Power: KOT ADDU POWER COMPANY – Analysis of Financial Statements Financial Year 2008 – Financial Year 2009
OVERVIEW (January 06 2010): Power sector in Pakistan has been in the limelight for a couple of years. The gap between the demand and supply increasing day by day, the companies also facing the problem of acute liquidity shortage because of circular debt. To exacerbate the situation, losses in the transportation of electricity go up to around 40%. Surging fuel prices also worsened the situation of the sector.
The question that most investors ask is regarding the reason this crisis happened and the answer is simple: power projects were not planned according to the increment in demand. Following table issued by Private Power and Infrastructure Board of Government of Pakistan shows the inflated deficits in the sector that have been projected:
============================================================================================================================================ SUPPLY AND DEMAND POSITION: 2008-2020 (MW) ============================================================================================================================================ 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ============================================================================================================================================ Existing Generation 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 15,903 Proposal / Committed Generation 530 4,235 7,226 10,115 10,556 13,307 13,520 14,607 16,134 18,448 18,448 18,448 18,448 Total Existing/Committed Generation 16,484 20,138 23,129 26,018 26,459 29,210 29,423 30,510 32,037 34,351 34,351 34,351 34,351 Expected Available Generation 13,146 16,110 18,503 20,814 21,167 23,368 23,538 24,408 25,630 27,481 27,481 27,481 27,481 Demand (Summer Peak) 16,484 17,868 19,352 20,874 22,460 24,126 25,919 28,029 30,223 35,504 34,918 37,907 41,132 Surplus/Deficit Generation -3,338 -1,758 -849 -60 -1,293 -758 -2,381 -3,621 -4,593 -8,023 -7,437 -10,426 -13,651 ——————————————————————————————————————————————– Source: Private Power and Infrastructure Board – Govt. of Pakistan ============================================================================================================================================
RECENT RESULTS 1Q10
Turnover for the review period was Rs 20,325 million and cost of sales was Rs 17,728 million. Profit after tax for the period was Rs 1,336 million (compared to Rs 1,536 million in the corresponding period in 2008), resulting in an earnings per share (EPS) of Rs 1.52 per share (EPS Rs 1.75 in corresponding period in 2008). Finance cost has increased by 7.7% in 1Q10, while the administrative expenses have been in line with the inflationary pressures. Due to some settlement of the circular debt, the trade payables and receivables both have declined.
During the period under review the power plant generated net output of 2,028 GWh of electricity, resulting in a load factor of 68.3% with an overall commercial availability of 98.4%. The fuel mix for the dispatched output being 82.2% on low sulphur furnace oil; 10% on high speed diesel; and 7.2% on gas.
RECENT DEVELOPMENTS IN THE INDUSTRY
As Pakistan has taken loan from the International Monetary Fund, Pakistan government had to pay-off the circular debt. Hence, payments from Wapda have been given to power generation companies and therefore further paid to the refineries. Hubco also received payments of 35 billion rupees, which they eventually paid off 30 billion to refineries.
Kot Addu Power Company Limited (Kapco) was incorporated in Pakistan on April 25, 1996 as a public limited company. It is listed on all the three stock exchanges of the country. The principal activities of the company are to own, operate and maintain a multi-fuel fired power station with 15 generating units with a nameplate capacity of 1,600 MW in Kot Addu, District Muzaffargarh Punjab.
The company is one of the largest independent power plants in Pakistan and it enjoys key significance as it is listed on all three stock exchanges and represented on KSE 100 and KSE 30. Its only customer is WAPDA and therefore, the company faces a problem of debt servicing. Two tranches of circular debt have been received but still a huge amount still remains to be repaid. This is discussed below in further detail.
Before analyzing the liquidity of KAPCO for FY08-09 suppliers and customers need to be discussed first. It has been mentioned that Wapda, the only customer of Kapco has not paid its dues. One must understand that these are not written-off because the government of Pakistan has given guarantee for it and these are in ordinary course of business. However, these payments get charged of interest worth discount rate +4% in case of delay. Likewise, they have to pay to PSO only, a state-owned company, 15.48 billion rupees. This go up to 80.58% of Kapco’s payables. This situation of circular debt does not bother Kapco in real terms because both PSO and Wapda are state-owned companies and as one will pay the other will get payment. The situation can nevertheless be bad for Kapco the case that Wapda imposes liquidity penalty of Kapco for not supplying power on time. This has been predicted by the company. Kapco, on the other hand, maintains the stance that it was due to Wapda’s delayed payment that Kapco failed to properly supply power.
