SNGPL

CROSBYSECURITIES OCTOBER 23, 2009 Madeeha Akhtar Sui Northern Gas Pipelines Limited Valuation We initiate coverage on SNGPL with a BUY recommendation and a target price of PKR 36.34 per share, reflecting an upside potential of 33%. The stock is trading at a PE multiple of 6x for FY10F. SNGPL has underperformed the benchmark index, yielding a return of 27% as compared to the KSE-100’s healthy return of 66%YTD. Profitability Analysis SNGPL has posted a net Profit After Tax (PAT) of PKR 931mn for FY09 (EPS: PKR 1.69) as compared to PAT of PKR 2,497mn (EPS: PKR 4.55) over the corresponding period last year registering a significant decline of 60%. Unaccounted For Gas (UFG) and huge exchange losses led to this dismal performance . In FY10, we expect the profitability to improve considerably because of the drop in Weighted Average Cost Of Gas (WACOG) over the first half of the year. UFG Losses … A Drain on Earnings Adjustments are made to the guaranteed return by the OGRA on account of UFG losses in excess of the allowed targets. In FY09, the benefit of higher sales and an increase in asset base was dented by excessive UFG losses which amounted to PKR 6,283mn. The hit on account of the UFG losses was exacerbated by the enormous hike in WACOG. Higher UFG losses together with stringent OGRA targets have undermined the bottom line for FY09. In our future estimates, we assume that UFG losses will display a gradually declining trend. Exchange Losses Exchange losses on gas purchases increased by an exorbitant amount in FY09. However, going forward the rupee is expected to remain relatively stable against the USD. Hence, exchange losses are expected to fall sharply in FY10. Liquidity Concerns … Deferred Credit & Circular Debt Other income declined by 16% to PKR 1,210mn in FY09. This is due to drop in interest income on large cash deposits as a result of a change in the deferred credit mechanism. This together with the circular debt issue has adversely impacted the liquidity position of the company. Wellhead Gas Prices A rise in the wellhead gas prices increases WACOG and adds on to the losses on account of UFG, as was the case in FY09. Going forward, the reduction in wellhead prices is expected to clip the cost of UFG losses for SNGPL and will improve profitability. Expansion Plans OGRA has restricted the addition of fixed assets to PKR 11.4bn in FY10 as against the requested amount of PKR 18.5bn. This is quite low as compared to the record addition of over PKR 22bn that the company made to its operating fixed assets in FY09. Future Outlook It is expected that the benefit of the reduction in WACOG translating into lower UFG cost will be dampened by lower levels of other income, liquidity shortage (as a result of a change in the deferred credit mechanism) and lower asset additions approved by OGRA. GAS DISTRIBUTION INITIATING COVERAGE KATS Code Reuters Code Current Price PKR Target Price PKR Upside Potential Shares Outstanding mn Paid Up Capital PKR mn Market Capitalization PKR mn Free Float SNGP SUIN.KA 27.29 36.34 33.00% 549.11 5,491.10 14,985.21 15.00% SNGPL - Relative Price Performance PKR / Share SNGPL 40 KSE-100 35 30 25 20 15 Feb-09 Jul-09 Apr-09 May-09 Aug-09 Mar-09 Sep-09 Oct-09 Jun-09 Jan-09 Disclaimer: All reports and recommendations have been prepared for your information only. Summary and Analysis are not recommendation to Buy or Sell. This information should only be used by investors who are aware of the risk inherent in securities trading. The facts, information, data, indicators and charts presented have been obtained from sources believed to be reliable, but their accuracy and completeness cannot be guaranteed. Crosby Securities Pakistan Pvt. Limited and its employees are not responsible for any loss arising from use of these reports and recommendations. Comprehensive Analysis Profitability Analysis UFG Losses… A Drain on Earnings Exchange Losses Liquidity Concerns… Deferred Credit & Circular Debt Wellhead Gas Prices Expansion Plans Future Outlook Company Background Sector Overview Natural Gas.Initiating Coverage Table of Contents SNGPL . Leading the Way Mismatch… Growing Demand & Lagging Supply Demand Supply Plan for FY10 Help on the Way… Natural Gas Sourcing Plans Will the Benefit Trickle? Gas Distribution… The Key Players Tariff Regime… The Safety Net Required Return Calculation Key Financials of SNGPL ……………………………………… ……………………………………… 3 3 ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… 4 5 5 5 6 6 7 8 ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… ……………………………………… 9 9 11 11 11 12 12 13 14 Page 2 ..Investment Perspective Valuation Risks to Valuation SNGPL . 