Financial Statement Analysis of the Sui Southern Gas CompanyFor the Financial year 2009-2010

Course

Analysis of Financial Statements

Course Instructor

Mr. Abdul Ghaffar

Group Members

Murtaza Asgher AliMuhammad Faraz UmerYousuf Hatim

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Contents

Industry information...................................................................................................................................3

Liquefied Petroleum Gas (LPG)................................................................................................................4

Compressed Natural Gas (CNG)...............................................................................................................4

Liquefied Natural Gas (LNG)....................................................................................................................5

Company Information – Sui Southern Gas Company...................................................................................5

Analysis of director’s report........................................................................................................................6

Analysis of Auditor’s Report........................................................................................................................8

Analysis of Profit and Loss statements......................................................................................................10

Ratio Analysis.........................................................................................................................................10

Working Capital.................................................................................................................................10

Activity Ratios....................................................................................................................................10

Liquidity Ratios..................................................................................................................................13

Solvency Ratios..................................................................................................................................14

Profitability Ratios.............................................................................................................................15

Market Ratios....................................................................................................................................17

Analysis of the Statement of Changes in Equity........................................................................................19

Computation of Growth Rate of Dividend.............................................................................................19

Computation of Fair Value.....................................................................................................................20

Computation on the basis of Break-up Value (Book Value)...............................................................20

Computation on the basis of Earnings...............................................................................................20

Conclusion.................................................................................................................................................21

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Industry information

The supply of gas has exhibited an increase of 1.6 percent during July-March 2009-10. The increase in supply owes to higher production of 1.6 percent in natural gas during the period under review. Due to this increase in availability of natural gas, the overall consumption of gas remained higher during the period. Furthermore, the sector wise consumption of gas suggests that the household, commercial, fertilizer and transport sector witnessed positive growth in consumption of gas during 2008-09.

More recently, with the exception of cement and power sectors, many major sectors have witnessed positive growth rates during July-March FY10 (see Table 13.4). The consumption of gas by industry has witnessed a significant increase of 5.3 percent during July-March 2009-10 especially after the decline of 1.1 percent during 2008-09. The increase in industrial consumption owes to rise in domestic demand for manufacturing production during the period.

The maximum decline of 72.7 percent has been witnessed in cement sector’s gas consumption on the back of contraction in its external demand during the period along with the switch over to coal for production. Decline in power sector’s gas consumption is based on the inter-corporate circular debt reason. On the other hand, gas consumption in the transport sector increase due to shift from imported fuel oil to relatively cheaper source of gas during Jul-March 2009-10.

The importance of natural gas to the country has been increasing rapidly. As on January 1st 2010, the balance recoverable natural gas reserves have been estimated at 28.33 trillion cubic feet. The average production of natural gas during July March 2009 10 was 4,048.76 million cubic feet per day (mmcfd) as‐ ‐ against 3,986.53 (mmcfd) during the corresponding period of last year, showing an increase of 1.56 percent. Natural gas is used in general industry to prepare consumer items, to produce cement and to generate electricity. In the form of CNG, it is used in transport sector and most importantly to manufacture fertilizer to boost the agricultural sector. Currently 28 private and public sector companies are engaged in oil and gas exploration & production activities. Company wise total natural gas production is presented in Table 13.8.

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Liquefied Petroleum Gas (LPG)

Liquefied Petroleum Gas (LPG) contributes about 0.7 percent of the country’s total energy supply mix.The main objective to enhance the use of LPG is to stop deforestation in the areas where the supply of natural gas is technically not viable. As a result of government’s investor friendly policies, LPG supplies have gradually increased. The corner stone of LPG Policy is to ensure enhanced availability of LPG at a competitive price to the end consumer. LPG marketing companies have imported around 62,920.3 MT of LPG during July March, 2009 10.‐ ‐

Compressed Natural Gas (CNG)

In an effort to reduce dependency on other fuels as well as to improve the environment, the use of CNG in vehicles is being encouraged. Due to existing price differential between CNG & Petrol, vehicles are being converted to CNG and approximately 2.0 million vehicles are using CNG in the country. The number of CNG Stations is ever increasing with an increase in the vehicle conversion rate resultantly there are about 3,116 established CNG Stations operational in the country. With an investment of overRs.70 Billion, Pakistan at present is the largest CNG user country in the world. In addition, theGovernment has recently approved the project of “Private Public Partnership Based Environment‐Friendly Public Transport System for Major Urban Centers of Pakistan” which is being actively pursued with the provincial governments leading to gradual phase out of diesel operated intra city urban ‐transport to achieve import substitution.

