Divestment of Shell Pakistan by parent company may value around US$140mn

Divestment of Shell Pakistan

KARACHI, PAKISTAN: Shell Pakistan Limited (SHEL) is set to be sold by its parent company, Shell Global. The announcement was made in a notice to the Pakistan Stock Exchange (PSX).

Shell Global has a 77.42% stake in SHEL, and the sale is subject to regulatory approvals. The company has not disclosed the identity of the potential buyer, but it is said to be a foreign investor.

The sale of SHEL is part of Shell Global’s strategy to focus on its core businesses. The company has already announced plans to divest its retail and lubricant businesses in Europe.

SHEL is the fifth largest oil marketing company (OMC) in Pakistan. It has a network of over 641 retail outlets and 150,000 tons of oil storage capacity. The company also owns 26% of Pak Arab Pipeline Company, which transports white oil fuels to upcountry.

The sale of SHEL is expected to be completed in the second half of 2023. The company’s management has said that the sale will not have any impact on its day-to-day operations.

Analysts say sale could be positive for SHEL

Analysts say the sale of SHEL could be positive for the company. They point out that the sale could bring in much-needed investment, and it could also lead to greater efficiency and improved profitability.

Sherman Securities Research believes that the asset valuation of SHEL is close to Rs40bn (US $140mn) or Rs186/share. The company believes that the current share price offers potential upside, as SHEL is trading at a market capitalization of US $71m (Rs95.8).

Sherman Securities Research has assumed that 5% of SHEL’s retail network is owned and operated by the company, while 10% right of use is for the rest of the retail network (other than COCO sites). Based on this assumption, the company believes that SHEL’s retail assets contribute around US$45mn.

Sherman Securities Research also values SHEL’s storage business to contribute around US$55mn. Similarly, the blending plant and White Oil Pipeline contribute around US$22mn and US$18mn, respectively.

New player may bring efficiency to local business

Interestingly, SHEL’s annualized net revenue is close to Rs430bn (US$1.5bn) while gross margin (excluding inventory gains/losses and depreciation) is close to 6.5%, which is one of the highest amongst listed OMCs. This is thanks to the lube business, which contributes a higher share in gross profit.

Interestingly, OMCs enjoy a gross margin of 2.2% (Rs6/liter) on retail business. This is expected to rise further going forward since the formula is linked with CPI inflation.

Sherman Securities Research believes that the acquirer may bring down costs by around Rs3-4bn per annum (EPS may improve by Rs10) as multinationals pay technical fee to its foreign franchise and allocates higher cost for environment protection. The company believes that the acquirer may continue with technical fee on lubricant business to keep the quality intact.

Overall, the sale of SHEL is seen as a positive development for the company. It is expected to bring in much-needed investment, and it could also lead to greater efficiency and improved profitability.

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