2009 GAS DISTRIBUTION Sui Northern Gas Pipelines Limited .CROSBY OCTOBER 23.. reflecting an upside potential of 33% . GAS DISTRIBUTION Sui Northern Gas Pipelines Limited . The stock is trading at a PE multiple of 6.70 Dividend Discount Model Growth Rate 6.0% 0.34 per share.98 Risks to Valuation UFG losses ..58% Required Return 18.05 PKR 35. UFG losses account for the major chunk of the drop in the company’s earnings below the required return. P/BV Valuation Growth Rate Risk Free Rate Risk Premium Beta Required Return Sustainable ROE P/BV Target Price/share 6. yielding a return of 27% as compared to the KSE-100’s healthy return of 66%YTD.0% 6. SNGPL has underperformed the benchmark index. higher financial charges and exchange rate risk . Financial charges SNGPL may encounter liquidity shortage as a result of a drop in the interest income on deferred credit. the key components of which are summarized below. Exchange rate risk Accelerated depreciation of the PKR can cause the company to register exchange losses on account of gas purchases as in FY09. This would lead to greater dependence on short term borrowing and eventually disrupt profitability in the form of higher financial charges. unfavorable political conditions and the law and order situation continue to pose major challenges..46% 1.. Key risks to our valuation include inability to curtail UFG losses.67 16. reflecting an upside potential of 33%. geographically tough terrains.Investment Perspective We initiate coverage on SNGPL with a BUY recommendation and a target price of PKR 36..0% Target Price/share PKR 36. High pressure in the pipelines. calculated using P/BV and Dividend Discount valuation models.CROSBY OCTOBER 23. Our valuation is based on an average of the target prices.Initiating Coverage SNGPL .0% Payout Ratio 60. varying tribal cultures. We initiate coverage on SNGPL with a BUY recommendation and a target price of PKR 36....58% 12.02% 16. 2009 Valuation .0x for FY10F.34 per share. Page 3 .. With respect to investor returns from the scrip in terms of dividend.500 2. Source: Company financials & CSPL Research 4. Both these factors work together to reduce its business risk.000 500 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F Profit After Tax . The company has posted a Loss After Tax (LAT) in the 4QFY09 of PKR 45mn (4QFY09 LPS: PKR 0. we expect the profitability to improve considerably because of the drop in WACOG over the first half of the year .69) as compared to PAT of PKR 2. Profitability Analysis SNGPL has posted a net Profit After Tax (PAT) of PKR 931mn for FY09 (EPS: PKR 1.000 2.00 50% 4. In FY10. low-leveraged balance sheet..00 5.00 6. we expect the profitability to improve considerably because of the drop in Weighted Average Cost Of Gas (WACOG) over the first half of the year. .PKRmn EPS and Dividend Payout EPS PKR (LHS) Dividend Payout % (RHS) Source: Company financials & CSPL Research 8..497mn (EPS: PKR 4.000 3.55) over the corresponding period last year registering a significant decline of 60%. it may be noted that SNGPL has maintained a dividend payout in the range of 40%-70% over the past seven years.155mn in FY08.500 1. This was on the back of an increase in consumer gas prices which offset the impact of the drop in volumes. The finance costs however. except for FY09.. In FY10. Page 4 . The company made a record addition of over PKR 22 billion to its operating fixed assets but the benefit was masked by excessive UFG losses.00 30% 2. which provides an inbuilt safety cushion. 