Shipping Company: PAKISTAN NATIONAL SHIPPING CORPORATION - Analysis of Financial Statements Financial Year 2003-June 2008

Pakistan National Shipping Corporation and its subsidiary companies were incorporated under the provision of Pakistan National Shipping Corporation Ordinance, 1979 and the Companies Ordinance, 1984 respectively.
The board of directors consists five directors appointed by Federal Government and two directors appointed by the shareholders. The group is principally engaged in the business of shipping, including charter of vessels, transportation of cargo, and other related services.
The group is also engaged in renting out its properties under long-term lease agreements. Its registered office is situated in PNSC Building Moulvi Tamizuddin Khan Road, Karachi. Pakistan National Shipping Corporation (PNSC) is an autonomous corporation, which functions under the overall control of the Ministry of Ports and Shipping, Government of Pakistan. It manages a fleet of 14 ships (consisting of bulk carriers, oil tankers, and combi-vessels), real estate, and a repair workshop. The group consists of a holding company: Pakistan National Shipping Corporation and subsidiary companies:
Bolan Shipping (Private) Limited
Chitral Shipping (Private) Limited
Hyderabad Shipping (Private) Limited
Islamabad Shipping (Private) Limited
Khairpur Shipping (Private) Limited
Johar Shipping (Private) Limited
Lalazar Shipping (Private) Limited
Makran Shipping (Private) Limited
Malakand Shipping (Private) Limited
Multan Shipping (Private) Limited
Sargodha Shipping (Private) Limited
Sibi Shipping (Private) Limited
Swat Shipping (Private) Limited
Kaghan Shipping (Private) Limited
Pakistan Co-operative Ship Stores (Private) Limited
Lahore Shipping (Private) Limited [Formerly Pak Nippon Car Liner (Private) Limited]
Karachi Shipping (Private) Limited [Formerly National Tanker Company (Private) Limited]
Quetta Shipping (Private) Limited
RECENT RESULTS 3Q09
The consolidated revenues of the group for the quarter ended March 31, 2009 were Rs 2,736 million (including Rs 737 million from PNSC), making a total of Rs 9,503 million (including Rs 2,841 million from PNSC) for the nine months under review as against Rs 7,471 million for the corresponding period last year showing an increase of 27.1%. Main contributor to the increase was the chartering revenue, which showed an increase of 41.5%. Gross profit for the nine months to 31 March 2009 was Rs 2,448 million showing an increase of 26%.
PAT was Rs 1.94 billion, an increase of 28% as compared to 9M'08. Fleet expenses swelled by 27%, while the administrative and operating expenses increased nominally in line with inflationary pressures. Financial costs however went down by 62%, on account of lower liabilities due to paying off of long term liabilities. The earnings per share for the 9 months period ended March 31, 2009 was Rs 14.69 as against Rs 11.46 for the corresponding period last year. During the quarter ended 31 March 2009, three dry cargo combi vessels, and one oil tanker were sold for scrapping as they had completed their useful lives. This was a much-needed move in times of trimmed tariffs and downturn in global trading activity.

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                           2007-2008     2006-2007     2005-2006

SECTOR                       FREIGHT       FREIGHT       FREIGHT

                                TONS          TONS          TONS

                             MILLION       MILLION       MILLION

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Liquid                         7.561         7.677         8.185