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Liquefied Natural Gas (LNG)

The Government is encouraging LNG import by the private sector. Accordingly, Pakistan Mashal LNGProject (PMLP) was conceived to cater for the energy need of the country as envisioned in the 25 yearNational Energy Security Plan and identified in the Energy Gap Coverage Strategy.

PMLP is to be set up on an integrated basis whereby a private sector project developer will manage the ‐entire supply chain including procurement and shipping of 3.5 million tons per annum LNG, construction and operation of an onshore LNG receiving terminal, and delivery of 500 MMCFD regasified LNG to the SSGC’s system in Karachi. Mashal (Phase I) will be based on Floating Storage and Regasification Unit ‐(FSRU).

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Company Information – Sui Southern Gas Company

The Sui Southern Gas Company (SSGC) (Formerly Sui Gas Transmission Company Limited) was formed in 1954. The Company in its present shape was formed on March 30, 1989 following a series of mergers of three pioneering companies, namely Sui Gas Transmission Company Limited, Karachi Gas Company Limited and Indus Gas Company Limited.

Sui Southern Gas Company is Pakistan's leading integrated gas company. The company is engaged in the business of transmission and distribution of natural gas in southern part of Pakistan. Sui Southern Gas Company transmission system extends from Sui, Baluchistan to Karachi, Sind.

The company also owns and operates the only gas meter manufacturing plant in the country, under an agreement with Schlumberger Industries, France. The Company is listed on the Karachi, Lahore and Islamabad Stock Exchanges.

The company is engaged in the business of transmission and distribution of natural gas besides construction of high pressure transmission and low pressure distribution systems.

SSGCL transmission system extends from Sui in Baluchistan to Karachi in Sind comprising over 3,220 KM of high pressure pipeline ranging from 12 - 24" in diameter. The distribution activities covering over 1200 towns in the Sind and Baluchistan are organized through its regional offices. An average of about 388,828 million cubic feet (MMCFD) gas was sold in 2009-2010 to over 2.2 million industrial, commercial and domestic consumers in these regions through a distribution network of over 37,000 Km. The company also owns and operates the only gas meter manufacturing plant in the country, having an annual production capacity of over 750,000 meters.

The Company has an authorized capital of Rs. 10 billion of which Rs 6.7 billion is issued and fully paid up. The Government owns the majority of the shares which is presently over 70%

The Company is managed by an autonomous Board of Directors for policy guidelines and overall control. Presently, SSGC's Board comprises 14 members. The Managing Director/Chief Executive is nominee of Government of Pakistan (GOP) and has been delegated with such powers by the Board of Directors as are necessary to effective conduct the business of the company.

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Analysis of director’s report

We are pleased to present and share with you, our valued shareholders, the Company’s 56th Annual Report and the audited financial statements for the year ended 30 June 2010, together with the Auditor»s Report thereon, including highlights of major achievements, new initiatives and other notable aspects of the Company’s operations.

With a distribution and transmission network spread over 40,000 kms, serving more than 2.24 million customers, SSGC can be easily rated as one of the largest integrated natural gas companies in the region. By winning the ‘Brands of the Year’ Award this year, the Company has once again proved that it is the best utility company in the country. Your company has maintained a strong national presence with its ever-growing customer base by providing prompt and credible service that can be compared with any world class utility.

As our valued shareholders are well aware, in numerous public hearings held by Oil and Gas Regulatory Authority (OGRA) over the past five years for revenue determination, SSGC strongly pleaded its case for relaxing the stringent Unaccounted for- Gas (UFG) and HR benchmarks the former had imposed on it which also included recognition of non-operating income from non-licensed activities. The unrealistic benchmarks set by OGRA made it extremely difficult for the Company to maintain its infrastructure. As a result, the Company’s profits were largely eroded because of higher UFG which invoked heavy penalties. OGRA’s timely action gave your Company a much needed fiscal space.

