JS Securities Limited – JS Research (05-10-2019)

Karachi, November 05, 2019 (PPI-OT): SHEL: Key takeaways – Analyst Briefing

Shell Pakistan Limited (SHEL) held its corporate briefing to discuss the company’s 9MCY19 financial performance.

The company incurred exchange losses of Rs2.7bn during 9MCY19 (up 28% YoY) while the impact of increased turnover tax has been Rs950mn.

The management is looking to maximize returns from its existing retail network of 750+ outlets instead of focusing on expanding the network.

9MCY19 saw a sharp decline in earnings

Shell Pakistan Limited (SHEL) held a corporate briefing session to discuss the company’s 9MCY19 profitability. To recall, the company registered a Loss after Tax of Rs877.5mn (LPS: Rs8.20) as opposed to a Profit after Tax of Rs1,937.6mn in the same period last year. On a quarterly basis, the company managed to increase its earnings by about 70% YoY as it reported 3QCY19 earnings of Rs569.9mn (EPS: Rs5.32).

Key highlights

Management presented the following insights during the Analyst Briefing:

There are 750+ retail sites operating around the country run by nearly 650 retailers. Given this substantial footprint, the management is not currently looking to expand its retail network. Instead, the goal is to maximize returns from the existing network.

Currently, Shell has 11 depots in the country owned and operated by the company.

Apart from imports, fuel is also sourced locally from 5 different refineries. High Speed Diesel is primarily sourced locally while 60-70% of the Motor Spirit is imported.

Shell remains a market leader in the lubricant business. While the management remained shy of sharing absolute figures, historical numbers place Shell’s market share in the lube segment over the 40% mark. The lube market has witnessed double digit declines over the last 2 quarters. The Lubes Oil Blending Plant in Karachi supplies most of the products and has a capacity of 95k tons under 3-shift operations at 100% capacity.

In the Aviation business, Shell provides fuel at 4 airports in Pakistan with Karachi being the largest. At the remaining three destinations (Quetta, Sukkur and Nawabshah), Shell remains the sole supplier. On average, Shell services nearly 60 flights a day across Pakistan.

The influx of Oil Marketing Companies in Pakistan over has changed the industry environment over the last 2 decades. In such a scenario, Shell has adopted a strategy of a concentrated product mix. Here, Shell reaps the fruit of building a brand name over its 100 year history.

After deregulation of HOBC in 2016, the management expects the industry to deregulate further going forward.

The non-fuel retail segment has become more important, particularly in urban areas with Shell-Select stores being opened up at retail sites. Additionally, the management is working with other companies such as banks and ‘quick-serve restaurants’ to broaden the scope of non-fuel retail.

Exogenous factors such as higher inflation and interest rates along with sharp Rupee devaluation have created a challenging business environment.

Given the rise in the policy rate, the interest costs jumped from Rs100mn to Rs700mn over the 3 quarters while the currency devaluation resulted in an exchange loss of Rs2.7bn (~28% higher YoY).

The revised turnover tax of 0.75% in the latest budget has had a substantial impact on the company’s earnings. This has resulted in a loss of Rs950mn.

The net increase in cash and cash equivalents of Rs1.68bn during 9MCY19 has primarily been a result of improved working capital.

Despite a decline in volumetric sales, the top-line has increased because of a rise in prices.

The management believes in holding minimum levels of inventory which at the moment is 20 days of sales, as per OGRA.

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