Hubco’s share sale speculation

Since last few days once again the speculation is that one of the major shareholder in Pakistan ’s largest IPP, Hub Power, is interested to offload its shareholding. In the absence of official notification, market gossip suggests that the seller is in negotiation with selected investors to place the share that can be at slight discount to the market price.

Xenel Industries of Saudi Arabia, founded in 1973, is a diversified group with exposure across the globe in energy, petrochemical, constructions/real estate and infrastructure development amongst many others. In Pakistan , the group is co-founder in country’s largest IPP (Independent Power Producers), Hubco. As per Hubco’s latest accounts, the group currently holds 140mn share in the company which it is interested to disinvest as the market grapevine suggest. The size of the deal if executed comes close to US$65mn. (US$60mn if executed ex-dividend)

In last 3-trading sessions, the volume in Hubco share has increased substantially to 14.6mn shares (US$7.1mn) a day compared to last 1-year volume of 1.3mn shares (US$0.6mn). The phenomenal increase in the turnover is primarily on two accounts. Firstly investors believe that after the surprise interest rate cut of 150bps recently, the scrip now offers dividend yield (estimated at 14% for FY12), which is far better than 1-year T-Bill yield of 11.9%. Secondly few investors have aggressively sold the shares in anticipation that they can buy it back once this float of 140mn shares come to the market. Currently, 810mn share (70% of capital) is in the market and after this deal the float will rise to 950mn share (82% of capital) There is also speculation that investors entering into the deal at discount may have sold it at higher rates just to earn short-term gains.

Though a sharp increase in the stock supply may put a downward pressure in the stock price in the short-run, but we remain positive on the company on account of its strong fundamentals. With predetermined cash flows and low beta of 0.7, Hubco is an ideal defensive stock offering attractive rupee IRR of 21.7% (US$18.3%), adequately compensating equity risk as 10-year government bond is trading around 12.0%. Furthermore, dollar denominated tariff provides a natural hedge against Pak rupee devaluation (which has deprecated by 1.6% against US dollar since the start of FY12).