By: Muhammad Saad Ali
KASB Securities Limited
+92 21 111 222 000
We expect Kapco to post a 4QFY14E EPS of PRs2.80 (up 4% QoQ/45% YoY), taking FY14E EPS to PRs8.73, along with a final DPS of PRs5.25 (full year: PRs8.0). We have revised up our FY14E DPS by 7%; and we think this higher-than-expected dividend will be a trigger for the stock price.
The 45% YoY growth in 4QFY14E earnings is attributed to diversion of 45mmcfd gas from the fertilizer sector, which benefited Kapco with 1) increased utilization, 2) curtailed liquidated damages and, 3) higher fuel efficiency; in addition to higher penal income.
We highlight Kapco as one of our preferred defensive plays in the Pak energy sector given 1) lower vulnerability to circular debt, 2) dividend cuts for coal expansion limited by leverage and, 3) being the only listed IPP to benefit from higher gas supply.
We reiterate our Buy stance on the stock with PO of PRs65 (7% upside) with an attractive FY15E/FY16E D/Y of 15%/17%.
4Q EPS/DPS will surprise investors
We expect Kapco to post a 4QFY14E EPS of PRs2.80 (up 4% QoQ/45% YoY), taking FY14E EPS to PRs8.73 (up 5% YoY), along with a final DPS of PRs5.25 (full year: PRs8.0). We have revised up our FY14E EPS/DPS by 11%/7%; led by 1) higher gas availability, 2) greater plant utilization and 3) higher penal income amid rising circular debt. We think the dividend surprise will be a trigger for the stock, which currently offers a FY15E/FY16E D/Y of 15%/17%. We reiterate our Buy stance on the stock with PO of PRs65 (7% upside). In our view, the result will reinforce the stock’s merits of attractive dividend yield and lower risks than peers.
Greater gas availability to trigger earnings growth
We think that the 45% YoY growth in 4QFY14E earnings will be partly triggered by diversion of about 45mmcfd of gas from the fertilizer sector, which enabled Kapco to 1) increase capacity utilization by an estimated 10%, thus 2) curtailing liquidated damages (penalty for lower availability of plant) and 3) leading to gains from higher fuel efficiency. In addition, we expect higher penal income from rising circular debt, without commensurate increase in borrowings, to augment earnings further. We also attribute significantly improved liquidity post circular debt settlement in Jun‐13. In our opinion, while gas might be re‐diverted to fertilizer plants, LNG imports, expected to commence in FY15, will increase gas supply to Kapco. As such, we are optimistic about the sustainability of EPS/DPS for next year