Secondary Public Offer of Pakistan Petroleum Likely to Get Enormous Response

According to a report by one of Pakistan’s largest and most trusted brokerage house, AKD Securities, sale of 70 million shares of Pakistan Petroleum (PPL) is likely to be completed before June 30 2014. The familiarity with the process can potentially lead to the strike price coming much higher than the floor price.          .

At present, the Government of Pakistan (GoP) holds 1.4 billion shares of PPL which translates into a 71% stake in the Company. The GoP intends to raise PkR15bn (US$150mn) by offloading 5% (70 million shares) of its holding in PPL.

In recently concluded transaction of sale of shares of United Bank Limited (UBL), the floor price was set close to the stock's 6-month average price (PkR155/share). Based on the same benchmark PPL’s 6-month average price comes to PkR215.4/share. However analysts do not rule out a further discount on this in setting PPL's floor price, a case may be made for the strike price settling much higher than was the case for UBL.

This is because PPL's is a smaller transaction and will be carried out by local book runners using methodologies that were used for EFERT and AVN for example. At current levels, PPL trades at a FY15F P/E of 6.8x and D/Y of 5.9% - attractive multiples that merit a subscribe stance particularly if the floor price is set at a 5 to 10 percent discount to market price.    

After raising US$313 million and a further PkR7.62 billion from UBL's stake sale, the GoP intends to raise US$150 million by selling 5% of its stake in PPL which translates into 70 million shares.

Taking cue from the UBL transaction, the floor price is likely to be close to the 6-moonth average share price PkR215.4/share in case of PPL. However, considering the current share price hovering around PkR210, a further discount to the 6-month average share price appears likely.

In this regard, a 5% discount to the 6-month average price results in a tentative floor price of PkR205/share. This translates into a FY15F P/E of 6.6x while last closing price implies a forward P/E of 6.8x. These stack up well against the broader market's forward P/E of 7.9x.

While analysts await the transaction's formal details, those privy to the details believe PPL transaction could be similar to that of Engro Fertilizer and AVN, run by a local book runner with the color of the book being visible at all times.

Analysts believe that while the onus of participation may be on local investors, foreign investors will be free to participate as well. Presently, PPL has free float of 21%, which translates into 410 million shares. Out of this, 24% is held by foreign institutions which include Lazard Ltd., Invesco Ltd., Robeco AMC and Tundra Fonder amongst whom Lazard Ltd. has the largest declared shareholding (as far as free float number of shares are concerned) holding 18.3% of the total free float, while remaining are with local participants.

Foreign investors have clearly been keen on PPL in the past and this could manifest at the time of the book building. At the same time, PPL remains an attractively valued stock and is likely to result in strong local interest.

In UBL transaction, despite international and local interest, the strike price inched up by mere 2% against the floor price of PkR155/share. Analysts believe this was mainly due to the sheer size of the transaction.

Analysts believe the same might not be the same in case of PPL due to: 1) the size of the PPL transaction being roughly two-fifths that of UBL where a small size also means less supply concerns, 2) a 76% of PPL's free float with local investors, which limits the number of shares that can be acquired through the market, without affecting the price and 3) PPL's book building is being done by the local book runner who will be using similar methodologies that were used in recent book buildings.

This familiarity with the process can potentially lead to the strike price coming much higher than the floor price.          .

Pakistan: Divestment of Government Holding in Pakistan Petroleum

In an attempt to accelerate privatization process in Pakistan, the incumbent government had decided to divest its holding in UnitedBank Limited (UBL), Pakistan Petroleum Limited (PPL), Oil and Gas DevelopmentCompany Limited (OGDC) and other state owned enterprises (SoEs).

