Daily Call. PTI Govt s First Major Economic Decision to save PKR 94bn REP September 17,

Transcription

1 REP- 300 Gas Price Hike PTI Govt s First Major Economic Decision to save PKR 94bn f1 Old & New Gas Prices PKR/MMBTU Old New Change Domestic (1st Slab) % Domestic (2nd Slab) % Domestic (3rd Slab) % Domestic (4th Slab) % Domestic (5th Slab) % Domestic (6th Slab) , % Domestic (7th Slab) , % Commercial % Ice Factories % Industrial % Captive Power % CNG Stations % Cement Factories % Fertilizer (Feed-Stock) % Fertilizer (Fuel-Stock) % Power Stations % IPPs % Average % Source: Petroleum Ministry, AHL Research Market Strategy As per latest news reports, ECC has given a go-ahead for across the board - ex export oriented industries - gas price hike previously proposed by the Oil and Gas Regulatory Authority (OGRA) with some changes as the governments focus was to facilitate domestic / household consumers by not putting any additional burden on them while reducing the deficit of Gas Distribution Companies from PKR 152 billion to PKR 58 billion, thereby saving PKR 94 billion per annum. Given that, 4 new slabs have been introduced (total 7 slabs for domestic / household consumers) in the today s gas tariff hike announcement. The gov t increased gas tariff for household consumer by a meager 10% to PKR 121/mmbtu for the first slab up to 50m 3 as compared to the proposal of 186% by OGRA. Like, the second and third slabs with volume up to 100m 3 and 200m 3 were raised by 15% and 20%, respectively. Major industries (fertilizer, cement, power and steel) will also be subject to higher gas prices. We highlight the new gas prices in the write-up below. Macro Direct inflation impact to be muted, second round impact could be pronounced As far as inflation is concerned, the total direct weight of gas price in the CPI basket is ~1.57%; the increase in gas price for domestic consumers by an average 12.5% (consumer s that fall under category 1 & 2 i.e. up to 100m 3 ) means inflation could escalate by ~25bps. However, the second round effect of increase in gas prices would be much higher as industrial users gradually pass on the impact going forward. With inflation level at 5.8% during 2MFY19 we estimate our CPI for FY19 is expected to clock-in at 6.9% YoY. Fertilizers Price pass-on expected Latest development suggests that feed and fuel stock price would increase by 50% and 30% to PKR 185/mmbtu and PKR 780/mmbtu, respectively. The impact of the hike would be significant as fertilizer manufacturers would have to increase urea prices by an average of ~PKR /bag (as shown below in the table) in order to nullify the impact. However, EFERT (Enven plant) would be a little less vulnerable to the gas tariff hike on feed amid availability of concessionary gas and the hike impact would only be on company s base plant (feed and fuel) and Enven s fuel gas. In addition to this, impact on FFBL would only be on its feed gas as for power generation/fuel its whole dependency is on coal based power plant. Please see the table below for earnings impact. Analyst AHL Research ahl-research@arifhabibltd.com Exhibit: Increase in Feed & Fuel stock Annualized Negative Impact % of Annual Earnings Increase in price to pass on impact PKR /Share PKR /bag Fertilizer FFC % 123 FFBL (Urea) % FFBL (DAP) EFERT %