During the recent OGRA hearing spread over two days in Islamabad to determine the total revenue requirement for FY 2009-10, your Company formed a formidable team, which through valid commercial and legal explanations, was able to convince the Authority, thus resulting in a win-win situation for SSGC and its customers and shareholders. OGRA’s positive evaluation of this long pending macro issue which led to a revision of Unaccounted-for-Gas (UFG) benchmark and recognition of the Company»s non-operating income, is a historic decision and deserves commendation.

Consequent to OGRA’s landmark decision, the Company’s after tax profit grew to Rs. 4,399 million as compared to Rs. 256 million in the last fiscal year.

The timely OGRA determination without increasing customer tariffs will help your Company generate substantial internal cash flow for rapid implementation of rehabilitation plans as well for constructing expensive infrastructure for imported LNG and transnational piped gas. It will also facilitate the Company in implementing the 5-year UFG reduction plan that will improve profits and make available much needed saved gas to industries and the power sector. While OGRA»s determination this year will result in lesser penalty and, consequently, higher profits, your Company realizes that controlling UFG remains a huge challenge. In fact, if the planned steps are not taken immediately to plug and repair pipeline leakages and adopt effective measures to eliminate gas theft while at the same time rectify some major

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defects in meters and meter reading, the menace of ever increasing UFG will only worsen in the days to come. We need to therefore exercise maximum restraint and plough back our increased profits into much greater productive use for the health of the Company.

The Company’s Board of Directors has supported the management’s 5-year UFG plan to bring down the losses. The plan envisages rehabilitating 5,750 kms of supply mains, augmenting 713 kms pipelines and rectifiying underground and overhead leakages. The management undertook a massive organizational restructuring plan with the support of the Board to put the utility back on the road to growth and profitability. To rationalize the re-structuring process, two operational business units, each headed by a DMD, have been created. Such a system promises better control and accountability as we enter the next fiscal year more determined than ever to tackle the nagging issue of UFG with a renewed plan and unparalleled vigour.

During the year, the Company also held productive meetings with World Bank (Energy Mission) whereby it was able to convince the Bank with detailed proposals to provide a loan of US$115 million for gas pipeline and affiliated infrastructure improvement.

On the other hand, in the year under review, the Company completed a number of transmission and distribution projects including installation of new SMSs and upgradation of old ones. These projects have resulted in minimizing UFG to an appreciable extent.

The Distribution Department demonstrated an inventive approach by designing and constructing in-house automated pressure management system for managing pressures on its Town Border Stations with the objective of curbing gas losses.

In accordance with the directives of the Government of Pakistan the Company formulated a plan to install 5 LPG Air-mix plants in remote and inaccessible regions in its franchise areas. The Noshki plant was commissioned in July 2010 whereas the construction of plants at KotGhulam Muhammad in Sindh and Surab in Balochistan is moving as per schedule.

The Customer Services Division contributed immensely in pinning down UFG by surpassing the PUG meter replacement target of 59,740 it had set for itself by replacing 85,000, a record 42% increase. Its Billing Department contributed a volume of 2.5 bcf towards UFG reduction while the Recovery Section further intensified campaign against gas bill defaulters. Also gas sales continued and gas bills to a customer-base of 2.2 million were raised regularly with a monthly sale of around Rs. 10 billion.

The Surveillance and Monitoring Department also played a pivotal role in cracking down on gas theft through regular raids while taking practical steps such as installation of cyber locks and setting up of ultrasonic meters to help monitor meter reversals. The Measurement Department also took new initiatives for curbing gas losses by installing Differential Pressure Gauge and advanced Remote Monitoring System on all SMSs to detect gas theft.

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During the year, the Meter Manufacturing Plant produced a record 745,000 gas meters. In its pursuit of continuous technological enhancement, the Plant gave special attention to the development of Pakistan-specific V-3 meters. Plans are afoot to produce ACD G-1.6 gas meters which will replace the existing G-1.6 meters.

Through Technical Advisory Services (TAS), your Company continued to contribute towards energy efficiencies through co-generation and combined cycle systems in the design of 100 captive power plants, leading towards anticipated annual gas savings of around 34 mmcfd.

