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JS Securities Limited – JS Research (January 12, 2023)

Karachi, January 12, 2023 (PPI-OT): E and Ps dividend plan – smaller part of a bigger picture

The government’s attempt to clear the gas circular debt to comply with IMF’s recommendations has further firmed up with some indications of executing the piling debt’s settlement by partially adjusting government E and P companies’ receivables against prospective dividends from the same.

This may lead to sizable dividends announced by OGDC and PPL when compared to its prevailing market prices at the bourse, benefitting minority shareholders.

The whole transaction would in the best-case lead to evaporating pending gas dues, however, would just be a one-time adjustment, in contrary to IMF’s recommendations of working on curtailing the pace of piling circular debt, where higher gas prices would be inevitable, bearing inflationary repercussions.

Hefty dividend payouts by OGDC and PPL under talks

The government’s attempt to clear the gas circular debt on IMF’s recommendations has further firmed up with some indication of addressing the existing outstanding pile of the same through various modes. Though modalities are not definite so far and various options have emerged over time, the prospective transaction is expected to at least partially address the outstanding gas payments in the system.

Irrespective of modality eventually finalized, one common theme seems to be an eventual hefty dividend payout by OGDC and PPL which results in a large chunk of injection returning back to GoP, making it as close to cash neutral as possible for GoP. An inevitable externality however continues to excite the market i.e. minority share of any such dividend announcement. In the best case, a one-time complete clearance of Sui receivables would result in dividend of Rs78/share from OGDC and Rs138/share from PPL – compared to stock price of Rs 87.57/sh and Rs82.12/sh respectively for OGDC and PPL respectively. This excitement is already reflecting in stock prices which are up 26%/59% in OGDC/PPL, respectively, since recent developments regarding gas circular settlement have emerged.

As GoP is the majority shareholder of the two companies, actual cash outflow in the aforementioned scenario may still be ~Rs50bn for OGDC and ~Rs94bn for PPL for minority shareholder dividends. At present, OGDC reports short term investments worth Rs48bn, while PPL reports the same of Rs70bn.

‘Do more’ may follow

The whole transaction would in the best-case lead to evaporating pending gas dues, however, would just be a one-time adjustment, contrary to IMF’s recommendations of working on curtailing the pace of piling circular debt. Upon IMF’s consistent reminder of pending gas price increases, the government has also indicated to settle the remaining Rs650bn gas circular debt through gas price increases. To recall, the last gas price increase was announced in Sep-2020, that too for limited segments and within the range of 1% – 6%. Prior to that, 31% gas price increase for all segments (62% for Fertilizer feed gas) was announced in Aug-2019.

While the same would have inflationary repercussions, higher energy costs would also dent corporate profitability of fertilizer companies and industries running captive plants on gas, in the worst-case scenario. IMF’s recommendations also include progress on implementation of weighted average cost of gas (WACOG) pricing, which has also been stalled.

js-securities-limited-js-research-january-12-2023

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