- Phenomenal 1QFY11 results: While headline 1QFY11 EPS at PKR0.16 was a disappointment, details revealed 1Q revenues would have been PKR580mn (PKR1.64/share) higher as per revised tariffs. Adjusting the incremental revenues for share of 4QFY10 (in which plant was operational for 22 days) yields 1QFY11 EPS at PKR1.48.
- Operational savings evident: 1QFY11 earnings (based on revised tariff) at PKR1.48/share, was more than 3.5x higher than IRR implied quarterly EPS of PKR0.42, suggesting substantial operational savings. We estimate that 1QFY11 fuel savings clocked in at 5.3gms/kwh, whereas actual O&M expense was 81% lower than the amount allowed as per tariff. We now conservatively factor in efficiency savings of 5gm/kwh (3.5gms/kwh from FY12 onwards) and O&M savings at 50%.
- Higher operational savings to offset downward revision in debt component: Nepra re notified NPL’s tariff on Oct 15, 2010 lowering its debt component by 11.2%. However, we estimate operational savings to more than offset the impact of downward revision in debt component. We thus raise our FY11-13 EPS by 41-56% and DPS by 52-77%.
- PT revised up to PKR20/share… Incorporating operational savings and reduction in debt component of tariff, we have revised our December-11 PT upwards to PKR20/share. We now assume an equity risk premium of 9% for NPL, 1.5x our market risk premium. At current levels, the scrip offers an upside potential of 24%, FY11E dividend yield of 24% and a USD IRR of 24% over the life of the project. BUY!
- But we don’t rule out risk of adverse tariff adjustments in future: Our base case estimates of operational savings suggest that NPL would yield project USD IRR of 27% to sponsors (which further rises to 35% as per savings reflected in 1Q accounts), much higher than policy IRR of 15% for these projects. We hence foresee high risk of reduction in cost components of the tariff structure in the future.
We will be releasing short report soon.
Economic & Political News
Used cars: Uncertainty remains over reduction in age limit for imports
Prime Minister Yousaf Raza Gilani was quoted by a small section of media as saying that the government wanted to withdraw its earlier decision allowing import of five-year-old cars. The government has not issued any notification revoking its earlier decision that increased the age limit for imported cars from three to five years. Uncertainty prevails because the government has abruptly withdrawn from its previous move.
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