2 Gas utilities Neutral for earnings, positive for cash flow While there will be no direct earnings impact for local gas utilities (SNGP and SSGC), the aforementioned jump in consumer gas prices will have a positive cash flow impact as it will compress the deficit filled in by the government to establish the revenue required under a fixed ROA (also known as the differential margin). This will be a sentiment booster for the sector as the companies had to rely on borrowing to carry out routine business in light of receivables from the government piling up historically. Cements Muted impact of PKR 4-7/bag Gas tariff for cement players using captive power plants has been finalized at PKR 780/mmbtu from PKR /mmbtu previously. Pertinently, very few key players are reliant on gas power plants (namely LUCK, DGKC and MLCF; where the latter two use a mix of natural gas and RLNG). With the incline in gas prices, our initial workings suggest that bottom-line impact on LUCK, DGKC and MLCF in FY19 would arrive be -4.29%, -4.30% and -0.66%, respectively. Now that a uniform rate has been announced for South and North, we have assumed gas price for LUCK, DGKC and MLCF at PKR 980/mmbtu (including PKR 200/mmbtu GIDC). That said, we owe the muted impact in FY19 for MLCF to the idle available capacity of its newly inducted 40MW coal power plant, which post hike in gas tariff would appear more favorable in use. Albeit, with MLCF s capacity being fully operational in FY20, we believe profitability would recoil by ~3% as gas power plant is expected to resume operations. We also accentuate that LUCK and DGKC would have to increase cement prices by PKR 7/bag and PKR 5/bag, respectively in FY19 in order to completely pass on the impact of higher gas prices. Exhibit: Gas Tariff increase for captive power plants Annualized Negative Impact % of Annual Earnings Increase in price to pass on impact PKR /Share PKR /bag Cements LUCK % 7.10 DGKC % 4.89 MLCF % - Steel Impact to be passed on easily It has been advised that gas tariff for industries be raised to PKR 780/mmbtu (+30%). Long steel players (manufacturers of rebars; ASTL and MUGHAL) use very limited gas during the reheating process. Amreli Steels Limited (ASTL) uses around 30 m 3 /ton given its hot link technology whereby billets at the new mill would not have to be reheated for conversion into rebars whereas Mughal Iron and Steel Industries (MUGHAL) consumes m 3 /ton for billet reheating. Hence, hike in gas tariff remains slightly negative. In particular, ASTL would have to increase rebar prices by PKR 475/ton to pass on the impact while bottom-line would retreat by ~PKR 0.56/share in FY19 if cost rise is absorbed. Albeit, MUGHAL s recently installed gas captive power plants (20MW) increases the company s exposure to gas price hike of which 30% is natural gas based and the remainder 70% is RLNG sourced. 2

3 Chemical LOTCHEM to bear the brunt Chemical companies under AHL coverage (EPCL & LOTCHEM) use captive power plants to fulfill their energy requirements. These plants use gas to generate electricity and are located in southern region. Currently gas price for captive power plants is PKR 600/mmbtu which has increased to PKR 780/mmbtu (+30.0%). In this regard, for LOTCHEM, we estimate the hike in gas price to have a negative earnings impact of PKR 0.24/share in CY19 earnings (18.5% of total earnings). Exhibit: Gas Tariff increase of 30.0% to PKR 780/mmbtu Annualized Negative Impact % of Annual Earnings Chemicals PKR/share LOTCHEM % EPCL Textile Exempted from gas price hike The government has decided to keep gas prices of the textile sector unchanged at PKR 600/mmbtu to retain export competitiveness of the sector. However, Punjab based manufacturers are using a mix of RLNG and pipeline gas (72:28). The government intends to provide gas and electricity to textile exporters at regionally competitive rates of PKR 800/mmbtu and USd 7.5/KwH to increase export proceeds. Banking Higher interest rates due to cost push inflation positive With a new wave of cost push inflation expected in the country as gas prices undergo a swift incline post approval by ECC, our FY19 CPI is expected to reach 6.9%. Therefore, we expect interest rates to move up, which will positively impact the earnings of the banking sector. Coverage Restricted 3

4 Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. In addition, we currently do not have any interest (financial or otherwise) in the subject security (ies). Furthermore, compensation of the Analyst(s) is not determined nor based on any other service(s) that AHL is offering. Analyst(s) are not subject to the supervision or control of any employee of AHL s non-research departments, and no personal engaged in providing non-research services have any influence or control over the compensatory evaluation of the Analyst(s). Equity Research Ratings Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December In addition, return excludes all type of taxes. For more details kindly refer the following table; Rating Description BUY Upside* of subject security(ies) is more than +10% from last closing of market price(s) HOLD Upside* of subject security(ies) is between -10% and +10% from last closing of market price(s) SELL Upside* of subject security(ies) is less than -10% from last closing of market price(s) * Upside for Power Generation Companies (Ex. KEL) is upside plus dividend yield. Equity Valuation Methodology AHL Research uses the following valuation technique(s) to arrive at the period end target prices; Discounted Cash Flow (DCF) Dividend Discount Model (DDM) Sum of the Parts (SoTP) Justified Price to Book (JPTB) Reserved Base Valuation (RBV) Risks The following risks may potentially impact our valuations of subject security (ies); Market risk Interest Rate Risk Exchange Rate (Currency) Risk Disclaimer: This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report. 4

5 For U.S. persons only: This research report is a product of Arif Habib Limited ( Arif Habib ), which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Arif Habib Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Arif Habib Limited has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. 5