

Market Making: The author(s) does not act as a market maker in the subject company’s securities.

Ratings Guide: Banks rate companies as a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute

returns of 15% or greater over the next twelve months period, and recommends that the investors take a position above security’s

weight in the KSE 100 index, or any other relevant index. A SELL rating is given when the security is expected deliver negative

returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Investment Research Challenge and Global Investment Research Challenge Acknowledgement: CFA Pakistan Investment Research Challenge as part of the CFA Institute Global Investment Research Challenge is based on the

Investment Research Challenge originally developed by the New York Society of Security Analysts.

Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the

author(s) to be reliable, but the author(s) does not make any representation or warranty express or implied as to its accuracy or

completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This

information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any securities. This

report should not be considered to be a recommendation by any individual affiliated with CFA Pakistan, CFA Institute or the

Global Investment Research Challenge with regard to this company’s stock.

________________________________________________________________________________________________________