The industry for the purification, transmission and distribution of natural gas - the primary energy source in Pakistan with a share of 48%, exhibits an oligopolistic structure; where SNGPL caters to the needs of the Northern provinces of Punjab and Khyber Pakhtunkhwa, SSGC focuses on the demands of the Southern regions of Sindh and Balochistan.
These companies distribute natural gas via their exhaustive network spanning approximately 101,705-km. The upstream supply chain for natural gas exhibits similar market imperfection; OGDC a public sector company controls the production of 23% of the total natural gas production in Pakistan whereas PPL stands close with 21% of the market. The companies are guaranteed compensation for any shortfalls that they face in the achievement of their predefined operating margins with the E&P companies, in the event that the prices set by OGRA defy their expectations. The chart below depicts the comparative performance of SSGC and SNGPL in terms of their market coverage:
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COMPANY SNAPSHOT
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Name of company SUI SOUTHERN GAS COMPANY LTD
Nature of Business Gas Utility
Ticker SSGC
Net Sales FY '09 Rs 108,151,087,000
Net Sales FY '10 Rs 127,613,530,000
Share price (avg.) Rs 15.91
Market Capitalisation 10.678 million
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Recent results (1H11)
The sales have decreased by 8% due to supply disruptions, however, due to a 15% increase in price levels to Rs 329.10 per BTU from Rs 286.70 per BTU, the net sales revenue has increased by 7% to Rs 56.9 billion. Cost of sales increased significantly due to 32% increase in wellhead prices. Administrative, selling and other operating expenses increased by 45.8% to Rs 2.2 billion. The UFG limit was revised to 7% and SSGC having UFG at 8.73% faced a revenue loss of Rs 901 million. Also, various categories of income were classified out of operating income like income from sale of meters, royalty income from JJVL therefore allowing the company to earn more profits.
Profit after tax was recorded at Rs 2.1 billion in 1H11 as compared to Rs 0.22 billion in the same period last year, mainly due to above mentioned reason. SNGPL extended its gas distribution system by 1032-km despite impending gas shortages.
The government is a major shareholder in both of these utility suppliers. The dynamics of distribution of natural gas differ in Pakistan as compared to the rest of the world primarily because both of the firms enjoy the status of being Integrated Gas Transmission and Distribution companies with full capacity to lay gas pipelines in all geographic topographies. The companies are well equipped with in-house capacities for all sorts of specialized pipeline operations including in service welding, hot tapping, stopple plugging operations, on stream pigging etc. A host of other value adding activities including rehabilitation of pipelines, fusion bonded epoxy and PE coating of line pipes, design, development and installation of CP systems and the manufacture of gas meters, also fall under the sphere of the firms' operations.
An imminent problem that looms large for utility suppliers is the projected emergence of a gap in the demand and supply for Natural Gas; the shortage was estimated to be close to a figure of 1700 MMCFD by 2010. The industry needs to look at alternative sources of gas supply in order to meet the growing industrial demands for the fuel as a chief source of energy. The import of LNG or the construction of a gas pipeline seems like the most feasible options to consider in this regard.
Company overview
SSGC was established in 1989 after Sui Gas Transmission Company Limited (SGTC) and Sui Gas Company Limited (SGC) amalgamated into a single entity ie the SSGC. The transmission line under the firm's control extends from Sui in Balochistan to Karachi and covers an area of over 3200-km. In lieu of various corporate issues undermining the performance of the company's value adding activities, a corporate restructuring plan was implemented. One of the root causes for the ills of the firm's deteriorating position has been that of the rising incidence of Unaccounted for Gas (UFG). The company aims to bring this high level down to the 5% level stipulated by OGRA over a five year period and the organisational changes being implemented to facilitate the achievement of this objective. Other areas targeted for improvement include the introduction of one window operation, enhancement of overall operational efficiency, employee empowerment, resource optimization and rehabilitation. A snapshot of the company's standing as at 30th June 2010 is as follows:
Operations
FY10 has been a period of remarkable improvement in the operating performance of the company; the sales standing at a little over rupees 1,122,274 million marked a 7.76% increase over the previous year's revenue figure. In addition to this the company successfully converted its gross loss of 559 million rupees into a positive gross profit valued at rupees 2800 million, an increase evaluated to be around 600%. However, on a comparative level SSGC was found to lag behind SNGPL in terms of sales and gross profitability; SNGPL succeeded in earning a sales turnover of around Rs 172,995,000,000 with an average rate of 3.25% of gross margin as opposed to SSGC that not only had a poorer sales performance but also yielded a lower GP% valued at 2.5%.
