Chemical: BOSICOR PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2004 - 2007
Bosicor Pakistan was incorporated on 9th January 1995 as a public limited company. At the time of inception, the company aimed to operate in the chemical, petroleum/petro-chemical and energy sectors.
The Bosicor Corporation Limited holds 55% shares of Bosicor Pakistan making it a majority owned company of the former.
Bosicor Pakistan is in the business of refining and marketing a large range of petroleum products. It operates a refining facility at Mouza Kund Plant (MKP1), at Mouza Kund in Balochistan. The range of products include: light straight run naphtha, liquid petroleum gas (LPG), heavy naphtha, kerosene, motor spirits, high octane blending component, aviation fuels 1 & 4, high speed diesel and furnace oil. The company has a long-term sale and purchase agreement with Pakistan State Oil for marketing of its products.
The refinery has a designed capacity of 1.5 million tons per annum and a total production capacity of 30,000 bpd, making it the fifth largest refinery in the sector. The plant produces about 10,000 bbl/d of fuel oil, 6,000 bbl/d of diesel, and 5,500 bbl/d of naphtha, among other products. Its production capacity with respect to the other companies is illustrated.
Bosicor Pakistan started commercial operations in 2004. It completed its first turnaround on 15th August 2005 after starting trial operation in November 2003. The trial operations started with a capacity of 8,000 barrels per day. The capacity was subsequently increased to 18,000 barrels per day.
The medium term objectives of the company are aimed at infrastructure development, which will promote the company towards self-reliance in the supply chain. For this, Bosicor is pursuing additional storage capacity of 126,000 metric tons, besides investment in a single point mooring to improve freight economy. In the longer term, ie 2009-2010, the company will add an isomerisation plant for converting and upgrading light naphtha into environmentally friendly motor gasoline. The gasoline obtained from isomerization can be exported to neighbouring countries at higher rates than naphtha or consumed in the local market with environmental advantages. This will add to the profitability of the company.
In the marketing and sales department, the company is establishing the retail outlets. It was expected that it would have 15 such outlets with company's Brand Identity by the end of June 2007. The company moved further in this area during 2007, entering into the oil marketing business with its first two modern fuel stations during July 2007. Bosicor aims at opening 50 more fuel stations during FY08.
The global refining industry witnessed a downturn in profit margins during FY06. During FY06, the industry had to cope with rising crude oil prices against steady demand of refined products. As a result, refinery margins came under significant strain and the average gross and net profit margins in the industry fell steeply. The figure compares the international crude oil prices with refined product prices over the last five years. The squeezing of margins in the FY06 is evident from the shrink in the difference between crude oil prices and product prices during the period.
Furthermore, the refinery product prices in Pakistan are linked to the prices in the Gulf region, which remained depressed during the 2nd and 3rd quarters of the FY06. The domestic market also suffered its share of the lower margins. However, in the last quarter, the profit margins redeemed themselves in the backdrop of strong oil demand from China and other emerging market economies.
The deplorable profitability position of the refinery sector improved during FY07. During the second half of FY07, even though crude oil price hike continued, but the damage to profits was cushioned by a larger increase in product prices.
RECENT RESULTS: FY07 ended by the company achieving net sales of Rs 19.33 billion compared to Rs 17.93 billion for the corresponding period last year. Bosicor Pakistan posted a loss of Rs 681.27 million in FY07.
During the first half of FY07, crude oil prices continued its hike due to supply constraints, so that, gross margins were squeezed further. The prices of its products also remained volatile, putting further pressure on refinery margins. The second half, however, witnessed a favourable turn of events as product prices increased more than crude oil prices.
As a result, refinery margins improved greatly in the second half and enabled Bosicor to partially recover losses made in the first half of the year. Consequently, the company posted an after tax loss for the year of Rs 681.27 million. Nonetheless, the severely wounded gross margins during the first half had a significant impact on the company's earnings, depicting a massive decline of 445%, one of the worst in the sector during the period.
FY07 witnessed a 7.8% increase in net sales, corresponding to an increase in production from 15,218 bpd to 15,355 bpd. This equates to a 5.7% higher crude consumption during the year compared to FY06.
The profit margins of Bosicor have remained below the industry average but the FY06 brought about a positive change in this trend as the company managed to outdo the average industry, in terms of the gross profit margin, in the face of the changing industry dynamics.
The improvement in the trend notwithstanding, the pricing dynamics in the global market took its toll on the company in the FY06 and FY07, manifesting itself most glaringly in the FY07. In the FY07, the company was unable to stand the in pricing pressures and as a result incurred losses, hence the gross and net profit margins cascaded for the period, turning negative and dropping well below the average industry level.
This decline in the profit margins for the FY06 and FY07 occurred despite higher sales revenue than the corresponding periods in prior years. In the FY07, the cost of sales continued to increase sharply, and despite the greatly improved pricing situation in the second half, the company was unable to fully recover its losses. As a result, BP posted an after tax loss of Rs 681.3 million.
Financial charges increased by 66% during the FY06, further pulling down its profits. Likewise, a 42% increase in financial and other charges was registered for the FY07. This rise in finance cost may be attributed to the higher level of long-term loans and other debt instruments.
