Earnings Report /
Pakistan

Pakistan State Oil: 1QFY23 Preview - Inventory losses to drag earnings into red zone

  • Conversion of inventory gains into inventory losses is expected to damage this quarter’s earnings.

  • Elevated interest rates are likely to increase finance costs and late payment surcharges for trade debts.

  • Volumetric sales are expected to slightly recover going forward as FO demand will revive during the winter.

Intermarket Securities
26 October 2022

PSO’s BoD is scheduled to meet on Oct27’22 in which we expect a loss announcement of PKR913mn (LPS: PKR 1.94) against earnings of PKR12.0bn (EPS: PKR 25.55). The loss is primarily a function of inventory losses during the quarter as petroleum cracks continued to contract from historic highs. However, the company is expected to post adequate late payment surcharge to be able to buffer for the inventory losses.

Key expectations:

  • Net sales are expected to decline by 2% QoQ. The minor decline in topline despite significantly lower volumetric sales is due to rising POL prices during the period.

  • PSO has suffered a 32% fall in total volumetric sales QoQ, where the major contributors were HSD (-46% QoQ), FO (-29.5% QoQ) and MS (-21%% QoQ). The decline in demand can be attributed to weak economic growth, infrastructure damage caused by floods and high POL product prices.

  • Owing to the decline in ex-refinery rates during 1Q, inventory losses are likely to be incurred to the tune of PKR 7.4bn. This will likely lower gross profit by 86% to PKR9.8bn during the period.

  • Other overheads are expected to increase simultaneously due to persistently high inflation during the quarter.

  • Other income from delayed payments of trade debts and finance costs are expected to skyrocket due to elevated interest rates.

This will be a tough quarter for PSO due to the challenging macro environment where volumetric sales have contracted and falling ex-refinery prices have led to inventory losses. Overall volumes are expected to recover going forward, as the effects of floods start to recede and RLNG shortages during winter inevitably revives FO demand. The deregulation of OMC margins is a key catalyst for the company and will help to stabilize inventory gains/losses in the future. For PSO, we currently have a TP of PKR309/share.