Equity Analysis /

Pakistan OMCs: 2QFY22 result preview – big inventory gains expected to recur

  • Pakistan OMCs are expected to repeat strong results for 2QFY22

  • Key highlight will be large inventory gains and a large one-time penal income in case of PSO

  • We have Buy rating on both PSO and APL; the results are expected to revive their stock price performance

Intermarket Securities
27 January 2022
  • OMCs are likely to have another great quarter of earnings for 2QFY22, from an already high base in the previous quarter. The results will be accompanied with handsome payouts from both covered OMCs.

  • Key highlights for the result expectations are: (i) significant inventory gains, potentially larger than in the previous quarter, and (ii) large penal income from IPPs, in case of PSO; these together will disguise otherwise modest results, because overall volumes fell c.11% qoq.     

  • Stock price performance of PSO and APL have been divergent since the beginning of FY22. PSO has underperformed the broad market despite two healthy results during the period; APL has outperformed due to improving market share. We think the 2Q results can help revive price performance for both companies.

Expect another great quarter of profits…

We expect the IMS OMC Universe (PSO and APL) to post combined net profits of PKR15.8bn, c.10% higher than in the previous quarter (despite a high base) but will be tripled yoy. Amid a broad decline in volumes of major products (except HSD), net profits will benefit from even larger inventory gains than in 1QFY22 results, and another large penal income for PSO. Both companies are expected to announce interim dividends – PKR10/sh by PSO and PKR20/sh by APL. The results should serve to revive stock price performance of the two stocks (lackluster lately), in our view. We have a Buy rating on both stocks, where PSO is significantly undervalued (forward P/E of only c.3.5x on recurring earnings); while APL offers a FY22f dividend yield of c.20%.       

…backed by inventory gains and penal income

We expect inventory gains for PSO and APL, equivalent to PKR18/sh and PKR20/sh after tax, respectively. Ex-refinery prices of petrol and HSD rose by more than PKR20/liter until November but came off c.PKR10/liter in December. Since volume sales during October and November were much greater than in December, we expect net inventory gains for the period – which are also expected to be larger than in 1QFY22. PSO is likely to book another large penal income from IPPs, following the receipt of the second tranche by pre-1994 and 1994 Power Policy plants (related to a negotiated agreement between the government and IPPs). We conservatively incorporate net penal income PKR4.0bn of (PKR6.0/sh), but we highlight that the first tranche had led to more than PKR6.0bn of net penal income (c.PKR9.0/sh). Overall industry volumes fell 11% qoq during 2QFY22, where PSO lost 3ppt share to 49% and APL lost 0.6ppt share to 9.1%. Only HSD volumes were higher, up 8% qoq, because of healthy demand from Agriculture and increase in transport due to greater trade, in our view. 

The results should revive stock price performance

PSO has underperformed the broad market FY22td despite healthy results in the previous two quarters, potentially due to volumetric slowdown amid record retail prices, and less optimism for payouts (future cash drain for PRL upgrade). We think that the stock should rerate on the back of positives from several Energy sector reforms in the recent past, while more are likely to follow with the resumption of IMF Program, likely by February 2022. APL, on the other hand, has outperformed the market FY22td partly due to market share gains in recent quarters as a result of significant investment in storage and pumps. We reiterate that 2Q results will help revive the stock price performance of both stocks. Note that OMC margins were increased by c.25% to PKR3.68/liter by 16 December and will boost the results of coming quarters, while inventory gains would likely normalize.