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Initiating Coverage – Nishat Power Limited

Initiating Coverage – Nishat Power Limited

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Published by Shahid Ali
Comprehensive Research Report on Nishat Power Limited
Comprehensive Research Report on Nishat Power Limited

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Published by: Shahid Ali on Jan 10, 2011
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M.M. Securities (Pvt.

) Ltd
Synergy of Finance & Opportunities

Equity
INITIATING COVERAGE
Jan 06, 2011

NISHAT POWER LIMITED
We initiate our coverage on Nishat Power Limited (NPL) with a DDM based fair value of PKR 21.66/share. We recommend ‘Buy’ stance on NPL as its currently offering upside potential of 27.4% from our fair value. Further, NPL is offering attractive dividend yield of 17.6% at current level as compared to sector dividend yield of 15% and trading discounted P/Ex of 3.77 and P/Bx of 1.44.

Shahid Ali
Senior Research Analyst shahid@mmsecurities.com.pk +92-21-35317703 Ext. 106 Our research available on: Bloomberg http://www.mmsecurities.com.pk
Recommendation BUY PKR PKR % PKR PKR PKR PKR % % x x 17.01 21.66 27.4% 4.51 5.21 3.00 3.90 17.6% 23.0% 3.77 3.26

Reason To Invest in NPL
 NPL is the first Independent Power Producer (IPP) under power policy 2002, which has completed Reliability Run Test (RRT) as required under Power Purchase Agreement (PPA) in its first attempt at 132 KV transmission lines. The project has finally started its commercial production in June’10. NEPRA has approved revised tariff for the company which have increased overall profitability of the company for 1QFY11 and also positive for the forthcoming years. we estimate that plant to operate at efficiency level of 95% capacity factor in 2QFY11 which will be one of the highest efficiency level in the country. Whereas, NPL plant efficiency level in 1QFY11 was highest in power generation sector as plants operated at an optimal efficiency of 91.2% capacity factor and dispatched 393,287 MWh power to national grid during 1QFY11. NPL is offering highest dividend yield in the power sector. We expect company to announce first ever cash dividend of PKR 3.0 per share during FY11. Based on last closing price of the stock, its currently offering attractive dividend yield of 17.6% as compared to HUBCO & KAPCO dividend yield of 15.8% and 14.3% respectively for the period of FY11.
FY10 Net Sales (PKR mn) PAT (PKR mn) EPS (PKR) DPS (PKR) Dividend Yield P/Ex P/Bx 0.0% N/A N/A 1,018 47 0.13 FY11E 17,095 1,599 4.51 3.00 17.6% 3.77 1.44 FY12E 18,702 1,846 5.21 3.90 23.0% 3.26 1.30 FY13E 19,892 1,990 5.62 4.50 26.5% 3.03 1.20 FY14E 20,464 2,094 5.91 4.85 28.5% 2.88 1.11
Current Price - As of Jan 05, 2011 Fair Value (DDM )

Upside Potential EPS - FY11E EPS - FY12E DPS - FY11E DPS - FY12E Div Yield FY11E Div Yield FY12E P/E FY11E P/E FY12E

KATS Code Bloomberg Code Outstanding Shares Market Capitalization 1Yr High - Low Daily Avg Volume mn PKR-mn PKR in '000

NPL NPL.PA 354.1 6,023 17.10-9.75 1,414

Relative Price Performance—PKR
NPL 20 15 10 5 0
Apr-10 Aug-10 Sep-10 Oct-10 Jan-10 Jul-10 May-10 Mar-10 Jun-10 Nov-10 Dec-10 Feb-10 Jan-11

KSE 100 Index

Disclaimer: This report has been prepared by MMSPL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. MMSPL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. MMSPL may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.

M.M. Securities (Pvt.) Ltd
Synergy of Finance & Opportunities

Equity
INITIATING COVERAGE
Jan 06, 2011

Valuation Methodology We have used Dividend discounted model (DDM) for the valuation of NPL and derived a fair value of PKR21.66/share. We recommend ‘Buy’ on NPL as scrip is offering upside potential of 27.4% and attractive dividend yield of 00% at current level from our fair value.

