We reiterate our BUY recommendation for The Hub Power Company Limited (HUBC) with a target price of PKR 201.5/share by Jun’25, an upside of 36%. Our positive outlook on this stock is based on several key factors: i) Unlocking new investment opportunities by partnering with Build Your Dreams (BYD), the world’s largest electric vehicle manufacturer, to drive profitability ii) early retirement of HUBC plant, which could potentially lead to advance capacity payments expediting early conversion of base plant (RFO) to Thar coal-based power plant iii) solidifying position among IPPs iv) increasing stake in Sindh Engro Coal Mining Company (SECMC) and v) successful acquisition of Eni Pakistan operations, contributing to the company’s overall profitability. The stock is trading at an attractive forward P/E and D/Y ratio of 2.7x and 17%, respectively, offering an upside of 36% from the last day’s closing.
Unlocking new investment horizon
Hub Power Holdings Limited, a wholly-owned subsidiary of The Hub Power Company Limited (HUBC), is diversifying its investment by entering the business of electric vehicles with Build Your Dreams (BYD), a leading Chinese EV manufacturer, through its associate company, Mega Motor Company (Private) Limited. Our work suggests that for every 10,000 annual unit sales with a weighted average unit price of PKR 9mn, incremental annualized earnings impact on HUBC would be PKR 5.95/share, assuming a 100% stake in the company. However, it is pertinent to note that we have not incorporated Mega Motors into our target price calculation.
Potential conversion to Thar coal amid earlier termination
The federal government recently proposed not to renew agreements with the IPPs whose PPA agreements have expired. The early termination of nine independent power producers (IPPs), including HUBC’s base plant, has been proposed. This proposal could benefit HUBC, as it may receive advance payment for its base plant, which could be used to convert its RFO (residual fuel oil) plant to Thar coal, positively impacting its profitability. Additionally, in a recent development, HUBC has signed a Memorandum of Understanding (MoU) with K-Electric (KEL) to explore the possibility of power off-take following the plant’s conversion to local Thar coal.
Solidifying position among IPPs
China Power Hub Generation Company Limited (CPHGC) began commercial operations in Aug’19, with two units of 660 MW each. CPHGC paid out its first dividend in November 23 and is expected to continue disbursing dividends in the future after achieving the project completion date (PCD) in February 23. Moreover, Thar Energy Ltd (TEL) and ThalNova Power Thar (Private) Ltd (TNPTL) commenced commercial operations on October 1, 2022 and on February 17, 2023, respectively. Both power plants, powered by indigenous coal, have a capacity of 330 MW. We anticipate that TEL and TNPTL will contribute PKR 5.71/share and PKR 4.1/share, respectively, to the consolidated earnings of HUBC for FY25.
Potential investment in SECMC
HUBC entered into a definitive agreement to acquire additional 9.5% stake in Sindh Engro Coal Mining Company Limited (SECMC) held by Habib Bank Limited (HBL), as per its notice to PSX. After this transaction, the total holding of HUBC in SECMC will reach 17%. SECMC is a coal producer with a current mining capacity of 7.6mn tons per annum, with plans to achieve a mining capacity of 11.2mn tons per annum in 2024.
Diversified into the Oil and Gas Exploration sector:
HUBC successfully finalized the acquisition of Prime International on Dec’22, establishing a 50:50 joint venture between the company and the Employee Buyout Group. In FY23, Prime International contributed PKR 3.9bn (PKR 3.03/share) to HUBC’s consolidated earnings. We anticipate Prime International contributing PKR 5.1bn (PKR 3.9/share) in HUBC’s FY25 earnings.
Courtesy – AHL Research