2009 GAS DISTRIBUTION Sui Northern Gas Pipelines Limited .00 FY04 FY05 FY06 FY07 FY08 FY09 FY10F 20% 10% 0% 90% 80% 70% 60% .. controlling UFG losses is essential to keep its profitability afloat.00 0.. Also we envisage operating expenses to go down to almost half of their FY09 amounts because of the anticipated decline in exchange losses.500 3.CROSBY OCTOBER 23...5mn customers.08) against a 4QFY08 PAT of PKR 733mn (4QFY08 EPS: PKR 1.33) and has not declared any final cash dividend for FY09. the company’s sales revenue increased by 36% to PKR 168.Initiating Coverage SNGPL . eased by 17% to PKR 653mn in FY09 due to lower levels of long term financing.. Its profile is further enhanced by its strong.00 7.00 40% 3. The company is structured to earn a guaranteed rate of return of 17. In FY09. However.Comprehensive Analysis SNGPL enjoys a monopoly position in North Central Pakistan serving approximately 3.000 1.00 1.5%. Healthy dividend payout in the range of 40%70% in the past .934mn against PKR 124. Under this agreement.. . PKR 1.. Liquidity Concerns . In our future estimates. extension of gas mains and laying of distribution lines are now kept in special project accounts rather than company accounts. OGRA has revised the allowable limits of the UFG losses from FY09 onwards. In FY09. the company with a higher weighted average cost of gas raises a demand to the other company of the amount necessary to equalize the cost of gas for both companies. exchange losses are expected to fall sharply in FY10. This was mainly due to exchange losses on gas purchases. The circular debt issue.5% and the lower limit is 4.. SNGPL will also be a beneficiary in the event of the resolution of the circular debt issue. SSGCL has raised a demand of PKR 28. reducing the actual return on assets for SNGPL.CROSBY OCTOBER 23. thus. coupled with the altered deferred credit mechanism has adversely impacted the liquidity position of the company. Exchange Losses Other expenses increased by an exorbitant 210% to PKR 2.. This was predominantly due to a drop in the interest income on large cash deposits as a result of a change in the deferred credit mechanism. the benefit of higher sales and an increase in asset base was dented by excessive UFG losses which amounted to PKR 6. we assume that the UFG losses will display a gradually declining trend. It had to receive PKR 2. The hit on account of the UFG losses was exacerbated by the enormous hike in WACOG. A Drain on Earnings GAS DISTRIBUTION Sui Northern Gas Pipelines Limited .. This rolls into higher UFG penalties and SNGPL suffered a significant hit in FY09 on account of the increase in the disallowance percentage alone. In FY09.321mn under this head during the current period. This deprives SNGPL of interest income and also creates liquidity issues. Huge payables particularly to SSGCL as discussed above have aggravated the situation. Deferred Credit & Circular debt The Government has changed the deferred credit mechanism from FY09 onwards whereby the government grants for providing service connections.283mn.08bn from the Government Page 5 .. leaving it with negative working capital... SNGPL’s receivables against the circular debt amounted to PKR 17bn. The circular debt issue.. The hit on account of the UFG losses was exacerbated by the enormous hike in WACOG . Higher UFG losses together with stringent OGRA targets have undermined the bottom line for FY09. As a consequence of this agreement.Initiating Coverage Adjustments are made to the guaranteed return by the OGRA on account of UFG losses in excess of the allowed targets.. the benefit of higher sales and an increase in asset base was dented by excessive UFG losses which amounted to PKR 6.8%. whereby the upper limit is 5. Furthermore SSGCL has entered into an agreement with SNGPL for uniform pricing of gas. However.283mn. Unaccounted for Gas (UFG) 12% OGRA UFG Band Actual UFG Source: OGRA & CSPL Research 10% 8% 6% 4% 2% 0% FY06 FY07 FY08 FY09 FY10F FY11F ...210mn in FY09. Hence.975mn in FY09 versus PKR 957mn last year. As at the year end. 2009 UFG Losses . Other income declined by 16% to PKR 1.378bn from WAPDA. going forward the rupee is expected to remain relatively stable against the USD. given the company’s planned efforts to curtail them. coupled with the altered deferred credit mechanism has adversely impacted the liquidity position of the company. It is also laying 104km fiber optic cable for MOL Pakistan in the Karak area.. This is quite low as compared to the record addition of over PKR 22bn that the company made to its operating fixed assets in FY09. The final segment of 20km Darra Adam Khel segment of 24-inch Gurgury-Kohat-Nowshera line is being completed. Going forward.4bn in FY10 as against the requested amount of PKR 18.. 