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Gas: Sui Southern Gas Company Ltd - Analysis of Financial Statements - Financial Year 2009 - 1H - Financial Year 2011

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Highlights - Corporate News

OVERVIEW : 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 areas 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:



The government of Pakistan 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-added activities including rehabilitation of pipelines, fusion bonded epoxy and P. E. 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.

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 3,200-km. In lieu of the various corporate issues undermining the performance of the firm s value-added 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 aim 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 optimisation and rehabilitation. A snapshot of the company s standing as at 30th June 2010 is as follows:

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COMPANY SNAPSHOT

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Name of company SUI SOUTHERN GAS COMPANY LTD

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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 Capitalization 10. 678 million

RECENT RESULTS (1H11)

The first six months of the current FY11 have seen a growth in the customer base of the SSGC but led to a contraction of the sales volume by 7. 677% as compared to the first half of FY10. The distribution network expanded by a modest 7% over the same period as did the number of meters manufactured by the company. Hence the company seemed to have been on a modest expansion spree.

As far as the profitability is concerned, the graph below shares the story of the changes in the absolute profitability levels. The contraction in sales volume reported above was evident in the 8% contraction in sales volume of the company over this six-month period as compared to the first half of last fiscal year. However, the gross profitability position improved, as the firm recovered from its mounting gross loss on 31 December 2009 to a reported 1,092,604 million rupees of gross profit in this tenor. The gross margin although still at a low 1. 68% represented a 160% recovery over the last reported period and served to commend the management over their staunch efforts to revive the profitability of the company.

On the other hand, the position of operational and post-tax profitability of the firm was not as stable or positive; the operating profit declined by an astounding 584% whereas the post-tax profit shrunk by 862%. This was aptly reflected in the contraction of pre-tax margin and net margins to 0. 7% and 0. 3% respectively, levels that should send off great warning bells for any manager. However, one can appreciate from the projects cited in the directors report of prior fiscal year that this unhealthy growth of overhead expenditure was a direct consequence of the management related changes and human resource dissent resolution proposals implemented by the company. The finance costs of the firm declined by a margin of 8% on the debt costs borne by the firm in the half year ended 31 December 2009. The debt service coverage ratio experienced a great positive change, valued at around 175% as compared to the -0. 48 times as at 31 December 2009, predicting that the rationalising of interest-bearing debt accompanied by the generation of higher other operating income from different sources helped to increase the ability of the firm to service its debt.

As far as the financial position of the company is concerned, the overall shareholder equity increased by approximately 8% over the corresponding value in June 2010. The company seemed to have engaged in compensatory capital expenditure in order to maintain the functioning ability of its present operations as its property plant and equipment value climbed by 9%. However, the liquidity position worsened over the six-month period as the firm generated a negative working capital of Rs 1,830,600 on 31 December 2010 and its current ratio drastically fell to 0. 978. The firm seems to be in a credit crunch with desperate need for corrective measures to be taken.

As far as the financial performance is concerned the firm experienced a pick-up in its return on assets despite the poor performance in the profitability spectrum; the return on equity and capital employed similarly soared. However, the efficiency of asset use diminished greatly over the six-month period as both the asset turnover and the fixed asset productivity contracted by approximately 6% and 1% respectively. On the investor side, the EPS increased by an astounding 870% from 0. 26 rupees to 2. 52 rupees.

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 2009 2010

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OPERATING RESULTS Million Million

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Sales Revenue 60368165 65219316

Gross profit/Loss -1699553 1092604

Profit Before Tax 474887 3252155

Profit After Tax 219479 2113118

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OPERATING Ratios 31-Dec-09 31-Dec-10

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Gross Margin -2. 815313 1. 6752767

Pre tax Margin 0. 7866514 4. 9864905

Net Margin 0. 3635675 3. 2400186

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 Jun-10 Dec-10

FINANCIAL POSITION Million Million

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Shareholder Equity 14072345 15188372

Property Plant and Equipment 41665603 45259004

Net current assets 1203489 -1830600

Long term assets 42924836 46482912

Long term Liabilities 30055980 29463940

Capital Employed 44128325 44652312

Total Assets 110759622 128398307

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PERFORMANCE

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ROA 0. 198158 1. 6457522

Asset turnover ratio 0. 5450377 0. 5079453

Fixed assets turnover ratio 1. 4063691 1. 4030815

ROE 1. 5596477 13. 912735

ROCE 0. 4973654 4. 7323821

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VALUATION AND OTHER RATIOS

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EPS 0. 26 2. 52

Debt: Equity ratio 7. 49 6. 83

Current Ratio 1. 0180619 0. 978141

Debt service coverage ratio -0. 480719 0. 3613947

OPERATIONS

FY10 has been a period of remarkable improvement in the operating performance of the company; the sales standing at a little over Rs 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 percentage valued at 2. 5%.

At the other end of the spectrum, the performance dynamics tilt in favor 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 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. The comparative figures in this sphere are illustrated below:

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. SNGPL attained a negative net current asset figure of 10,380 million and a very low current ratio of 0. 83.

DEBT POSITION AND INVESTMENT RATIOS

As explained earlier FY10 has been period of promising returns for the investors in SSGC; where the EPS increased to Rs 6. 55 per share from a meagre 0. 38 rupees in FY09 and stood superior to the return offered by 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

FUTURE OUTLOOK

The future performance of the company stands contingent upon the course that the ambitious policies implemented as part of the corporate restructuring and improvement plan take. In addition to the broad company-wide changes discussed earlier, SSGC effectively plans to use US $115 million offered by the World Bank to replace the distribution network it currently operates with, in addition to the introduction of mediums to increase the utilisation efficiency of its investments. Dollar 105 million from the above sum has been earmarked for gas pipeline and affiliated infrastructure improvements whereas the remaining $10 million is projected to contribute towards the establishment of the efficiency pilot project. A creative measure undertaken under the UFG control program has been the creation of a monitoring crisis cell to share and analyze data as well as the remedial measures proposed by the employees with regard to the UFG crisis, called the UFG situation room . An attitudinal change in the employee mindsets is also sought by the new management of SSGC in order to create conditions more conducive for the successful development and implementation of a more open corporate culture.

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].

 

Courtesy: Business Recorder

 


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