KARACHI, Feb 12: The Privatization story of Kot Addu Power Company Limited (Kapco) has finally begun to unfold as the company disclosed financial results for the half year ended December 31, 2004.

In an announcement released through the Karachi Stock Exchange on Saturday, the company posted after tax profit of Rs3,687 million for the six months, July-December 2004. That translated into earning per share (eps) of Rs4.19 on 880 million outstanding shares.

The financial figures look adequately attractive. Government is offering 20pc (176m shares) in Kapco (including the green shoe option of 10 per cent) to shareholders in the minimum lots of 500 shares each. But that includes 17.61 million shares (10 per cent of the offer) reserved for employees and 35.21 million shares (20 per cent) for non-resident Pakistanis. When those two priority interests are set aside, the rest of the 123.24 million shares (70 per cent) would go on offer for the 'normal' small local shareholders. In case of under subscription by either overseas Pakistanis or employees, the remaining shares would be allocated to Pakistani investors.

The Privatization Commission would open up its books for public subscription to the Kapco's offer for four days from Feb 21 to 24.

Most of the 800,000 and more small investors are likely to test their luck by filing applications in Kapco, as they did in Pakistan Petroleum Limited (PPL). That would mean 246,000 applications for 500 shares each would be successful. If the number of applicants rises to a million, success ratio would be one-in-four (1:4) at the ballot. But the gains for the small investors at least in the immediate run up are not likely to be that momentous as were in PPL. The PPL stock was offered at Rs55 per share, it opened on the provisional counter at Rs103 and shot up to Rs116.50 by the end of the first day's trading.

On various valuation models which may all be Dutch for a general investor, it may simply be said that analysts are projecting Kapco stock's fair value to fall somewhere in the range of Rs47.7 to Rs53.

The stock would open on the provisional counter on Monday February 14. It is unpredictable how high or low that might send the price on the first day of provisional trading, for there are no upper and lower locks on stock price, called "circuit breakers" on that day. The stock is then allowed to adjust itself either on the upside or on the down side according to what the market believes correctly represents the underlying fundamentals. Due to the strong possibility of Kapco being included in the KSE-100 index soon, institution and mutual funds could go out for aggressive buying.

Kapco was privatized in 1996 and the government transferred management control to International Power plc along with 26pc shares. Subsequently, 10pc additional shares were also divested to the new owners. Total proceeds of Rs9 billion were realized by the government in this divestment. The present offer is being made from Wapda's holding of 64 per cent in the company.

Kapco is the country's largest IPP. It is a 1600mw multi-fuel fired power plant located in Muzaffargarh. During FY04 it contributed 29pc of total power produced by IPPs and 7pc of total power generation of the country.

In theory the tariff structure of every IPP is such that its shareholders are guaranteed a fixed return, assuming they meet certain conditions set in power purchase agreement (PPA) with Wapda. The closest stock which might draw a parallel to Kapco is that of Hubco. But as analysts point out there are a number of factors which differentiate Kapco from Hubco. Kapco is a multi-fuel power plant whereas Hubco can only operate on furnace oil. Kapco has 1600mw capacity versus Hubco which has 1292mw. Kapco has a three way relation with Wapda. All at the same time, Wapda is its customers, lender as well as shareholder. By contrast, Wapda is only its customer. Like Hubco, Kapco also holds sovereign guarantee by the Government of Pakistan. Both cater to one customer that is Wapda. The tariff structure of Kapco and Hubco is of same kind and is such that shareholders of these companies can forecast dividends with certain level of accuracy, which is why Hubco and Kapco stocks are sometimes referred to as quasi-bond or closer to preferred stock.

Kapco did not announce an interim dividend for the half year ended December 31, 2004 on Saturday. But Malcolm P. Clampin, the company's Chief executive mentioned in the directors report that the final dividend of Rs0.8 per share recommended by the Board and approved by the shareholder in September 2004 was paid in October 2004, resulting in a full year 2003-04 dividend payout per share at Rs6.48. The company disputes the provision for 'Workers' Profit Participation Fund' and has not provided any.

The company reported turnover of Rs13,215 million; operating costs at Rs8,514 million and net profit at Rs3,687 million for the period under review, compared with profit of Rs3,140 million in the corresponding period of the previous year. The company holds Rs34.6 billion in total assets.