HASCOL posted a dismal 2QCY19 loss of PKR5.4bn (LPS: PKR27.22), compared to a profit of PKR298mn (EPS: PKR1.50) in 2QCY18. This was significantly lower than our loss forecast of PKR1.1bn (LPS: PKR5.57). 1QCY19 accounts are also restated where the company has now recorded a loss of PKR5,749mn (LPS: PKR28.87) vs a profit of PKR674mn (EPS: PKR3.73) reported earlier. This has resulted in a huge 1HCY19 loss of PKR11.2bn (LPS: PKR56.09).
The unusual factors behind these large losses includes higher cost of products sold and hefty “other expenses”. Both of these items are also restated for 1QCY19. We think about PKR4.3bn of inventory loss/write-off was charged against cost of goods sold in 1H. We think this could be related to some non-profitable sales during 1H; we await clarity on this from the management (1H accounts do not explain the reversal in GP). Note that APL and SHEL booked healthy inventory gains in their Mar’19 results and PSO is expected to book similarly.
Other expenses came in at PKR2.9bn and PKR3.5bn for 1Q and 2Q respectively. The note on other expenses in 1H accounts attribute unfavorable price fluctuations and PKR deval. However, exchange losses are recorded separately which came in higher than expected at PKR2.3bn due to 11% PKR depreciation in 2QCY19 (also greater than expected).
Distribution expenses of c. PKR2.0bn in 2Q is about 2x the normal rate. HASCOL has booked PKR0.8bn of IFRS-9 related provision.
Trade payables (PKR48bn as of Jun’19) and short-term borrowings (PKR25bn) are up by PKR7.1bn and PKR15.3bn sequentially due to working capital challenges. Finance cost has thus more than doubled to PKR1.9bn qoq in 2Q.
HASCOL contained the losses by booking a deferred tax asset of PKR3.8bn (PKR19/sh). Note that the PKR11bn loss in 1HCY19 has almost completely eroded the company’s equity to PKR1bn. Without the tax adjustment, the result would have been much worse. In the 1H accounts, HASCOL has reasoned expected profits in future against which they will offset the deferred tax liability.
HASCOL was already struggling to maintain its market share which has been constantly dropping in the past 12 months. In 2Q, its petroleum volumes declined by 42% sequentially (vs 5% increase for the industry). We were already concerned with HASCOL’s declining market share amid a higher turnover tax regime (minimum tax increased to 0.75% from 0.50% of revenues)
Along with the results, HASCAL also announced plans to increase its authorized capital from PKR2.5bn to PKR10bn in order to issue right shares. The company has reasoned severe liquidity issues for the need to issue rights, as depicted by the working capital and borrowing trends seen in 2QCY19.
We think the 1H results are overall very weak and indicate severe operational issues related to market share, working capital and borrowing. We await clarity on the reversal of gross profit; thus we put the stock Under Review.
Risks: (i) Inventory/exchange losses, (ii) slow-down in sales growth, and (iii) poor working capital cycle.