Pakistan Oxygen Limited (PSX: PAKOXY) has gone by many names since it was incorporated as a private limited company in 1949. Converted to a public limited company in 1958, it was renamed BOC Pakistan in 1995. BOC and Linde AG, Germany merged to form the Linde Group in 2006. In 2011, it was re-branded as Linde Pakistan before being named back to Pakistan Oxygen Limited earlier in this year.
While harnessing the heritage and experience of big business such as BOC and Linde, PAKOXY adopted the original name to capitalise upon the strong image and goodwill associated with it. The company is a leading supplier of industrial and medical gases, pipeline engineering services and welding solutions in Pakistan. Its customers are from a wide spectrum of industries, ranging from chemicals and petrochemicals to steel, food, and healthcare.
Industry overview Industry reports indicate that global medical gas market was valued at $7.5 billion in 2016 and is expected to grow at a CAGR of 8-9 percent till 2024. Medical gases are specialized gases used for medical purposes, drug processing and research in biotechnology. The most common are oxygen, ammonia, hydrogen, nitrous oxide, nitrogen, and carbon dioxide. Many of these gases have industrial uses as well.
Valued at $63 billion globally in 2017 as per Pacra, industrial gases have a much bigger market than their medical counterparts. This sector is projected to increase to $114 billion by 2025 at a CAGR of 7.7 percent.
There are three main distribution channels through which gases are delivered to customers. Packaged gases are delivered compressed in metal cylinders; merchant distribution channel is where supply is through cryogenic tankers and on-site distribution channel is one though which customers are supplied directly through a pipeline. Globally and in Pakistan, the packaged segment dominates the market whereas the merchant distribution channel has a nominal share.
Different gases have different demand drivers. For example, growth in population, increase in demand of steel, and increase in healthcare facilities for the elderly results in higher demand for oxygen whereas increasing energy needs result in higher nitrogen demand. Specialty gases are used in the auto industry and for research & development.
The industrial and medical gas sector in Pakistan has a few big players of which Pakistan Oxygen is the biggest with over 40 percent share, as per Pacra. Other major players are Ghani gases, Sharif gases, and Agha Steel. Major consumption domestically is through the ship breaking industry, oil and exploration and in hospitals.
Business overview Pakistan Oxygen currently operates in four businesses: bulk gases, healthcare, packaged gas products (PGP), and tonnage. To service its customers, the company has three Air Separation Units (ASU) with an installed capacity of about 263 tons per day (TPD). It also has two carbon dioxide, one hydrogen, and one on-site nitrogen plant.
At over 40 percent, the bulk business is its biggest contributor to the top-line. This segment supplies gases through large road tankers to customer sites. The company aims to enhance its fleet facilities to further grow its bulk business.
Health care accounts for about quarter of the top-line and is involved in delivering medical gases to clinics, laboratories and hospitals. This segment also provides associated services such as designing and installation of gas pipelines to hospitals.
PGP also accounts for about a quarter of sales. This business segment deals with compressed gases of industrial and specialty grade along with gas/arc equipment and hard goods for welding and cutting.
Tonnage is the smallest segment. It supplies gases to customer sites through turnkey plants designed for specific customers and offers commissioning and operating turnkey plant services. The customers are mainly from oil & gas and chemical sectors.
Financial history In recent years the top-line was not faring too well with an average growth of -1 percent from 2014 to 2016. 2017 saw a significant increase in the top-line, a trend which has carried on to the current calendar year.
Sales in 2012 were subdued because of the energy crisis that crippled the country. However, strong demand from industrial sectors and the successful commissioning of a new Air Separation Unit (ASU) at Lahore enabled the company to have the highest gross margin of 26 percent in recent history.
Despite the ongoing energy crisis, sales increased mainly through the new Lahore ASU plant in 2013. However, the frequency of plant shutdowns were also higher which brought down operational efficiencies. To counter this, rented diesel-Gensets were installed in the Lahore ASU which increased plant availability but severely brought down gross profit margin.
Sales volume improved in almost all major market sectors in bulk and well as PGP business portfolios in 2014. However, prices remained under sharp pressure due to excess supply, lower demand, and increased competition especially in the ship breaking and health care sector. This pulled down the top-line and profits.
While sales were stagnant in 2015 and 2016, profit and profit margins improved. Lower demand prevented sales revenue from rising but improvements in plant productivity and efficiency through new process initiatives helped stem the bottom line. Operational costs reductions through reduced power and diesel costs and increased plant loadings also helped enhance gross and net profit.
