Morning Call about Hub Power Company Limited – Arif Habib Limited

Karachi: FBR has asked banks to freeze all accounts of HUBC Hub Power Company Limited (HUBC) through a notice to Karachi Stock Exchange (KSE) informed that Federal Board of Revenue (FBR) has frozen its bank accounts.

According to Arif Habib Limited, the company, FBR issued a notice under Income Tax Ordinance 2001 to the banks to freeze all its accounts which included one meant for dividends disbursement. This is being done to recover the pending tax amount in relation to issuance of shares against the project development costs. This consequently has resulted in delay of the disbursement of dividend (PKR 3.0/share) announced by the company with its 1HFY12 results. The company, due to its non fulfilment of regulatory condition has requested SECP to allow it to delay its dividend payment under the current circumstances.

Withholding tax on project development cost As per the PPA, the company is exempted from paying corporate tax till life of the project. This specific issue of tax relates to non payment of withholding tax at the time of issue of shares to the sponsors of the company against project development costs. As per company accounts FBR in its assessment under Income Tax Ordinance 1979, demanded payment of PKR 1.9bn for the same. In response, the company deposited tax amounting to PKR 297mn against the above assessment and filed an appeal before the commissioner of Income Tax, however, the decision came against HUBC. Thereafter, the company filed an appeal in Islamabad High Court which also gave verdict in favour of the FBR. The company’s management now plans to file an appeal with the Supreme Court of Pakistan (SC) along with a stay from freezing of its accounts,

Anomaly in payment to be made As per media reports FBR claims an amount of PKR 3.0bn against the company however as per Arif Habib Limited’s discussion with the management and the notice floated by the company in KSE on March 12, 2012, it has to pay PKR 2.0bn against the levy of tax. If verdict of the Supreme Court goes against HUBC it can negatively impact the company’s earnings by PKR 2.0bn (translating into an impact of PKR 1.73/share). This will push down Arif Habib Limited’s target price to PKR 49.7/share using DDM model.

Recommendation In Arif Habib Limited‘s view this is a short lived phenomenon and HUBC accounts will be unfrozen soon. Arif Habib Limited believes that the company’s payout will remain intact as the company has ample reserves. However, the cash position of the company due to circular debt issue may remain a key determinant in that case.

Based on Dividend Discount Model Arif Habib Limited’s target price for Dec-12 works out to PKR 51.4/share, which offers an upside potential of 41% from its last closing price of PKR 36.44/share. Beside attractive upside potential, the stock offers FY12F dividend yield of 16.2%. Thus Arif Habib Limited recommends BUY.

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