SSGC FURTHER DIVESTMENT

Shareholders expected to gain due to ambitious capital expenditure programme

By SHABBIR H. KAZMI
Jan 19 - 25, 2004

The Cabinet Committee on Privatization has approved the divestment of part of government holding in Sui Southern Gas Company Limited (SSGC) by divesting 5% of its holding with a green-shoe option of an equal amount. The public offer will be made shortly at Rs 26/share but no date has been fixed for the public offer. The proposed divestment is expected to have a positive impact on equities market with the increase in market float of the scrip. SSGC will be a good addition to investors' portfolio as it increases their exposure to the growing downstream gas sector of Pakistan.

The Government of Pakistan directly holds around 70% shares of SSGC. Whereas its total holding, including holdings through institutions is estimated as high as 93 per cent. According to Murad Ansari of KASB Securities the inadequate stock liquidity has been one of the key issues hampering active trading in SSGC's shares. The 5-10% planned divestment by the government is likely to give a boost to the liquidity in SSGC's share, which is likely to bring it among the top traded stocks at the KSE. The increased stock liquidity will also help in containing erratic movements in the share price.

SSGC'S SHAREHOLDING PATTERN (AS OF 30 JUNE 2003)

Government of Pakistan

70.43%

National Bank of Pakistan Trustee Department

8.38%

Banks and DFIs

10.62%

Investment Corporation of Pakistan

1.00%

Individuals

4.77%

Others

4.88%

There was a lot of loud talk regarding the offer price for public offer. The overwhelming consensus was that it would be fixed around Rs 25 per share. However, movement of its share price in the recent past played a key role and Privatization Commission fixed the offer price at Rs 26/share. It was not unique because earlier the Commission adopted this policy at the time of recent offer of shares of National Bank of Pakistan (NBP). The Commission had fixed the offer price of NBP share at a slight discount to the one-month average price quoted at the stock exchanges.

SSGC constitutes an indispensable component of any long-term portfolio. The company, which gets a fixed return on operating assets has recently embarked upon an ambitious capital expenditure programme that is expected to further improve its profit. The company is also expected to benefit from improved relationship with India due to realization of gas pipeline project.

According to a report from AKD Securities the GIERP II plan amounting to Rs 35 billion is spread over 2004-08. The plan envisages revamping and expanding transmission and distribution network to improve capacity for handling additional load of gas. The lack of infrastructure facility has restricted consumption of gas in the past. Given the fact that of gas discoveries are made in southern part of Pakistan, expansion in gas infrastructure had become mandatory.

The earnings driver for SSGC has been the constant increase in operating assets. Despite higher borrowing to undertake expansion programme financial charges are expected to remain within modest limit. The new debt is being acquired at around 3% per annum, which is also bring down average cost of funds. This provides further impetus to improving company's profitability. Profit after tax is expected to more than double in next five years.

SSGC's presence in overall portfolios of institutional as well as retail investors has been very insignificant. This has been primarily due to the fact that the majority of the company's shareholding has been with the government itself as well as government owned institutions. Further divestment of SSGC shares will have a positive impact on investors' portfolio. It will increase investors' exposure to Pakistan's gas sector. SSGC is among the few companies enjoying enormous growth potential. The Company has recently announced a Rs 34 billion infrastructure expansion to be completed in next five years. With the profitability of the company linked to its asset base, the expansion plan will translate in to good earnings growth for the company in the coming years.

SSGC PROFILE

The company is Pakistan's leading integrated utility powering the national economy by providing gas to two provinces, Sindh and Balochistan. SSGC supplies gas to nearly 1.7 million customers. Its pipeline network consists of 2,786 km of transmission lines and 23,416 km of distribution network. The Sui gasfield remained a primary source of gas for decades. However, its share in total gas supply at present stands only 14% and remaining 86% gas is being obtained from various fields in Sindh, i.e. Bhit, Zamzama, Sawan, Badin, Miano, Kadanwari. SSGC has transmission and distribution network across the provinces of Sindh and Balochistan. The Karachi metropolitan area accounts for about 1.2 million customers. Hyderabad and the interior of Sindh have approximately 340,000 customers and about 130,000 customers are from Balochistan.