The profitability of Hub Power (HUBC) increased by 47% Y/Y to PKR 16,888mn (EPS: PKR 12.60) during 1HFY21 because of: 1) increased contribution from the company’s key investments, 2) Pak Rupee depreciation (4.3% Y/Y), 3) the U-shaped tariff of the base plant enhancing its returns, 4) lower interest rates reducing financial charges and 5) absence of loss recorded on the transfer of shares to the Government of Baluchistan. Potential increase in profitability, however, was marred by an increased effective taxation rate of 11%. On a sequential basis, earnings remained relatively constant at PKR 8,441mn (EPS: PKR 6.32). Along with the result, the company announced an interim cash dividend of PKR 3.00/sh.
– HUBC’s gross profits enhanced by 10% Y/Y to PKR 15,878mn during 1HFY21 likely because of: 1) 4.3% depreciation of the Pak Rupee improving returns on the USD-hedged tariff, 2) The base plant’s U-shaped tariff improving its overall return during the period. Sequentially, gross profits dipped by 5% Q/Q to PKR 7,739mn likely because of the 3.7% appreciation of the Pak Rupee.
– Financial charges fell by 40% Y/Y to PKR 3,731mn during 1HFY21 because of the 625bps cut in interest rates.
– The share of profits from associates rose by 48% Y/Y to PKR 7,605mn during 1HFY21 because of the performance of the company’s investments in CPEC-based projects amidst a weakening Pak Rupee.
– HUBC had recorded a loss of PKR 1,009mn during 2QFY20 on the transfer of its stake in CPHGC (1.5%) to the Government of Baluchistan. The notable absence of this charge supported the overall growth in the company’s profitability.
– The company’s effective tax rate increased to 11% during 1HFY21 as the company is likely providing for the 25% WHT on the projected dividends of its CPEC-based projects.
– We have a BUY stance on HUBC with a Jun22 TP of PKR 139/sh. Our preference for the stock stems from: 1) sharp earnings growth as its investments commence, and 2) action against the proliferation of the circular debt, likely improving the company’s cash crunch. The stock is presently trading at an FY22 PE of 3.4x.