Earnings Report /
Pakistan

Pakistan OMCs March 21 results: Earnings growth to be impressive but low quality

  • We expect our OMC Universe to post c.80% qoq growth in net profits

  • Profits will come off a low base, but significant inventory and exchange gains are also expected

  • PSO is our top pick in the sector for a turnaround in cash earnings and undemanding valuations

Intermarket Securities
16 April 2021

We expect the combined net profits of our OMC Universe to grow by an average c.80% qoq for 3QFY21 – partly due to low base in 2Q. This is also driven by our expectation of large inventory and exchange gains, which will disguise a sequential decline in sales.  

Broadly, market shares of the three OMCs we cover improved by 5ppt yoy, majorly because of PSO gaining strength in both furnace oil and retail fuels’ market, but also due to the government’s crackdown on smuggling and malpractices by smaller OMCs. 

The OMC sector has declined c.2% CY21td (c.6% relative to the market). We expect the present momentum in earnings will continue, on the back of growing volumes and rising oil prices. Our top pick in the space is PSO for a strong rebound in cash earnings and undemanding valuations.

Profits to rebound qoq from a low base and due to…

We expect the IMS OMC Universe (PSO, SHEL and APL) to post nearly 80% qoq growth in combined net profits in 3QFY21 (1QCY21 for SHEL). Profits will not only rise from a low base in the previous quarter (due to inventory losses in 2Q), but they will be boosted by substantial inventory and exchange gains (both nonrecurring, however). We estimate that these gains will comprise nearly 60% of the expected 3Q profits for OMCs. The yoy comparison of profits, however, is distorted by the onset of Covid-19 and collapse in global oil prices SPLY. Total volumes declined by about 10% qoq in 3Q due to seasonal factors (albeit volumes rose c.25% yoy). In our view, the 3Q results will be a reflection of two key positives for the sector: (i) volume growth is defying high retail prices, and (ii) rising oil prices and strong PKR are complementing core profits. Note that the OMC margins were increased (by PKR0.18/liter) in April 2021 and will not affect 3Q profits.   

…significant inventory and exchange gains

Gross profits of the three OMCs are expected to increase by c.30% qoq. We estimate inventory gains of about PKR5.1/2.5/5.6 per share for PSO/SHEL/APL (after tax). Note that even though local retail prices were increased by only c.7% by the government, inventory gains are based on ex-refinery prices which follow international prices. In case of PSO, gross margins will also improve because of higher sales of furnace oil (up 15% qoq) and c.17% qoq higher prices of RLNG. On the other hand, PKR appreciated c.5% against the USD during the quarter. This is likely to be more positive for PSO and SHEL, which have relatively more imports. We estimate exchange gains of about PKR3.8/3.5 per share for PSO/SHEL (after tax). Note that we do not estimate significant penal income from the Power sector in case of PSO, as the planned payments by the government to IPPs (following negotiated revisions of their PPAs) has been delayed.

Sales fell sequentially but incumbents consolidated market share

Our OMC cluster did well to consolidate market share. The three companies had c.63% share during 3QFY21, a 5ppt yoy increase over c.58% same period last year. This was majorly led by PSO, which gained c.8ppt share (to c.46%), thanks to the largest retail network and growth in furnace oil sales. Credit also goes to government measures for addressing the smuggling of fuels and unfair competitive practices by new entrants. A third reason would be the recent investment in storage and supply chain by APL and SHEL, although they had moderate gains in market share in 3Q. Net revenues are expected to be flat qoq (due to c.10% average lower volumes) but rise by 14% yoy.