Gas Company: SUI NORTHERN GAS PIPELINES LIMITED Analysis of Financial Statements Financial Year 2004- Financial Year 2009
OVERVIEW (November 12 2009): SNGPL is the largest integrated gas company in the country, involved in distribution and transmission of gas in the north of the country. SNGPL was incorporated as a private limited company in 1963. Later, in 1964, it converted into a public limited company.
It is listed on all three stock exchanges of the country. SNGPL's transmission system extends from Sui to Peshawar in NWFP. The company's distribution system comprises of 46,964-km of pipeline, spreading over 831 main towns and adjoining villages.
Name of company Sui Northern Gas Pipelines Ltd.
Nature of Business Gas Utility
Gas Sales FY '08 Rs 124,155,033,000
Gas Sales FY '09 Rs 168,933,831,000
Share price (avg.) Rs 32.10 per share
Market Capitalization 17,543,000,000
SNGPL has now expanded its operations to venture into the business of planning, designing and construction of pipelines, both for itself as well as for other organisations. The main fields supplying gas to SNGPL are Dhodak, Gurguri, Chanda, Pirkoh+Loti, Sui, Zamzama, Qadirpur, Sawan, Block 22 and Northern sources. The company kept its pace consistent throughout the year and provided record number of gas connections to industrial, commercial and domestic consumers, by expanding its distribution and transmission network up to 66,967-km in Punjab, NWFP and Azad Jammu and Kashmir.
(Rupees in Thousands) FY08 FY09 % change
Gas sales (MMCF) 597,913 584,895 -2.18%
Gas sales 123,404,537 160,714,737 30%
Net Gas sales 124,155,033 168,933,831 36%
Cost of gas sold 109,107,461 151,337,339 39%
Gross Profit 15,047,572 17,596,492 17%
Rental & service income 916,351 990,101 8%
Operating expenses 14,134,052 19,710,034 28%
Other operating income 1,446,568 1,210,008 -16%
Operating profit 4,770,056 2,383,422 -50%
Finance cost 789,247 653,182 -17%
Profit before taxation 3,981,231 1,730,240 -57%
Taxation 1,484,541 799,704 -46%
Profit after taxation 2,496,690 930,536 -63%
EPS 4.55 1.69 -63%
SNGPL was able to expand its distribution network by over 7497-km and transmission network by 332-km. A record addition to operating fixed assets of over Rs 24 billion was also made during the year. The gas sales amounted to Rs 161 billion in FY09 (FY08: Rs 123 billion), depicting an increase of 30%. The volume of gas sales has declined by 2.18%, which shows that per unit of sales price has increased. The net sales were also higher at Rs 169 billion (FY08: Rs 124 billion), representing an increase of 36%. In FY08 Rs 0.75 billion were added as the gas development surcharge where as in FY09, Rs 8 billion were added as differential margin.
The cost of gas sold has also increased by 39% during the fiscal year. This was mainly due to disallowance of unaccounted for gas (UFG) losses, which increased from Rs 3,281 million in FY08 to Rs 6,283 million in FY09. These deductions resulted in reduction of EPS by Rs 7.44. Also the increase in disallowance is high because the benchmark of UFG is set much lower at 3.74% compared to 17.5% of last year. The gross profit showed a respectable increase of 17% and amounted to Rs 17.5 billion (FY08: Rs 15 billion). The rental and service income grew by 8% during 2009. The operating expenses cumulatively grew by 28%. The main contributor was the other operating expenses that had increased by 211%, in which exchange losses of the amount Rs 2.8 billion (FY08: Rs 0.62 billion) was the major cause.
The distribution cost and administrative expenses had increased by 27% and 25% respectively. Other operating income declined by 16%. Hence operating profit showed the consequent decline of 50% and amounted to Rs 2.4 billion in FY09 (FY08: Rs 4.8 billion). These figures clearly show that the reason for plunge in the SNGPL performance for the period under consideration is mainly due to shortcomings in operations. The operational costs were higher and operating income was lower. The finance cost exhibited a 17% decline and hence brought a minor relief. Profit after taxation thus stands at Rs 931 million (FY08: Rs 2.5 billion), representing 63% decline. The EPS has also plunged down from Rs 4.55 per share in FY08 to Rs 1.69 per share in FY09.
Profitability SNGPL Industry Average
ROA 0.76% 0.51%
ROE 5.76% 4.21%
Net profit to sales 0.58% 0.4%
Gross Profit Ratio 10.95% 7.91%
Debt Management SNGPL Industry Average
Debt to equity 3.33 6.36
TIE 3.65 2.23
Liquidity SNGPL Industry Average
Current ratio 0.82 0.92
Quick ratio 0.77 0.87
Efficiency SNGPL Industry Average
Operating Cycle 60 84
Inventory turnover 205.16 129.62
Total asset turnover 1.31 1.26
Fixed asset turnover 2.03 2.56
Investment SSNGPL Industry Average
EPS 1.69 1.04
Market Value per share 32.1 24.4
P/ E ratio 18.99 31.43
Cash Dividend 3.48 2.36
The figures and ratios of SNGPL compare favourably to the industry average.
