Equity Analysis /
Pakistan

Pakistan Energy: Regulator will likely defer IFRS-9 implementation for energy companies

    Saad Ali
    Saad Ali

    Head of Research

    Intermarket Securities
    23 August 2019

    According to reports, regulator SECP has decided to defer the implementation of IFRS-9 for companies in the power supply-chain for two years until 30 June 2021. Affected companies include PSO, OGDC, PPL, SNGP and SSGC, and HUBC and other IPPs. The implementation was required to come in effect by Jul’19 and would have reflected in Q4 FY 19 results. Note this has not yet been notified by the SECP, but our channel checks suggest a notification will be made very soon.

    As we highlighted in our note on IFRS-9, this would have been majorly negative for earnings of the mentioned companies as they would have booked large provisions related to circular debt affected assets (receivables, for instance). Even though these assets may not have been tested for impairment (due to government guarantees), provision due to time-value adjustment would have been significant, in our view. We had not incorporated IFRS-9 in our estimates and Q4 earnings preview.

    The deferment is particularly positive for PSO and other oil and gas distribution companies, which operate on thin operating margins and are susceptible to turnover tax rate. 

    The implementation would have depressed earnings of the overall Oil & Gas sector (total weight in index: 26.6%) and could have triggered sharp earnings revision.

    We think the risk of large provisions led to correction in stock prices of above mentioned companies in the past month, and this news may help to reverse that correction. We have Buy stance on PSO (TP PKR191.0/sh), OGDC (TP PKR194.0/sh) and PPL (TP PKR165.0/sh). 

    Risks: (i) Delay in formal notification of the deferment, and (ii) revision in the policy stance in future.