Huge capital expenditure with innovative marketing will continue to
provide edge over rivals in the near future
By SHABBIR H. KAZMI
Sep 20 - 27, 1999
Earnings Data (Rs in million)
Before tax profit
After Tax Profit
Shell Pakistan, the second biggest oil marketing company
in the country, has announced a robust earning growth of 49 per cent for the year ending
June 30, 1999. The Company has posted Rs 881 million after tax profit for the year as
compared to Rs 592 million for the previous year. The earning per share comes to Rs 25 per
share. The Company also announced Rs. 8.5 in cash dividend (final) per share. It had
previously paid interim dividend of Rs 4 per share. The total dividend paid to
shareholders during the year comes to Rs 12.5 per share (125 per cent) .
Petroleum price increases provided the Company a higher rupee margin
and substantial one-time inventory gains. Moreover, aggressive marketing has increased its
share especially in the high-margin lubricants products. Considering government's huge
reliance on development surcharge, a further surge in the prices of petroleum products
will definitely increase the profit of oil marketing companies.
All these factors are reflected in its financial results for the year
ending June 30, 1999. Earnings were primarily driven by an 18 per cent increase in gross
sales which rose to Rs 49.89 billion. Two reasons appear to have had grounds for this
notable growth. First, the year witnessed two oil price increases of 25 per cent in July
1998 and 15.8 per cent increase in May this year. Second, rising overall sales volumes of
deregulated products, lubricants segment depicts the highest growth of 8 per cent on year
to year basis. Net sales, however, demonstrated a decline of 9.6 per cent owing to a
constant increase in duties, taxes and levies on petroleum products.
Overall profitability of the Company received boost from a drop in
financial charges and rising other income. Financial charges dropped by 63 per cent as
capital expenditures were funded mainly through the proceeds of the rights issue. Other
income contributed 18 per cent to the profit before tax showing a significant year
to year increase of 50 per cent.
The analysts forecast Rs 118 million profit after tax for the year
ending June 30, 2000. An upward margin revision in the deregulated segment appear
improbable as development surcharge collection for the GoP are already under stain due to
the GST imposition and surging international oil prices. Keeping this scenario in mind
coupled with sluggish demand the analysts feel a POL product price increase will be
pivotal in attaining the predicted profit after tax growth. And that increase, provided
current international oil prices, should materialize in coming months.
It is indicated from the results that the share of duties, taxes and
levies in the total sales has increased from 41.52 per cent in 1998 to nearly 54.20 per
cent in 1999. This indicates a possible reduction in sales of POL products whose prices
are regulated by the government. The analysts fear that constant increase in prices of
petroleum products may adversely affect the sales of the Company. However, it is the
higher profit margin on lubricants that will continue to help oil marketing companies in
posting higher profit.
The results, posted by Shell, seem to vindicate earlier apprehensions
that the Company has slowed down its capital expenditure plan in Pakistan. However, the
lower financial charges, which dropped by 63 per cent, clearly indicates healthy cash flow
situation and the ability of the Company to meet these expenditures from internal cash
generation rather than depending on outside sources.
The analysts say that if their forecast remains unchanged at this
stage, the shares of the Company are still trading at 14 per cent discount to their
estimated price of Rs 230. While such a discount would warrant accumulation, these
analysts suggest accumulation around the Rs 200 level given tight liquidity in the capital
Pakistan State Oil Company (PSO) is also expected to post similar
results. However, it still suffers from huge receivables from state-owned utilities. PSO
enjoys a larger market share due to more elaborate network of outlets. The argument for a
quasi currency hedge existing for the oil marketing companies is still intact, more so
when international prices of crude oil are expected to remain firm.