Sunrise Research
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` Sunrise Research Sunrise Capital (Pvt.) Limited Trend of PIA Losses (Rs Billions) Revenue by Geographical Segments DISCLAIMER: ANY UNAUTHORIZED USE OR DISCLOSURE OF THIS REPORT IS PROHIBITED. THIS REPORT HAS BEEN PREPARED BY SUNRISE CAPITAL PVT LIMITED AND THE INFORMATION CONTAINED HEREIN WAS OBTAINED FROM VARIOUS SOURCES WHICH ARE BELIEVED TO BE RELIABLE, SUNRISE CAPITAL PVT LIMITED DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF THE INFORMATION PRESENTED HEREIN. NEITHER THE INFORMATION NOR AN OPINION EXPRESSES CONSTITUTES AN OFFER OR AN INVITATION TO BUY OR SELL ANY SECURITY. Friday, January 10, 2014 Movement Since Jan-13TD Overview : Privatization of PIA PIA a state owned entity with a GoP holding of 2.43bn shares (84.64%) is suffering with huge losses since more than 5 years. There are various reasons behind the losses like corruption, incompetent management and political appointments. As per financials of 9MCY13, Losses of PIA stood at Rs 31.94bn with an increase of 42% YoY and so far PIA has accumulated loss of Rs 180bn. The finance cost of PIA appreciated by 10% to Rs 9.32bn while due to huge borrowings, liabilities of PIA stood at Rs 267.8bn as compare to Rs 238bn last year with an uptick of 12%. In current scenario due to consistent losses PIA is unable to pay off its outstanding debt and due to which accrued interest is compiling up and as on 9MCY13 it stood at Rs 11.26bn with an uptick of 66%. It is hard to believe that the airline with 26 operational aircrafts supports a staff of 16,600 regular and 2,700 contractual employees, having 742 employees per aircraft which is almost 6 times higher than the global average of 120 per air craft. PIA is still having losses of approximately Rs 3bn per month with Rs 1bn mark up included in Rs 3bn amount. Risks associated with PIA Fuel price risk PIA has exposure to fuel price risk and due to which its earnings are affected by changes in price of aircraft fuel. As per 9MCY13, PIA fuel cost is Rs 40.8bn and due to current tension in Iraq and Libya it is expected that it may disturb the supply of oil which may push the price. If international oil prices appreciated by 10% from here onwards, it will further increase the fuel cost of about Rs 3bn to Rs 4bn and deteriorate financial position of the company. Currency risk PIA revenue streams are denominated in a number of foreign currencies resulting in exposure to foreign exchange rate fluctuations. In addition, PIA has substantial foreign currency borrowings and lease liabilities that are primarily denominated in US Dollar (USD), Saudi Riyal (SAR), United Arab Emirates Dirham (AED) and Great Britain Pound (GBP). As per 9MCY13 financials PIA lost Rs 6.13bn due to changes in exchange rates. Since FY14TD PKR has depreciated about 7.31% against US$ so it is expected that losses due to exchange rates may increase about Rs 0.4bn. PIA manages some of its currency risk by utilizing its foreign currency receipts to satisfy its foreign currency obligations. Interest rate risk PIA is also exposed to risk of Interest rate that have the impact on the fair value or future cash flows of a financial instrument due to changes in market interest rates. SUNRISE PIA Outlook 0 5 10 15 20 25 30 35 9.45 20.79 26.77 33.18 31.94 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.48 0.2 0.05 0.19 0.08 0 5 10 15 0 10000 20000 30000 KSE vs PIAA KSE-100 Index PIA surged by 149% surgerd by 56% www.sunrisecapital.com.pk | 111-786-772 | [email protected]
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Transcript of Sunrise Research
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`Sunrise Research
Sunrise Capital (Pvt.) Limited
Trend of PIA Losses (Rs Billions)
Revenue by Geographical Segments
DISCLAIMER: ANY UNAUTHORIZED USE OR DISCLOSURE OF THIS REPORT IS PROHIBITED. THIS REPORT HAS BEEN PREPARED BY SUNRISE CAPITAL PVT LIMITED AND THE INFORMATION CONTAINED HEREIN WAS OBTAINED FROM
VARIOUS SOURCES WHICH ARE BELIEVED TO BE RELIABLE, SUNRISE CAPITAL PVT LIMITED DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF THE INFORMATION PRESENTED HEREIN. NEITHER THE INFORMATION NOR AN
OPINION EXPRESSES CONSTITUTES AN OFFER OR AN INVITATION TO BUY OR SELL ANY SECURITY.
Friday, January 10, 2014
Movement Since Jan-13TD
Overview : Privatization of PIA
PIA a state owned entity with a GoP holding of 2.43bn shares (84.64%) is sufferingwith huge losses since more than 5 years. There are various reasons behind thelosses like corruption, incompetent management and political appointments. Asper financials of 9MCY13, Losses of PIA stood at Rs 31.94bn with an increase of42% YoY and so far PIA has accumulated loss of Rs 180bn. The finance cost of PIAappreciated by 10% to Rs 9.32bn while due to huge borrowings, liabilities of PIAstood at Rs 267.8bn as compare to Rs 238bn last year with an uptick of 12%. Incurrent scenario due to consistent losses PIA is unable to pay off its outstandingdebt and due to which accrued interest is compiling up and as on 9MCY13 it stoodat Rs 11.26bn with an uptick of 66%.
