Research house upgrades SNGPL fair value of share

The Jun’22 target price for Sui Northern Gas Pipelines Limited (SNGP) is set at PKR 91.10/share. The scrip offers a noteworthy upside of 86% from current levels, recommendation to BUY was issued, according to a report of leading research house.

Analysts investment thesis is premised on i) RLNG UFG benchmark being upheld by the Court today and no longer a threat to earnings, which, alongside the high base of average assets and continued investment in distribution network going forward (CAPEX forecast at an average of PKR 13bn over our investment horizon), should translate into an upbeat bottom-line, and ii) single-digit UFG with the first phase of OGRA’s ambitious UFG reduction plan already been implemented. With that said, we project a 3-yr forward earnings CAGR of 31% with bottom-line in FY21E and FY22F set to arrive at PKR 13,727mn (EPS: PKR 21.64) and 13,565mn (EPS: PKR 21.39), respectively. Alongside this, we expect the company to declare a dividend of PKR 6.00/share in FY21. The stock is currently trading at an attractive forward (2022) PE multiple of 2.3x. Key upside for the company remains construction of RLNG-III pipeline while a downside risk is unexpected jump in UFG.

RLNG UFG benchmark upheld + recurring CAPEX to keep profits buoyant

Sui companies had strongly opposed OGRA’s decision to cut the transmission UFG benchmark on RLNG, given its adverse impact of nearly PKR 10bn for both companies. With the Lahore High Court finally ruling in favour of the gas utilities, this will be a major booster for SNGP and SSGC’s earnings sustainability. In addition, we expect SNGP to continue building assets (addition of assets forecast to average at PKR 13bn over our investment horizon) and although lower compared to addition of PKR 33bn in the last 5 years, we believe that given the base of assets (already at an all-time high), profitability should remain robust. We also highlight that the government is set to commence work on the USD 2.5-3bn North-South Gas pipeline (alongside Russia), which should further contribute to earnings. We await financing, design and engineering details before incorporating this in our financial projections.

UFG losses visibly curbed

Unaccounted for gas (UFG) losses have been a key component pouring heavy on bottom-line performance of Sui companies given the ROA-based formula to derive earnings. To recall, its checkered history (11.17% in FY15 to 8.04% in FY17 to 12.32% in FY20) and the ensuing gas circular debt, has been a major cause of concern for the present government and hence, directives were issued to the Regulator (Oil and Gas Regulatory Authority – OGRA), to devise a strategy to contain UFG. Under this UFG reduction plan, SNGP has been given an ambitious target to slash UFG by 4% or 18,240mmcf till FY22. Pertinently, the company managed to cut UFG by 4,771mmcf against a target of 6,840mmcf in FY20 (despite a higher percentage of 12.32% vs. 11.86% last year in lieu of lower natural gas sales). Whereas UFG came down to just 10.01% in 1QFY21, churning a robust EPS during the quarter. Going forward, we have assumed UFG to remain a single-digit number with UFG volumes coming down alongside natural gas sales.

Valuation

Our DCF-based Jun’22 target price for the company works out to PKR 91.10/share. At current levels, the scrip offers an upside of 86%, we recommend BUY. Our valuation is based on a cost of equity of 17.46%, with Risk Free Rate (RFR) at 10.5% and a 2% growth rate. Please find the valuation table below.

Courtesy – AHL Research

 

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