Oil sector profitability in 2008: The overall oil sector profitability grew by 39.3% in HY08 to Rs 52.4 billion as compared to Rs 37.6 billion during HY07 due to escalating international oil prices that helped refineries in boosting their gross refining margins and OMCs to book handsome inventory gains.
Kohinoor Energy Limited (KEL) was incorporated in April 1994 with the aim to take part in the prosperity of the country through power generation. It is a joint venture of Saigol Group of Companies and Toyota Tsusho Corporation, Japan. KEL is one of the first projects of Independent Power Producers in Pakistan. The principle activities of the company is to own operate and maintain a furnace oil power station. Wapda is the only customer of KEL.
FINANCIAL RESULTS - JULY-DEC'07:
Overall 450,281 MWH of electricity demonstrating 82.91% load factor, was supplied to Wapda during the half year as against 374,166 MWH, with the load factor of 68.89% dispatched in the comparable six months of the financial year 2006-2007.
The turnover of the company for the half year ended December 31, 2007 surged to Rs 3.334 billion compared to Rs 2.514 billion of six months period from July-Dec'06. During the half year, the company posted net profit after tax Rs 281 million demonstrating the earnings per share of Rs 1.66 as compared with Rs 368 million (EPS of Rs 2.17) posted in the corresponding half year of the financial year 2006-2007. As per the Power Purchase Agreement, previously on account of early achievement of commercial operation date (COD) KEL was enjoying premium for ten years till June 2007. The termination of said premium, decline in pre structured power tariff and spending on major maintenance of engines are main reasons of decline in profits of the company.
The profitability of the company shows a declining trend. Though the profits have been increasing throughout the years, the sales of the company have been increasing at a faster rate than its profits. The cost of sales of the company has been rising, that have resulted in a slower rate of profit growth. The company's plant has been undergoing maintenance and overhauling to improve the capacity utilization and generation.
This has resulted in greater maintenance charges subsequently depressing the profits in 1H'07. Moreover, the cost of raw materials consumed has been increasing. The return on equity and total assets have been at almost similar levels throughout the period under review as the rates of growth of the equity and assets bases of the company have been almost the same as increase in the profits of KEL.
Due to higher gross profits this year, the company has succeeded in diluting the effect of decline in the pre-structured power tariff. Saving in fuel oil consumption and a reduction in financial charges played pivotal role in the performance of the company in 2006-2007. The termination of the premium in June 2007 granted to KEL for 10 years, decline in pre structured power tariff were other reasons for the decline in the profitability in 1H-'07.
The operating cycle of the company has been declining on yearly basis indicating efficient inventory and asset handling. The inventory is converted into sales at a higher rate, hence generating higher returns over the period. The sales of the company have increased and have been both volumetric and price driven. This has been facilitated by an increase in generation capacity of KEL. The company responding to the load demand of Wapda as overall dispatched 805,527 MWH of electricity to Wapda, while during the previous financial year the dispatch was 707,974 MWH. The overall capacity factor of the power complex remained at 74.16% as against 66.35% of the previous financial year. The company kept on increasing its capacity consistently in the wake of rising demand for energy.
The debt has been successfully declining as indicated by debt ratios of the company. This indicates that all of the debts are being paid off consistently and there is no delay in repayment of any loans. Consequently, the debt servicing of the company has improved over the years. The commercial loan of ABN Amro Bank and long-term Loan 'B' of International Finance Corporation (IFC) have already been fully paid off while the remaining Loan 'A' is due to be ended by September 2008.
Due to a decline in total debts of the company, the financial costs of KEL have also been declining, that have contributed to greater profits in recent years. As a result, the times interest earned of the company has shown a rising trend indicating improved efficiency and strength of the company is servicing its debt. The improving debt profile of the company reduces the financial leverage of the company and implies long term growth and better solvency.
The liquidity profile of the company has been generally favorable over the years, with the ratios showing a marked improvement in FY'07. The company has made debt retirement one of its highest priorities. Consequently, the current liabilities are being paid off indicating better debt servicing. Liabilities of the trade creditors have been decreasing.
