Shipping Co: PAKISTAN NATIONAL SHIPPING CORPORATION - Analysis of Financial Statements Financial Year 2003-June 2008
Pakistan National Shipping Corporation and its subsidiaries were incorporated under the provision of Pakistan National Shipping Corporation Ordinance, 1979 and the Companies Ordinance, 1984 respectively. The board of directors consists of five directors appointed by the Federal Government and two directors by the shareholders.
The group is principally engaged in the business of shipping, including charter of vessels, transportation of cargo and other related services. The group is also engaged in renting out its properties under long term lease agreements. Its registered office situated at PNSC Building Moulvi Tamizuddin Khan Road, Karachi.
Pakistan National Shipping Corporation is an autonomous corporation, which functions under the control of Ministry of Ports and Shipping, Government of Pakistan. It manages a fleet of 14 ships (consisting of bulk carriers, oil tankers, and combi-vessels), real estate and a repair workshop. The group consists of a holding company: Pakistan National Shipping Corporation and subsidiary companies:
-- Bolan Shipping (Private) Limited
-- Chitral Shipping (Private) Limited
-- Hyderabad Shipping (Private) Limited
-- Islamabad Shipping (Private) Limited
-- Khairpur Shipping (Private) Limited
-- Johar Shipping (Private) Limited
-- Lalazar Shipping (Private) Limited
-- Makran Shipping (Private) Limited
-- Malakand Shipping (Private) Limited
-- Multan Shipping (Private) Limited
-- Sargodha Shipping (Private) Limited
-- Sibi Shipping (Private) Limited
-- Swat Shipping (Private) Limited
-- Kaghan Shipping (Private) Limited
-- Pakistan Co-operative Ship Stores (Private) Limited
-- Lahore Shipping (Private) Limited [Formerly Pak Nippon Car Liner (Private) Limited]
-- Karachi Shipping (Private) Limited [Formerly National Tanker Company (Private) Limited]
-- Quetta Shipping (Private) Limited
The operations of PNSC include worldwide tramping and chartering operations. It also operates three Aframax tankers on regional routes. The company manages the following fleet of 10 multi-purpose cargo ships, 3 oil tankers and one bulk carrier.
In FY06, MV Kaghan, a bulk carrier was added to the fleet making the total fleet size of 15 vessels. The total capacity of the PNSC-managed vessels is 536,821dwt (dead weight tonnage which is the displacement at any loaded condition minus the lightship weight), 325,254 GRT (gross register tonnage representing the total internal volume of a vessel) and 179,307 NRT (net register tonnage is the volume of cargo the vessel can carry; ie the gross register tonnage less the volume of spaces that will not hold cargo). PNSC operates on two major routes, namely: trade area west with regular calls at Karachi, Dubai, Dammam, Abu Dhabi, Kuwait, Bander Abbas, Genoa, Marseilles, Bremen, Antwerp, Tarragona, Casablanca, East/West Africa and Brazilian ports and the other route called trade area West with regular calls at Karachi, Colombo, Singapore, Xingiang, Shanghai, Yokohama, Osaka and Busan.
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SECTOR 2007-2008 2006-2007 2005-2006
FREIGHT FREIGHT FREIGHT
TONS TONS TONS
MILLION MILLION MILLION
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Liquid 7.561 7.677 8.185
Dry Bulk 0.959 0.343 0.261
Trade Area - East 0.398 0.470 0.493
Trade Area - West 0.533 0.470 0.470
Total 9.451 8.960 9.409
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RECENT PERFORMANCE 1Q09
higher efficiency The PNSC Group achieved a turnover of Rs 3,562 million (including Rs 1,385 million from PNSC) as compared to Rs 2,487 million (including Rs 623 million from PNSC) in the same period last year. The gross profit for the period ended September 30, 2008 was Rs 535 million as against Rs 547 million for the same period last year. Freight earnings increased in the first quarter with corresponding increase in operating expenses, resulting in a steady gross margin.
The major revenues increased due to a more than 100% increase in the freight revenues. Fleet expenses also increased by 57.8%, thus pushing down the gross profit to 15% from 21% in the same period last year. Administrative and other expenses have been kept tight, they have not witnessed a sharp incline. Other income has increased by 29.4 %, resulting in a PAT ratio of 12.1%.
FINANCIAL PERFORMANCE
The consolidated revenue of the group for the year ended June 2008 was 18% higher to Rs 10.753 billion from Rs 9.089 billion (FY07). This revenue consisted of chartering, freight and rental income. Although the major chunk of the revenue is contributed by freight which actually shrunk this year by 11% but chartering saw a major growth of about 97% (Y-o-Y). Similarly, the rental income also reduced significantly this year. The whole revenue picture is somewhat fair due to growth in chartering which overshadowed the other growth losses.