2009 Wellhead Gas Prices . Asset Additions (PKRbn) Source: Company financials & CSPL Research 20 18 16 14 12 10 8 6 4 FY10F Currently construction activities of Project IX are underway. it is expected that well head prices will decline.336bon GDS and PKR 1. OGRA has restricted the addition of fixed assets to PKR 11. Project IX was initiated in 2006 to absorb additional gas supply from newly discovered gas fields.4bn in FY10 as against the requested amount of PKR 18. Construction of 28-inch 12km water line for Fatima Fertilizers is also being carried out on a contract basis. GAS DISTRIBUTION Sui Northern Gas Pipelines Limited . reduction in wellhead prices is expected to reduce the cost of Unaccounted For Gas (UFG) losses for SNGPL and will improve profitability. Expansion Plans ..5bn.483bn from other government consumers *As of Oct 31-208 while it had net payables of PKR 20. Page 6 FY12F FY11F FY03 FY04 FY05 FY06 FY07 FY08 FY09 ..Initiating Coverage of Pakistan.658bn. This is a difficult portion of the project given the rugged terrain and the volatile situation in the area.. The company has also submitted a technical bid to SONATRECH (Algerian National Gas Company) for prequalification as contractor on EPC Basis for participation in tender covering 504km in 20”/24” diameter pipeline project in Algeria. A rise in the well head gas prices increases WACOG and adds on to the losses on account of UFG as was the case in FY09 .. SNGPL as a contractor is carrying out construction of 20-inch 38km line for Engro Fertilizers plant in Sindh. A rise in the well head gas prices increases WACOG and adds on to the losses on account of UFG as was the case in FY09. The wellhead gas prices are linked to international oil prices..CROSBY OCTOBER 23.5bn . OGRA has restricted the addition of fixed assets to PKR 11.. With oil prices showing a downward trend. PKR 12. This is because of the average decline in oil prices during 2HFY09 by 37%. is not expected to impinge the profitability of the company due to the predefined return formula based on operating assets. We foresee that despite the active measures.. it will give rise to human resource management issues as well. WACOG is expected to decline during FY10. . Furthermore. It is expected that the benefit of the reduction in WACOG translating into lower UFG cost will be dampened by lower levels of other income. It is expected that the benefit of the reduction in WACOG translating into lower UFG cost will be dampened by lower levels of other income.. However. however..CROSBY OCTOBER 23. liquidity shortage (as a result of a change in the deferred credit mechanism) and lower asset additions approved by OGRA. 2009 Future Outlook *As of Oct 31-208 GAS DISTRIBUTION Sui Northern Gas Pipelines Limited ..Initiating Coverage Going forward. the government has mandated SNGPL to reinstate a large number of employees who were inducted during the period between 1996 and 1998 and were relieved later on. Liquidity issues may restrict the management’s capacity expansion plans. This has the potential to create working capital management issues which may increase reliance on short term financing and inflate financial charges. This will push up SNGPL’s profitability via lower UFG costs. the company will be unable to bring UFG losses in line with OGRA standards and the UFG woes will continue to be a drain on profitability. This. The additional salaries will be a huge burden on SNGPL. Also the asset additions undertaken will be subject to approval by the OGRA. Additionally. liquidity shortage and lower