Southern Gas: SUI SOUTHERN GAS COMPANY - Analysis of Financial Statements (Jun 2003 to December 2006)
Pakistan's gas distribution sub-sector is comprised of two regional, state regulated monopolies, SSGC and SNGPL. SSGC is responsible for transmission and distribution of natural gas in the south of the country, with exclusive distribution and sale license in Sindh and Balochistan.
The core business of the company is purchase of natural gas from E&P companies and its distribution and sale. Besides, it is also engaged in the manufacturing and sale of gas meters, gas condensate and import of LPG.
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Year end: June 9mths'07 9mths'06 Chg.(Rs) Chg.(%)
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Net Sales 51,964 45,668 6,296 13.8%
Cost of goods sold 47,938 41,167 6,771 16.4%
Gross Profit 4,026 4,502 (476) -10.6%
Transmission & Distribution cost 4,007 3,645 362 9.9%
Administration expenses 772 932 -159 -17.1%
Other operating expenses 109 115 -6 -5.6%
Other operating income 2,697 1,859 838 45.1%
Finance cost 1,113 693 420 60.7%
PAT 469 444 25 5.5%
EPS 0.70 0.66 0.04 5.5%
Gross Margins 7.7% 9.9% -0.02 -21.4%
Net Margins 0.9% 1.0% 0.00 -7.3%
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SSGC started its operations in 1954 as the Sui Gas Transmission Company (SGTC) when it laid down its first high pressure gas pipeline to connect the Sui gas field to Karachi. Here, gas distribution was assigned to the newly formed Karachi Gas Company and the Indus Gas Company was formed to serve other towns in Sindh. SSGC came into existence when the Indus and Karachi Gas companies (merged and renamed the Southern Gas Company) were amalgamated with the Sui Gas Transmission Company. Hence the Sui Southern Gas Company Limited was incorporated in 1989.
The issued share capital of the company amounts to Rs 6.7 billion, against an authorised share capital of Rs 10 billion. Of this, the government holds 70% interest.
The company's transmission system comprises over 3000 kms of high pressure pipelines. The network expanded from Sui in Balochistan to Karachi in Sindh. The network of 27540 kms covers over 1126 towns in the two provinces, catering up to 28% of the country's gas requirements. The company also operates the only gas meter manufacturing plant in Pakistan with a capacity of over 510,000 meters.
SSGC has embarked upon an ambitious five-year expansion programme which not only expands its network but also enhances capacity. To increase its customer base the company is endeavouring to add 600 new towns and villages to its network.
Most Recent Results:
Sui Southern Gas Company Limited (SSGC) posted PAT of Rs 469m (EPS: Re 0.70) in 9 months of '07 as compared to PAT of Rs 444m (EPS: Re 0.66) in 9 months '06, reflecting a growth of 5.5% due to nominal increase in sales volume, rise in other income and decrease in administrative and other operating expenses of the company.
Sales volume of the company in 9mths'07 rose by 1.0% to 269,227mmcf as compared to 267,441mmcf in the corresponding period of last year, resulted 13.8% increase in net sales revenue of the company to Rs 51.96bn during the period under review, as against Rs 45.67bn in 9mths'06.
The FY06 and HY07 witnessed a sales growth of 6% and 2% and corresponding sales value increase of 26% and 25% respectively. The profitability of the company, however, declined despite the sales growth. This trend of declining profitability is common for both companies in this industry.
The declining profitability is largely due to increase in cost of gas. In FY06, the cost of gas increased by 27% and in HY07 it grew by 17%, which lowered the profit margins for the industry. Sizeable penalties were paid to Ogra as well as high distribution losses also greatly eroded the profits of the company. An increase in salaries, wages and benefits further incurred the expenses.
Most of the loans acquired by SSGC are based on KIBOR and the tight monetary policy pushed the rates even higher. Finance cost increased by 147% in FY06 due to increase in loans and the rising interest rates.
The other operating income also increased in the same period. These factors led to lower the profits of the company, causing it to drop below the profit margin of the other industry player.
The ROE and ROA also followed the negative trend set by the profit margins.
The company's liquidity position is on the decline over the five years studied. In the FY06, SSGC lost its superior liquidity position to SNGPL and the difference between the current ratios of the companies has been increasing since then. In HY07, the current ratio of the company was declined further, as did that of SNGPL.
The inventory turnover (days) and days sales outstanding increased slightly in the HY07 for SSGC, in contrast to a decrease in inventory turnover and increase in DSO for SNGPL. As a result, SSGC ended the year with a longer operating cycle. Hence, in terms of generating cash from gas purchases, SSGC lags behind its counterpart in the north.
SSGC has a superior position in the industry in terms of the total asset turnover and sales to equity although total asset turnover has been declining since the FY04. In the FY06, the sales to equity reached its peak over the five-year period.
The debt-to-equity and long-term debt-to-equity ratios have been on an increasing trend for the last few years and the trend continued in the FY06 and HY07. Shrinking equity due to declining profitability and consequently lower unappropriated profit account influenced this trend. In the FY06, SSGC acquired more long-term loans to finance its capital expenditure. Increases in creditors and short-term borrowings also aggravated the ratios. Despite this, SSGC has been able to maintain lower levels of debt to equity, long-term debt to equity and debt to assets than the other regional monopoly. This suggests lower levels of leverage for SSGC.
