SNGP – 4Q drag earnings

Delay in announcing their financial result is common practice of gas utilities as they usually face a delay in finalizing revenue requirement by the regulator. Sui Northern Gas Pipelines Limited (PSX: SNGP) has recently announced its financial performance for fiscal year 2019. Where the gas utility saw its earnings increase by 29 percent in FY18, profits for FY19 slipped by 36 percent year-on-year.

Growth in earnings in the first three quarters of FY19 was followed by a weaker 4QFY19, which dragged the overall profits for the utility. Key growth driver in all quarters were higher gas sales. During FY19, SNGP’s gas sales witnessed growth of 53 percent year on year primarily due to increase in natural gas tariff in FY19, growth in RLNG volumes by around 25 percent as well as positive impact on RNLG prices from higher oil prices and currency depreciation in FY19. The impact on gas sales was counter balanced somewhat by a decline in domestic gas volumes sold. Though gross profit improved by 33 percent, margins were seen sliding due to higher base.

SNGP incurred expected credit loss of Rs1.5 billion – one-off in FY19, but the operating profits still grew by 41 percent. According to a research note by Arif Habib Limited, the growth in operating profits came from the company recognizing an expected Rs18 billion in allowable Late Payment Surcharge (LPS) – in the absence of which the company would have incurred massive losses due to significant UFG losses and lower than expected addition in gross assets.

Besides higher UGF losses and the credit loss, what also impacted SNGP’s bottomline was the growth seen in finance cost (139 percent YoY) due to high borrowing due to circular debt. Higher UFG losses and the expected credit loss led to loss in 4QFY19. Overall earnings of the company saw a decline of 36 percent year-on-year. SNGP announced final cash dividend of Rs2 per share for FY19, in addition to interim cash dividend already paid at Rs1.50 per share for the first quarter of FY19.