KotAdduPowerCompany

Dividendcertaintytofetchinvestorsinterest
HOLD
TargetPriceDec14:PKR65 CurrentPrice:PKR63

Bloomberg Reuters MCAP(USDmn) 12MADT(USDmn.) SharesOutstanding KAPCO.PA KAPCO.KA 530 0.3 880

Monday February17,2014

Kot Addu Power Companys (KAPCO) Board of Directors is scheduled to meet on February 18, 2014 to announce 1HFY14 financial results. We expect the company to postYoYflattishnetprofitofPKR3.7bnin1HFY14culminatingintoEPSofPKR4.24 Along with the result, we expect the company to announce an interim cash dividend ofPKR4.0/shfor1HFY14 In case of KAPCO, 47% YoY decline in other operating income will partly be offset by 44%YoYreducedfinancecostofPKR1.99bnkeepingthenetprofitabilityintact On sequential basis, we expect the company to mark 16% QoQ improvement in net profitability,reachingEPSofPKR2.28in2QFY14 The key advantage KAPCO enjoys over its peer HUBC is its more predictable dividend streamasthecompanydoesntplantogoforcoalconversion WeremainupbeatwithourPKR8.5/shdividendexpectationforFY14.Thescripoffers totalreturnof16%fromitslastclosing;thus,werecommendHOLDforKAPCO!

Valuations
EPS DPS FY14EDividendYield(%) CapitalGain(%) TotalGain(%) 2012A 6.9 6.9 2013F 8.4 7.5 2014F 9.4 8.5 13% 3% 16%

KAPCOvs.KSE100RelativeChart
KSE100Index KAPCO

Kot Addu Power Companys (KAPCO) Board of Directors is scheduled to meet on February 18, 2014 to announce 1HFY14 financial results. We expect the company to post YoY flattish net profit of PKR3.7bn in 1HFY14 culminating intoEPS of PKR4.24. The sales figure isexpectedtogrowby20%YoYtoPKR58.6bnasloadfactorimprovedby420bpstoreach 53% in 1HFY14 coupled with higher furnace oil prices. KAPCO, like other IPPs, is also expected to witness decline in penal income as overdue receivables from WAPDA were cleared off in Jun13. However, 47% YoY decline in other operating income will partly be offsetby44%YoYreducedfinancecostofPKR1.99bnkeepingthenetprofitabilityintact. On sequential basis, we expect the company to mark 16% QoQ improvement in net profitability, reaching EPS of PKR2.28 in 2QFY14 compared to EPS of PKR1.96 in 1QFY14. The growth in profitability is primarily attributed to lag impact of 7% PKR depreciation coupledwith48%QoQhigherpenalincomefromWAPDA.KAPCOisalsoexpectedtoreap benefitsfromshiftingtoadvancepaymentmechanismtoPSOthatwillsavepenalinterest owedtoPSO(beingchargedat~200bpshigherratethanshorttermborrowings). Along with the result, we expect the company to announce an interim cash dividend of PKR4.0/shfor1HFY14.

160 150 140 130 120 110 100 90 80 Dec13 Nov13 Jan14 Feb14 Mar13 Feb13 May13 Apr13 Jul13 Jun13 Aug13 Oct13 Sep13

KAPCO Profile: The principle activity of the

companyistoown,operateand maintaina1600MW nameplate capacity multifuel fired power station with fifteen generating units with a 1600MW nameplate capacity in Kot Addu, Punjab and sell the electricity produced there from to a single customer, the Pakistan Water and Power Development Authority (WAPDA) under a Power Purchase Agreement(PPA).

1HFY14financialhighlights PKRmn
Sales 2QFY14 28,805 25,398 3,407 966 4,220 1,186 3,034 2,003 2.28 4.00 1QFY14 29,801 27,147 2,654 651 3,147 806 2,341 1,727 1.96 QoQ 3% 6% 28% 48% 34% 47% 30% 16% 16% 1HFY14 58,606 52,545 6,061 1,617 7,367 1,991 5,375 3,730 4.24 4.00 1HFY13 48,666 42,410 6,256 3,053 9,024 3,555 5,469 3,683 4.18 3.00 YoY 20% 24% 3% 47% 18% 44% 2% 1% 1%

CostofSales
GrossProfit OtherOperatingIncome ProfitfromOperations FinanceCost Profitbeforetaxation Profitaftertaxation Earningpershare(PKR) Dividendpershare(PKR)
Source:BMAResearch

TaseerAbbas
taseer.abbas@bmacapital.com +92111262111Ext:2056

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.11

Recommendation
Our Dividend Discount Model (DDM) based Dec14 target price for KAPCO works out to PKR65/sh. The key advantage KAPCO enjoys over its peer HUBC is its more predictable dividendstreamasthecompanyhasnointentiontogoforcoalconversion.Therefore,we remain upbeat with our PKR8.5/sh dividend expectation for FY14. The scrip offers total returnof16%fromitslastclosing;thus,werecommendHOLDforKAPCO!

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.22