This year as devastating floods ravaged the country, SSGC exhibited a heightened sense of corporate responsibility by carrying out a massive relief campaign. The campaign involved shipping food stuff and medicines to especially set-up relief camps in Shikarpur, Dadu, Larkana and Thatta where the dedicated Company staff along with a team of doctors and paramedics has so far taken care of more than 12,000 flood affectees. A Crisis Management Cell has been created, which, on a round-the-clock basis, is monitoring the overall flood situation as well as the status of relief camps. I deeply commend those dedicated company personnel who have been involved in this extraordinary service beyond the call of their normal duties. They have done the company proud.

This year»s theme ‘Surmounting Challenges, Together We Can» aptly sums up the Company»s action plan to methodically tackle the infrastructural and financial issues facing the Company. As we embark into the next fiscal year, the Company’s human resource - its most valuable asset - is all set to work collectively towards consolidating the Company’s position as Pakistan’s premier utility.

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Analysis of Auditor’s ReportWe have audited the annexed balance sheet of Sui Southern Gas Company Limited (‘the Company’) as at June 30, 2010 and the related profit and loss account, statement of comprehensive income, cash flow statement and statement of changes in equity together with the notes forming part thereof, for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit.

It is the responsibility of the Company’s management to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the above said statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the above said statements. An audit also includes assessing the accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that:

(a) In our opinion, proper books of account have been kept by the Company as required by the Companies Ordinance, 1984;

(b) In our opinion:(i) The balance sheet and profit and loss account together with the notes thereon have been

drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the books of account and are further in accordance with accounting policies consistently applied, except for the changes as stated in note 3.1 (a) to the financial statements, with which we concur;

(ii) The expenditure incurred during the year was for the purpose of the Company’s business; and(iii) The business conducted, investments made and the expenditure incurred during the year

were in accordance with the objects of the Company;(c) In our opinion and to the best of our information and according to the explanations given to us,

the balance sheet, profit and loss account, statement of comprehensive income, cash flow statement and the statement of changes in equity, together with the notes forming part thereof conform with approved accounting standards as applicable in Pakistan, and, give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the Company’s affairs as at June 30, 2010 and of the profit, total comprehensive income, its cash flows and changes in equity for the year then ended; and

(d) In our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980).

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(e) As more fully explained in note 26.1 to the unconsolidated financial statements, amounts receivable from Karachi Electric Supply Company Limited, Jamshoro Power Generation Company Limited and Sui Northern Gas Pipelines Limited aggregated to Rs. 35,912 million including interest accrued on their balances and amounts of Rs. 37,084 million is payable to Oil and Gas Development Company Limited, Pakistan Petroleum Limited, Government Holding (Private) Limited including interest on their balances. The settlement of these debts is dependent on resolution of inter corporate circular debts. In this matter, our opinion is not qualified.

The financial statements of the Company for the year ended June 30, 2009 were audited by another firm of Chartered Accountants, who in their audit report dated September 29, 2009, expressed an unqualified opinion, but included two paragraphs of emphasis.

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Analysis of Profit and Loss statements

Ratio Analysis

Working Capital

Year 2010 2009 2008Current Assets 67,834,786 61,032,600 36,279,168Current Liabilities 66,631,297 57,923,004 33,455,815Working Capital 1,203,489 3,109,596 2,823,353

Interpretation - Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying.it is clearly seen that the working capital is declining with the passage of each financial year. It was only in 2009 when the working capital is the highest.

Activity Ratios

Inventory Turnover

Year 2010 2009 2008Cost of Goods Sold 104,936,801 108,709,660 69,238,236Average Inventory 2,342,934.5 1,930,260 1,530,746.5Inventory Turnover 44.79 56.32 45.23

Inventory Turnover in days

Year 2010 2009 2008Days per Year 360.00 360.00 360.00Inventory Turnover 44.79 56.32 45.23Inventory Turnover in Days 8.04 6.39 7.96

Interpretation - Inventory turnover reflects how frequently a company flushes inventory from its system within a given financial reporting period. The measure can be computed for any type of inventory—materials and supplies used in manufacturing or service delivery, work in progress (WIP), finished products, or all inventory combined. Inventory turnover is approximately the same in 2008 and 2010, while the year 2009 was comparatively good where the turnover increased to 56.32 and it the cycle completed in around 6.39 days.

