Fundamental Analysis of Pakistan Petroleums Limited
Qualitative and quantitative analysis of PPL has been done using different company valuation methods. Calculations for quantitative and fundamental analysis have been done in separate google sheets and links to that sheets are also attached to the document.
Comparable Company Valuation:
Comparable company analysis of PPL with peer companies POL, MARI, & OGDCL using different ratios. In this analysis ratios like, EV to Sales, EV/EBIT, EV/EBITDA, and P/E are calculated for the companies operating in the Oil/Gas exploration here and compared with the respective ratios of PPL and Fair Price of the PPL have been calculated with different ratio wise and on average we have found PPL should be worth ~ Rs. 69.00 This analysis shows that PPL’s market price is undervalued and it has an upside potential of 21%.
This method of stock valuation best fits when all the peer stocks are operating in a similar way and using more or less the same technology, and equipment, and having similar assets, reserves and liabilities. All the companies bear similar effects of the Country’s economic policies, political directions, and global market prices. This method suits our case of PPL for estimating its fair price. Click here to open the sheet for complete calculations:
Dividend Discounted Model for Stock Valuation:
The dividend Discounted model has been used for stock valuation. This method is useful for companies that have a history of dividend-paying and continuous dividend growth. Applying DDM on PPL for fair stock evaluation has some drawbacks as it has a haphazard dividend growth ranging from -73% to +455% so a precise estimate for future growth can not be calculated. Pakistan Petroleums Limited has 10 years average dividend growth rate of 40% and for the last 5 years average is 11%. A consistent 18% dividend growth rate for PPL justifies its current market price (Rs. 56.00) according to this method, so dividends should increase at higher rates to grow as a company. Changing the dividend growth rate from 18% in the yellow highlighted cell will give a different fair value -it should be less than CoE 22.3. Receivables of PPL are piling up for a few years that's why they have issues with payouts hence this method is cant be a good measure to value PPL.
Click here to open the complete sheet having all the calculations:
Discounted Cashflow Analysis of PPL:
Discounting the future cash flows to find the present value of a business or asset is a widely used method by investors. Free cash flows of PPL also remained inconsistent in past years, so finding a precise FCF growth rate for future FCFs is difficult in this case. The main reason behind irregularity in cash flows is due to pending receivables. By this method, we can calculate the fair value of PPL’s stock price, but some assumptions have to be made. A precise growth rate for FCFs that justifies the market price of PPL is calculated for the next 8 years which is 29% -changing value in the yellow highlighted cell will give a different fair price. So, a higher growth rate for free cash flow is required to grow in the future, more than 30% is not a big issue if the receivables issue got fixed.
Click here to open the complete sheet having all the calculations:
Ratio Analysis in Comparison to Peers:
Different financial ratios of PPL have been compared with its peers (POL, MARI, OGDCL).
This link has all the ratio in comparison to peers:
Profitability ratio:
In the last 5 years, ROCE for PPL remained around ~20% and hasn’t seen any reasonable improvement. On the other side average ROCE of 5 years for its competitors like POL, and MARI was more than 30% and continuously improving. This means management is not using its capital as efficiently as its competitors.
Similarly, PPL’s return on assets (ROA ) is around 10%. It was regularly improving pre-Covid but is stagnant below 10% in the last 3 years. Its competitors have an average ROA more than PPL’s i.e. ~17% (POL). Likewise, ROE for PPL is below 20% for the last 6 years though its peers (Mari & POL) have an ROE double that of PPL. This indicates PPL’s remained unable to harvest its assets efficiently.
The average Gross profit margin of PPL for 6 years is around 45%. POL and OGDCL have also similar profits, though GPM for Mari is significantly higher than all others. A profit margin of PPL indicates its profits are in good comparison with its peers.
Liquidity Ratios:
PPL’s current ratio and the acid ratio are good in comparison to its peer's POL and OGDC, it has sufficient liquidity against its liabilities. Since last 2 years its 4 times of its liabilities. This indicates it has enough room for growth in the future without any fear of liquidity crisis.
Activity Ratios:
Asset turnover shows how efficiently the assets are being used to generate revenues by the management. PPL’s average asset turnover ratio is ~0.3 which means its revenues are 30% of its assets. It was outperforming its peers (Mari & OGDCL) pre-Covid’19, but for the last 2 years, Mari and POL has assets turnover of around 0.5 as compared to PPL’s 0.3.
The inventory Days of PPL are around 25, which means it was understocked to some extent as Inventory days for its peers are in a range of 50 to 70. According to experts, it should be in a range of 40 to 50 days to avoid understock issues and the extra cost of idle stock at the same time.
Solvency Ratios:
The debt to equity ratio of PPL is 0.5 averaging to the last 6 years. It has equity two times the debt amount, for every 2 rupees in equity PPL has 1 rupee in debt. Its peers have POL and MARI has larger D/E values means they are in much debt against equity, although Mari has improved it much and is now at 0.5 from the average D/E of 1.74. OGDCL and PPL have less debt against equity, which is a positive indicator.
The interest coverage ratio of PPL is much larger as compared to its peers. Its earnings are ~90 times its interest payments, though it has decreased post-Covid’19 yet significantly above its competitors. POL and Mari have values below 50 and OGDCL has a mean value of 73 times.
Book Intrinsic Value:
The book value of a company is also a good measure to find the intrinsic or fair value of a stock. In business-like energy, heavy manufacturing, and physical product-based companies book value is also a good measure for long-term investors, it waives off the major risks, as most of their assets can be converted to liquid cash in case of a business shutting down or bankruptcy, etc. PPL’s book value is ~160.0 rupees per share and its been increasing for the last 6 years, which means its growing and acquiring more assets with time. It is trading Rs. 103.00 below its book value, which means PPL is much undervalued and an attractive buy opportunity. At the same time, this shows the inefficiencies of the management to harvest its full potential.
Critical Analysis:
Global economic slowdown due to anti-inflationary measures by central banks poses a threat of global recession and decreasing demand for crude oil is leading to low prices in global markets. This will have negative impacts on the whole oil/gas industry worldwide and PPL revenues and earnings as well for a year or two, but for the long-term investors buying throughout the year will be a good investment for the next economic cycle.
PPL is also operating in UAE, Yemen, and Iraq; the company is growing internationally as well. Furthermore, dollar strengthening due to interest hikes by FED will be beneficial for PPL due to international operations.
PPL is also diversifying its operations by participating in mineral exploration projects locally, so good growth in the future is expected. Depleting Oil/Gas reserves has made exploration more competitive plus worldwide policies related to renewable and the shift to EV can’t be ignored for sustainable growth of the business in the future. So, PPL’s diversification of business is a good step.
PPL is earning well (i.e EPS: 23 rupees) but retaining about 90% (Plowback 89.8%) of earnings, company is investing a major portion of its earnings in asset building that's why its book value is continuously increasing.
One of the main issues in PPL is receivables, they have continuous pending receivables from govt and institutions, which negatively affects its cashflows. Its latest PE ratio is 2.63, which is also good meaning paying every 2.63 rupees in price is earning 1 rupee.
Conclusion:
On doing quantitative and qualitative analysis considering all the global factors, Pakistan’s economic conditions, the company’s financials, future projects, and the company’s performance in comparison with its peer groups PPL has an upside potential from here for the long-term investor. It's trading around its IPO, so it's a good opportunity to buy for the long term. The market price of a company is not a reflection of its fundamentals only, there are many other factors -an investor's interest in a specific industry or some strategic investments in a particular sector may also effect the market price of a company.