This is noteworthy that their current assets now stand 188% their current liabilities. This is an increment of 35.71% for FY08-09. The main driver for this is the trade debts that are to be collected from Wapda and they alone rose up by 58.46%.
FUTURE OUTLOOK OF LIQUIDITY
It is expected that due to IMF’s further tranche requirements, further payments of circular debt will be made and this would in turn help Kapco. Their receivables that would come up from the circular debt settlement are more than the paying amount owed to PSO. Hence, liquidity is looking to improve after the payments. Following that, the higher interest rates would give them a good return in the money markets that they may easily maintain without sacrificing liquidity.
Sales volume for Kapco for 2008-09 increased by 23.98% as the power prices shot up in the region. However the cost of sales increased by 25.26% that led to 15.23% decline in profit to sales ratio. There was 26% increment in the cost of sales for Kapco for FY08-09. The reason for increased fuel cost is the high prices of fuel that kept their high levels despite the slowdown in global economy. The increased cost also led to significant drop in returns to assets and to common equity. Now for every 100 rupees of asset 11 rupee return has been generated and for each 100 of equity, the return is 36 rupees. This would be considered very good performance if we compare it to Hubco for FY08-09.
The comparison graph shows that Kapco has outperformed Hubco in terms of profitability. One must understand that being such a good performer in power sector, Kapco has a very high free float and hence it is listed on the exchange.
The stock being very volatile due to the movements in the oil prices showed a variance of 15.85 rupees with a mean of 38.78 rupees. The FY08-09 also witnessed an average daily volume of 16.855 billion shares of Kapco, which represents the liquidity in its stock. If we compare it with Hubco whose stock showed mean return of 21.94 rupees with 15.81 rupee variance, Kapco seems to give more return in about the same risk!
Debt management is a major concern for the investor for any company because chapter 11 is the most dreaded thing. However, in case of Kapco one doesn’t need to bother about debt because all payments of debt of Kapco are because of Wapda’s dues and it’s backed by government guarantee. In turn, almost all the debt of Kapco is guarded by government of Pakistan’s guarantee. The good part for Kapco despite all the hassle is that its debt as a ratio of equity is decreasing. For FY08-09, Kapco witnessed 19.37% decrease in the debt to asset ratio bringing the finance structure to almost ideal 50:50.
The decrement has happened because of the payment of circular debt by the virtue of which they were able to pay back their supplier PSO. Another significant decline has happened in the finance under mark up, which showed a decline of 14.88%. Comparing it with Hubco shows that Hubco is more leveraged in this interest regime, it is better to have more equity than debt. Hence, Kapco is better off over there. However, TIE ratio is lower for Kapco, which indicates that Hubco is in better position to pay off its loans. As mentioned earlier that Kapco has only one customer that is a government entity thereby once payment is received from them, further payments can be easily made.
When analyzing the asset side of power generation company, we must look at it from the scenario that there is a problem of circular debt and abnormally large value for collection period. The number of days to sell of the inventory have reduced by 8 days and they it takes Kapco just 22.9 days to produce electricity and supply it to Wapda but it takes now 241 days which is 32% higher than last year.
This has led to an increased operating cycle. This will hurt the management in the way that they cannot plan their inflows and outflows until the circular debt issue isn’t completely resolved. It would keep their cycle abnormally high. Comparing it with Hubco shows that the assets are better being managed by Hubco that is obvious because there is only one customer of Wapda, a state entity. Being only customer and that too owned by the state increases its bargaining power and cause problems for Kapco.
This is known to everyone that the markets faced a collapse in 2008-09 when KSE lost more than half its value. Floor had also been imposed in the market. But still Kapco continued to prove itself as a blue chip company giving good yields and good dividends despite bleak situation in the economy. Though the dividend per share reduced by 30.10% to just Rs 4.35/share.
If we compare it with Hubco for FY08-09, we can see that the earnings have been better but the prices have not really responded to the better earnings giving low P/E multiple as compared to HUBCO. The earnings per share for KAPCO is 97% higher than HUBCO (KAPCO=Rs 6.44 HUBCO= Rs 3.27). However, the P/E multiple is just 89% of that of HUBCO. This shows that investors have not responded well to the earnings In comparison of HUBCO, KAPCO seems to be under-priced in the market.
The payments to be received in form of the circular debt will surely improve the liquidity further. The increased power tariffs in the year 2010, as part of IMF’s restructuring program will also lead to increased revenues. The market mechanism will lead the prices to go up in order to respond to the earnings and high dividend. Lastly expansion plans also look to increase their productivity. Hence, for an investor looking to have high yield and high return may invest in it.