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Account Receivable Turnover

Year 2010 2009 2008Net Sales 107,736,781 108,151,087 76,642,399Average Receivable 38,191,936 26,306,616.5 18,053,050.5Account Receivable Turnover 2.82 4.11 4.25

Account Receivable Turnover in days

Year 2010 2009 2008Days per Year 360.00 360.00 360.00Receivable Turnover 2.82 4.11 4.25Receivable Turnover in Days 127.62 87.57 84.80

Interpretation - SSGC being a monopolistic company and the only supplier of gas in the southern region should have a sustained receivable turnover. The turnover ratio keeps worsening as the time passes by, but in 2010 the turnover in days peaked too much (127 days from 87 days) and this is surely not anything good.

Account Payable Turnover

Year 2010 2009 2008Purchases 105,236,480 109,235,330 69,514,593Average Account Payable 49,909,015.5 40,462,187 27,809,479Payable Turnover 2.11 2.70 2.50

Payment period in days

Year 2010 2009 2008Days per Year 360.00 360.00 360.00Payable Turnover 2.11 2.70 2.50Payment Period In Days 170.73 133.35 144.02

Interpretation -A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. In case of SSGC, where the receivable turnover in days worsen by the passage of year so does the payable turnover. In 2010, it took them around 171 days to clear of supplier payments.

Fixed Asset Turnover

Year 2010 2009 2008Net sales 107,736,781 108,151,087 76,642,399

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Average Fixed Asset 41,223,083 37,472,500 33,527,760.5Fixed Asset Turnover 2.61 2.89 2.29

Interpretation - A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. Year 2009 was quite better than the other two years where the FA turnover stays highest at 2.89. It is fairly acceptable in 2010 too.

Total Asset Turnover

Year 2010 2009 2008Net sales 107,736,781.00 108,151,087.00 76,642,399.00Average Total assets 105,656,796.00 86,128,384.00 66,811,363.50Total Asset Turnover 1.02 1.26 1.15

Interpretation - Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue. There isn’t any significant difference between the total asset turnover ratios. It peaked in the year 2009 and then declined.

Operating Cycle

Year 2010 2009 2008Inventory Turnover in Days 8.04 6.39 7.96Receivable Turnover in Days 127.62 87.57 84.80Operating Cycle 135.66 93.96 92.76

Interpretation - Operating cycle is the average length of time between when a company purchases items for inventory and when it receives payment for sale of the items. SSGC has an inclining operating cycle; it was 135 days in 2010. Comparatively much higher than in both the years.

Cash Cycle

Year 2010 2009 2008Operating Cycle 135.66 93.96 92.76Payment Period in Days 170.73 133.35 144.02Cash Cycle -35.08 -39.39 -51.26

Interpretation - The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. SSGC has a negative cash cycle, a good sign for investors.

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Liquidity Ratios

Current Ratio

Year 2010 2009 2008Current Asset 67,834,786.00 61,032,600.00 36,279,168.00Current Liabilities 66,631,297.00 57,923,004.00 33,455,815.00Current Ratio 1.02 1.05 1.08

Interpretation - Current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations. Current ratio is declining every year depicting the fact that the company is gradually deteriorating its liquidity.

Quick Ratio

Year 2010 2009 2008Current Assets 67,834,786 61,032,600 36,279,168Inventory 2,492,774 2,193,095 1,667,425Prepayments 182,944 110,812 267,422Quick Assets 65,159,068 58,728,693 34,344,321Current Liabilities 66,631,297 57,923,004 33,455,815Quick Ratio 0.98 1.01 1.03

Interpretation - The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, the higher the ratio, the better the position of the company. Quick ratio is also declining every year depicting a loss of liquidity.