Moreover, due to decreasing overall debt burden, the accrued interest charges have also been declining in the recent years. As the liquidity condition of the company eases, KEL's position to meet its obligations is likely to remain comfortable. Better liquidity position and debt servicing ability have proven to be profitable for the company consequently enhancing the bottom line.
The earnings per share of the company have remained around a similar value for most of the years. The total number of shares of the company has remained the same all throughout with the profits of the company hovering around Rs 700-800 million in most of the years except in 2006 where they crossed the level of 1000 million. The price of KEL's share has hovered around Rs 25-37 in the period under consideration.
This explains the fluctuating trend in the price to earnings ratio. The company has paid dividends only in certain years, indicating that the company is pursuing a policy of earnings retention to finance the plant maintenance and capacity enhancement programs. The equity of the company is has been witnessing increases due to rising unappropriated profits. Hence, the book value per share ratio has shown an upward trend.
FUTURE OUTLOOK:
The Government of Pakistan recently decided to encourage the existing operating IPPs to expand their capacities on a fast-track basis. Accordingly, PPIB, a government window facilitator for private investors, issued a request for proposal for fast track capacity expansion to the existing operating IPPs including KEL. In response to the request for proposal, KEL has bid to implement a 143MW (net) expansion power project on a piece of newly acquired land of approx. 11.25 acres adjacent to KEL. Moreover, the undergoing maintenance of the KEL's power plant would mean a greater capacity for generation of power. In lieu of the increasing demand scenario prevailing in the economy, the KEL would be better able to cope with the demand. Its sales are likely to rise in the future.
The power plant site has an ongoing proactive approach to safety. Thus, the company has an objective of maintaining a healthy environment in the country. In the long run this is likely to reap benefits for the company in terms of enhanced shareholder and customer value. To address foreseen shortages in 2002, GOP established a new policy for encouraging investment in various modes of power generation. However, because no new power plants have come into service under this policy, the GOP recently decided to encourage the existing operating IPPs to expand their capacities on a fast-track basis.
Accordingly, PPIB, a government window facilitator for private investors, issued a request for proposal for fast track capacity expansion to the existing operating IPPs including KEL. In response to the request for proposal KEL has bid to implement a 143MW (net) expansion power project on a piece of newly acquired land of approx.11.25 acres adjacent to KEL.
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FINANCIAL RATIOS-KOHINOOR ENERGY LIMITED
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LIQUIDITY RATIOS Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Dec'07
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Current ratio 1.88 1.84 1.89 1.70 2.15 3.13 2.48
Quick Ratio 1.66 1.56 1.56 1.34 1.67 2.46 2.00
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ASSET MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Dec'07
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Operating cycle(days) 169.10 76.47 93.33 99.91 74.09 112.87 96.11
Inventory Turnover (days) 46.48 44.69 50.08 51.30 33.53 34.87 26.00
Days sales outstanding (days) 122.62 31.78 43.25 48.61 40.56 77.99 70.11
Total assets turnover 0.27 0.34 0.34 0.43 0.74 0.74 0.46
Sales-Equity 0.55 0.59 0.53 0.61 0.91 0.84 0.54
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DEBT MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Dec'07
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Total debt to total asset 51.18% 43.45% 35.27% 28.84% 18.41% 12.00% 13.94%
Long term debt to assets 71.91% 50.46% 32.31% 16.80% 5.28% 1.58% 0.02%
Times-interest-earned 3.56 3.81 5.57 6.04 8.98 9.44 0.00
Debt to equity 1.05 0.77 0.54 0.41 0.23 0.14 0.16
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PROFITABILITY Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Dec'07
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Return on total assets 11% 10% 12% 12% 15% 12% 4%
Return on equity 22% 17% 19% 17% 18% 13% 5%
Gross profit on sale 55% 43% 46% 36% 25% 22% 14%
Profit margin on sales 39% 29% 35% 28% 20% 16% 8%
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MARKET RATIO Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Dec'07
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Price/ Earnings ratio 2.78 6.61 7.18 5.47 4.32 7.59 19.16
Dividend per share 3.00 2.50 2.50 2.00 1.00 0.98
Book Value per share 22.70 23.83 26.18 28.44 32.42 37.35 37.35
EPS 4.89 4.13 4.85 4.75 5.98 4.94 1.66
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