COMPARISON OF BALANCE SHEET ITEMS: compared to the industry average, long-term liabilities are 26% higher, total equity is 24.86% higher, total liabilities are 77.8% higher; current assets are 19% lower.
COMPARISON OF INCOME STATEMENT ITEMS: compared to the industry average, gas sales are 15.1% higher, net sales are 21.9% higher, gross profit is 50.7% higher, operating profit is 40.2% higher, profit after taxation is 56.7% higher and finance cost is 288% lower.
PROFITABILITY RATIOS: All the ratios are greater than the industry average indicating good profitability of SNGPL than its competitor SSGC. The ROE ratio had fell considerably to 5.76% but still higher than the industry average; gross profit ratio has also decreased to 10.95%. This is primarily due to the turbulent year FY09 for all sectors due to the rising gas cost and increase in expenses.
DEBT MANAGEMENT RATIO: Debt to equity ratio of 3.33 is almost half as compared to the industry average of 6.36. This shows that the company can comfortably seek leverage for financing needs in the future. However, the TIE ratio of 3.65 is slightly greater than the industry average of 2.23.
LIQUIDITY: The liquidity ratios - current ratio 0.82 and quick ratio 0.77 are both lower than the industry of 0.92 and 0.87 respectively. This is because although the total current assets increased by 24%, the total current liabilities increased by around 78%. The liquidity has slightly worsened compared to the industry.
EFFICIENCY: The operating cycle takes 60 days against the industry average of 84 days. Consequently the turnover ratios are higher than the industry average. This shows that the company has an efficient working capital cycle. The cash is not tied up for long and is collected in a reasonable period. Hence firm will not face liquidity problems as significant as its competitor.
INVESTMENT: Compared to the industry average the company has a higher EPS of Rs 1.69/share as against Rs 1.04/share, market value of Rs 32.10/share as against Rs 24.4/share and offers a dividend of Rs 3.48/share as against Rs 2.36/share. The P/E ratio is 18.99 as against 31.43, which shows that the stock is undervalued. Its market price has potential to increase in the future.
PROFITABILITY: The gas sales amounted to Rs 161 billion in FY09 and have increased by 30.23% on a y-o-y basis due to the expansion of the distribution and transmission network. The company posted net sales turnover of Rs 169 billion - an increase of 36.07% on y-o-y basis. The gas development surcharge was Rs 8.2 billion in FY09 as against Rs 0.75 billion in FY08. The cost of gas sold amounted to Rs 151 billion showing an increase of 38.7% on a y-o-y basis. The gross profit was consequently Rs 17.6 billion and showed growth of 17%. The operating expenses have increased from Rs 13 billion in FY08 to Rs 17 billion in FY09 - an increase of 27%.
Distribution cost makes up the largest chunk of operating expenses. In FY09 distribution cost made up 89.7% of operating expenses. Other operating expenses have increased drastically from Rs 957 million in FY08 to Rs 3 billion in FY09 - an increase of 211%. Other operating income has declined from Rs 1.44 billion in FY08 to Rs 1.21 billion in FY09. Consequently the operating profit has declined from Rs 4.8 billion to Rs 2.4 billion - a decline of 50%. Finance cost has declined by 17% on a y-o-y basis. Profit before taxation stands at Rs 1.7 billion depicting a decline of 56.5% on a y-o-y basis while profit after taxation amounted to Rs 931 million which has shown a decline of 62.7% on a y-o-y basis.
The profitability ratios have declined on the whole. The return on equity has dropped from an all time high of 26.59 in FY06 to 5.76 in FY09. The low ROE in FY09 can be attributed to a massive decline in PAT, ie 62.7% despite a 6% decrease in equity. Despite the increase in sales, the gross profit margin shows has declined from 12.19 in FY08 to 10.95 in FY09 due to rise in the cost of gas. The EBITDA margin has progressively declined from 12.39 in FY04 to 1.59 in FY09. The ROA has declined from 2.56 in FY08 to 0.76 in FY09. The net profit margin has dropped from 2.02 in FY08 to 0.58 in FY09.
The graph shows that liquidity position of SNGPL was rather stable, between FY05 till FY08, but worsened significantly in FY09. The liquidity ratios of the firm have declined, illustrating that the firm may experience problems in financing its short-term obligations given that the net income for the period has also declined. SNGPL is experiencing liquidity risks due to an increase in debtors; increase in dollar value and due to a shortage of funds.
The current ratio has decreased from 1.19 in FY08 to 0.82 in FY09. The current liabilities have increased by 78% while the current assets have increased by 24%. The quick ratio of the firm has declined from 1.09 in FY08 to 0.77 in FY09. The quick assets have increased by 23.36% compared to increase in current liabilities by 78%. The driver of growth in current liabilities was trade and other payables registering an increase of 82% in FY09. To improve liquidity the firm must improve its credit management. The receivables have increased over the time but the firm's payables have increased at a greater rate causing the liquidity trend to decline drastically. The inventory of stock in trade has seen a nominal rise of 49% when seen in absolute terms compared to other assets. Therefore there is not a vast difference between current and quick ratios.