The total expenditures for the year grew by only 12% showing a growth in profits. The breakup shows direct and indirect expenditures grew by 12% and 15% respectively, which is quite less for an organisation working in an economy with high inflation rates and uncertainty. Gross profits rose by a remarkable 34% from Rs 2,593 million to Rs 3,476 million owing to growth in revenues unmatched by growth in expenses. Notes to financial statements reveal that administrative expenses have actually fallen by 5% owing to zero "brokerage fee for disposal of the vessels" this year.
The financial costs swelled up by 125% as the credit facility costs increased in this period. For the holding company bank charges for arrangements and commitment were also high as the on behalf of Quetta Shipping (Private) Limited, Karachi Shipping (Private) Limited and Lahore Shipping (Private) Limited in respect of credit facility for purchase of vessels. However, during the year the credit facility has been expired and was not renewed for further period, therefore, in coming years it is not taking toll on company's profitability.
During the year MT Shalamar was sold as it had completed its useful operational life. Two fire incidences in PNSC Building took place on February 18, 2007 and August 19, 2007. However, there was no interruption in PNSC's worldwide operations, which continued uninterrupted. During the year under review, PNSC and its vessel-owning subsidiary companies together performed a total of 669 voyages (inclusive of foreign chartered vessels and slot chartered vessels) and lifted 9.486 million freight tons of cargo as compared to 671 voyages and 8.961 million freight tons of cargo respectively in the previous year.
In the year under review, the current assets fell by 4% to an amount of Rs 7.848 billion. The major decreases were seen in advances (-23% as compared to FY07), accrued interest payments (-23% compared to FY07) and short-term investments (-48% compared to FY07). On the other hand, the insurance claims were also pending and mounted to 7 times to those of FY07. The short-term investments were earning around 9.5% to 11.75% even then we see that there has been drastic decrease in it.
One likely reason could be that the company was in need of cash funds as it had to hold some security money for the guarantees issued on behalf of the group provided by banks. This draws our attention to the huge amounts of cash which are being held by the company, though it had added to liquidity of the firm but the idle cash reserves have its opportunity too, as a larger chunk of cash is not deposited into savings accounts.
With the rising current assets and declining current liabilities, PNSC has been able to gradually improve upon its current ratio trend as indicated by the liquidity graph. PNSC has gradually paid off its trade payables and other liabilities and is now sufficiently liquid enough to post a high current ratio trend. High amount of liquidity increases the creditors' confidence in the company but it has exceeded the requirement and can lower profits from non-operational activities too. The increasing trend since FY05 onwards, continued till 2007, but fell in year 2008 even then it's very high and alarming. Extremely high liquidity is not at all indicative of higher efficiency.
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Debt Management
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FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Debt to Asset (%) 78.24 82.70 57.95 31.03 12.90 8.90
Long Term Debt to Equity (%) 160.69 112.75 78.87 34.85 4.11 1.01
Debt/Equity (Times) 1.18 1.84 1.39 0.58 0.14 0.10
Times Interest Earned (Times) 8.25 5.67 7.23 15.07 37.82 20.93
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Higher sales extremely high liquidity position, and better financial performance, PNSC has enabled the company to reduce its reliance on debt. The company is now using better means of financing with lower associated costs. As evident from the declining trend in long-term to equity and debt to equity ratios, PNSC has now diverted its focus towards increasing its shareholder base to raise cash.
Thus, property, plant and equipments are now financed by issuing additional shares, rather than by taking loans. PNSC, however, does not enjoy a high leverage but on the contrary does not face interest rate risk. Since the company has been availing a credit facility which pumped up its financial costs, the Times Interest Earned has fallen drastically from 37.82 to 20 implying that the debt servicing ability has reduced but still its satisfactory.
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PROFITABILITY
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FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Gross Profit Margin 28.54 31.05 35.89 21.07 28.53 32.33
Net Profit Margin 12.86 59.72 115.71 15.62 25.71 22.77
Return of Asset 9.17 21.91 18.62 9.10 14.26 10.88
Return on Common Equity 25.50 48.65 44.77 16.94 15.69 11.83
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Since a profitability dip in 2006, the company is continuously improving and till FY08 the company managed a gross profit around 32% and net profit around 22%. It is primitive to note that in FY08, the net profit has not been as high as the gross profit is, reasoning being the high financial costs, which are already discussed before. During FY06, profitability of PNSC has declined mainly on account of high expenditures. Despite the fact that the sales revenue soared tremendously over the years, the top line as well as the bottom line of the company remained depressed.
The main contributing factors were higher fuel charges and higher insurance costs due to revaluation of assets. Moreover, the full year effect of depreciation on the revalued assets also contributed towards increase in costs. These three costs accounted for 43% of the total revenues as against 21.6% for FY04-05. FY05 was far more commendable for the company as net profit margins soared in consequent of increased demand for both dry and liquid cargo and consequent higher freight charges. Gross profit margin also increased on the same grounds.