asset additions approved by OGRA. Page 7 . interest income will continue to be affected by the change in the deferred credit mechanism.. Incremental costs will also arise from reimbursement of prior year payments to these employees. the company needs to curb its UFG losses which offset the impact of any additions to the asset base. . Sui Northern Gas Pipelines Limited (SNGPL) is the largest integrated gas company involved in the operation and maintenance of high-pressure gas transmission and distribution systems . designing and construction of pipelines. both for itself and other organizations. private sector.CROSBY OCTOBER 23.9% Associated Companies & Dawood Hercules Chemicals Limited 18.21% held by the . It also undertakes the planning. Shareholding Pattern of SNGPL Source: Company Reports President of Pakistan 36. Insurance Cos Modarbas & Mutual Funds 13. The Government and the Government controlled institutions and Dawood Hercules Chemicals Limited shareholdings are 36% and 20% respectively with the remaining 44. SNGPL operates in North Central Pakistan through an extensive network in Punjab and NWFP. SNGPL’s transmission system extends from Sui in Balochistan to Peshawar in NWFP...Initiating Coverage Sui Northern Gas Pipelines Limited (SNGPL) is the largest integrated gas company involved in the operation and maintenance of high-pressure gas transmission and distribution systems.951km of distribution pipelines.3% Banks.000 million. 2009 Company Background *As of Oct 31-208 GAS DISTRIBUTION Sui Northern Gas Pipelines Limited .4% NIT & ICP 3. comprising over 7. SNGPL has an authorized capital of RS 15.0% Others 4.347km of transmission system and 59.7% Page 8 .6% General Public 4. DFIs NBFI.7% Related parties 19.. Initiating Coverage Sector Overview Natural Gas…Leading The Way Pakistan’s primary energy supply stands at 62.275 billion cubic feet in FY08.7%.5% Mismatch … Growing Demand and Lagging Supply .2% Coal. Gas .7% Oil. The supply mix is tilted toward natural gas which continues to be the largest energy source with a lion’s share of 48% in the total energy supply .00% 16. the country’s natural gas consumption is sourced domestically. Poor quality of coal reserves.00% FY03 -4. 12.. The natural gas consumption on the other hand is on an uptrend and has increased rapidly during the last few years at a CAGR of 8.250 1..100 1.5% Hyrdro. 0.00% 6.. 2009 *As of Oct 31-208 GAS DISTRIBUTION Sui Northern Gas Pipelines Limited .. hydro at 13% and nuclear at a tiny 0.2% .. 1.150 1. the mounting burden of oil imports and unreliability of hydro sources has led to this unsustainably high dependence on natural gas.9 million TOE (tons of oil equivalents) in FY08. The recoverable reserves stand at 29.000 950 900 850 800 FY03 FY04 FY05 FY06 FY07 FY08 Natural Gas Consumption .CROSBY OCTOBER 23. At present...050 1.00% 11.. 9.200 1.300 1. 30. The natural gas consumption is on an uptrend and has increased rapidly during the last few years .00% 1. The supply mix is tilted toward natural gas which continues to be the largest energy source with a lion’s share of 48% in the total energy supply followed by other thermal sources at 39%. 47.67 trillion cubic feet.5% amounting to 1.00% FY04 FY05 FY06 FY07 FY08 Page 9 .bcf Source: Energy Yearbook 2008 Annual Growth Rate in Natural Gas Consumption Source: Energy Yearbook 2008 21. Primary Energy Supplies By Source Source: Energy Yearbook 2008 Nuclear. .3mn.. However.. The number of gas consumers has also increased at a growing rate since FY03.Initiating Coverage The jump in the natural gas demand was greatest in FY04 because of increasing availability *As of and of cheaper local gas Oct 31-208the government policy of attracting expansion in the power generation sector based on indigenous fuel. Going forward. the number of consumers was 5.0 4.275 billion cubic feet in FY08 against the total production of 1.Million Source: Energy Yearbook 2008 5.. the gap will increase to 540 billion cubic feet by FY16.5 Number of Gas Consumers .6% Fertilizer (Feedstock) 3.bcf 2400 2200 2000 1800 1600 1400 1200 1000 800 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F