The Hub Power Company (HUBC) announced its financial results earlier today, posting earnings of PKR 18,900mn (EPS: PKR 14.07) during 9MFY20, up by 110% YoY compared with earnings of PKR 9,009mn (EPS: PKR 7.16) recorded during 9MFY19. On a quarterly basis, HUBC’s bottom-line shot up by 122% YoY to PKR 5.55/sh during 3QFY20. Earnings growth is largely attributable to improving indexation as the PKR/USD parity averaged 156.5 during 9MFY20 against 132.7 during SPLY. Moreover, the commencement of HUBC’s investment in China Power Hub Generation Company (CPHGC) also contributed towards bottom-line growth during the period.

Key Highlights

 Despite improving indexation, HUBC’s revenues dipped by 18% YoY to PKR 36,473mn during 9MFY20 largely due to a subdued load factor. Note that HUBC’s base plant and Narowal plant have continued to fall down NTDC’s merit order list post the commencement of efficient capacities fueled by cheaper alternatives. Consequently, the demand for FO-based generation fell substantially, causing the company’s load factor to decline to marginal levels.

 HUBC’s gross profits rose by 43% YoY to PKR 21,975mn during 9MFY20 with the increase primarily attributable to improving indexation, and rising PCE component of the base plant.

 The company’s financial charges grew by 90% YoY to PKR 9,357mn led by higher prevalent interest rates and a levered balance sheet to fund its investments.

 HUBC’s share of profits from its investment in CPHGC contributed PKR 8,960mn (EPS: PKR 6.92) during 9MFY20 as the plant commenced its commercial operations during Aug19.

 Note that quarterly earnings grew by 30% QoQ likely due to an absence of a PKR 1.0bn charge HUBC incurred during 2QFY20 for transferring 1.5% of its stake in CPHGC to the Government of Baluchistan.

 We have an Outperform stance on the stock based on its Target Price of PKR 137/sh (upside of 83%). The stock trades at an undemanding PE of 3.57x. While near term cash-flow issues may limit the company’s dividend paying capacity, we believe HUBC has the potential to offer a dividend yield of 18% by FY22.