In Focus: Sui Northern Gas Pipeline Limited (11112008)

The company has 30 year exclusive license from OGRA beginning March 25, 2002 to carry on the regulated activities of transmission, distribution and sale of natural gas in the provinces of Punjab, NWFP, and Azad Jamu & Kashmir. Currently company is providing natural gas to its industrial, commercial and domestic consumers by expanding its distribution and transmission network upto 66,967 Kms under licensed area FY08.
Profitability is guaranteed under fixed return formula
The profitability of SNGP is governed under fixed required rate of return formula. Companies should earn an annual return of not less than 17.5 % per annum on the value of its average fixed assets in operation (net of deferred credit) excluding income tax, interest charges on debt, UFG loss, dividends and other non- operating income.
Attractive Dividend Yield
SNGP is currently offering attractive dividend yield of 12.5 & 14.3 percent for FY09E and FY10E respectively.
Hectic efforts to reduce UFG loss
During FY08, company required return declined to 9.3 percent from 17.5 percent fixed by the regulator which is mainly due to higher UFG loss exceeding prescribed target by OGRA. However, company is working very hard to reduce UFG loss to the target set by the regulator for this purpose company had made a detailed plan to combat the current trend. Further, we expect company will able to meet the UFG loss target within two to three year time, as company is investing substantial amount for the rehabilitation of existing network of the company.
Continues increase in fixed assets…
Company fixed assets are indicating continues increasing trend during last few year and expected to continue in coming years mainly due to Project-IX which covering Southern Punjab to Southern area of NWFP. However, 50 percent of the project has been completed till FY08. Since profitability of the company is determined under fixed return formula as operating assets, increase profitability of the company also increase.
Recommendation
We recommend Buy stance on the scrip, at current level SNGP is offering upside potential of 72 percent from our one year target price of Rs48. Further, script is trading at attractive price to earnings multiples of 6.5 and 5.4 respectively, based on FY09 and FY10 expected earnings.