DDM Valuation Required Return Terminal Growth Risk Free Rate Risk Premium Beta Target Price 21.6% 3.0% 15.0% 6.0% 1.10 21.66

Company Overview
NPL is a subsidiary of Nishat Mills Limited (NML) which owns 56.86% shares of the company, NPL is primarily engaged in the business of power generation. The Nishat Power Project (NPP) was started in late 1995 with the permission of PPIB to NML for setting up new power generation project to offset the increasing power deficit in the country. NPP has established a new power generation plant at district of Kasur near Lahore, having gross generation capacity of 200MW a net generation capacity of 195.305 MW Residual Furnace Oil (RFO) fired Independent Power Plant (IPP). NPL was incorporated in 2007 with the objective to build and operate power generation plant in the country. The project has finally started its commercial production in June’10.
Shareholding Pattern as of June’10
Source : Company Financials

Others Individuals 11.51% 7.40% ABL 15.62% NBP 8.61% NML 56.86%

2

M.M. Securities (Pvt.) Ltd
Synergy of Finance & Opportunities

Equity
NISHAT POWER LIMITED
Jan 06, 2011

Project Detail Plant Specification
The entire plant, machinery and equipment required for the project has been procured from Wartsila Finland. Whereas, Wartsila Pakistan (Private) limited has been appointed for the construction, erection, installation testing and commissioning of the entire project. The total cost of the project including interest during the construction period is ~PKR R17.7 billion (bn). The project was finance with debt to equity ratio of 75%:25% which is stander ratio for new IPP.

Power Purchase and Sale Agreement
NPL has entered into a 25 years Power Purchase Agreement (PPA) with Water and power development authority (WAPDA) through National Transmission and Dispatch Company Limited (NTDCL), be the sole purchaser of power generated by NPL. NTDCL has contracted to purchase the total net generation capacity of 195.305 MW produced by NPL during the contracted period.

Fuel Supply Agreement
NPL has finalized its Fuel Supply Agreement (FSA) with Shell Pakistan Limited as the plant is operating on residual furnace oil, for a period of ten years after the commencement of commercial production. Furnace oil price will be depend on market price or as announced by ministry of petroleum for a specified time period.

Commercial Date of Operations
NPL had successfully achieved Commercial Operation date (COD) on 09th June’10 after the delayed of ~5months due to some technical issues. However, plant of the company operated at an optimal capacity of 86% in FY11 and dispatched 88,692 MW electricity to the national grid. Further, NPL has become the first IPP of under power policy 2002. Moreover, capacity utilization of the company has improved to 91.2% in 1QFY11 and expected to improve further in upcoming quarters.

3

M.M. Securities (Pvt.) Ltd
Synergy of Finance & Opportunities

Equity
NISHAT POWER LIMITED
Jan 06, 2011

Power Tariff
Power tariff has a typical two parts structure with and energy charges for the energy actually dispatched and capacity charges based on available capacity. The capacity components is consist of two parts one is scalable and the other one is non-scalable. Scalable component coated with fixed cost and an implicit return whereas non-scalable component is coated with principal repayment and interest payment on the loan elevated during the construction of project. Further, any decline in the non scalable component depends on the payment of loan. If any decrease in the electricity off take by WAPDA from NPL, the company’s fixed costs, implicit return and principal and interest payments would still be covered through the capacity payments. The maintenance & fuel costs and variable operations are covered by Energy Component and it is subordinated on the delivered electricity to WAPDA and varies on the basis of fuel mix used to generate that electricity.

Reviesed Tarif Approved As of 29 Nov'10 Year Variable Charges (PKR/kwh) Fuel 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 9.12 Variable O&M Total 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 0.6505 9.7705 Fixed O&M Working Capital 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1983 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 0.1997 Capacity Charges (PKR/kwh) Insurance ROE 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 0.122 0.3424 ROEDC W/tax Loan Payment Interest Total 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.0596 0.0301 0.3755 0.4365 0.5075 0.5899 0.6857 0.7971 0.9265 1.0772 1.2522 1.4556 1.2222 2.5498 1.1612 2.5498 1.0903 2.5499 1.0078 2.5498 0.912 2.5498 0.8006 2.5498 0.6711 2.5497 0.8206 2.8499 0.3456 2.5499 0.1422 2.5499 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521 0.9521

Net Capacity at COD: Exchange Rate at COD: Fuel Price (Inclusive of Freight) US CPI WPI (Manufacturers) Levelized Tariff at 60% plant Factor

195.305MW 85.40 PKR/USD 45,363.97 PKR/ Matric Ton 218.03 For May 2010 170.15 For May 2010 PKR 13,1.160/kwh

4

M.M. Securities (Pvt.) Ltd
Synergy of Finance & Opportunities

Equity
NISHAT POWER LIMITED
Jan 06, 2011

Circular Debt
The major issue for the power sector is prevailing circular debt issue in the country which has restricted power sector to utilize their maximum capacity and lower dividend to their share holders. As for as NPL is concern its receivables are continuously increasing from the starting of power generation business to date as of Sept’10 NPL trade debt rises to PKR 4.44bn from PKR 2.66bn last year. However, we have discussed this issue with the management they said that currently the impact of circular debt on NPL is not significant as they are continuously receiving cash which is sufficient to meet their requirement. Despite the fact Govt. had made commitment during IMF program in 2008 that Govt. to settle circular debt issue but in last three year Govt. is not able to do so. However, recently IMF has mounted pressure on Pakistan to resolve circular debt issue due to which power tariff is rising on monthly basis. Govt. has plan to rises power tariff by ~20% to eliminate overall subsidy on power sector.