The sales to equity ratio shows a healthy optimistic trend that has gradually inclined. In the fiscal year under consideration this ratio has seen a slight drop from 7.2 in FY08 to 9.95 in FY09. This can be attributed to the rising gas sales. Gas is a product with inelastic demand. In the given period gas prices have seen hikes. Therefore the increase is likely to be the result of gas prices rather than the gas volumes. Fixed asset turnover has increased due to an increase in gas sales by 30.23% that more than offset the increase in fixed assets by 26%. The total asset turnover has recovered slightly as it increased from 1.26 to 1.31.
The assets have increased by 25.3% while the gas sales have increased by 30%. This signals that company's asset management has improved compared to last year. The analysis of operating cycle gives a clearer idea of the asset management situation. It is clear that the operating cycle became smaller and then increased. The cash management of the company has improved. In FY04 it took 53 days to convert inventory to accounts receivables to cash but it takes 58 days of operating cycle in FY09. The DSO makes up a larger portion of the operating cycle than the inventory turnover period, which has been constant for the past six years now at two days.
As the gas is a product with inelastic demand, the inventory of gas is likely to sell quickly. However, a large portion of the gas sales, is usually purchased by the industrial consumers and the gas stations on credit. The cash recovery takes a long time. There is more potential for the operating cycle to improve.
The TIE ratio has showed an impressive incline over the past few years till FY08, showing a healthy increase in the operating profit of the company. However, in FY09 the TIE suddenly fell down to 3.65. This was due to the significant 50% decline in EBIT (ie operating profit). The debt to equity ratio, after having declined, picked up since FY07 and now stands at 3.33 in FY09. This means that the company's debt is increasing continuously with respect to its equity. Hence its ownership is diluting as very small assets are provided for equity financing. The debt to asset ratio has remained somewhat constant due to same proportional increases in the amounts of debt and assets.
MARKET VALUE RATIOS
The earnings per share of the company have declined from 4.55 in FY08 to 1.69 in FY09. The market value per share has followed an inverted U-shaped trend with high price per share of Rs 100 in FY06 as against price per share of Rs 32.10 in FY09. The price to earnings ratio has decreased from 9.58 in FY08 to 18.99 in FY09. This is primarily due to an overpowering 63% decline in EPS compared to a 26% decline in prices on a y-o-y basis. The recovery in P/E ratio means that the investors do have restored expectations about the future performance of the stock. This is a sign of recovery in the stock exchange.
Despite decline in net income the company paid higher dividends this year amounting to Rs 3.48/share. The investors are earning a good return on investment. This is also evident in the dividend yield ratio, which has increased from 6.08 in FY08 to 10.8 in FY09. The dividend payout ratio has declined from 1.30 in FY08 to 2.06 in FY09.
The future of gas demand and supply conditions in Pakistan remains uncertain. There is considerable confusion, whether gas supply to CNG stations would be curtailed during the 3 months of winter or not. There is a chance that the industrial sector might suffer from gas shortage due to increased demand for natural gas in households during winters. Gas prices are even expected to go up that could increase the demand for the already expensive oil. This seems to be a loss-loss scenario for the government as well.
The gas demand has been increased due to seasonal demand, transportation use and for electricity generation purposes as hydel power generation has been shut down for maintenance. Moreover, the IPI gas pipeline project is not yet finalized due to disputes on deciding tariff between the three member countries. This has put pressure on the existing gas supplies in the country. In Northern areas people are facing gas shortage. The most current project is Project IX (2006-2009) which is being undertaken to absorb additional gas supply from newly discovered gas fields. Currently the execution of the final segment of Project IX is underway and will be completed by end of 2009.
Since SNGPL is an internationally respected pipeline laying entity, the Company has undertaken contracts commissioned by various other organisations in Pakistan and bids for tenders on an international level. Most significantly, the company has submitted a technical bid to the Algerian national oil and gas company SONATRACH for construction of a 502-km long pipeline. SNGPL has planned various projects including Mobile Customer Service Units to enhance the availability of face-to-face service in remote areas. These Units will be out-fitted with new technologies for efficient problem solving and billing procedures.
During FY08-09, 1229-km transmission and distribution lines were commissioned providing gas facility to various localities in Punjab, NWFP and several industrial units. Projects that are near completion include P-IX pipeline project, installation of gas systems for Independent Power Producers (IPPs), and construction of a 41-km transmission pipeline for gas supply to Bhakkar and 40-km loop line for enhancing system capacity in NWFP. Laying of supply mains under Annual Distribution Development Programme FY08-09 for various localities/villages in Punjab and NWFP are also in progress. In order to supply natural gas to Narowal, 28-km pipeline is being laid. These pipelines have 8-inch diameters.
SNGPL, as a contractor, is carrying out construction of 38km (20 inch diameter) line for Engro Fertilizers plant in Sindh, which would be one of the biggest plants of its kind in the world. Construction of 52km gas gathering network in assorted diameters and laying of 104km Fibre Optic cable for M/s MOL Pakistan (Hungarian Company) is also in progress in Karak area for the Manzalai Gas Well gathering system. Construction of 12-km (28-inch diameter) water line for Fatima Fertilizers is being carried out by the Company on contract basis.