Container: PAKISTAN INTERNATIONAL CONTAINER TERMINAL LIMITED - Analysis of Financial Statements Financial Year 2003 - December 2008
OVERVIEW (November 19 2009): Pakistan International Container Limited (PICT) is the only container terminal in Pakistan, sponsored and owned by Pakistanis and the only port infrastructure project whose shares are traded on the Karachi Stock Exchange.
It is also the first port infrastructure project in Pakistan financed by International Finance Corporation (IFC). In June 2002, Premier Mercantile Services Ltd (PMS), as sponsors of the project, entered into an Implementation Agreement (IA) with Karachi Port Trust (KPT) to design, construct, operate and transfer after 21 years a modern container terminal project at berths 6-9, East Wharf, Karachi Port.
The container terminal project commenced commercial operations in August 2002, within the targeted cost of USD 30 million. Within six weeks of taking over possession of the container terminal area from KPT with the existing container handling equipment of PMS, the project started generating business and paying royalty and land rental to KPT. The terminal currently has 4 Ship-to-Shore (STS) quay cranes, 2 mobile harbour cranes, 10 rubber tyred gantry (RTG) cranes and other ancillary equipment.
Phase 4 equipment, two quayside cranes and 10 rubber tyred gantry cranes, have been arrived by September 2008, which significantly added to berth and yard handling capacity. The dedicated area for the Terminal is 220,000 square metres. PICT has also procured land at the Northern Bypass, which will develop as an Off-Dock Container Depot to extend efficient services to its customers. The Quay Wall length is 600 metres. Amongst the present container terminals in Pakistan, PICT has the deepest designed berths, with a planned alongside depth of 13.5 metres and a current alongside depth of 12.2 metres.
An entire power generation plant of 7.4 megawatts capacity is installed with Cummins (UK) generators. PICT aims at enhancing the capacity of the power plant to 10 megawatts. PICT has constantly enhanced its container handling capacity since the completion of Phase I in 2004, achieving an impressive annual growth rate; a growth of 37 percent in 2007-08 to 472,137 TEUs (Twenty-Foot Equivalent Container Units) from 345,802 TEUs (2007).
PICT now serves 4 weekly shipping services and handles on average 27 container vessels a month. PICT has also installed the first quayside crane in Pakistan that can lift two empty containers at the same time - thereby doubling its crane productivity on empty container moves. The development process is a four-phase work, out of which, three have already been completed. Once the development of the all four phases has been completed, PICT will have the capacity to handle over 550,000 TEUs per annum. PICT has also commenced e-clearance of cargo under the new Custom's PACCS System (Pakistan Customs Computerized System).
Despite the lack of liquidity and declining sales in Pakistan's economy, PICT has performed better than expected. It successfully installed and commissioned its phase 4 equipment. PICT managed to increase its revenues by 45.63% to Rs 4,564 million in FY08-09. The increment drivers not only include inflation (CPI of 12%) but also increased volumes. PBT witnessed an increase of 58% Rs 1174 million in FY09. PAT shows an increase of 77% to Rs 935 million. The graph shows the volume increment.
These high volumes may be attributed to increased prices and demand of yarn in the international market. Another reason is increased exports rebates. However, this value is of net revenue. Due to lofty figure 16% sales tax this year, its portion in revenue increased. Amongst the cost, the significant increase this year has been in stevedoring cost ie the cost paid to the entity responsible for loading and unloading in the ships. This is attributed to the increased costs and subsequent increased prices of the companies.
This is evident in PICTL's increments as well. Their gross profit margin for FY08-09 increased by 7.2% but the net profit margins improved drastically and showed 21.39% increment. One reason for that is very small increment in financial charges. This seems to be a wise decision as the company is liquid and does not need running finances. Moreover, surging interest rates give a dismal picture of the debt askers. Consider the following increment in the overnight discount rates this fiscal year. The company also recorded 15.45% increase in their income from investments. In FY08-09 a lot of companies faced difficulties in managing the required yield. However, the given increment in yield shows that their portfolio is very efficiently managed. They also showed 31.72% and 38.34% increase in returns to assets and returns to equity respectively.
FUTURE OUTLOOK ON PROFITABILITY
The textiles have started recovering and it's expected that the interest rates would go down and markets will start performing better. All of these will impact the revenues of PICT effectively. However, they should keep an eye of surging inflation, which is expected to come down but definitely it won't be at the levels one would want it to be. According to State Bank of Pakistan, it would be 10% this calendar year and 6% in the next one.
Using the compounding assumption, inflation would be roughly 7.98%. This will increase their administration cost and terminal operating cost. However, due to their differentiated product strategy, they have the room of increasing the prices. Considering relatively better purchasing power than last year (using core inflation), they can easily increase the prices further.
Liquidity is very important in a shipping business because one cannot delay payments. Their liquidity has deteriorated a little. One reason is increased trade debts, whose impact will be discussed later. The important factor here is repayment of their loan tranche. The loss in liquidity is also because of about Rs 54 million losses from derivatives and about Rs 84 million payable to a related party.