Dividend Expectation
Power sector specially IPP are well known for the highest dividend payout history for investors as our current listed companies HUBCO and KAPCO averagely maintain over 95% payout in last few years. We expect NPL to flow in same trend of paying higher dividend to its investors we have estimated that NPL to maintain average payout of ~85% in upcoming five years. However, due to circular debt issue in the country dividend payout from the company may be on lower side. NPL is offering highest dividend yield in the power sector. We expect company to announce first ever cash dividend of PKR 3.00 per share during FY11. Based on last closing price of the stock, its currently offering attractive dividend yield of 17.6% as compared to HUBCO & KAPCO dividend yield of 15.8% and 14.3% respectively for the period of FY11.

Year FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

EPS 0.13 4.51 5.21 5.62 5.91 6.23 6.43 8.06 8.90 9.48 9.64 4.93

DPS Dividend Yield 3.00 3.90 4.50 4.85 5.30 4.99 6.45 6.68 7.59 8.19 4.19 0.0% 17.6% 23.0% 26.5% 28.5% 31.2% 29.3% 37.9% 39.2% 44.6% 48.2% 24.6%

Year FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 FY31 FY32 FY33

EPS 5.58 6.12 5.48 4.95 5.05 5.23 4.84 4.65 5.19 5.76 5.73 5.10

DPS Dividend Yield 5.03 5.82 4.93 4.45 4.80 4.97 4.60 4.41 4.41 5.48 4.87 4.59 29.5% 34.2% 29.0% 26.2% 28.2% 29.2% 27.0% 25.9% 25.9% 32.2% 28.7% 27.0%

5

M.M. Securities (Pvt.) Ltd
Synergy of Finance & Opportunities

Equity
NISHAT POWER LIMITED
Jan 06, 2011

Financial Highlights 1QFY11 Performance Review
NPL has announced PAT of PKR 55.365mn and EPS of PKR 0.16 for 1QFY11, however after NEPRA notification PAT of the company has increased to PKR 635.32mn translating into earning per share of PKR 1.79 as compared to LAT of PKR 1.55mn and LPS of PKR 0.005 in corresponding period last year. The significant increase in bottom line earnings of the company is mainly due to startup of commercial power production in last quarter of FY10. Further, during 1QFY11 plant operated at optimal efficiency with 91.2% capacity factor which is significantly higher when compared to other power plants in the country. During 1QFY11 top line of the company increased to PKR 4,919.2mn, primarily due to ~393K MWh electricity produced and sold by the company. Moreover, company financial charges during the quarter were PKR 701.68mn as compared to negligible amount paid last year.
1QFY11 Net Sales Cost of Sales Gross Profit Other Operating Income Finance Cost PBT Taxation PAT EPS 4,919.2 3,578.6 1,340.7 13.2 701.7 639.9 4.6 635.3 1.79 1QFY10 1.8 0.0 0.9 0.6 (1.6) (0.01)

FY11 expectation:

We expect NPL to post PAT of PKR 1,599mn and EPS of PKR 4.51 for the year ended June’11 as compared to PAT of PKR47mn and EPS of PKR 0.13 in corresponding period last year. The massive increase in bottom line earning of the company directly relates with the startup of commercial power production during the year which has boosted overall profitability of the company. Further, we expect company to announce cash dividend of PKR 3.0/share for FY11. Further, we estimate that power plant to operate at average capacity utilization of 85% during the year, whereas plant capacity utilization in 1QFY11 was 91.2%. Moreover, in upcoming years we expect company profitability to rise significantly due to better capacity utilization which will increase capacity charges as well as fuel saving will also support the bottom line earnings of the company. We estimate that the company will declare handsome amount of dividend in forthcoming years as other power plants paid in their initial face, as per our expectation scrip is presently offering attractive average dividend yield of ~26.0% for the period of FY11-FY16.

