K-Electric (KEL) – Entity Has Pulled Itself Out From Mire

Standard Capital Securities (Pvt) Ltd

• We see unbundling, as per director’s report, to be a major breakthrough for K-Electric (KEL). The separation for entities in between Generation, Transmission & Distribution will going to increase the efficiency levels, as per our view.
• Consistent reduction in transmission & distribution (T&D) losses we assume that benchmarked to be 13% -15% and as per company analyst briefing arranged few months ago (FY15 23.7%);

Consumer base expanding…

• Few initiatives taken by the company like aerial bundling cable (ABC) and smart grid projects which will improve entity to expand its consumer base (recent financials depicts increase in sale of energy increased by 10.1%);
• In addition to the installation of ABC and covering Karachi through new cables, the overall electricity theft has decreased;
• Recovery ratios stood at 88.8% excluding public sector consumers;

Debt Repayments ~ nearly Rs12bn has been repaid in FY15 | thus slight lowering gearing levels

Recap of KEL plans highlighted…

-Development of 700 MW Coal-fired plant at Port Qasim
-Conversion of BPQS 1 to coal (two unit of 420MW)
-Working on alternate sources of energy -Introduction of ABC & Smart Grid projects
-Separation of entity ~ We see this big
-Change of management ~ Abraaj needs a passage

K-Electric | PE of 5.9x

Entity EBITDA margins have beefed up in recent years i.e. Rs34.3bn in FY15 which may reach up to Rs52.1bn by FY16 thus making KEL a good investment option.

We expect FY17 to be a year where company will extract itself out from accumulated losses.