Cash Ratio

Year 2010 2009 2008Cash 620,884.00 1,477,155.00 4,356,300.00Marketable Securities 0.00 0.00 0.00Current Liabilities 66,631,297.00 57,923,004.00 33,455,815.00Cash Ratio 0.01 0.03 0.13

Interpretation - The cash ratio is most commonly used as a measure of company liquidity. It can therefore determine if, and how quickly, the company can repay its short-term debt. The cash ration too is declining every year. It fell sharply from 2008-2009.

Cash Flow from Operations Ratio

Year 2010 2009 2008Cash Flow from Operations 4,876,999.00 -5,189,456.00 4,827,737.00

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Current Liabilities 66,631,297.00 57,923,004.00 33,455,815.00CFO Ratio 0.07 -0.09 0.14

Interpretation - The operating cash flow ratio can gauge a company's liquidity in the short term. Due to a negative cash flow in 2009, the CFO ratio is a negative value. Compared to the year 2008 the ratio almost halved in 2010.

Solvency Ratios

Debt Ratio

Year 2010 2009 2008Total Liabilities 96,687,277.00 90,870,406.00 61,387,778.00Total Assets 110,759,622.00 100,553,930.00 71,702,838.00Debt Ratio 0.87 0.90 0.86

Interpretation - A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Based on this fact SSGC is maintaining a balanced amount of debts and assets.

Debt to Equity Ratio

Year 2010 2009 2008Long term liabilities 30,055,980.00 32,947,402.00 27,931,963.00Total SHE 14,072,345.00 9,683,524.00 10,315,060.00Debt to Equity Ratio 2.14 3.40 2.71

Interpretation - Debt-equity ratio indicates what proportion of equity and debt that the company is using to finance its assets. It was the highest in 2009, while dropped sharply in 2010.

Debt to Capital Ratio

Year 2010 2009 2008Long term Liabilities 30,055,980.00 32,947,402.00 27,931,963.00Total Liabilities & SHE 110,759,622.00 100,553,930.00 71,702,838.00Debt to Capital 0.27 0.33 0.39

Interpretation - The debt-to-capital ratio gives users an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. The ratio is fairly strong in all three years however it declined a little in 2010.

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Interest Coverage Ratio

Year 2010 2009 2008EBIT 12,029,307.00 4,826,487.00 4,752,301.00interest Expense 5,015,893.00 4,409,792.00 2,370,674.00Interest Coverage Ratio 2.40 1.09 2.00

Interpretation - A ratio used to determine how easily a company can pay interest on outstanding debt. Depending on this assumption, it seems that in 2010 the company is in really good conditions to pay off its debts. All because of the high EBIT.

Financial Leverage

Year 2010 2009 2008Total Assets 110,759,622.00 100,553,930.00 71,702,838.00Total Equity 14,072,345.00 9,683,524.00 10,315,060.00Financial Leverage 7.87 10.38 6.95

Interpretation - The degree to which an investor or business is utilizing borrowed money. The total equity is the highest in 2010 however it is properly balanced its utilization in the asset side causing the ratio to decline.

Profitability Ratios

Gross Profit Margin

Year 2010 2009 2008Gross Profit 2,799,980.00 -558,573.00 7,404,163.00Net sales 107,736,781.00 108,151,087.00 76,642,399.00Gross Profit Margin 0.03 -0.01 0.10

Interpretation - A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. The GPM was negative in 2009 due to Gross loss; however it is on the path of regaining strength.

Operating Profit Margin

Year 2010 2009 2008Operating Profit 3,388,754.00 -1,182,936.00 2,979,911.00Net Sales 107,736,781.00 108,151,087.00 76,642,399.00Operating Profit Margin 0.03 -0.01 0.04

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Interpretation - Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. SSGC’s operating profit margin showed a shortfall in 2009 however it recovered in 2010 due to better performance.

Net Profit Margin

Year 2010 2009 2008Net Profit 4,399,145.00 257,485.00 991,067.00Net Sales 107,736,781.00 108,151,087.00 76,642,399.00Net Profit Margin 0.041 0.002 0.013

Interpretation - This number is an indication of how effective a company is at cost control. The higher the net profit margin is, the more effective the company is at converting revenue into actual profit. This statement is held true for SSGC where a sufficient increase of profit margin is in 2010.