2017 saw a significant rise in sales revenue driven by growth in business across all segments. Healthcare took the lead with a growth of 25 percent YoY followed by welding and hard good segment which rose by 20 percent. The one-off expense of re-branding and divestment related charges, exchange losses relating to the final settlement of intergroup liabilities payable to the Linde Group before change of ownership brought down net profit by Rs40 million.
1HCY18 Since the company changed hands, it has been doing well. PAKOXY posted strong results with PAT increasing by a whopping 56 percent YoY. The double digit growth in sales, margin expansion by 14 percent and optimization of costs that significantly decreased administration and marketing expenses, allowed the company to jump in profitability.
The company's healthcare segment and electrode business drove the higher sales revenue. Hard goods segment, which grew by 21 percent in the first quarter of the year, continued to support significant volume growth. Broadening of customer base in the health care segment helped drive its increase in turnover with higher demand from steel & oil and gas industries driving the industrial gas segment.
The growth has been the result of PAKOXY aggressively increasing its presence in the industrial and health sector while growing in its welding and hard goods segment. Through expanding geographic foot print, enhancing its logistics network, and achieving global partnerships, the company intends to continue its trend of increasing top-line and bottom-line.
For this purpose, the company has announced expansion plants for its Air Separation Unit of an increase in capacity by 250 tons per day. This will take its capacity to 513 tons per day and will result in CAPEX of Rs4.4 billion. The plant is expected come online by 2Q2020. As yet the project team has met with three ASU manufacturers and is in the final phases of negotiating the deal.
PAKOXY uses toll-business vendors to purchase electrodes that contribute about 70 percent of sales for its PGP division. The company has earlier been manufacturing electrodes in-house but in FY07 the then BOC management switched to the structure it has today. Increase in cost of production due to low volumes and strong labour union led to the decision to suspend electrodes manufacturing. The new management has however sighted growing demand and hence opportunity. Therefore, the company has announced that its electrode manufacturing facility will be restarted utilizing existing plant and machinery.
Shareholding pattern Linde Pakistan became Pakistan Oxygen Limited after acquisition of majority of shares by Adira Capital Holdings (PVt) Limited and its affiliates.
Future outlook The company has bright prospects as evident from its strong financial performance and range of investment plans for expansion. As per industry estimates, globally and locally, the sector is expected to grow at a rate of over 6 percent with CPEC in particular being a driver.
It the past the company has faced challenges such as the fire that broke out in Gadani's ship breaking year in 2017 and the series of explosions that occurred there in 2016. The company resilience and operational efficiency in overcoming these challenges bodes well for future obstacles as well. Since PAKOXY is concentrating on enhancing its facilities and offering a more diversified portfolio, one-off incidents are less likely to impact its financials.
Since PAKOXY is the biggest player in the sector, growth in the industrial and medical sector will result in growth in the company. Going forward, PAKOXY likely to continue to deliver on expectations of sustained strong performance.
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Pakistan Oxygen Limited
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Rs. (mn) 1HCY2018 1HCY2017 YoY
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Net Sales 2,382 2,120 12%
Cost of sales (1,844) (1,649) 12%
Gross Profit 538 471 14%
Distribution and marketing expenses (100) (125) -20%
Administrative expenses (106) (117) -9%
Other operating expenses (25) (29) -14%
Operating profit before other income 306 200 53%
Other income 7 10 -30%
Operating profit 313 210 49%
Finance cost (51) (51) 0%
Profit before taxation 262 159 65%
Taxation (70) (36) 94%
Profit for the period 192 123 56%
Earnings per share 7.67 4.90 5700 bps
Gross profit margin 23% 22% 200 bps
Net profit margin 8% 6% 3900 bps
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Source: Company accounts
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Pattern of shareholding (as at 31 Dec, 2016)
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Shares held %
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Adira Capital Holdings (Pvt.) Limited 8,265,024 33%
Hilton Pharma (Pvt.) Limited 6,003,859 24%
Soorty Enterprises (Pvt) Limited 3,000,247 12%
Shahid Mahmood Umerani 1,802,788 7%
Babar Khan 901,394 4%
EFU General Insurance Limited 300,000 1%
State Life Insurance Corporation of Pakist 298,183 1%
CDC-Trustee National Investment (Unit) Tru 196,158 1%
National Bank of Pakistan 181,585 1%
Shahid Malik 156,000 1%
Others 3,933,482 16%
Total 25,038,720 100%
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