Dry BuJk                       0.959         0.343         0.261

Trade Mea - East              0.3 98         0.470         0.493

Trade Area-West                0.533         0.470         0.470

Total                          9.451         8.960         9.409

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FINANCIAL PERFORMANCE
The consolidated revenue of the group for the year ended June 2008 was 18% higher to Rs 10.753 billion from Rs 9.089 billion (FY07). This revenue consisted of chartering, freight, and rental income. Although the major chunk of the revenue is contributed by freight which actually shrunk this year by 11% but chartering saw a major growth of about 97% (Y-o-Y). Similarly, rental income also reduced significantly this year. The whole revenue picture is somewhat fair due to growth in chartering which overshadowed the other growth losses.
The total expenditures for the year grew by only 12% showing a growth in profits. The break-up shows direct and indirect expenditures grew by 12% and 15% respectively, which is quite less for an organization working in an economy with high inflation rates and uncertainty. Gross profits rose by a remarkable 34% from Rs 2,593 million to Rs 3,476 million owing to growth in revenues unmatched by growth in expenses. Notes to financial statements reveal that administrative expenses have actually fallen by 5% owing to zero "brokerage fee for disposal of the vessels" this year.
The financial costs swelled up by 125% as the credit facility costs increased in this period. For the holding company bank charges for arrangements and commitments were also high on behalf of the Quetta Shipping (Private) Limited, Karachi Shipping (Private) Limited and Lahore Shipping (Private) Limited in respect of credit facility for purchase of vessels. However, during the year, the credit facility has been expired and was not renewed for further period, therefore, in coming years it is not taking toll on company's profitability.
During the year MT Shalamar was sold as it had completed its useful operational life. Two fire incidences in PNSC Building took place on February 18 and August 19, 2007. However, there was no interruption in PNSC's worldwide operations, which continued uninterrupted. During the year under review, PNSC and its vessel-owning subsidiary companies together performed a total of 669 voyages (inclusive of foreign chartered vessels and slot chartered vessels) and lifted 9.486 million freight tons of cargo as compared to 671 voyages and 8.961 million freight tons of cargo respectively in the previous year.
In the year under review, the current assets fell by 4% to an amount of Rs 7.848 billion. The major decreases were seen in advances (-23% as compared to FY07), accrued interest payments (-23% compared to FY07) and short-term investments (-48% compared to FY07). On the other hand the insurance claims were also pending and mounted to 7times to those of FY07. The short-term investments were earning around 9.5% to 11.75% even then we see that there has been drastic decrease in it.
One likely reason could be that the company was in need of cash funds as it had to hold some security money for the guarantees issued on behalf of the group provided by banks. This draws our attention to the huge amounts of cash which are being held by the company, though it had added to liquidity of the firm but the idle cash reserves have its opportunity too, as a larger chunk of cash is not deposited into savings accounts.
With the rising current assets and declining current liabilities, PNSC has been able to gradually improve upon its current ratio trend as indicated by the liquidity graph. PNSC has gradually paid off its trade payables and other liabilities and is now sufficiently liquid enough to post a high current ratio trend. High amount of liquidity increase creditors confidence in the company but it has exceeded the requirement and can lower profits from non-operational activities too. The increasing trend since FY05 onwards, continued till the year 2007 but fell in 2008, even then it's very high and alarming. Extremely high liquidity is not at all indicative of higher efficiency.

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Debt Management

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                                 FY'03   FY'04    FY'05    FY'06    FY'07   FY'08

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Debt to Asset (%)               78.24    82.70    57.95    31.03    12.90    8.90

Long Term Debt to Equity (%)   160.69   112.75    78.87    34.85     4.11    1.01

Debt/Equity (Times)              2.18     1.84     1.39     0.58     0.14    0.10

Times Interest Earned (Times)    8.25     5.67     7.23    15.07    37.82   20.93

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Higher sales extremely high liquidity position, and better financial performance, PNSC has enabled the company to reduce its reliance on debt. Better means of financing with lower associated costs are now being used by the company. As evident from the declining trend in long-term to equity and debt to equity ratios, PNSC has now diverted its focus towards increasing its shareholder base to raise cash.
Thus, property, plant and equipments are now financed by issuing additional shares, rather than by taking loans. PNSC, however, does not enjoy a high leverage but on the contrary does not face interest rate risk. Since the company has been availing a credit facility which pumped up its financial costs, the Times Interest Earned has fallen drastically from 37.82 to 20 implying that the debt servicing ability has reduced but still its satisfactory.

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PROFITABILITY

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                          FY'O3    FY'04    FY'05    FY'06    FY'07    FY'08

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Gross Profit Margin       28.34    31.05    35.89    21.07    28.53    32.33

Net Profit Margin         12.86    59.72   115.71    15.62    25.71    22.77

Return on Asset            9.17    21.91    18.62     9.10    14.26    10.88

Return on Common Equity   25.50    48.65    44.77    16.94    15.69    11.83

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Since a profitability dip in 2006, the company is continuously improving and till FY08 the company managed a gross profit around 32% and net profit around 22%. It is primitive to notice that in FY08, net profit has not been as high as the gross profit, reasoning being the high financial costs, which are already discussed earlier. During FY06, profitability of PNSC has declined mainly on account of high expenditures. Despite the fact that the sales revenue soared tremendously over the years, the top line as well as the bottom line of the company remained depressed. The main contributing factors were higher fuel charges and higher insurance costs due to revaluation of assets.
Moreover, the full year effect of depreciation on the revalued assets also contributed towards increase in costs. These three costs accounted for 43% of the total revenues as against 21.6% for FY04-05. FY05 was far more commendable for the company as net profit margins soared in consequent of increased demand for both dry and liquid cargo and consequent higher freight charges. Gross profit margin also increased on the same grounds. The company has also recovered from its lower profit margins that it incurred in FY06, increasing in FY07 on account of higher sales, lower expenses and relatively efficient operations. Healthy contribution in respect of freight revenues from both Combi Vessels and Oil Tankers also added to the net profit of the company.
The return on assets (ROA) and return on equity (ROE) fell in FY08 for the reason the company's assets were revalued upwards, including plant, property and equipment which was high enough to supercede the growth of net income and show a falling trend in ROA and ROE, thus, the performance has been substantially good, not to be seen as a factor for lower ROA and ROE. Return on Assets and Return on Equity declined a little in FY06 owing to higher total assets and equity respectively, recovering marginally in FY07. Equity increased as a result of increase in share capital and retained earnings. Expansion in the cargo lifting facility as planned by the management is likely to boost the company's financial position further.