Return on Sales

Year 2010 2009 2008Net Profit 4,399,145.00 257,485.00 991,067.00Net Sales 107,736,781.00 108,151,087.00 76,642,399.00Return on Sales 0.041 0.002 0.013

Interpretation - This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales. The year 2010 shows a good ROS because of its better performance in that fiscal period.

Return on Assets

Year 2010 2009 2008EBIT 12,029,307.00 4,826,487.00 4,752,301.00Average Total Assets 105,656,796.00 86,128,384.00 66,811,363.50Return on Assets 0.114 0.056 0.071

Interpretation - ROA gives an idea as to how efficient management is at using its assets to generate earnings. In case of SSGC the management had been utilizing the assets fairly well, the boosted figure of 11.4% in 2010 is a clear evidence of this.

Return on Equity

Year 2010 2009 2008Net Profit 4,399,145.00 257,485.00 991,067.00Average SHE 11,877,934.50 9,999,292.00 10,026,981.50Return on Equity 0.370 0.026 0.099

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Interpretation - Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. The year 2010 shows a 37% return on each of the dollar invested,

Market Ratios

Fair Value per Share

Year 2010 2009 2008EPS 6.55 0.38 1.48P/E Multiple 2.43 36.49 19.00Fair Value per Share 15.910 14.000 28.060

Interpretation - Fair value is used as a certainty of the market value of an asset (or liability) for which a market price can be determined (usually because there is no established market for the asset). It is the highest in 2008 due to an increased PE multiple. In 2010 the earnings are fairly high however, the reduced PE multiple is balancing its effect.

Earnings per Share

Year 2010 2009 2008Earnings for CS 4,399,145.00 257,485.00 991,067.00No. of Shares Outstanding 671,174.30 671,174.30 671,174.30Earnings per Share 6.554 0.384 1.477

Interpretation - The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. The impact of the global recession is clearly seen in 2009, however the company regained strength in 2010 and it is far better than in 2008.

Dividend per share

Year 2010 2009 2008Dividend 1,006,761.45 0.00 838,967.88No. of Shares Outstanding 671,174.30 671,174.30 671,174.30Dividend per Share 1.500 0.000 1.250

Interpretation - Dividend per share (DPS) is a simple and intuitive number. It is the amount of the dividend that shareholders have (or will) receive for each share they own. Due to better performance the company declared a dividend of Rs. 1.5 per share along with giving out stock dividends.

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Dividend pay-out Ratio

Year 2010 2009 2008Dividend 1,006,761.45 0.00 838,967.88Net Profit 4,399,145.00 257,485.00 991,067.00Dividend Pay-out Ratio 0.229 0.000 0.847

Interpretation - The DPR (it usually doesn’t even warrant a capitalized abbreviation) measures what a company’s pays out to investors in the form of dividends. Due to no dividends in 2009, there isn’t any dividend payout. If compared to 2008, the dividend payout ratio has declined in 2010.

Break-up Value per Share

Year 2010 2009 2008Total SHE 14,072,345.00 9,683,524.00 10,315,060.00No. of Shares Outstanding 671,174.30 671,174.30 671,174.30Break-up Value 20.967 14.428 15.369

Interpretation - A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. Break-up value of SSGC shows a clear rise since 2008. It did decline in 2009 due to the global recession however it spiked again in 2010.

Dividend Cover

Year 2010 2009 2008Earnings for CS 4,399,145.00 257,485.00 991,067.00Dividend 1,006,761.45 - 838,967.88Dividend Cover 4.370 - 1.181

Interpretation - Dividend cover is a measure of the ability of a company to maintain the level of dividend paid out, higher the cover, the better the ability of a company to maintain dividends if profits drop. If compared to 2008, a change of 3.139 is fairly acceptable and the company seems to be maintaining dividends near future.

Dividend Yield

Year 2010 2009 2008Dividend per Share 1.50 0.00 1.25Market Price Per Share

15.91 14.00 28.06

Dividend Yield 0.094 0.000 0.045

Interpretation - Dividend yield shows how much a company pays out in dividends each year relative to

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its share price. In case of SSGC, there weren’t any dividends paid out in 2009 so the change of 9.4% from 2009-2010 is relatively adequate.