The recent offer to divest the Government of Pakistan (GoP) holding in United Bank Limited (UBL) attracted enormous response as the amount received was almost twice the initial estimate. Sale of 19.8 percent shares of UBL was through a book building process. The deal was struck at US$387 million, of which 80 percent shares on offer went to foreign investors, which helped GoP in mobilizing around US$310 million. The proceeds have already been received by the GoP on June 20, 2014. More than 40 leading global equity funds, including Templeton, Wellington, Everest, Lazard, Morgan Stanley, Blackrock and others, participated in this transaction.

Encouraged by the outcome, the GoP has decided to divest over 70.05 million shares out of its holding in Pakistan Petroleum Limited (PPL). The offer would be open to both international and domestic institutional investors and high net worth individuals through a book building process, to be completed in the last week of June 2014. It has also been approved to offer 7 million shares to the general public with preference to existing employees of PPL through a subsequent subscription process within next few months.

PPL has been a frontline player in the energy sector since mid fifties. As a major supplier of natural gas, PPL today contributes over 20 percent of the country’s total natural gas supplies besides producing crude oil, Natural Gas Liquid and Liquefied Petroleum Gas.

The company’s history can be traced back to the establishment of a public limited company in June 1950, with major shareholding by Burmah Oil Company (BOC) of the United Kingdom for exploration, prospecting, development and production of oil and natural gas resources.

In September 1997, BOC pulled out itself from exploration and production worldwide and sold its equity in PPL to the GoP. Subsequently, the government reduced its holding through an initial public offer in June 2004, which was further decreased with the initiation of the Benazir Employees Stock Option Scheme (BESOS) in August 2009 when PPL employees were allotted 12 percent shares from the government’s equity.

Currently, the company’s shareholding is divided among the GoP, which owns about 71 percent, PPL Employees Empowerment Trust that has approximately 7 percent — being shares transferred to employees under BESOS — and private investors hold nearly 22 percent.

Lately, PPL has acquired 100 percent shareholding of MND E&P Limited, a company incorporated in England and Wales. The name of the subsidiary has been changed to PPL Europe E&P Limited. It has also established a wholly-owned subsidiary, PPL Asia E&P B.V. with corporate seat in Amsterdam, Kingdom of Netherlands. The subsidiary will focus on exploration and production of oil and gas in the region. PPL has assigned its interest in Block 8, Iraq, under the Exploration, Development and Production Service Contract with Midland Oil Company, Iraq to PPL Asia E&P B.V.

PPL operates six producing fields across the country at Sui (Pakistan’s largest gas field), Adhi, Kandhkot, Chachar, Mazarani and Hala and holds working interest in fifteen partner-operated producing fields, including Qadirpur the country’s second largest gas field.

PPL together with its subsidiaries has a portfolio of 47 exploration assets of which the company operates 27, including one contract in Iraq, while 20 blocks, comprising three offshore leases in Pakistan and two onshore concessions in Yemen, are operated by joint venture partners. 

Daily gas production of PPL from its operated and partner-operated fields stands at around one billion cubic feet (bcf) of gas per day, which translates into over 20 percent of the country’s total gas production. The company’s major clients are Sui Southern Gas Company Limited (SSGCL), Sui Northern Gas Pipelines Limited (SNGPL) and Water and Power Development Authority.

On March 31, 2014, PPL’s proven recoverable reserves were 2.267 trillion cubic feet (Tcf) of natural gas, 40.293 million barrels (MMbbl) of oil/ NGL and 412,557 tonnes (tons) of LPG.

Auction of Government of Pakistan Ijarah Sukuk

Tender for Sale of 3-Year Government of Pakistan Ijara Sukuk (GIS) are invited by the Director, Domestic Markets & Monetary Management Department (DMMD), State Bank of Pakistan, Karachi from the designated Primary Dealers for the Sukuk in accordance with the provisions of SBP, DMMD Circular No.10 dated 17th June, 2014.

1. Receipt of Tenders                 Up to the date of auction (11:15 hrs)
2. Opening of tenders                 11:30 hours on the date of auction
3. Communication of result        On the date of auction
4. 1^st Rental Coupon                   To be determined one day prior to the settlement date
5. Maximum value of the asset under the present issuance program of the Ijara Sukuk is PKR.49.572 billion.