It is hard to believe that the airline with 26 operational aircrafts supports a staff of16,600 regular and 2,700 contractual employees, having 742 employees peraircraft which is almost 6 times higher than the global average of 120 per air craft.PIA is still having losses of approximately Rs 3bn per month with Rs 1bn mark upincluded in Rs 3bn amount.
Risks associated with PIA
Fuel price risk
PIA has exposure to fuel price risk and due to which its earnings are affected bychanges in price of aircraft fuel. As per 9MCY13, PIA fuel cost is Rs 40.8bn and dueto current tension in Iraq and Libya it is expected that it may disturb the supply ofoil which may push the price. If international oil prices appreciated by 10% fromhere onwards, it will further increase the fuel cost of about Rs 3bn to Rs 4bn anddeteriorate financial position of the company.
Currency risk
PIA revenue streams are denominated in a number of foreign currencies resultingin exposure to foreign exchange rate fluctuations. In addition, PIA has substantialforeign currency borrowings and lease liabilities that are primarily denominated inUS Dollar (USD), Saudi Riyal (SAR), United Arab Emirates Dirham (AED) and GreatBritain Pound (GBP). As per 9MCY13 financials PIA lost Rs 6.13bn due to changes inexchange rates. Since FY14TD PKR has depreciated about 7.31% against US$ so it isexpected that losses due to exchange rates may increase about Rs 0.4bn. PIAmanages some of its currency risk by utilizing its foreign currency receipts tosatisfy its foreign currency obligations.
Interest rate risk
PIA is also exposed to risk of Interest rate that have the impact on the fair value or futurecash flows of a financial instrument due to changes in market interest rates.
SUNRISEPIA Outlook
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101520253035
9.45
20.79
26.77
33.18 31.94
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0.10.15
0.20.25
0.30.35
0.40.45
0.5
0.48
0.2
0.05
0.19
0.08
0
5
10
15
0
10000
20000
30000
KSE vs PIAA
KSE-100 Index PIA
surged by 149%
surgerd by 56%
www.sunrisecapital.com.pk | 111-786-772 | [email protected]
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Sunrise Research
Sunrise Capital (Pvt.) Limited
Liabilities (Rs Billions)
Finance Cost (Rs Billions)
Accrued Interest ( Rs Billions )
DISCLAIMER: ANY UNAUTHORIZED USE OR DISCLOSURE OF THIS REPORT IS PROHIBITED. THIS REPORT HAS BEEN PREPARED BY SUNRISE CAPITAL PVT LIMITED AND THE INFORMATION CONTAINED HEREIN WAS OBTAINED FROM
VARIOUS SOURCES WHICH ARE BELIEVED TO BE RELIABLE, SUNRISE CAPITAL PVT LIMITED DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF THE INFORMATION PRESENTED HEREIN. NEITHER THE INFORMATION NOR AN
OPINION EXPRESSES CONSTITUTES AN OFFER OR AN INVITATION TO BUY OR SELL ANY SECURITY.
In 9MCY13, finance cost of PIA was Rs 9.32bn if we assume increase in policy ratein coming monetary policies in 2HFY14 by 50-100 basis points its finance cost willalso increased.
Liquidity risk
As per financials, PIA liquidity risk has grown with increase in liabilities andcompiling of accrued interest and dont having earnings due to consistent lossesto payoff. But through support of GoP either in the form of capital/loans or in theform of guarantee to obtain financing from lenders, liquidity risk is minimum.
Privatization of PIA & GoP
PIA is considered as white elephant among public state entities which has eatenup the billions of rupees of tax payers. Due to which govt has placed PIA in the listof companies which has to be privatized. As per previous guidelines of IMF PIAwas set to privatized in June, 2014 but now it has been changed to Dec 2014.According to Privatization Secretary Amjad Ali Khan, advisor will be hired by theend of March in current year and he will prepare a report on financial andtechnical aspects of the PIA after that final decision will be made and it can befurther extended to beyond Dec 2014 in the light of financial advisors report.
Board of privatization commission in its meeting has approved the appointmentof financial advisor who will also determine the base price. It has also beendecided in the meeting that the liabilities will not be transferred to the buyer.Management control will also be transferred to the buyer.
Govt has planed to sell 26% shares of PIA, since "A" Class shares of PIA having facevalue of Rs 10 is most likely to be considered for 26% sale deal. If we assume themarket price of PIA at the time of privatization stands at Rs 9.97/ share, Govt canearn Rs 6.3bn due to selling of 633mn shares.
Recommendation
The consideration is not just to earn revenue out of the privatization of PIA. Tomeet IMF condition, Govt looking after efficient private player having theability/capacity to turn it around & safeguard tax payers money & stop losses.Govt will appoint a financial adviser by March 2014 who will be responsible forfinalizing different stages of cut-off dates to accomplish in consultation withPrivatization Commission and hand over the airlines to a potential party by Dec2014.
As per privatization commission, outstanding liabilities of PIA stands at Rs 268bnwhich will not be transferred to successful bidder which has made the potentialdeal more lucrative. Since Jan-13 to till date KSE-100 Index surged by 56%, whilePIA share price surged by hefty gain of 149%. Post privatization, with the takeover of professional and efficient management control it is possible that PIA cantransform into profitable entity so it can be potential stock for investmentpurpose.
SUNRISE
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179.88 183.28204.93
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www.sunrisecapital.com.pk | 111-786-772 | [email protected]
