Benefit from synergies
The Hub Power Company Limited (Hubco) has entered into a joint venture with China Power International Holding Limited for the development of 2x660MW coal-fired power plants at Hub. Hubco plans to have a 26pc of equity interest in the project with an option to increase it to 49pc any time before its commercial operation deadline, which is expected in FY20.
The company’s investment outlay for the project will be Rs16.5bn (26pc stake) and our preliminary estimates suggest that the investment will add Rs2.43/share towards the company’s bottom-line.
During the project’s initial years, we expect the company will benefit from fuel savings and lower O&M expenditures. Hubco is also expected to benefit from the synergies provided to the company due to its location next to its existing plant and also because of Hubco’s stake in Sindh Engro Coal Mining Company (SECMC) — incorporating all the benefits and synergie
Hubco has agreed to invest $20mn (6pc stake) in SECMC to develop the Thar coal mine, which will have an initial capacity to mine 3.8m metric tonnes of coal annually. SECMC’s is expected to provide a dollar based IRR of 20pc.
The company has decided to demerge the Narowal plant, which has a capacity of 220MW. Narowal contributes around 20pc to Hubco’s earning with a per share impact of Rs1.10/1.86 during FY14/15, respectively.
Hubco has taken over its O&M operations rather than outsourcing since 2QFY16. The company has also sent a notice to Tenaga National Berhad Repair and Maintenance Company for discontinuation of O&M for its Narowal plant. HPSL will take over its O&M of Narowal plant from 4QFY16.
HPSL will also be managing O&M of its new 2X660MW coal based power plant once its production starts. Due to economies of scale, we believe company will be able realise substantial O&M savings.
Published in Dawn, Business & Finance weekly, April 11th, 2016