FUTURE OUTLOOK OF LIQUIDITY
All of their long-term loans are based on LIBOR + spread. This is the reason PICT is not facing problems in repaying those amounts. With world desperately trying to come out of recession LIBOR will remain low at least for a year. It seems that they will not have any issues with liquidity as such but position can be a little shaky in the forthcoming years as a lot of tranches are there to be repaid.
PICT's operational performance has quite improved from the last year, as there is 21% decrement in the days required to sell of inventory. By definition, it is not inventory because it's how quickly their stores and spares being utilized. One reason of such improvement can be the quality of service and the business model. Since, it's unique and consumer friendly, a lot of new customers seem to get attracted. However, on the flip side, their time required to collect receivables has increased. This is because of lack of liquidity on part of importers and exporters.
Assuming that all of the customers are abiding by the government requirement of opening a Letter of Credit for imports and exports, they would not be willing to take out their money quickly on such high rates. Even if they do, they will tend to delay this. This seems to be an obvious decision. Nevertheless, 30 days is not an alarming number. Sales to equity, has obviously increased and this is a good sign for anyone willing to invest in its shares.
FUTURE OUTLOOK OF ASSET MANAGEMENT
Since the interest rates are expected to go down, it is expected that they would get their receivables relatively quickly. With permit from Port Qasim, PITC will be the first dedicated terminal for coal, clinker and cement meaning an increase in volumes.
PICT is a highly leveraged company if one considers the nature of business. 62:38 Debt-to-equity ratios is being managed brilliantly. As mentioned before their strength is the fact that they have taken loan at LIBOR bench-mark and not KIBOR. This is the fact Times Interest earned ratio is 8.53 times. Their financial charges would have been almost double had the benchmark been KIBOR instead of LIBOR.
PICT took its fourth loan from International Finance Corporation that is about 244 million in FY08-09. Considering its payment would begin in the 2011, and other tranches of previous loans being repaid by 2015, their debt to equity ratio will not change. Hence, it seems it is a great buying opportunity in terms of shares because with huge leverage from a respectable lender, one is getting regular dividends.
FUTURE LOOK ON DEBT MANAGEMENT
It seems that the debt-equity of PICT will remain as it is for the next few years. However, long-term debt to equity ratio will slowly and gradually diminish, as the company would start paying off its loans back. The leverage attitude may earn them value if they switch their investment to TFCs which they would want to after they could easily buy/sell them through BATS on KSE. Getting a loan on about 8% and getting a yield of 12-14% is a very good opportunity the company is eyeing.
The collapse of capital markets was a systematic risk each company suffered during FY 08-09. However, looking at the company in a stand-alone perspective, we can say that PICT has performed exceptionally well and earnings per share increased by 53%. This is a landmark achievement in the given period. One must also see that they have employed the technique of Employee stock option. Since the employees are in-the-money, they are likely to exercise the options. This is the reason I have taken the diluted and not the basic amount.
FY08 FY07 change change
Revenue 3,134.06 2,186.06 948 43%
Gross Profit 1,325.60 808.07 517.53 64%
Finance Cost 2,003.69 1,794.93 208.76 12%
Operating Profit 1,185.61 699.61 486 69%
Profit before Tax 740.99 520.12 220.87 42%
Profit after Tax 529.26 331.19 198.07 60%
FINANCIAL RESULTS OF FY08-FY05
In FY08 (June 07-June08), the company has been successful in keeping up its growth and maintained an impressive growth in container volumes and revenue. The handling capacity increased to 472,137 TEUs from 345802 TEUs, a colossal growth of 37%. If we see the graph there has been a constant growth in TEUs and boxes every year owing to rapid technological advancement and managerial expertise. As the result of consistent efforts the company realized a net growth in revenue of 43% in FY08. In the current period FY08 the profit after tax has grown by a significant 60% as compared to FY07. At the same time it is important to notice that the financial costs also rose by 12% as the debt servicing cost increased due to leveraging of the company.
PICT has shown a praiseworthy trend in its current ratio till the year FY07. The Y-o-Y growth in liquidity signifies efficiency on part of the company to enhance its current asset position and pay off its liabilities. Since PICT acquired long-term loans to finance its development, this amount is adversely affecting the current ratio as a portion (Rs 366 million) of this long-term liability comes due. Even though the current ratio has fallen in this year but it is still in a safe zone as it hovers around 2.0 assuring the company's ability to meet its liabilities as they become due.
Since FY04 there has been a growing trend of liquidity which might imply that the company is not effectively utilizing its current assets and some funds are left idle thus increasing the opportunity cost. The dip in FY04 was in line with a greater than proportionate increase in the current liabilities of the company followed by a very large increase in the trade payables and other liabilities for financing the expansion in property, plant and equipment and Phase I project. After that, PICT has consistently improved upon its liquidity trend, increasing rapidly while simultaneously outpacing its competitors.
