Recently, news has been circulating regarding the termination of IPPs under the 1994 and 2002 Power Policy. The government has reportedly planned to shift old power plants from the current take-or-pay arrangement to a take-and-pay basis. Under the take-and-pay arrangement, the government will no longer be obliged to pay capacity payments to the converted plants as they are expensive and have recently contributed little electricity to the national grid. The development has triggered a sharp 10% decline in HUBC’s price in the past week. HUBC’s base plant and Narowal (both RFO-based and cumulatively 40% of HUBC’s total generation capacity) are likely to be negatively affected if the government enforces their conversion of PPAs.
The downside is limited, but the potential upside is high; we remain Neutral
§ If the government terminates the PPAs for HUBC’s base plant and Narowal, we estimate the company’s recurring earnings and payouts to decline by 30% from our current estimates. DPS should fall to PKR14/13 from PKR25/23.5 in FY25/26f. This would reduce our TP from PKR160/sh to PKR130/sh.
§ While HUBC is expected to negotiate with the government for an expedited settlement of its pending receivables of about PKR65bn in exchange for the early termination of PPA, we conservatively expect a 50% settlement of the outstanding receivables of the base plant.
§ The stock is presently trading below our estimated fair value of PKR130/sh (in case the PPAs are terminated), suggesting limited downside risk. Moreover, potential upsides can also emanate from HUBC’s appeal against the decision in international courts. However, a significant risk remains regarding the pending receivables. Reportedly, the government may ask the IPPs to forgo outstanding payments, though we consider such an outcome unlikely. If IPPs are compelled to relinquish their exceptional receivables, they will likely pursue arbitration in International courts.
Through a partnership with BYD, HUBC’s recent venture into the automobile sector should lead to more upside potential. However, this is not incorporated in aforementioned numbers due to lack of clarity on capex requirement and company’s stake. We are Neutral on HUBC as we believe the stock has priced in its worst-case scenario; which has limited downside while upside potential is huge if the company successfully negotiates better terms with the government.
Courtesy – IMS Research