FY13F FY14F FY15F FY16F Demand Source: CSPL Research Supply At the existing rate. the country is walking headlong into a natural gas shortage. The statistics indicate that supplies will rapidly start depleting after FY11FY12.5 4.0 3.0% Transport 5.7% Domestic 16.5 3. The jump in the natural gas demand was due to increasing availability of cheaper local gas and the government policy of attracting expansion in the power generation sector based on indigenous fuel . we project that demand will exceed supply in FY11 by approximately 32 billion cubic feet propelled by a recovering economy.6% The net demand for natural gas has increased by almost 8.. fertilizer and other sectors. 5.3% Cement 1.0% Fertilizer (Fuel) 12. 2009 .0 FY03 FY04 FY05 FY06 FY07 FY08 The power sector accounts for the largest portion of the gas consumed followed by the industry. Natural Gas Consumption by Sector Source: Energy Yearbook 2008 Commercial 2. GAS DISTRIBUTION Sui Northern Gas Pipelines Limited . Natural Gas Demand Supply . 8.7% General Industry 25. In FY08.1% Power 33.CROSBY OCTOBER 23. The following figure shows Natural Gas consumption by sector. Page 10 .5 % annually during FY03FY08.2 % higher than last year.454 billion cubic feet. reaching around 1. Will the benefit trickle? However. which will help in overcoming the power crisis. . In view of its current shareholding.. The diameter of the pipeline will be 42 inches which is estimated to cost USD 3. ISGS. Page 11 . the Government has engaged in projects for importing piped natural gas and LNG from neighboring countries..5mtpa (million tons per annum).CROSBY OCTOBER 23. under the Companies Ordinance 1984. The 1680km pipeline will have a design capacity of 3. and will take around four years to complete. these projects cannot be taken as a positive trigger for the gas distribution companies as they earn a fixed return according to the return formula. 2009 Demand Supply Plan for FY10 *As of Oct 31-208 GAS DISTRIBUTION Sui Northern Gas Pipelines Limited .Initiating Coverage With the winter season coming up the Sui twins are anticipating a potential gas shortfall of over 1000mmcfd. equivalent to 500mmcfd of gas. According to this plan gas supply will be curtailed to low priority segments of the economy. This would mainly include cement and the non committed power sector. LNG import project with a re-gasification facility which will be located in Karachi. The pipeline will be supplied from the South Pars field. It is a 3. Gas Imports Interstate Gas Systems (ISGS) is a private limited Company incorporated in Pakistan and is a joint venture between SSGCL and SNGPL. The project envisions the import of 750mmcfd of natural gas. The first supply of LNG is expected in the year 2011..5bn. traversing along the Makran Coastal Highway to connect with Pakistan’s existing gas transmission network at Nawabshah. The pipeline is proposed to start from Asalouyeh and stretch over 1100km through Iran. The gas will be supplied from Douletabad and other fields in Turkmenistan. Pakistan will construct a 1000km pipeline from the border.6bn. The controlling interest of the two major gas utilities is 51% and 49% respectively. Also both companies earn a return only on those assets that become operational which is not expected for the above mentioned projects for another four to five years..000MW power generation capacity. SNGPL has already served notices of gas load shedding from November 2009 to March 2010 .2bcfd and will cost USD 7. Iran Pakistan Pipeline The first major upcoming project is the Iran Pakistan Gas Pipeline which is expected to come online by FY14. ISGS has been mandated by the Government to explore and make arrangements for import of natural gas from neighboring countries.. The project will support around 4. is a subsidiary of SSGC. Trans-Afghanistan Pipeline The second project is the Trans-Afghanistan Pipeline (TAP or TAPI) which will transport natural gas from Turkmenistan through Afghanistan into Pakistan. SNGPL has already served notices of gas load shedding from November 2009 to March 2010. LNG SSGC is acting as the facilitator