Note: Bids can be rejected without assigning any reason.

Government of Pakistan Issuing Ijara Sukuk

In accordance with provisions of the notification of the GoP Ijara Sukuk Rules, 2008, another GoP Ijara Sukuk will be issued. Detailed transaction structure can be found at http://www.sbp.org.pk/dmmd/2014/C10-Annex- C.pdf

As per transaction mechanism, profit on the GOP Ijara Sukuk will be based on the followings: Rental rate benchmarked against the latest weighted average yield of the 6 month Market Treasury Bills or 6 month PKRV (as per FSCD circular 13 dated September 06, 2008). The rental rate as mentioned may be adjusted based on the difference between estimated supplementary rental and actual maintenance expenses of the underlying asset as explained in transaction structure.

For this particular issue of GIS (M-3), the total auction participation of a single 9Primary Dealer (PD) will be capped at whichever is the lower of the following: a) PKR 25 billion or b) 20% of Total Demand & Time Liabilities-Islamic (excluding FE-25 deposits) of the respective PD Islamic bank / Islamic window of that particular PD.

For this purpose, Total Demand & Time Liabilities – Islamic as of 28th March, 2014 will be used as reported to the State Bank of Pakistan.

In case any PD breaches the aforesaid limit, SBP reserves the right to cancel all or some of the bids of the concerned bank.

All Islamic banks and commercial banks with Islamic Branches are designated as PD for participating in the auction of GOP Ijara Sukuk.

All designated PD for the GOP Ijara Sukuk are advised to ensure meticulous compliance with the above instructions.

All other instructions on the subject shall, however, remain unchanged.

 

Pakistan: Opportunities for Global Insurers

The incumbent government in Pakistan wishes to put the economy on track as well as accelerate pace of productive activities, construct mega size infrastructure projects and improve the quality of life of people, insurance companies will have to shoulder greater responsibilities. They have to come up with new products to cater to emerging needs. Over the last two decades new threats have emerged and hedging the risk has become the collective responsibility of all the stakeholders. The government being the largest stakeholder is responsible for paying compensation to the victims of various types of eventualities, i.e. act of terrorism, political violence and natural calamities. Three deluges, carnage and destruction on the eve of assignation of Benazir Bhutto and 2005 earthquake have shown that while economic losses ran into billions of rupees insurance claims were minuscule, simply because immovable and movable properties, government assets and even the lives of people were not adequately insured. In the prevailing scenario insurance will have to come up with new products to cater to emerging needs. This also offers opportunities to the global insurers to form joint ventures with Pakistani insurance companies to exploit a market that still suffers from very low insurance penetration. To read the details visit shkazmipk.com

Pakistan: Government divesting its share in United Bank

Government of Pakistan is scheduled to offer its shareholding (19.8% of outstanding shares) in United Bank to international and domestic investors on 11th Jun'14. The base size is determined as 160 million shares, whereas upsize can accommodate additional 81.9 million shares. Floor price will be announced through notice to all three exchanges after market close on June 10, 2014.

Profit after tax of United Bank have gone up by 19% CAGR (CY10-CY-13). Though, the growth has been impressive, surge in Net Interest Income (7%) lagged the escalation of Net Interest Expense (12%) primarily as Policy Rate dropped from 14% to 9%, to close at 10%. Resultantly, Gross spread ratio deteriorated to 52.1% (CY13) from 57.8% (CY10).

Net Interest Income for Q1'14 increased by 12%YOY to settle at PKR9.8 billion with Gross Spread Ratio declining to 50.6% from 51.7% in Q1'13.

The Bank targeted an investment focused asset allocation with a lengthening maturity profile, consequently ADR & IDR moved inversely as they settled at 45% & 57% from 47% & 51% a quarter earlier. PIB holdings ballooned up by 90% QoQ.