Unlike the falling trend in past few years the company managed show a growing profit trend in FY08 owing to rapid expansion of business. The gross profits soared up to 42%, which is commendable. If we observe closely the net profit did not show an increase proportional to gross profit, as there was a high financial cost of debt servicing. Profitability trend of PICT has generally weakened over the years except in FY05 when it took a rapid upturn. PICT posted a growth of 230% in its gross turnover, as a result of which profitability figures rose considerably. The increase in sales can be partly attributed to the increase in volumes and partly to the increase in tariffs in the same year after the commissioning of the new Gantry Cranes.
The rapid decline in the later years is because of the high base affect arising from higher than proportionate increase in sales revenue. Subsequently the profit margins declined in FY07 as well owing to the above-mentioned reason. ROA and ROE trends were more or less parallel to the trends of gross profit margins and net profit margins, following the same pattern on account of the aforementioned reasons. PICT has been able to enhance its profitability on account of increased sales backed by expansions. The central contribution in the improved performance was the significant reinvestment of the profits back into the business.
The ROA and ROE has been on a rise since most of the growth is financed through loans rather than equity. Leveraging is helpful as far as the profits are flowing in it can have remorseful effect if the profit stream is affected for any reason. The profit distribution has seen some changes at the discretion of the management. The profit share to employees, Karachi Port Trust, lenders and retained reserve has fallen significantly while the profit share of Government of Pakistan has increased from a mere 15% to almost 3times high 45% in FY08.
The changes in profit distribution could affect decisions of potential investors and shatter the confidence of existing shareholders. The owner ship comprised of various parties with Jahangir Siddiqui and Premier Mercantile Services having 19.52% and 34.31% of total ordinary shares while the redeemable preference shares with numerous lenders and financiers.
As mentioned before the development process had multiple phases, the financing of Phase I, Phase II and Phase III expansions have increased the debt ratios for PICT. The major chunk of debt came from International Finance Corporation (IFC); Rs 1.277 billion and the Opec Fund; Rs 877 million for International Development. Financial charges soared as a result, affecting the net income of the company. Part of the expansion was financed through raising ordinary shares through right issues and preference shares.
The financial charges increased substantially in FY05. This is due to the fact that until FY04 the borrowing costs related to the markup on US dollar loans for the Phase I expansion were being capitalized. During the FY05, the grace period of the loan expired and the company started the repayment of these loans. As a result, the company's operating profit rose considerably. During FY06 and FY07, the financial charges increased further due to the increase in markup on the foreign loans acquired for Phase II and increase in markup on the lease of Phase III assets.
As evident from the trends as depicted in the debt management graphs; debt to assets ratio, long-term debt to equity ratio as well as debt-equity ratios has increased over the years. The debt paying ability of the company, as a result witnessed a wavering trend in consequent of the fluctuating trend in the financial charges. Debt continues to be the major source of financing and at the same time a riskier mode posing the company to the interest rate risk as the SBP has followed a tight monetary policy stance for the sake of curbing inflation.
The book value of PICT is commendable. The company has increasingly reinvested the major part of the profits back into the company's expansion projects. Furthermore, the shareholder base also increased in FY04 to finance the expansions. This in turn increased the share capital for PICT. Increasing book value signifies increasingly high investors' confidence. EPS has also increased after falling in FY04 when the company increased its right shares and preference shares to finance its expansion. P/E multiple has posted an erratic trend nevertheless. There has been redeemable preference share issue which is helpful from the company's as well as ordinary shareholders point of view as they are going to reap the benefits in medium to long term.
PICT's utilization of assets is praiseworthy. The declining inventory turnover (days) signifies rapid turnover and conversion of stores and spares into sales. Furthermore, DSO ratio has also decreased over the years with the increase in cash sales, reflecting company's prudent policies to change its credit sales into cash sales as quickly as possible. Thus, the operating cycle for PICT has reduced considerably over the years and remains superior to the competitors. Sales/equity and TATO (total assets turnover) have also climbed up in continuously till year FY08. PICT raised its tariffs, positively affecting the company's sales revenue and thus improving asset management ratios.
The company experienced significant losses due to rupee devaluation thus pushing up its financial costs. There could have been growth in profits but the exchange rate effect nullified the profits growth. Besides that the company has equipped itself with the latest equipments to handle the larger vessels. Furthermore, PICT has planned to set up the latest scanning and radioactivity detection system. This will enable the company to employ the most modern methods of non-intensive custom examination by scanning the containers without opening them.
Also, with rapid expansion in container handling capacity, PICT is all set to face the forthcoming competition. Nevertheless, the threat of hike in LIBOR looms around the company, as all the long-term loans are foreign loans. Changing international scenario might have serious repercussions on the company's debt paying ability. While, PICT has generally performed well in all areas, a more concentrated effort towards improving the marketability of the shares will further augment its presence in the stock market.