The PICT Saga: The Market Overbuys?

 

Pakistan International Container Terminal’s (PICT) share price has plunged from Rs 134.5 on 12th June to Rs 58.5 on 27th July. That implies a steep decline of 56.5%. Most of PICT’s ride downwards is well justified, but the stock has picked up 52% from its low of Rs 38.6 on 7th July. Is there any credence to this rise?

One would consider PICT to be a sleepy stock. Its share price rarely budged after the 2017-18 market-wide selloff. It continued paying an above-average dividend yield over the years. Steady and rising dividends with low volatility. Sounds good, doesn’t it?

However, its shareholders barely took notice of the fact that PICT lost two court cases against the Government of Pakistan for renewal of its concession contract – first on 2nd of March and later on 6th of June (2023). It took till 12th June for the market to take notice of the fact that PICT may not remain an operating business for long; although insiders had been selling for days before that.

Now, PICT would be winding up as Abu Dhabi ports is set to take over PICT’s container terminal operations. This is a classic case of liquidation, so the share price should reflect PICT’s liquidation value. Or in other words, the value of its final dividend payout to shareholders.

How do we find PICT’s true value? There are multiple ways. You can begin with a book value approach. Take book value, add expected profit for Q2 and divide by number of shares. This approach imputes a value of Rs 39.8 per share.

Secondly, a net asset approach can be used. Under this approach liabilities can be netted off from assets and expected Q2 profit. According to my calculations, with some reasonable assumptions for assets sold at a discount, PICT’s final share price comes in at Rs 34.6. 

However, I have not incorporated non-current assets into this calculation as PICT’s financial reports make it unclear which non-current assets are to be transferred to Karachi Port Trust as per concession agreement. To balance this effect out, I did not apply a margin of safety to my calculations. Thus, a conservative estimate of PICT’s final share price would be Rs 34.6. Although, the true share price could be higher especially if there are off-book assets (and higher Q2 profit which is likely).

The last method is one which Warren Buffett would use for cigar butt shares. It is called the net current asset value (NCAV) approach. Under this approach, current liabilities and value of preferred shares are netted off from current assets. Current assets and liabilities are used as they are mostly liquid and are likely to be worth market value. While preferred shares are netted off as preference shares have seniority.  

At one point in time, PICT did have preference shares, but they were redeemable. PICT did redeem them hence one would notice that there are no listed PICT preference shares on PSX now. So, adding Q2 expected profit to the NCAV imputes a value of Rs 36.7. Calculations for all three approaches can be found here.

Note that all three approaches give relatively similar share prices due to simplicity of the scenario. The share price ranges from Rs 34.6 to 39.8 as per the three approaches. But the best approach is certainly the net asset approach simply due to its conservative nature. Consequently, investors can be certain that PICT’s share price must be about Rs 34.

Now, normally the market should react to bring the share price to around Rs 34 once it becomes aware of this information and halts the recent speculative buying. However, the market may still be irrationally optimistic. In that case, a potential investor with this information should know that PICT’s final dividend should be close to Rs 34.

As of now, PICT’s share is trading 40% above its net asset value. It may be true that the market still thinks PICT has a chance of attaining another concession agreement with Karachi Port Trust. However, with Abu Dhabi Ports’ recent expansion at Karachi Port, the chances are very slim as there is little to no land left for potential terminal expansion at Karachi Port.

There might be a possibility that investors with inside information are buying PICT shares – as often is the case in Pakistan. But this would indicate that either PICT has excessive off book assets (non-current assets not transferable under concession agreement) or that PICT is close to achieving a new concession agreement with Karachi Port Trust.

Either way, a regular investor shouldn’t take the risk of buying PICT shares. Because the chances of the above scenarios are low. Plus, publicly available information reveals that PICT will be liquidated at a value far below its current share price.