The other income for the company jumped up by 35.2 times in the FY06, and this somewhat eased the pressure on profits exerted by the higher costs of sales. However the settlement of the insurance claim, on account of loss of profit arising from breakdown in production in the year 2003-2004, formed a large portion of this income. Hence this growth is not sustainable in the long run. Consequently, in the absence of insurance claims and other one-time gains, other income registered a decline in FY07. The profits from bank deposits also increased by 3.6 times in the FY06, further augmenting other income.
The ROE and ROA have also remained below average for the entire period. ROE suffered most in the FY07 as an increase in equity, resulting from the revaluation of assets, compounded with the loss for the period, leading to high negative figures.
Bosicor Pakistan has not performed well compared to its peers in terms of inventory management. Throughout its four years of commercial production, the inventory turnover (days) of the company has been longer than the industry average. The company's stance continued deteriorating for FY06 and FY07. The increase in the FY06 was seen despite a 79% increase in sales for the year, since the inventory levels shot up, offsetting the effect of the increase in sales. This trend may be attributed partially to an increase in crude oil prices, which have increased the value inventory.
Bosicor Pakistan is also relatively less efficient in recovering cash from its sales but the trend seems encouraging. The high DSO and inventory turnover gave rise to prolonged operating cycles for the company compared to the industry. Hence Bosicor Pakistan trails behind the industry in turning its crude oil inventory into cash. The Asset management capacity of Bosicor Pakistan, as measured by the total asset turnover and sales to equity also tarried below average for all periods. The sales to equity and total asset turnover have showed a positive trend up to the FY06 but declined in FY07.
Hence BP is relatively inefficient in managing its assets. An improvement in this area may enable the company to lower its per unit costs and increase efficiency in operations, leveraging its financial performance.
During FY07, Bosicor finalized an agreement to obtain a syndicated term loan of Rs 2.6 billion to finance the debt portion for implementing its ongoing projects, which include the construction of additional storage tanks with a combined capacity of 126,000 tons, laying of sub-sea pipeline for the SBM project and the addition of Isomerization Penex-Molex Unit.
The equity portion of financing was arranged through the issue of 60% right shares, amounting to Rs 1,470.4 million during the year. The result of these developments was a nominal increase in the company's debt ratios; however the effect was subdued because of the substantial increase in equity accompanying the increase in debt. During FY06, the debt ratios escalated as a result of an increase in both, current and non-current liabilities.
During the year, the company was able to acquire more loans and assets on finance lease, causing the jump in the debt to equity and long term debt to equity ratios. The inflated current liabilities figures, arising from creditors and higher accrued mark up, further boosted the debt to equity and debt to assets figures for the FY06.
Despite this, the figures remained on the higher side, reflecting a high level of financial leverage for the company. The Times Interest Earned (TIE) dropped slightly in the FY06, compared to the FY05, largely as a result of the mark up on the mounting loans. In the FY07, Bosicor Pakistan incurred losses even at the gross profit level hence the finance charges led to a further deterioration of the situation. This does not bode well for the company and raises doubts about the company's debt financing abilities.
The current ratio of Bosicor Pakistan has lingered slightly above 1 for the whole period, the greatest change being the temporary increase to 1.07 in the FY06. The ratio has hovered slightly below the industry for the period, indicating the company's weaker standing in this area.
Inventory constitutes the largest portion of current assets, followed by cash and trade debts. The inventory figures have been increasing sharply during the last few years as a result of the mounting crude oil prices.
The EPS of Bosicor Pakistan has always been lower than that of the average industry and the trend persisted in the FY06 and FY07. The EPS turned negative in the FY07 the losses for the year translated into an EPS of Rs (1.74). Although this trend was experienced by the entire sector, but the average industry figures remained positive, compared to the negative EPS for Bosicor Pakistan.
The book value of the company's shares has been increasing throughout the period of commercial operations starting 2004. However compared to the industry, Bosicor Pakistan has not done well in this field. Consequently, the company did not pay dividends for FY07.
FUTURE OUTLOOK: The profitability situation is expected to stabilize in the future and margins are likely to improve in light of the supply constraints and demand surge anticipated by the International Energy Agency. Moreover, although OGRA regulates the oil prices and revises the ex-refinery prices on a fortnightly basis, but LPG and furnace oil, which have been deregulated.
In recent months the international oil prices have crossed $98 per barrel. And the average Arab light price during 1Q08 was $72 per barrel and is currently at $85.8. Since the ex-refinery price equates the import parity price of the product if the same were to be imported, thus the higher international oil prices will enable refineries to increase their gross refining margins (GRM) during the current fiscal year and if the trend keeps up they will rise further.
Furthermore, as mentioned above the company has undertaken various capacity expansion projects. As the additional capacity from these facilities comes online, it will augment sales for the company in addition to reducing per ton operating costs.
Besides this, various projects are in progress, which, once completed will enhance the profitability of BP. These include the project to increase storage capacity of the company and the SBM Sub-sea Pipeline Project. The latter will improve the financial performance of the company by improving freight economics and reducing transit costs.
