Earnings Report /
Pakistan

Pakistan OMCs: 1QFY22 result previews – big inventory gains to maintain profits

  • For 1QFY22 results, Pakistan OMCs are expected to repeat the elevated earnings seen in the previous quarter

  • Expect big inventory gains and higher FO margins, which will offset exchange gains

  • We maintain our Marketweight stance on the sector, as higher prices could lead to lower volumes and worsen circular debt

Intermarket Securities
20 October 2021

Healthy volumes and handsome inventory gains should enable our OMC Universe to repeat elevated profitability in 1QFY22 (similar to that in 4QFY21), in our view. We expect our covered companies to post combined net profits of PKR12.3bn, flat qoq but up 46% qoq.

Pent-up demand following Covid lockdown (fourth wave) lifted volumes during the quarter, while retail fuel prices rose sharply. Estimated net profits in 1QFY22 could have been higher, but we expect greater exchange losses than in the previous quarter.    

IMS OMC Universe has underperformed the broad market FY22td, despite good payouts in FY21 results, rising volumes, and the prospect of big inventory gains in 1HFY22. This is partly justified by volumes expected to come under pressure from higher retail prices, while higher oil prices threaten to accelerate circular debt buildup. 

Larger inventory gains in 1QFY22 to maintain profitability qoq…

We expect the IMS OMC Universe to post combined net profits of PKR12.3bn (up 46% yoy), nearly the same as in the previous quarter, where profits were already elevated. Key highlights include: (i) big inventory gains, as retail prices rose sharply, amplified by (ii) higher volumes amid pent-up demand (no lockdown measures in place by September), and (iii) healthy furnace oil sales (doubled qoq industry-wide), which fetch higher margins. Our estimates would have been higher had it not been for hefty exchange losses expected in the results (despite lack of penal income for PSO). We also highlight that our estimated inventory gains constitute nearly 70% of the estimated combined net profits; and, without the expected inventory gains and exchange losses, our EPS estimates for 1QFY22 would be nearly half of what they are (closer to our estimates of recurring earnings).     

…complemented by higher volumes and FO margins

During the quarter, overall petrol sales rose 8% qoq (up 14% yoy), thanks majorly to pent-up demand due to lack of Covid lockdowns by late August-September. HSD sales, however, fell 11% qoq due to waning demand from Agriculture and religious holidays. Notably, industry furnace oil (FO) sales rose 86% yoy on the back of strong demand from the Power sector amid lower than normal RLNG supply. FO sales are deregulated, fetch higher margins and are insulated from exchange losses – thus benefiting from both higher global prices and PKR weakness. In our coverage, only PSO and APL would benefit from higher FO sales. At the same time, retail prices of HSD/ Mogas rose c.PKR9.3/12.6 per liter, greater than the price change in the previous quarter. In case of SHEL, however, we expect weak earnings due to lack of FO sales and greater reliance on imports, which increases susceptibility to exchange losses – the same theme as in the previous quarter.

Outlook: Volumes should slow and circular debt can worsen

Retail fuel prices are nearly PKR140/liter (highest ever) as of October 2021 and are likely to increase further, in our view. Recall, motorcycles constitute at least 40% of total petrol demand and higher HSD prices will increase the cost of transport for industries. One positive of higher prices could be lower competition from smaller OMCs (new entrants), given the government manages the threat of increased smuggling of Iranian fuel. While higher FO sales will lift gross margins for PSO and APL, this could also spell a rise in circular debt for PSO (for which higher LNG prices is already a concern). We thus maintain our Marketweight stance on the sector, with Buy ratings on PSO (Jun 2022 TP: PKR316/sh) and APL (TP: PKR470/sh).