PNSC: Why a Huge Dividend is Probably Not Coming

 

Pakistan National Shipping Corporation’s (PNSC) share price has seen a monumental rise over the past year. It was hovering around Rs 50/share in July 2022 and spiked to reach a high of Rs 143.99/share in May 2023. The share price has since cooled off to around Rs 130/share. What has given way to such lucrative returns? Well, pricing. 

PNSC is in the business of shipping commodities mainly oil. There are two segments in oil shipping – liquid and dirty cargo. Liquid cargo refers to refined fuels (petrol, diesel etc.) and dirty cargo refers to unrefined fuels (crude oil etc.). Now, PNSC’s pricing is indexed to international shipping rates as mentioned in their annual reports and corporate briefing sessions.

We can take a look at the most widely quoted shipping futures found at the Baltic Exchange to understand PNSC’s pricing. You can see the Baltic Dry Index as well as the Baltic Clean and Dirty Tanker Index below (zoom in for clarity).

You’ll notice that the Baltic Dry Index boomed in mid to late 2021 due to coronavirus-related supply chain issues. But this did not significantly impact PNSC’s top or bottom line as PNSC’s business is concentrated in the oil shipping segment.

On the other hand, both Baltic Clean and Dirty Index boomed in mid-2022 right after the onset of the Ukraine War. The Ukraine War has caused severe disruptions in the oil market which has very much spilled over into the shipping business. As a result, PNSC’s top and bottom line skyrocketed over the past four to five quarters.

To get a true sense of this, you can return to PNSC’s financial reports. FY22’s half yearly report shows that PNSC had an earnings per share (EPS) of Rs 10.77 which was only slightly higher than the previous year’s Rs 9.12. In Q3 alone, its EPS was Rs 7.75, and it ended the financial year at an EPS of Rs 42.78 – a 149% increase YoY.

Oil shipping rates continued increasing and so did PNSC’s earnings. PNSC’s EPS marched on to hit Rs 40.8, Rs 49.94 and Rs 90.66 in the subsequent three quarters. Although the EPS in FY23Q3 is distorted since there was an unexpected rise in other income – exchange gain from the sale of one of its tankers.

PNSC has made huge windfall gains on the back of the Ukraine War. The market is expecting those gains to translate into distributed cash via dividends. But the key question is, will minority shareholders get a share of the spoils? History and PNSC’s reinvestment needs tell us: probably not.

One can go back to the last time there was such a massive oil shipping boom. That occurred in the mid-to-late 2000s. At the time, earnings skyrocketed just as they have over the past four quarters. The share price followed suit, but shareholders were left disappointed and probably a bit empty-handed.

From 2006 to 2009, PNSC’s payout ratio averaged at 14% while their dividend yield averaged out at a meagre 4.1%. Payout ratio did go up from the previous range of around 10% but it was not a colossal change. The payout ratio over the past few years has hovered around 12%. If PNSC maintains that payout ratio, it would likely offer a dividend between Rs 15 and 20 per share in the next earnings season.

Note that the market was also expecting a large dividend in Q2 of FY23. The share price had rallied 9% a few days before the announcement of financial results in February. But it came tumbling down a few days later. The company had announced a dividend of Rs 5 per share in a quarter with an EPS of Rs 49.94. The share fell 11% over five trading days after the announcement of the dividend.

Its poor dividend-paying record is not merely a result of stingy views which investors often associate with seth companies. It is a consequence of the way the management views the company. In particular, Captain Anwar Shah’s views – a longtime member of PNSC’s board of directors. In August 2022, he published an article in the Pakistan & Gulf Economist.

What really strikes an investor in that article is that PNSC is a vessel for the government to protect national interests. Or so Captain Anwar believes. He also opposes profit maximization because hiring a cheaper crew would reduce employment. This is very much consistent with the view of other PNSC managers who publish in newspapers. Their general mantra is to expand operations (and create jobs) rather than return cash to shareholders.

On top of this, there is also the issue of PNSC’s large reinvestment needs. In general, the shipping business requires plenty of reinvestment as tankers and ships cost a lot to produce/purchase and depreciate rapidly. Tankers are usually retired or sold after 15-20 years of usage and decommissioned after a maximum of 25 years of usage. Maintenance costs become too high after 15-20-years of usage. Bulk carriers follow the same story.

PNSC usually sells off its tankers or bulk carriers around the 15–20-year mark too. It offloaded a 19-year-old Aframax tanker at the end of last year. Now, the worrying part is that the average age of PNSC’s fleet is a mammoth 17 years. Roughly speaking, half of its fleet would need replacing in the short run.

What’s more concerning is that PNSC acquired two Aframax tankers which were 14.5 years old just last year. A Senate Committee had made an inquiry into this purchase since the tankers would have a usage life of 5.5 years. They were deeply displeased. Not only are PNSC’s reinvestment needs high, but their reinvestment decisions have been poor.

Based on all the above, it seems likely that PNSC minority shareholders will be disappointed. One should expect a higher-than-past but lower-than-expected dividend.

And on the earnings side, shipping rates are well down, so the picture isn’t rosy there either. After all, PNSC is trading at a record low trailing PE ratio of 0.64. A low PE ratio is usually an indicator that the commodities cycle has peaked and so have earnings. Maybe share price has peaked too. Who knows?