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Analysis of the Statement of Changes in Equity

A statement of changes in equity shows all changes in owner’s equity for a period of time. The purpose of the statement of changes in equity is to provide readers with the useful information on how the capital or fund of an entity is utilized and used. Since it shows the movements of equity and accumulated earnings and losses, the readers can depict on where the company’s equity came from and where did it go.

Year2008 2009 2010 2008 (%) 2009 (%) 2010 (%)

Share Capital (Rs. 10 par) 6,711,743 6,711,743 6,711,743 65.07% 69.31% 47.69%Capital Reserves 234,868 234,868 234,868 2.28% 2.43% 1.67%Revenue Reserves 2,232,794 2,384,794 2,872,533 21.65% 24.63% 20.41%Unrealized gain/loss 143,866 93,813 83,489 1.39% 0.97% 0.59%Un-appropriated profits 991,789 258,306 4,169,712 9.61% 2.67% 29.63%Total Shareholders' Equity 10,315,060 9,683,524 14,072,345 100.00% 100.00% 100.00%

Computation of Growth Rate of DividendGrowth Rate of Dividend is the annualized percentage rate of growth that a particular stock's dividend undergoes over a period of time. The time period included in the analysis can be of any interval desired, and is calculated by using the least squares method, or by simply taking a simple annualized figure over the time period.

The dividend growth rate is necessary in order to use the dividend discount model, which is a security pricing model that assumes that a stock's price is determined by the estimated future dividends, discounted by the excess of internal growth over the firm's estimated dividend growth rate.

Year 2010 2009 2008Dividend 1,006,761.45 0.00 838,967.88No. of Shares Outstanding 671,174.30 671,174.30 671,174.30Dividend per Share 1.500 0.000 1.250

Dividend (2010) = Dividend (2008) [1+growth Rate] n-1

1,006,761.45 = 838,967.88 [1+growth Rate] 3-1

1,006,761.45/838,967.88 = [1+growth Rate] 2

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1.1999 = [1+growth Rate] 2

1.0954 = 1+growth Rate

Growth Rate = 0.095

Growth Rate = 9.54%

Computation of Fair ValueFair value is used as a certainty of the market value of an asset (or liability) for which a market price can be determined (usually because there is no established market for the asset).

Computation on the basis of Break-up Value (Book Value)

Year 2010 2009 2008Total SHE 14,072,345.00 9,683,524.00 10,315,060.00No. of Shares Outstanding 671,174.30 671,174.30 671,174.30Break-up Value 20.967 14.428 15.369

Market Price (at June 30, 2010) = 15.91

Market Price < Breakup Value (2010)

15.91 < 20.967

Computation on the basis of Earnings

Year 2010 2009 2008Earnings for CS 4,399,145.00 257,485.00 991,067.00No. of Shares Outstanding 671,174.30 671,174.30 671,174.30Earnings per Share 6.554 0.384 1.477

Fair Value = Earnings per share x PE Ratio

Fair Value = 6.55 x 2.43

Fair Value = 15.9165

Now, Market Price = 15.91

Hence, Market Price = Fair Value

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Conclusion

Sui Southern Gas Company Limited Key Recent Developments

Jan 28, 2010: 4Gas Wins Approval To Build Floating LNG Terminal At Port Qasim, Pakistan

Dec 24, 2009: First Tri-Star And SSGC Enter Into Gas Supply Agreement For Supply Of Natural Gas

Dec 14, 2009: Hycarbex And SSGC Sign EWT-GSPA Agreement

May 05, 2009: Hycarbex Signs Gas Sales Agreement With SSGC For Haseeb #1 Well

Jan 30, 2009: American Energy Announces Allocation Of Gas For Haseeb #1 Well In Yasin Block

Sui Southern Gas Company Limited (SGGC) is engaged in the transmission and distribution of natural gas. The company is also engaged in the manufacturing and selling of gas meters. SGGC is a provider of high pressure transmission and low pressure distribution systems. The company owns and operates a network of high-pressure gas pipelines to supply gas. The gas is supplied to customers belonging to a franchise area covering more than 1,200 towns in the Sind and southern Pakistan. The transmission system of the company comprises of 3,200 km of high pressure pipeline having a diameter of 12 – 24 inches. The company principally operates in Pakistan.

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