Friday, June 16, 2023

Shell Pakistan (SHEL)

Equity Market
Enterprise value estimated at PkR 230/sh (upside: 130%) Research Entity Number: REP-039

The main sponsor of Shell Pakistan (SHEL), Shell Petroleum

Company, United Kingdom, has announced its intention to exit Yusuf Rahman
from Pakistan’s market by selling its controlling stake. The yusuf.rahman@kasb.com
sponsor owns 165.7mn shares, implying an ownership share of
77.4% in SHEL.

Storage capacity valued at USD 20mn

SHEL's Enterprise Value
SHEL presently has petroleum storage capacities of 156kT, of PkR bn Value
which 74kT is MS and 66kT is HSD. Based on our estimates of
Land 35.0
domestic and regional peers, setting up a new oil storage facility
costs around USD 250/MT. However, given SHEL’s relatively older Storage Facilities 5.6
facilities, we have assumed depreciation of 50%, implying a value Blending Plant 4.3
of USD 20mn (PkR 5.6bn). Net Liabilities (2.6)
Shell Pakistan Storage PAPCO 7.0
MT 100/LL JP-1 JP-8 MS HOBC KERO HSD HSFO Total Total - PkR bn 49.3
Total 1,353 2,031 1,684 74,038 145 2,012 66,206 9,009 156,478 Total - USD mn 171.8
Karachi 1,353 0 1,684 55,127 0 0 12,302 9,009 79,475 Total (PkR/sh) 230.3
Northern
0 2,031 0 3,768 0 271 3,956 0 10,026
Punjab
Central Punjab 0 0 0 11,002 145 1,389 30,352 0 42,888
Southern
0 0 0 655 0 0 5,205 0 5,860
Punjab
KPK 0 0 0 1,845 0 0 2,921 0 4,766
Sindh (Exc. Khi) 0 0 0 1,641 0 352 11,470 0 13,463
Source: Company Accounts

Blending plant valued at USD 15mn

SHEL presently has an annual lubricant blending capacity of
96kT with an estimated market share of 35%. Moreover, the
lubricant industry offers considerably higher margins, with an
estimated net profit margin of around 6-7%. Based on our
assessment of domestic & regional peers, setting up a 96kT
lubricant plant would cost around USD 21mn. Assuming the
plant’s depreciation of 30%, we estimate that the blending plant
could be valued at around USD 15mn (PkR 4.3bn).

Retail network of around 800 sites

Shell Pakistan has a retail network of around 800 sites, allowing
it to benefit from one of the highest market shares in the
country. During 11MFY23, its MS share stood at 10% and its HSD
share at 6%. Moreover, the company owns 9 company-operated
plants at prime locations, concentrated primarily in Karachi.
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 PAKISTAN
KASB | KTrade Research
Equity Market

A 26% investment stake in PAPCO

SHEL has a 26% stake in Pak Arab Pipeline Company (PAPCO).
PAPCO is a 786km long pipeline, connecting Karachi with
Shikarpur and Mahmoodkot. Moreover, the pipeline also
connects the two Karachi ports with each other. In 2022, the
pipeline was used to transport 7.1mn MT of fuel products. In
CY22, the pipeline contributed PkR 1.0bn towards SHEL’s
profits and also provided a cash dividend of PkR 705mn. Based
on our estimates, the 26% stake in PAPCO is valued at PkR
7.0bn.

PkR 35bn value derived from land

Shell Pakistan owns prime land with an area of 125 acres. As
mentioned, the bulk of its company-operated retail pumps are
located in Karachi, the largest city in the country. Moreover, its
storage terminals are also located in prime locations, such as the
Karachi Port and Aviation facilities. Our estimates include
location prices taken from Zameen.com and assess a
cumulative land value of PkR 35bn.

Net liabilities of PkR 2.6bn

Adjusting for SHEL’s short-term assets, liabilities, debt, and
capital work-in-process, we estimate net liabilities of PkR 2.6bn.
The company has inventory levels of PkR 63bn, creditor
payments to the tune of PkR 89bn, cash balances of PkR 10bn,
and net debt liabilities of around PkR 5.0bn.

Marred by industry-specific issues

Shell Pakistan has recorded cumulative losses of PkR 4.0bn,
driven by a number of factors. Most notably, the company’s
profits have been affected by currency and oil price volatility,
leading to inventory losses and exchange losses. In CY22, the
company recorded exchange losses of PkR 10.0bn, and in
1QCY23, its exchange losses registered at PkR 11.1bn. Despite
heavy losses in the past few years, the company is subject to
turnover taxes, further reducing its profits.

Potential savings of PkR 4.5bn annually if sponsors exit

Shell Pakistan paid PkR 3.5bn in technical service fees to Shell
Group and PkR 679mn in trademark and license fees to Shell
Brands International AG. We estimate that Shell’s exit could
result in new sponsors potentially bypassing these two fee heads
and yield annual savings of PkR 4.5bn.

APL a likely candidate given its foreign-based sponsors

Given issues with repatriation in Pakistan, we think SHEL’s
sponsors would prefer a foreign buyer to take over the
company, ensuring limited hurdles with repatriating the sale
proceeds. APL’s sponsor, the Attock Group, has a multinational
presence and should have the capacity to arrange USD dollars
for the transaction. Moreover, the Attock group’s energy supply
chain synergizes well with SHEL’s infrastructure, likely reducing
2
operational volatility historically faced by Shell Pakistan.
 PAKISTAN
KASB | KTrade Research
Equity Market

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Rating Definitions
• Outperform >18.5% potential upside
• Neutral: 12.5% to 18.5% potential upside
• Underperform <12.5% potential upside