6

M.M. Securities (Pvt.) Ltd
Synergy of Finance & Opportunities

Equity
NISHAT POWER LIMITED
Jan 06, 2011

Financial Highlights
P & L Statement PKRmn Net Sales Cost of Sales Gross Profit Administrative Expenses Other Operating Income Finance Cost PBT Tax PAT EPS (PKR) DPS (PKR) FY09 8 58 50 3 47 0.13 FY10 1,018 796 223 17 52 185 72 25 47 0.13 FY11E 17,095 13,102 3,993 55 206 2,473 1,671 72 1,599 4.51 3.00 FY12E 18,702 14,576 4,126 83 335 2,415 1,963 117 1,846 5.21 3.90 FY13E 19,892 15,641 4,251 91 280 2,352 2,089 98 1,990 5.62 4.50 FY14E 20,464 16,283 4,181 96 365 2,229 2,221 128 2,094 5.91 4.85 FY15E 19,219 15,145 4,074 97 511 2,102 2,387 179 2,208 6.23 5.30

Balance Sheet PKRmn Property, Plant & Equipment Current Assets Total Assets Equity Long Term Loan Current Liabilities Total Equity & Liabilities FY09 14,971 67 15,037 2,940 11,397 701 12,098 FY10 16,667 5,769 22,437 3,615 13,897 4,924 18,821 FY11E 15,829 15,845 31,673 4,171 12,958 14,545 27,503 FY12E 15,032 18,974 34,006 4,634 12,250 17,123 29,373 FY13E 14,276 21,136 35,412 5,030 11,430 18,952 30,382 FY14E 13,558 22,886 36,444 5,407 10,480 20,557 31,037 FY15E 12,876 21,173 34,050 5,738 9,379 18,933 28,312

Key Ratios FY09 EPS (PKR) DPS (PKR) BVPS (PKR) PEx PBVx Dividend Yield ROE ROA EBITDA Margin GP margin Net margins 0.13 8.30 N/A 2.05 0.0% 1.6% 0.3% N/A N/A N/A FY10 0.13 10.21 N/A 1.67 0.0% 1.3% 0.2% 29.4% 21.9% 4.6% FY11E 4.51 3.00 11.78 3.77 1.44 17.6% 38.3% 5.0% 29.1% 23.4% 9.4% FY12E 5.21 3.90 13.09 3.26 1.30 23.0% 39.8% 5.4% 27.7% 22.1% 9.9% FY13E 5.62 4.50 14.21 3.03 1.20 26.5% 39.6% 5.6% 26.1% 21.4% 10.0% FY14E 5.91 4.85 15.27 2.88 1.11 28.5% 38.7% 5.7% 25.3% 20.4% 10.2% FY15E 6.23 5.30 16.20 2.73 1.05 31.2% 38.5% 6.5% 26.9% 21.2% 11.5%

7

M.M. Securities (Pvt.) Ltd
Synergy of Finance & Opportunities

Equity
NISHAT POWER LIMITED

Research Team Amjad Nazir Shahid Ali Muhammad Mohsin Ali Chief Operating Officer & Head of Research Senior Research Analyst Research Analyst coo@mmsecurities.com.pk +92-21-35396983 shahid@mmsecurities.com.pk +92-21-35317703 research@mmsecurities.com.pk +92-21-35317704

Sales Team

Saqib Hussain Salma Aamir Rana Saghir Ahmed Sania Zulfiqar Shahzada Haris Rashid Muhammad Imran Alvi Muhammad Farhan Asif Raza Rawjani Shahwaiz Jouzy

Head of Sale & Portfolio Management Sales Coordinator Sales Coordinator Sales Coordinator Sales Coordinator Sales Coordinator Sales Coordinator Sales Coordinator Sales Coordinator

saqib@mmsecurities.com.pk salma@mmsecurities.com.pk rana@mmsecurities.com.pk sania@mmsecurities.com.pk hairs@mmsecurities.com.pk imran@mmsecurities.com.pk farhan@mmsecurities.com.pk raza@mmsecurities.com.pk s.jouzy@mmsecurities.com.pk

+92-21-35313911 +92-21-35317706 +92-21-35317705 +92-21-35313912 +92-21-35388719 +92-21-35396982 +92-21-35897063 +92-21-35313913 +92-21-35396982

Contact us: M.M. Securities (Pvt.) Ltd.
M. M. Tower, 3 – C, Khayaban-e-Ittehad, Phase – II, Extension, Defence Housing Authority, Karachi – 75500, Pakistan. P.O.Box # 12414 Tel : +9221-35317703-04 Fax: +9221-35895328 http://www.mmsecurities.com.pk E-mail: research@mmsecurities.com.pk Group: http://www.mmgoc.com.pk

Analysts’ Certification:
We, Mohsin Ali & Shahid Ali, are the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Disclaimer: This report has been prepared by MMSPL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. MMSPL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. MMSPL may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.

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