The TIE for SSGC has been historically lower as compared to its sister concern. Since the FY06, it has declined even more as interest rates heightened and profitability fell.
The EPS for the FY06 declined from the FY05 level. In the HY07, it increased to 0.72 from 0.54 in the corresponding period last year. The dividend per share for FY06 was steady as compared to previous year. Both the EPS and DPS stayed much below those of the other player in the industry. The book value has been on a receding trend since FY06, while remaining below those of the industry average. However SSGC enjoys a much higher P/E ratio, reflecting higher investor confidence in the company.
Unaccounted for Gas (UFG) is a major problem for SSGC as it leads to substantial erosion of profitability of the company. UFG is the difference between the amount of gas purchased and the amount of gas sold. In FY06, the company made efforts to reduce the amount of UFG and as a result managed to bring down the overall percentage of UFG from 7.39% in FY05 to 6.75% in FY06. Despite this reduction, the company had to suffer penalties enforced by Ogra on account of UFG.
The gas distribution utilities in Pakistan had been following a formula based on the provisions agreed upon with the Asian Development Bank. This formula allowed SSGC a rate of return on the EBIT level of 17% on net assets. Now, the Ogra has proposed a new gas tariff regime which allows for a variable rate of return based on 8% KIBOR for six months. In addition, Ogra has also specified lower and upper targets for UFG whereby the savings due to higher than targeted performance are retained by the companies.
It is hoped that the new tariff regime proposed by Ogra will improve efficiency and enable better utilisation of resources. Therefore, the company's performance is likely to improve as a result of the new regime. Moreover, the expansion plans are implemented and the enhanced capacity comes online, the company will be able to increase net sales and its efforts to reduce UFG will help reduce costs, thereby accentuating profitability.
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SUI SOUTHERN GAS COMPANY
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INCOME STATEMENT (Rs in '000) FY'03 FY'04 FY'05 FY'06 HY'07
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Net sales 34,836,457 44,799,690 52,702,677 66,303,588 34,656,100
Cost of gas 28,060,613 38,713,079 46,812,706 59,594,477 31,534,000
Gross profit 6,775,844 6,086,611 5,889,971 6,709,111 3,122,100
Operating Expenses 5,317,894 5,551,557 6,329,966 6,749,199 3,281,600
Other operating income 1,463,599 1,732,894 2,591,689 3,150,774 1,686,800
EBIT 2,921,549 2,267,948 2,151,694 3,110,686 1,527,300
Financial charges 872,548 695,597 563,017 1,390,460 798,000
Profit before taxation 2,049,001 1,572,351 1,588,677 1,720,226 729,300
Taxation 601,110 575,639 576,176 828,509 244,000
Profit after taxation 1,447,891 996,712 1,012,501 891,717 485,300
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BALANCE SHEET (Rs in '000) FY'03 FY'04 FY'05 FY'06 HY'07
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Total Equity 10,512,029 10,354,332 10,365,802 10,341,470 9,913,600
Non-current liabilities 11,572,151 11,234,632 14,524,412 17,169,048 16,696,800
Current Liabilities 8,151,596 10,247,859 12,792,279 19,569,183 28,592,100
Total Liabilities 19,723,747 21,482,491 27,316,691 36,738,231 45,288,900
Non-current assets 17,524,097 17,841,503 22,000,891 25,338,511 28,404,400
Current assets 12,711,679 13,995,320 15,681,602 21,741,190 26,798,100
Cash and bank balances 2,629,138 3,040,784 1,269,203 3,814,642 4,888,300
Total Assets 30,235,776 31,836,823 37,682,493 47,079,701 55,202,500
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LIQUIDITY FY'03 FY'04 FY'05 FY'06 HY'07
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Current Ratio 1.56 1.37 1.23 1.11 0.94
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ASSET MANAGEMENT FY'03 FY'04 FY'05 FY'06 HY'07
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Inventory Turnover (Days) 7.64 6.56 6.66 6.00 6.36
Day Sales Outstanding (Days) 61.41 44.34 50.42 50.58 54.81
Operating cycle (Days) 69.05 50.90 57.08 56.59 61.18
Total Asset turnover 1.37 1.71 1.66 1.65 0.80
Sales/Equity 3.95 5.26 6.03 7.50 4.48
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06 HY'07
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Debt to Asset(%) 0.65 0.67 0.72 0.78 0.82
Debt/Equity (Times) 1.88 2.07 2.64 3.55 4.57
Times Interest Earned (Times) 3.35 3.26 3.82 2.24 1.91
Long Term Debt to Equity (%) 1.10 1.09 1.40 1.66 1.68
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PROFITABILITY FY'03 FY'04 FY'05 FY'06 HY'07
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Gross Profit Margin 16.30 11.18 9.42 8.65 7.04
Net Profit Margin 3.48 1.83 1.62 1.15 1.09
Return on Asset 4.79 3.13 2.69 1.89 0.88
Return on Common Equity 13.77 9.63 9.77 8.62 4.90
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PER SHARE FY'03 FY'04 FY'05 FY'06 HY'07
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Earning per share 2.16 1.49 1.51 1.33 0.72
Price earning ratio 10.46 20.52 16.41 24.19 40.76
Dividend per share 1.75 1.80 1.49 1.49 1.24
Book value 15.66 15.43 15.44 15.41 14.77
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi.
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