Engro Powergen Qadirpur Limited (EPQL) is up for
listing at Karachi Stock Exchange (KSE) and provisional trading of the scrip
will start from 17Sep'14 and will end on 24Oct'14. The company has already
divested 12.5% (40.475mn shares) of its paid up capital through private
placement at the rate of Rs30.02/share and its present offer is to divest
further 12.5% of its paid up capital to general public at the same price i.e.
Rs30.02/share. The date of public subscription will start from September 22nd
to 24th, 2014 (both days inclusive). In today's Value Seeker we discuss
different aspects of the transaction along with our recommendation for the
same.
Strong financials
to support overwhelming response
The profitability of Engro Powergen is continuously
on rising trajectory since its COD back in 2010 except for CY13 where the
generation and resultantly the profitability halted due to plant shutdown in
2HCY13 on technical issues. Those plant issues are now completely resolved and
the plant is fully operational therefore financial performance has
significantly improved in 1HCY14 as evident from the results in the table
below. Furthermore, being a power generation company it holds a strong
payout history and we expect same healthy dividends going forward.
Principal
utilization of offering amount
Under the present offer, Engro Corp will divest its
total holding of Engro Powergen Ltd. which is 32mn shares while the other
8.475mn shares will be divested by Engro Powergen Ltd. from its own holding.
The company would be able to collect Rs1.45bn from total divestment (Pre IPO
40.475mn+ IPO 8.475mn shares) and the same would be utilized to 1) pay-off its
liabilities 2) finance new projects e.g. LNG terminal. The above utilization
expected to save company's finance cost and will generate other income in case
of investment in LNG terminal which will augment its bottom-line going forward.
Low cost
generation from permeate gas - key attraction
Engro Powergen utilize permeate gas from Qadirpur
field as major input. The permeate gas holds a low BTU value and was previously
flared due to its limited use. So the input supply is expected to remain
uninterrupted as the same has no industrial usage. Furthermore, due to lower
cost and higher dispatch factor the company ranks higher in NEPRA's dispatch
merit order list.
Internal O&M
service provider- key risk
The company operates the plant through internal
Operation and Maintenance (O&M) service providers while the other IPPs
outsourced the same service. The risk associated with internal management is
that the company can't pass on liquidated damages to third party in case the
company fails to make sure the availability of the committed capacity.
Peer comparison
and recommendation
The company is uniquely positioned when compared
with existing listed IPPs as the same utilize low BTU gas (incase of
unavailability of gas it can convert on HSD) as its primary raw material while
the other IPPs used FO to generate electricity. However the company is
comparable on the basis of guaranteed returns, similar tariff components and
similar type of indexation factors. We took average leading P/E of 4 comparable
IPPs and derive justified value of Rs36.84/share for the scrip. The stock
entails 23% potential for price appreciation from its offer price. Furthermore
a healthy 13% DY is also expected at subscription price of Rs30.02/share in
CY14. Keeping in view the significant total return with limited downside, we
recommend 'subscribe' for the scrip.
Written by: Invest Capital
lrfan Saeed
+92-21-35205520-22 (Ext
8635)
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