Being the first commercial bank to launch Branchless Banking (BB) seems keen to hold on to its initiative as UBL Omni retained its 27% share in 4QCY13, whereas its main competitor Easy Paisa saw its share falling to 59%. Further Omni revenue in Q1'14 grew by 60%.

Bank management has not only focused on domestic geographical diversification but also extended outreach internationally by launching 18 international branches. Further it expanded its spectrum of services by establishing 5 subsidiaries, locally and internationally.

Pakistan: Warehouse Receipt Financing an alternative route

Efforts of State Bank of Pakistan (SBP) to implement Warehouse Receipt Financing (WRF) in Pakistan are applaud able and needs to be supported by all the stakeholders. This essential but timely initiative is part of financial inclusion program being pursued by the central bank.Once fully implemented, WRF system will be extremely beneficial to the farmers and support in realizing top of the agenda item, achieving food security. This program one hand will help in containing wastages significantly, and on the other hand, enabling Pakistan to export surplus produce to those countries that need it the most.
Experts are of the consensus that the development of commodity physical trade and an efficient market system is a must for improving the performance of the agricultural sector in particular and the economy in general, the added advantage is documentation.
However, while going through initial reports regarding plan being considered by the designated working group constituted by the central bank, one gets a feeling that a rather complicated system involving too many participants is being proposed.
A closer look at the existing trading system of commodities like wheat, rice and cotton shows that not only too many intermediaries are involved but the available warehousing system is not to the level required for WRF system.
The detailed discussions with various stakeholders suggest that for the pilot project a product should be chosen that has relatively longer shelf life, quality standards are easy to certify, quantity to be handled can be monitored, appropriate warehousing facilities are available and above all commercial banks has the experience of extending credit against the selected commodity.
Keeping all the above stated factors in mind sugar can be picked as the first commodity to start WRF in Pakistan. The available data suggests that an elaborate and fully documented system is being followed in sugar trade. All the mills have reasonably reliable warehouses and sales are fully documented because of payment of GST.
Stock position is closely monitored by the commercial banks as these extend billions of rupees credit to the mills against hypothecation of stock. Mills submit daily stock reports to banks and physical stocks are checked with regular intervals to avoid any movement of stock without proper documentation.
Therefore, it may be said that since banks have been lending money against hypothecation of stock, sugar industry is a perfect test case to follow WRF system. The beauty of the system is that mills have long experience and expertise of collateral management and there may not be any need to induct additional collateral management company at this stage.
The added advantage is that Pakistan Mercantile Exchange (PMEX) is already working closely with some of the sugar mills to introduce trading of ‘mill specific deliverable sugar contracts’.
All the stakeholders have shown keen interest in participating in trading of sugar at PMEX. This on one hand will free the government from buying sugar through TCP in case of glut, and on the other hand, commercial banks will not be lending any additional funds.
Therefore, deliverable contracts can be changed into warehouse receipts and PMEX’s state-of-the-art technology based platform can be used for trading.
A closer coordination among the representatives of PMEX, sugar mills, apex regulators and commercial banks can lead to the commencement of trading of warehouse receipts in the shortest possible time.
Let one point be very clear to all the stakeholders that during the recently concluded sugarcane crushing season mills have produced over 5 million tons refined. The estimated value of the available stock is around Rs300 billion or US$3 billion based on international price of the commodity.
Mills have already acquired money from banks through hypothecation of stock and the amount involved can be confirmed from banks. The next move will be to convert these loans into warehouse receipt financing.
Once SECP approve these, trading of warehouse receipts can commence immediately as PMEX already has the required trading system in place.
One may say that according to my proposal the beneficiaries will be sugar mills and not the farmers. The perception has to be corrected because the ultimate beneficiary will be sugarcane growers as mills will be able to pay them off at a much faster pace. The added advantage is, they will not have to borrow from the informal sources and pay very high interest rate.