for the Pakistan Mashal LNG Project. SNGPL would thus be able to save up to 530 mmcfd of gas in January and divert to other priority areas. Help on the Way…Natural Gas Sourcing Plans In order to diversify sources of natural gas supplies. Kms 70.000 35. Under the tariff regime governed by the OGRA. both SSGC and SNGPL are required to earn an annual return of not less than 17% and 17. These gas distribution companies operate through a transmission and distribution network of over 102. both SSGC and SNGPL are required to earn an annual return of not less than 17% and 17. NWFP and Azad Kashmir region.000 65. OGRA determines the consumer prices while distribution companies are entitled to claim any shortfalls in their revenue that includes the gas purchase prices from E&P companies.000 45. before corporate income taxes...5% respectively per annum on the value of its average fixed assets in operation. Transmission and Distribution System ..000 50.000 40..000 FY03 FY04 FY05 FY06 FY07 FY08 SNGP SSGC Source: Company Financials Tariff Regime .000 60. The Key Players *As of Oct 31-208 GAS DISTRIBUTION Sui Northern Gas Pipelines Limited . 2009 Gas Distribution . Any deficit or surplus on account of this is recoverable from or payable to the Government as differential margin or gas development surcharge. Page 12 .. other operating expenses and a pre-defined operating margin (as per the return formula).000 30.187 KM spread across Pakistan. These are Sui Southern Gas Company Limited (SSGC) operating in Sindh and Baluchistan and Sui Northern Gas Pipelines (SNGPL) in Punjab.. The Safety Net .5% respectively per annum on the value of its average fixed assets in operation (net of deferred credit on jobs completed).000 25.CROSBY OCTOBER 23..000 55.. interest and other charges on debt and after excluding interest..Initiating Coverage The Gas Distribution sector comprises of two public-sector companies operating in different regions across Pakistan. dividends and other non operating income.000 20. Under the tariff regime governed by the OGRA. As per the regulations. 17.5%) V Amount of return required (III * IV) VI Shortfall over Return required (E-V) Page 13 .Initiating Coverage Following is a format of the calculation of the required return and differential margin/gas development surcharge:- A B C D Net revenue Less: Operating Expenses excluding financial charges Profit/(Loss) Add: Non admissible Expenditures Less: Non operating Income E Operating Profit / (Loss) Required Return on Net assets I II III Average Net Fixed Assets Less: Average Deferred Credit of completed jobs Average Net Fixed Assets after Average Deferred Credit IV Required Return on net assets (Avg. 2009 Required Return Calculation *As of Oct 31-208 GAS DISTRIBUTION Sui Northern Gas Pipelines Limited . ~17% .CROSBY OCTOBER 23. 308) 1.(1.211 26.9% FY09 549.329 1.7 10.103 52.448) 848 671 (514) 1.481 8.485 2.240 14.797 123.570 11.549 157.907 58.6 5.934 151.266 42.69 FY10F 172.041 70 1.582 4.234 122.7% 3.107 15.PKRmn CF From Operating Activities Net Income Depreciation Working Capital Changes Deferred Credit Operating Cash Flows CF from Investing Activties Capex Investments Investing Cash Flows CF from Financing Activities Deferred Liabilities Net Debt Dividends Equity Injection / Other flows to Equity Financing Cash Flows Net Cash flow Opening Cash Balance Ending Cash Balance Short term borrowing Trade and other Payables Interest Accrued Current portion of Long term financing Current Liabilities Long Term Financing Deferred Liabilties Security Deposits Deferred Credit Total LT Liabilities Total Liabilities Paid-up Retained earnings Total Equity TOTAL EQUITY AND LIABILITIES 27.737 2.137 18.028 1.392 1.370) 7.227 355 355 355 5 5 5 235 235 235 119.901 10.873 3.757 525 2.554 613 577 606 2.710 13.195 364 5 225 97.899 129.484 25.139 97.190) *As of Oct 31-208 Cash Flow Statement .3 6.879 3.730 800 930 1.520 827 4.4% 1.383 653 1.5 16.096 1.695 2.387 51.441) (22.086 1.137 1.410) (6.303 1.625) (15.443) (22.4 3.009 9.821 Sui Northern Gas Pipelines Limited .922) (2.4 5.55 FY09 183.337 17.CROSBY OCTOBER 23.5 12.189 4.068 31.898 