Moreover, the incremental demand growth of various POL products worldwide is expected to be 23 million barrels per day over a 15-year period. During FY07 the total POL consumption in the country registered a growth of 12.4% to 17.2m tons, over 15.3m tons in FY06, as against refining capacity of 13.0m tons.
The total energy demand of the country is expected to increase at an annual rate of 10%-12%. Hence the company will be able to benefit from the capacity expansion even in the unlikely event of stunted growth in the country by exploring their export prospects.
Secondly, the refining sector operates under the Import Pricing Formula, whereby the prices of products are determined by the landing cost of imports. In the Budget FY08, the surcharge on White Oil Products has been abolished and the 5% duty on the import of LDO has also been removed.
These developments will have a significant impact on the refining sector profitability as the imported price of products decreases, thereby reducing the local refinery revenue.
The Budget FY08 also slashed the surcharge on Furnace Oil in the industry. This change, however, will not have a significant on the refinery sector profits, as the FO is a widely imported and deregulated product, hence companies are forced to keep their prices at a discount even though their built up price is higher than the imported price. As a result, this part of the policy introduced in the budget will not have a noticeable impact on the industry.
The government has been contemplating the revision of the existing Caltex-Bahrain formula applicable on Motor Gasoline. Originally, the Caltex-Bahrain formula was equated to the FOB price of Naphtha plus a flat US $60 per ton premium on Gasoline which, on the 14th of June stood at US $82 per bbl.
The new formula, on the other hand, is based on the price of MoGas 95 RON published by Platts, which on the same date was $80 per bbl. new pricing formula for Motor Gasoline was expected to become effective from July 2007 and the impact will, obviously, not be in favor of the industry.
In addition, the government also plans to raise Rs 30 billion by raising taxes on POL products, to increase the strategic oil reserves in the country. This will be detrimental for the sector as it will result in a slow down in demand growth and a reduction in OMC's product off-take with a subsequent decline in the production of some products by the refineries.
These developments and changes in the Government's policies and the international scenario will have a significant impact on Bosicor Pakistan as well as the other companies in the industry. Bosicor Pakistan is still in its fourth year of commercial operations and it is hoped that as the company continues operations, it will grow and its profitability will improve.
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BOSICOR PAKISTAN LIMITED
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BALANCE SHEET (Rs '000) FY'04 FY'05 FY'06 FY'07
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Non-Current Assets 3,162,216 3,369,867 3,741,835 6,718,930
Current Assets 2,001,207 3,506,272 7,375,766 8,523,699
Total Assets 5,163,423 6,876,139 11,117,601 15,242,629
Current Liabilities 1,995,467 3,472,308 6,869,637 8,469,890
Long Term Liabilities 1,417,490 842,270 1,489,373 3,157,970
Total Liabilities 3,412,957 4,314,578 8,359,010 11,627,860
Total Equity 1,750,466 2,561,561 2,758,591 3,614,769
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INCOME STATEMENT FY'04 FY'05 FY'06 FY'07
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Net Sales 2,112,506 9,998,865 17,929,007 19,328,906
Cost Of Sales 2,182,300 9,607,392 17,304,378 19,401,391
Gross Profit -69,794 391,473 624,629 -72,485
Admin Expenses 29,386 67,179 99,410 159,936
Selling And Dist Expenses 28,836 23,236 36,206
Operating Profit -99,180 295,458 501,983 -268,627
Other Income 2,786 100,876 46,070
Financial Charges 20,936 106,253 285,566 405,647
Profit Before Taxation -120,116 182,391 301,361 -628,204
Taxation 10,787 71,482 104,331 53,062
Profit After Taxation -130,903 110,909 197,030 -681,266
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LIDUIDITY FY'04 FY'05 FY'06 FY'07
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Current Ratio 1.00 1.01 1.07 1.01
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY'07
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Inventory Turnover(Days) 179.22 68.30 80.39 99.01
Day Sales Outstanding (Days) 130.05 45.37 22.23 20.10
Operating Cycle (Days) 309.27 113.67 102.61 119.11
Total Asset Turnover 0.41 1.45 1.61 1.27
Sales/Equity 1.21 3.90 6.50 5.35
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07
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Debt To Asset(%) 66.10% 62.75% 75.19% 76.29%
Long Term Debt To Equity(%) 80.98% 32.88% 53.99% 87.36%
Times Interest Earned (Times -4.74 2.81 2.11 -0.55
Debt/Equity (Times) 1.95 1.68 3.03 3.22
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PROFITABILITY FY'04 FY'05 FY'06 FY'07
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Gross Profit Margin -3.30% 3.92% 3.48% -0.38%
Net Profit Margin -6.20% 1.11% 1.10% -3.52%
Return On Asset -2.54% 1.61% 1.77% -4.47%
Return On Common Equity -7.48% 4.33% 7.14% -18.85%
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MARKET VALUE FY'04 FY'05 FY'06 FY'07
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Book Value 10.00 10.45 11.26 14.75
Price Earning Ratio -30.69 28.61 26.74 -5.54
Earning Per Share -0.75 0.45 0.80 -2.78
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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