May 05, 2023 (MLN): Sui Northern Gas Pipelines Limited (SNGPL) will likely enjoy a significant surge in net profits during the period of FY24, increasing by around 60% YoY, according to the projections put forth by Arif Habib Limited on Friday.
The surge may be attributed to a significant surge in the weighted average cost of capital (WACC) for the company due to a breach in the guaranteed fixed return agreement set by the Oil and Gas Regulatory Authority (OGRA).
The company is operating under a guaranteed fixed return covenant which is a WACC of 16.6% applicable on assets at present. Although fixed for 3 years, the WACC automatically re-sets if it changes by +2% or -2%.
Given a drastic jump in SBP’s policy rate this year, and hence the 6 months KIBOR used to determine the cost of debt, the differential in WACC has been breached by over 6%.
Therefore, since WACC becomes applicable from the following year, it is estimated the WACC for FY24 at 22.9% average of the year of the breach and subsequent years i.e., FY23 and FY24 in this case.
The report projected the earnings of FY22 at Rs12.7bn and Rs10bn in FY23. This slowdown can be attributable to the surge in the weighted average cost of gas amid higher international oil prices and PKR depreciation, which means the quantum of disallowed UFG is set to climb higher, as well as a sharp increase in SBP’s policy rate, which added further downwards pressure to the company’s bottom line.
"We believe this practice will mimic FY21, whereby the change in WACC breached 2% after the State Bank undertook many rate cuts in the aftermath of COVID-19. As a result, WACC was revised downwards for FY22 to 16.6% against 17.4% previously," the report read.
However, the report also highlighted that once inflation starts tapering off, and interest rate cuts come into play starting the second half of FY24, WACC will once again adjust downwards by nearly 5% which will be reflected in FY26 earnings. Although it will still be higher than the current level of 16.6%, it added.
The report also shed light on the UFG curtailment plan, saying that OGRA had formed a 3-year plan to curtail gas losses of SNGPL.
As a result, the company began robustly investing in technology and digitization. Moreover, better UFG mapping through the new Geographic Information System (GIS), which has to be fully installed within CY23, will help identify leakages and gas theft and further curtail UFG.
Therefore, UFG volume in the next 5 years is expected to average 26,000mmcf, disallowed UFG of Rs5.3bn against 43,000mmcf worth Rs7.1bn in the past 5 years.
Discussing the circular debt of the gas sector, the report noted that the circular debt stood at Rs1.6 trillion primarily due to delays in tariff determination and notification, and insufficient revenue recovery from the government and private consumers.
Albeit, one of the key prerequisites for the ongoing ninth review of the IMF was to curb further accumulation in the gas circular debt.
Therefore, from January 2023, the incumbent government has raised gas prices across the board. consequently, it will relieve some pressure off of the balance sheet, at least by the end of this fiscal year, it said.
Copyright Mettis Link News
Posted on: 2023-05-05T15:48:22+05:00
