SNGPL profits down, while horizon still cloudy

Pakistans largest gas distribution company SNGPL posted a dismal performance in FY09 with 63 percent drop in earnings despite higher sales and increased asset base. The decade old irritant, losses on account of UFG, coupled with huge exchange losses led to this abysmal performance much to the disappointment of shareholders in terms of dividend announcement.
Gas sales, which slid 4 percent on year-on-year basis in 9MFY09, are likely to have remained lower in the last quarter as well - nearing 580 mmcf for FY09. Sales revenue, however, shored up owing to 35 percent rise in consumer gas tariffs during FY09 - more than making up for reduced volumetric sales.
Topline growth was clipped by losses on account of UFG that spurred to 8.5 percent as against OGRAs allowance of 5.5 percent as the upper limit. Although, detailed accounts haven been released yet, the firm is expected to have incurred UFG losses in excess of Rs 5 billion considering that nine-month numbers were touching Rs 4 billion. The Rs 3.1 billion increase stems mainly from the hike in weighted average cost of gas (WACOG), which rose 32 percent in fiscal year 2009.
The firms net earnings were hit further by exchange losses incurred on gas purchases as evident from staggering 3 times increase in other expenses - 40 percent of which was booked in the last quarter. Another dent to the bottom line was caused by reduction in other income mainly triggered by decline in bank deposits. Financial charges, however, provided a breather to net earnings, owing to prior payments and less reliance on long-term financing due to the nature of return formula.
It should be of significant mention that SGNPL, according to World Bank provisions is required to earn a return of 17.5 percent on average fixed operating assets, net of deferred credits. Having its profitability linked to assets, the firm is encouraged to make long-term investments on network expansions but seldom has the purpose been entirely served. Despite investing almost Rs 18 billion in fixed assets, the company has managed a return of just 8 percent as high UFG losses and deferred credit reduced its asset base.
Going forward, UFG losses remain a major concern for SNGPLs profitability as none of the efforts in this regard have borne fruits yet. However, WACOG is expected to be considerably lower in the first half of FY10 which would provide a much needed relief to SNGP as any change in WACOG directly impacts the bottom line.
This said - another year of low profitability is looming for SNGPL as OGRA has restricted the firms addition of fixed assets in FY10 to Rs 11.4 billion against the requested amount of Rs 18.5 billion. Making matters worse, the firm will have to arrange short-term financing for working capital requirements as deferred credit new mechanism is expected to create liquidity shortage. This is also likely to deprive the firm from interest income on cash deposits which historically has been a significant contributor to net earnings.

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SNGP P&L

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RS (MN)                          FY09        FY08     % CHG

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Sales                         168,934     124,155       36%

Cost of sales                 151,337     109,107       39%

Gross profits                  17,696      15,048       17%

Gross margins                      10%         12%     -14%

Distribution & Admin cost      16,735      13,177       27%

Other income                    1,210       1,447      -16%

Finance cost                      653         789      -17%

Other expenses                  2,975         957      211%

PAT                               931       2,497      -63%

EPS (Rs)                         1.69        4.55      -53%

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Source: Company results
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