Earnings Report /

Pakistan State Oil: 3QFY21 review – Significant inventory gains beat expectations

  • PSO’s 3QFY21 result exceed our estimate due to much higher-than-expected inventory gains

  • Though exchange gains have come in lower than expected and Opex are higher

  • We reiterate our Buy rating on the scrip with a TP of PKR300/sh

Intermarket Securities
29 April 2021

Pakistan State Oil (PSO) has posted an unconsolidated net profit of PKR8.7bn (EPS PKR18.57) for 3QFY21, double qoq and up from a loss last year. This takes 9MFY21 NPAT to PKR18.2bn (PKR38.86/sh), up from PKR3.0bn SPLY. The result is above our 3Q EPS estimate of PKR16.21/sh due largely to higher than expected inventory gains.

Key Highlights for 3QFY21 (Unconsolidated):         

  • Net Sales of PKR285bn are flat qoq (up 17% yoy). While retail prices of HSD and Mogas increased by PKR8-10/liter during the quarter, volumes fell 10% qoq amid a dull period (though sales were up 54% yoy). Notably, in a slowing market, PSO maintained its market share in retail fuels but increased its share in the Furnace oil market by 9ppt qoq (rebound in sales to Power sector amid RLNG being diverted to residential consumers).      

  • Gross profit of PKR17.5bn is much higher than our estimate of PKR12.6bn, indicating significant inventory gains of about PKR8.0-8.5bn (c.PKR12.50/sh). Note that product prices rose by PKR8.0/liter during 3Q - not enough for such inventory gains, in our view. We suspect PSO booked significant gains through import price differential on petrol when international prices were falling at the tail-end of the quarter. The GP is also the highest ever in a quarter by PSO.

  • Opex is down 20% qoq to PKR4.1bn - partly due to exchange gains and lower distribution expenses. However, they have exceeded our estimate, seemingly because of lower exchange gains.  

  • Other income of PKR0.74bn seemingly does not include any penal income from the IPPs - given the delays by the government in the disbursement of the first installment of a negotiated settlement with the IPPs. The finance cost of PKR1.0bn is in line with our estimate; it is up 84%, however, due to an increase in short-term borrowing (had risen 40% in 2Q).    

  • Effective tax rate has come in at 33% same as in the previous quarter (impacted by the final tax regime on LNG sales).

PSO has booked a record level of gross profit of PKR17.5bn, but at least half of it are inventory gains, in our view. Product prices in Pakistan have been coming off recently due to stabilizing international prices and PKR appreciation; therefore above gains should not repeat in the next quarter, in our view. Otherwise, PSO has been exhibiting a strong show in the retail fuels market, almost continuously outperforming the industry every month since the onset of Covid-19 outbreak in Pakistan. The imminent cash injection in the Power sector could mean significant penal income in future quarters and a reduction in ST borrowing by PSO following cash receipts from IPPs. However, PSO is likely to retain most of that cash given the impending large capex for upgradation of its subsidiary Pakistan Refinery (potentially through a capital call by PRL).  We have a Buy rating on the scrip with a TP of PKR300/sh; we would be upgrading our estimates in light of the much higher-than-expected 9MFY21 results.