Equity Analysis /

Pakistan OMCs: 2QFY20 preview – QoQ decline in profit on lack of inventory gains

    Intermarket Securities
    20 January 2020

    We expect IMS OMC universe to post a cumulative 2QFY20 NPAT of PKR2.6bn, (vs a loss of PKR2.4bn in 2QFY19). The return to profit on yoy basis is due to the absence of Fx and inventory losses. On a qoq basis, profits are expected to be lower by 50% as OMCs recorded inventory gains in 1QFY20, which will not repeat in 2Q, in our view.

    Both APL and PSO are expected to announce their first interim dividend during 2QFY20 results. SHEL, however, is expected to post a loss again amid higher operating expenses and turnover taxes. 

    We are Neutral on OMC space as multiple positives have played out. APL (Jun’20 TP: PKR440/sh) is our top pick in the space given its growth plans (adding storages and sites) and a superior margin profile (compared to sector average).

    Stable volumes but inventory gains missing in 2QFY20

    During 2QFY20, petroleum sales were 4.4mn tons, up 2% qoq but down 2% yoy as the decline of Furnace Oil (FO) is moderating due to low base. Additionally, High-Speed Diesel (HSD) declined by only 2%yoy in 2Q (vs 18% yoy decline in 1Q). However, unlike the previous quarter, we do not foresee any inventory gains during 2Q as retail prices remained largely stable. Moreover, we highlight the possibility of inventory losses due to sharp reduction in local FO prices (down 25% qoq) but we are not factoring in this, as OMCs carry minimal FO inventory.

    Dividends expected from PSO and APL; SHEL to post a loss

    In 2Q, PSO is expected to post NPAT of PKR2.3bn (EPS: PKR4.87), down 25% qoq. The decline is emanating from lower expected gross profits (as PSO recorded inventory gains of PKR1.8bn in 1Q) and a pickup in finance cost (higher short-term borrowing and reduction in foreign borrowing, where borrowing cost was low). We think PSO will announce its first interim dividend of PKR5.0/sh along with 2Q results, due to improved 1H profits (up 37%yoy). We do not rule out the possibility of bonus issue along with cash dividend.

    APL’s sequential profit is expected to decline by a less moderate 18%qoq to PKR1.0bn (EPS: PKR10.04) due to higher finance income, despite a similar decline in gross profits as peers (down 15%qoq vs 12%qoq decline for PSO). APL is also expected to announce its first DPS of PKR12.5/sh along with 1H results.

    SHEL posted a profit during 3QCY19 (PKR570mn, EPS: PKR5.33), due to Fx/Inventory gains, but we expect another loss of PKR641mn (LPS: PKR5.99) in 4QCY19. Major reasons include (i) high admin expenses, which peak during the last quarter and (ii) application of turnover tax, as a consequence of lower pre-tax margin. It will thus post a yearly loss of PKR1.4bn (LPS: PKR14.19/sh).

    Neutral on OMCs as growth triggers awaited

    We are Neutral on the OMC sector as multiple positives have been priced in, in our view. These include the increase in OMC margin (delayed by 5mths) and IMF’s nod for second Energy Sukuk. Going forward, we advocate investments in those OMCs which can capture higher market share and have superior margin profile (to avoid turnover taxes). In this context, we flag APL as our top pick, with a Jun’20 TP of PKR440/sh.