Few days back, Pakistan’s only integrated utility,, KESC (Karachi Electric Supply Co.), announced its corporate results for FY12 and surprised the market participants by posting a profit of Rs2.6bn (EPS Rs0.11) after 6-years and first time ever since its privatization in November 2005. More particularly company’s posting a profit of Rs7.6bn (EPS Rs0.30) in 4QFY12 has made investors positive on company’s outlook. Ever since the result announcement, KESC average traded volume stood at Rs45mn as against Rs5mn of the preceding one year, while it have gained 43% in following session.
Though we don’t not formally cover this stock but, increased queries from our investors regarding 4Q profits has complied us to look into the reasons behind it and provide a cursory glance over the future direction of the company.
Curtail line losses coming into effect
KESC announced its corporate result on August 08, 2012, depicting a profit of Rs2.6bn (EPS Rs0.11) as against a massive loss of Rs9.4bn (Rs0.39 per share). We believe the chief reason behind company turning into profits is company’s ability to curtail its T&D (Transmission and Distribution) losses. From 32% in FY11 the company, it has been reported that company has brought down its T&D losses to an average 29% in FY12. Moreover, T&D losses of 27% were reported in 3QFY12 and we expect the similar trend to prevail in 4Q. The curtailed T&D losses bodes well for the company and back of the paper calculation suggest that 1% reduction in the T&D losses has an incremental earning impact of Rs1.1-1.5bn (EPS of Rs0.05-0.06) per share.
It is worth mentioning here that KESC has divided the city into 28 regions, each served by integrated business center (IBC) and has been able to map the grid. This has allowed the company to pinpoint the problematic areas and divert the electricity to low theft area.
Fuel adjustment & other income-are abnormal
The other factors at play were incremental revenue booked in the head of fuel adjustment (particularly in 4Q) and 46% increase in other income to Rs7.1bn (4Q Rs3.5bn). Though still waiting for the detail accounts, we believe higher other income would be primarily attributed to late payment surcharges, while the former is likely to due allowance of prior quarter fuel adjustment in 4Q by Nepra. We believe the Nepra inclination of allowing the fuel adjustment for the utility is expected to bode well for the company. However, we flag that higher oil prices would continue to be a risk in this regard.
Baring the ballooned other income impact and only assuming fuel adjustment (as it was for prior quarter) company recurring income in 4Q would likely be Rs0.15-0.20 per unit.
Co. optimistic about FY13 Targets.
The surprising element is not just company posting a profit in FY12 but surpassed its projection of Rs2.1bn for the year as per there right issue notice dated July 29, 2011. Furthermore, in the same notice and reaffirmed in its later notice dated February 20, 2012 of right issue projected a profit of Rs14.1bn. Rs18.5bn and Rs23.4bn in FY13, FY14 and FY15, respectively. With company meeting its projection in FY12 and sponsor investing US$361mn in last 3-years (through various right issues) optimism has raised regarding company’s conviction of meetings its future projection.