Earnings Report /
Pakistan

Attock Petroleum: 2QFY20 results: Potential inventory losses lead to earnings miss

    Intermarket Securities
    22 January 2020

    Attock Petroleum Ltd (APL) posted 2QFY20 NPAT of PKR355mn (EPS: PKR3.57), down 36%yoy / 71%qoq. The result was lower than our expected NPAT of PKR999mn (EPS: PKR10.04) mainly on account of lower gross profits. APL also announced its first interim dividend of PKR5.0/sh, lower than our expectations, owing to reduced profitability.

    2QFY20 result highlights:

    • Net sales of PKR57bn, down 1%yoy as APL’s petroleum volumes declined by 4%yoy, broadly in-line with the 2%yoy decline for the industry. While prices of retail fuels were higher by c.17% yoy, we highlight Furnace Oil (FO) prices were down by a sharp c.30% yoy.
    • Gross profits of PKR926mn only, down by 36%yoy, against our assumption of PKR1,793mn, possibly due to large inventory losses. The losses could have emanated from rising international petroleum prices during the quarter due to inventory mismatch (20 days on average) with retail price-fixing (for a month); inventory is partly replenished with imports at higher prices during the month. On the other hand, local retail prices remained stable (excluding sales tax) and hence we had not incorporated any inventory losses.
    • Operating expenses of PKR724mn, down 24%yoy as earlier expenses were elevated due to Fx losses.
    • Finance income of PKR601mn, up 63%yoy, likely due to late payment surcharges, but its impact was muted by higher finance cost, where APL makes late payments to its suppliers.
    • APL booked an effective tax rate of 31% and did not book the minimum turnover tax (0.75% of revenues). The balance sheet shows a deferred tax asset of PKR105mn (or PKR1.05/sh), where we understand the company is expecting normalized taxation going forward.

    Despite a poor result, APL’s investment theme remains intact in our view as its capex plans (more storages and sites) should help in increasing its market share, especially when balance sheet strength of other OMCs have weakened significantly. We also highlight that when APL posted poor results in the recent past (below expected EPS of PKR2.86 and PKR5.58 during 2QFY19 and 3QFY20 results) due to inventory losses (a risk for OMC business), there has been only a knee jerk reaction in the share price (down 5% on that day but subsequently flattish). Our Jun’20 TP of PKR440/sh implies an upside of 17% for APL.