Earnings Report /
Pakistan

Pakistan OMCs: 2QFY21 preview – Expect sequentially lower profits

  • Pakistan OMC results for 2QFY21 are likely to be unexciting because of lack of inventory gains…

  • …even though sales of major products grew more than 20% qoq

  • We prefer PSO, which is also expected to outperform peers in terms of 2Q earnings growth

Intermarket Securities
21 January 2021

For our OMC universe, we expect combined profits of PKR7.7bn in 2QFY21, down c.9% qoq but nearly double yoy. Broadly, on a sequential basis, volumes of one major product (HSD) grew emphatically; but results will be less exciting because of potential lack of inventory gains, in our view.

Industry HSD volumes rose more than 20% qoq, where PSO was the winner with c.50% market share. Notably, OMCs are not expected to book significant inventory gains, courtesy biweekly price changes and price cuts at the beginning of the quarter. But, decent exchange gains are possible given PKR appreciated c.4% qoq.

We prefer PSO and APL in the space. PSO has been the biggest beneficiary of recent regulatory changes, while APL continues to have the better risk-reward profile. The next major trigger for OMCs will be the revision of fixed margins on retail fuels, but the decision is seemingly delayed until FY22f, in our view.

Drop in earnings qoq due to lack of inventory gains

Cumulative 2QFY21 profits of our OMC Universe are expected to be lower than that of previous quarter (by 9% qoq), because of probable lack of significant inventory gains, despite strong growth in volumes of HSD and Furnace oil (FO) during 2QFY21. Having said that, PSO’s earnings are expected to grow c.10% qoq because it outperformed peers in the HSD market, has unique presence in the LNG market, and could book decent exchange gains (being the largest importer). PSO and APL are likely to announce interim dividends of PKR7.5/sh and PKR15.0/sh respectively.

More cash profits as retail fuels take the bulk of sales

Industry HSD sales rose c.27% qoq during 2QFY21, while Mogas (petrol) sales were flat (though up 13% yoy). FO sales fell 24% qoq and have diminished to less than c.15% of total industry volumes from c.30% in FY18. Cash-based sales of HSD and Mogas now take the lion’s share (c.80%). This is a major positive as it reduces the sector’s exposure to circular debt (which is now driven mostly by natural gas / RLNG) and increases distributable earnings (particularly for PSO). Despite being the largest OMC, PSO outperformed the industry, thanks to gains in share of the HSD market; where recent regulatory changes and a crackdown on malpractices by smaller OMCs have visibly favored the incumbents.

No inventory gains despite up-trending prices

A key expectation for the result is that OMCs will not book significant inventory gains even though product rose by PKR3-7/liter towards the end of the quarter. This is partly because of biweekly pricing, which better matched product prices with costs, than possible before; but also, the quarter started with price reductions so that cumulative price changes at the end of 2Q were barely positive. In case of PSO and SHEL, however, there could be some gains through import differentials during the period. We have conservatively not assumed any such gains for the quarter. Positive surprises can emanate from higher-than-expected exchange gains and, in case of PSO, penal income from IPPs.

OMC margins increase is likely to be delayed until FY22f

Next key milestone for the sector remains the pending revision of margins of retail fuels, but we understand from channel checks that the government is not keen on the change (perhaps until the end of FY21). We have prudently assumed no change in the margins in our FY21f estimates.