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ASSET MANAGEMENT

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                            FY'03    FY'04    FY'05    FY'06    FY'07    FY'08

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Inventory Turnover (Days)    1.48     1.85     2.65     4.65    17.60    15.92

Total Assets Turnover        0.71     0.37     0.16     0.58     0.55     0.48

Sales/Equity                 1.98     0.81     0.39     1.08     0.61     0.52

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Generally, the total asset turnover and sales-to-equity has been more or less the same. One important peculiar trend is seen inventory turnover soared from a mere 4.65 times to over 17 and 15 times in FY07 and FY08 respectively. The observable reason for this unnatural change is due to very high inventory being kept since FY07 which was almost 400% than those maintained in FY06 which is an apparent trend seen since FY05 which might be done in order to meet certain operations needs. The asset management ability of PNSC registered a tremendous improvement in FY07 mainly on account of better inventory position backed by higher demand and improvement in cargo lifting facility as well lower expenses.
As evident from the graph, the inventory turnover (days) has been increasing rapidly. Practically, this is not a good sign for the company as the sales are not increasing by the same proportion as the stores and spares are. This means that PNSC lags behind in some areas of asset management. On the other hand, Total Assets Turnover (TATO) has also increased which proves better utilization of fixed assets including property plant and equipment. TATO witnessed a sharp decline in FY05 due to more than proportionate increase in the total assets of the company brought about by a change in long term investments in related parties, subsidiary companies, associates and listed companies. Once these investments start pouring in returns, the financial position will further strengthen for PNSC as has been in FY06.
Sales/equity ratio, signifying efficiency in using equity, also increased marginally after falling in FY05 owing to steep downward trend in sales revenue and high equity composition in FY05. It declined in FY07 however, as a result of higher equity as more reliance is now placed on equity financing and much of the retained earnings are ploughed back for further expansion. In general, PNSC has significantly improved upon its asset management ability. PNSC does not have a praiseworthy historical trend of its market value ratios.
The dividend given to shareholders is not comparative to that given in financial markets so that restricts the demand for shares and might lead to problems if the company is willing to raise capital from the market. Another source of earning for the stockholders is the capital gains from trading but even on this front there is not any commendable progress. And in the current scenario the markets are totally locked down thus adversely affecting the investor confidence. Much of the marketability has improved in FY07. Higher expenditure in terms of cost of production and financial expenses has taken its toll and affected the marketability of the company as much as they affected the profitability. The decline in EPS in FY06 can be explained on the basis of two components. First, the net income of the company declined in FY06 as explained earlier and secondly, shareholder base increased thus decreasing the per share earnings.
In FY07, better profitability reflected positively on the per share ratios, as evident from the graph. As against the EPS trend, DPS has remained historically low and PNSC has no outstanding dividend payout as such. Much of the earnings are retained and used for expansionary purposes. Only recently the company increased it is per share dividends only marginally, that might reflect investors' confidence in the forthcoming years. Book value in absolute terms has posted a YoY growth. It declined only recently as the number of shares outstanding increased by 10% but recovered in FY07, which can be attributed to higher reserves. Throughout the EPS has been hovering somewhere near 5.0 so it shows that it never worked as in incentive for potential buyers.
FUTURE OUTLOOK
Although dry cargo rates have been consistently firm, bunker prices continue to increase worldwide, putting pressure on the profit margin. The firm is planning to add two AFRAMAX oil tankers in coming year to replace its aging fleet and also two new dry combi vessels. The proposed induction plan of adding vessels to its fleet is being pursued, and this will add to capacity building of the company.
PNSC needs to acquire new vessels till 2010 as per International Maritime Organisation (IMO) rule as all single-hulled ships will have to stop sailing by 2010, which may leave the industry short of tankers. However, it is also expected due to the shortage of tankers IMO might give another two-year relaxation. But in the wake of scrapping of vessels, PNSC needs to acquire new vessels for its fleet as its stock is already depleted. Also depressed tariff rates will lead to somewhat flattish results for the year FY09.
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].
Copyright Business Recorder, 2009