PICT: Was it a good investment?

Pakistan International Container Terminal’s (PICT) stock has hit the lower lock for 10 straight sessions now. Over the course of those 10 trading sessions, PICT’s share price fell 50%. It has plummeted from Rs 134.5 on 12th June to Rs 66.68 on 23rd June. So, what caused this monumental drop? Before answering that question, one has to know PICT’s business model.

PICT had attained a 21-year concession agreement from Karachi Port Trust (KPT) starting in 2002. The agreement was a typical build-operate-transfer (BOT) contract. In a BOT contract, the concessionaire (holder of concession) has to build an asset and is allowed to operate it with certain conditions.

Upon the expiry of the agreement, the concession can be extended or renewed. If not, the asset is transferred to the host. In this case, the host was KPT (a federal government agency). PICT’s concession agreement with KPT allowed it to build and operate four berths at its terminal, mostly handling cargo containers.

Under a standard BOT agreement with the Government of Pakistan, the concessionaire is allowed to publicly list its shares within three years of beginning operations. As a result, PICT publicly listed itself on the Karachi Stock Exchange in the second half of 2003. At the time, it was the largest initial public offering on KSE with over 73,000 applicants. PICT shares opened trading at Rs 12.13 per share on 2nd December 2003.

Skipping forward to present day, PICT was in negotiation with the government to renew or extend the concession agreement. Although the management had flagged the risk of possible non-extension of the concession agreement, it had remained optimistic that it would be able to operate the terminal after 17th June – as mentioned in recent financial reports. The management believed this since it had the right of first refusal when the terminal is tendered for a new concession.

On 12th June, the government decided that it would take over PICT’s terminal and operate it. But a few days later, it allowed PICT to continue managing the terminal till 30th June. Why did the government do this? Because under clause 21.3 of the concession agreement, if KPT took over the terminal to operate it, the right of first refusal becomes seemingly null. The clause also states that KPT has to invite competitive bids before expiry date if it intends not to operate the terminal.

This legal sleight of hand has dented any chances of PICT retaining its operations at the terminal. Although PICT is likely to challenge this in courts, it is unlikely to bring any change since Sindh High Court already set a precedent for the case and backed the government’s stance back in March 2023.

Consequently, chances are that PICT will wind up operations or continue offering terminal management services, which is not a stable nor a very profitable line of business.

Now, returning to the main purpose of this blog: how did public shareholders of PICT fare? To determine this, it was assumed that the shareholders:

• Owned ordinary shares of PICT
• Bought shares at open on first trading day
• Subscribed to right shares in 2004 to avoid dilution
• Were filers so dividend tax rate for filers applied
• Held shares till the end (share price hits zero after final dividend is paid)

Within the calculations, it is also assumed that PICT will wind up operations and give a final cash dividend of Rs 34.6 per share – returning any cash from sale of assets net of liabilities. Based on this, the net present value of PICT came in at Rs 860 per share. Although, NPV would’ve been higher by more than Rs 100 if the shareholder sold their shares on or before 12th June.

This is still a good sign as it means that it was a positive NPV investment for the initial public investors of PICT. So, PICT was a worthwhile investment for initial public shareholders. This is important for future investors in other companies with a similar BOT or concession agreement structure as PICT.

Currently, Pakistan International Bulk Terminal (PIBTL) is a publicly listed company which has a 30-year BOT contract with KPT which commenced in 2010. In fact, it was started by some former sponsors of PICT. However, PIBTL is not comparable to PICT as PICT has been profitable right from the start of its operations (although it began paying out dividends only in 2008). Meanwhile, PIBTL has had a rocky performance with many years of losses, and it continues to bleed red as of 2023.

A more realistic comparison could be made to Abu Dhabi Ports Group which is taking over PICT’s operations at the container terminal. AD Ports is about to sign a 50-year lease agreement with KPT for operation of the terminal. The draft agreement includes a clause which states that AD Ports could publicly list itself on the Pakistan Stock Exchange.

If PICT’s experience has any weight, initial investors in AD Ports could make worthwhile returns. However, PICT’s experience also reveals that investors should be cautious and conservative. Investors should carefully consider the legal risks in a lease or concession agreement.