At the other end of the spectrum, the performance dynamics tilt in favour of SSGC when we consider the position of operating profitability both before and after tax. While SNGPL yielded pretax and net profit margins at 2.24% and 1.48% respectively, SSGC outstripped its performance by earning pretax profits at 6.25% and net profits at 8.92% of its net sales during the current financial period. FY10 also marked a period of considerable improvement over the results of its preceding financial tenor; gross profitability substantially increased from a negative 0.54% to a positive 2.5% and the pretax margin swelled to over 6% from a meager 0.4% in FY09. These statistics are depicted in the graph below:
Financial position
The positive profitability position contributed towards a substantiate enhancement (45.32% increase) in the shareholder equity, considering how no new issue of shares took place in the period. Positive capital expenditure of Rs 6040 million was undertaken during the same tenor, however, relative to the investment of Rs 6588 million in FY09 this represented a significant shrinkage; the efficiency ratios discussed in the next section will examine the productivity of these expenditures in detail. However, it must be noted that in comparison to SNGPL, SSGC has almost half the investment in productive plant, property and equipment (ratio of SNGPL investment to SSGC investment is 1.07:1). The position of long term assets other than plant and equipment reflects a position similar to the one discussed for plant and equipment in relation to time based trends, however, there is quite an opposite standing with regard to industry based comparison. This implies that where investment in long-term assets declined from Rs 1426 million to Rs 1259 million in FY10 as compared to 2009, SNGPL's investment during the same tenor stood at a comparatively lower level of Rs 1089 million. The chart below presents a snapshot of the position discussed hereby:
Efficiency ratios
As far as the productivity position of SSGC during the period FY10 relative to FY09 is concerned, both the fixed asset turnover and total asset turnover ratios have remained relatively stable at 3.1 and 2.9 respectively. This implies that the firm succeeded in maintaining the rate at which it uses its assets to generate sales and that the investment has been used in a break-even fashion if not in a productivity enhancing one. On a comparative basis, the industry performance outstrips that of SSGC as far as the use of fixed assets is concerned, as the Rate of fixed assets turnover for SNGPL stands at 9.25 times. However, SSGC yet again emerges as the leader when total asset turnover is concerned; SNGPL achieved a ratio of 1.25 times, almost half the 2.9 times attained by SSGC.
At the other end of the spectrum, the performance of SSGC in spheres of ROA, ROE and ROCE stands substantially superior to the industry trends as well as the company's past performance. Where the ROA has swelled from a meager 0.77% to over 11.9% in FY10, the performance of the competitor in this sphere stands at a modest 2.8% far behind that of SSGC. Similarly, the return to stockholders has increased to a phenomenal 31.26% for SSGC where the competing firm offered a return of 13.66% to its equity holders.
Liquidity
The short-term financial position stayed neutral in almost all possible spheres; where the current ratio declined to 1.02 from 1.05 over the year, the impact seemed less pronounced when we consider the valuation of net current assets/working capital; it declined from Rs 3110 million to Rs 1203 million. However, similar to the pattern exhibited by the current ratio, the acid test figure showed no significant change; it stayed at a stable value of 0.98. Overall, the liquidity position of SSGC showed no significant changes in comparison to the performance in FY09; however, relative to industry performance SSGC seems to have a clear-cut upper hand. The SNGPL attained a negative net current asset figure of Rs 10,380 million and a very low current ratio of 0.83.
Investment ratios
As explained earlier, FY10 has been remained a period of promising returns for the investors in SSGC as the EPS increased to Rs 6.55 per share from a meagre Rs 0.38 in FY09 and stood superior to the return offered by the SNGPL in terms of an EPS valued at Rs 4.65 per share. The cash dividend per share alone was Rs 1.5 and 25% bonus shares were awarded in addition to this figure, making the cumulative payout ratio a handsome 23%. All of this reflected positively in the increase in share price from Rs 14 in FY09 to Rs 15.91 in FY10. However, it must be noted that the increase in market price relative to the increase in book value per share was not sufficient to maintain a rising Price to break up value ratio; it fell from 0.97 in 2009 to 0.76 in 2010. The market capitalisation over this period swelled to 10.678 relative to 9.396 in 2009.
There was a marked improvement in the company's debt position; the debt to equity ratio declined from 2.7 to a figure of around 2 over the fiscal year; the other firms in the industry struggled with ratios as high as 6.4 during the same tenor. The debt servicing ability worsened over the period taking the debt coverage ratio down to 1.54 from a 2.43 ratio in FY09. Also that SNGPL had a service ratio of 1.97 during the same period. A closer examination of the P&L reveals a 13.74% increase in the finance cost; the lowering of the service ratio indicates that the firm's operating profit before finance cost was not sufficient to absorb this rise.
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SUMMARY POSITION 2009 2010
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OPERATING RESULTS Million Million
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Sales Revenue 104189 112274
Gross profit/Loss -559 2800
Profit Before Tax 417 7018
Profit After Tax 257 4899
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OPERATING RATIOS % %
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Gross Margin -0.54 2.49
Pre tax Margin 0.4 6.25
Net Margin 0.25 8.92
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FINANCIAL POSITION Million Million
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Shareholder Equity 9684 14072
Property Plant and Equipment 38096 41666
Net current assets 3110 1203
Long term assets 1426 1259
Long term Liabilities 30056 32947
Capital Employed 31451 29212
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Total Assets
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PERFORMANCE
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Capital Expenditure 6588 6040
ROA 0.77 11.9
Asset turnover ratio 2.9 2.95
Fixed assets turnover ratio 3.1 3.04
ROE 2.66 31.26
ROCE 0.88 13.99
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VALUATION AND OTHER RATIOS
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EPS 0.38 6.55
Cash DPS 1.5
Payout Ratio% 23
Bonus Shares % 25
Net assets per share 14.48 20.97
Market value per share 14 15.91
P/E ratio 36.84 2.43
Price to Break up value 0.97 0.76
Dividend Yield 25.14
Market Capitalisation 9.396 10.678
Debt: Equity ratio 2.69 1.91
Current Ratio 1.05 1.02
Debt service coverage ratio 2.43 1.54
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