6.mn EPS DPS Gross margin EBIT Margin Days in Payable Days in Receivable Total Asset Turnover Assets/Equity ROE ROA ROCE FY08 549.491 10.712 22.120 1.0% 8.546 8.346 14.Initiating Coverage GAS DISTRIBUTION Key Ratios Shares Outstanding .162 63.7 15.899 9.622 21.3 6.447 957 4.134 80.442 4.8 14.899 129.1% 8.1% FY12F 549.105 5.942 5.673 24.105 5.447 10.448) (2) (10) (17.777 43.0% 3.5% 117 45 1.731 19.800 6.349 1.875 12.562 29.105 4.3 16.648 FY09 1.636 5.921) (1.709 4.81 Balance Sheet .961 169.275 15.706 783 2.8% FY11F 549.177 1.3% 136 52 1.196) 959 733 3.1% 2.517 2.5% 9.416 396 1.105 1.241 .375 2.721 35.313) 632 (5.2 6.511 132.997 (8.598 25.205 704 880 1.287 5.100 539 164 125 43.824 735 4.062 1.777 (750) 124.881 7.152 34.2 15. 2009 Key Financials of SNGPL P&L Statement .148 122.201 16.194 1.497 4.509 5.859 62.453 22.637 2.397 2.8% 2.647) (1.786 552 1.491 5.190) 23.048) (14.693 1.320) (8.048) (14.819 144.000 32.058 22.626 989 1. and Admin.9% 3.875 141.770 789 3.460 10.616 355 5 235 122. Expenses Other income Other Operating Expenses EBIT Finance cost EBT Taxation PAT EPS FY08 145.267 18.049 983 1.0% .283 (2.882 (1.367 100.120 1.1% 3.766 20.999 79.38 FY12F 202.971 45.046 1.192 5.317 890 946 1.000 56.301 1.6% 3.440 32.317 25.4 16.8 3.000 53.625) (15.PKRmn Cash and bank balances Trade Debt Stock in Trade Stores & spare parts Other receivables Total Current Assets Assets Long term deposits and prepayments Investment in associate company Long term loans TOTAL ASSETS FY08 8.5 7.70 FY11F 187.957 3.758 119.504 103.406 11.375 5.488 4.137 78.172 13.000 32.210 2.798 8.237 8.820 Page 14 FY08 FY09 FY10F FY11F FY12F 2.2% FY10F 549.618) 2.5 3.PKRmn Gross Sales Sales Tax GDS Net Sales Cost of gas sold Gross Profit Rental and Service Income Amortization of Deferred Credit Surcharge on Gas Sales Arrears Dist.780 7.912 32.070 11.3% 3.129 38.134 109.151 1.918 87.189 5.4% 93 44 1.048 916 790 703 13.321 19.648 951 49.820) 13.085 (378) (821) (1.957 5.582 2.062 94.869 6.055 (17.491 11.062 5.354 42.975 2.735 1.519 24.105 4.491 13.497 930 2.176 1.254 1.596 44.7 2.648 17.427 (2.158 43.200 5.596 990 1.809 106.617 9.8% 84 44 1.0% 2.459 5.219) 168.099 1.746 7.491 5.530 22.7% 111 43 1.155 109.182 21.317 939 118 939 118 (1.234 122.348 FY10F FY11F FY12F 939 118 (1.137 8.242 34.981 1.898 11.4% 1.657 16.278 613 13.6% 9.276 982 1.573 28.310) (8.632 (417) 8.2 15. 544 Ext.com faisal. The [email protected] pershotam. Fertilizer & OMC E&P. ACA Fatima Anis. Limited and its employees are not responsible for any loss arising from use of these reports and [email protected] shahid. .com naveed. CFA. Summary and Analysis are not recommendation to Buy or Sell.com muhammad.542 Ext.com Disclaimer: All reports and recommendations have been prepared for your information only. 2009 Research Team: Rehan Uddin. M. information. Insurance & Autos Gas Distribution.lal@crosby. Cement Economy.com madeeha.com +92-21-35615859-60 +92-21-35615830 +92-21-35615828 +92-21-35615832 +92-21-35615824 +92-21-35615821 This report is prepared and published by: Research Department Crosby Securities Pakistan (Pvt. IPP GAS DISTRIBUTION Role of USD-PKR parity in the re-emergence of foreign portfolio investments [email protected]@crosby.com +92-21-35615855 +92-21-35615856 Ext. data.com [email protected] OCTOBER 16. but their accuracy and completeness cannot be [email protected]@crosby. PRC [email protected] Khan Road. Crosby Securities Pakistan Pvt.545 Sales Team: Syed Kashif Mustafa Muhammad Irfan Naviwala Faisal Kapadia Sohail Shaikh Naveed Ahmed Muhammad Khurram Head of Sales & Business Development kashif.com sohail.ali@crosby. Karachi.com omair. Pakistan +92-21-35615861-66 [email protected]@crosby. This information should only be used by investors who are aware of the risk inherent in securities trading.com muhammad.) Ltd 4th Floor.543 Ext. ACA Shahid Ali Pershotam Lal Omair Iqbal Madeeha Akhtar Head of Research & Corporate Advisory Deputy Head of Research Research Analyst Research Analyst Research Analyst Research Analyst Banks Refinery.shaikh@crosby. indicators and charts presented have been obtained from sources believed to be reliable.