The company has also recovered from its lower profit margins that it incurred in FY06, increasing in FY07 on account of higher sales, lower expenses and relatively efficient operations. Healthy contribution in respect of freight revenues from both combi vessels and oil tankers also added to the net profit of the company.
The return on assets (ROA) and return on equity (ROE) fell in FY08 because of the company's assets were revalued upwards, including plant, property and equipment which was high enough to supercede the growth of net income and show a falling trend in ROA and ROE. Thus, the performance has been substantially good not to be seen as a factor for lower ROA and ROE. Return on assets and return on equity declined a little in FY06 owing to higher total assets and equity respectively, recovering marginally in FY07. Equity increased as a result of increase in share capital and retained earnings. Expansion in the cargo lifting facility as planned by the management is likely to boost the company's financial position further.
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ASSET MANAGEMENT
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FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Inventory Turnover (Days) 1.48 1.85 2.65 4.65 17.60 15.92
Total Assets Turnover 0.71 0.37 0.16 0.58 0.55 0.48
Sales/Equity 1.98 0.81 0.39 1.08 0.61 0.52
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Generally, the total asset turnover and sales-to-equity has been more or less the same. One important peculiar trend is seen inventory turnover soared from a mere 4.65 times to over 17 and 15 times in FY07 and FY08 respectively. The observable reason for this unnatural change is due to very high inventory being kept since FY07 which was almost 400% than those maintained in FY06 which is an apparent trend seen since FY05 which might be done in order to meet certain operations needs. The asset management ability of PNSC registered a tremendous improvement in FY07 mainly on account of better inventory position backed by higher demand and improvement in cargo lifting facility as well lower expenses.
As evident from the graph, the inventory turnover (days) has been increasing rapidly. Practically, this is not a good sign for the company as the sales are not increasing by the same proportion as the stores and spares are. This means that PNSC lags behind in some areas of asset management. On the other hand, Total Assets Turnover (TATO) has also increased which proves better utilization of fixed assets including property plant and equipment. TATO witnessed a sharp decline in FY05 due to more than proportionate increase in the total assets of the company brought about by a change in long term investments in related parties, subsidiary companies, associates and the listed companies. Once these investments start pouring in returns, the financial position of PNSC will further strengthen as has been in FY06.
Sales/equity ratio, signifying efficiency in using equity, also increased marginally after falling in FY05 owing to steep downward trend in sales revenue and high equity composition in FY05. It declined in FY07 however, as a result of higher equity as more reliance is now placed on equity financing and much of the retained earnings are ploughed back for further expansion. In general, PNSC has significantly improved upon its asset management ability. PNSC does not have a praiseworthy historical trend of its market value ratios. The dividend given to shareholders is not comparative to that given in financial markets so that restricts the demand for shares and might lead to problems if the company is willing to raise capital from the market.
Another source of earning for the stockholders is the capital gains from trading but even on this front there is not any commendable progress. And in the current scenario the markets are totally locked down thus adversely affecting the investor confidence. Much of the marketability has improved in FY07. Higher expenditure in terms of cost of production and financial expenses has taken its toll and affected the marketability of the company as much as they affected the profitability. The decline in EPS in FY06 can be explained on the basis of two components. First, the net income of the company declined in FY06 as explained earlier and secondly, shareholder base increased thus decreasing the per share earnings.
In FY07, better profitability reflected positively on the per share ratios, as evident from the graph. As against the EPS trend, DPS has remained historically low and PNSC has no outstanding dividend payout as such. Much of the earnings are retained and used for expansionary purposes. Only recently the company increased it is per share dividends only marginally, that might reflect investors' confidence in the forthcoming years. Book value in absolute terms has posted a YoY growth. It declined only recently as the number of shares outstanding increased by 10% but recovered in FY07, which can be attributed to higher reserves. Throughout the EPS has been hovering somewhere near 5.0 so it shows that it never worked as in incentive for potential buyers.
FUTURE OUTLOOK
Although dry cargo rates have been consistently firm, bunker prices continue to increase worldwide, putting pressure on the profit margin. The firm is planning to add two Aframax oil tankers in the coming year to replace its ageing fleet and also two new dry combi vessels. The proposed plan for induction of vessels into its fleet is being pursued, and this will add to capacity building of the company. In the last year, the company has suffered through two fires which had its cost implications but thankfully the losses were bearable and not affecting the operations of the firm. As part of the fleet renewal/expansion plans, the company is continuing with its efforts to add more vessels to its fleet.
The dry bulk market continues to remain firmer than it has ever been in the past. This augurs well for the bulker and break bulk portion of PNSC group's ships. However, a down turn in tanker freight rates will somewhat dampen this, unless the tanker market firms up again. The overall group performance is however likely to remain good. This year the dividends have also been twice as more as compared to FY07 which might arouse investor's interest. Generally, the overall performance of the company has been competitive and therein we can look for better future prospects but the only thing it needs to address is its extremely high liquidity stance owing to high stocks and cash reserves.
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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