Equity Analysis /
Pakistan

Pakistan State Oil: 1HFY20 analyst briefing takeaways

    Intermarket Securities
    20 February 2020

    PSO posted 1HFY20 unconsolidated NPAT of PKR6.4bn (EPS: PKR13.71), up 51% yoy from a low base last year (large losses on Furnace oil inventory last year). PSO did not announce any interim dividends with the result. The 2Q profits (EPS PKR6.19), though better than expected, was supported majorly by one-off penal income from the Power sector and exchange gains.

    Sales and market share in 1HFY20

    PSO improved its market share by 4.8ppt from 40.8% to 45.6% during 1HFY20, where financial problems with smaller OMCs (HASCOL lost 4ppt share) and the company’s own marketing / promotion efforts were credited for the increase. Going forward, PSO expects competition from HASCOL and other smaller players to increase. Notably, PSO outperformed in the retail fuel and lubricants markets. 

    2QFY20 Financial Highlights 

    Key highlights of the 2Q results are below. Note that most of these items are nonrecurring in nature, because of which the earnings quality for 2Q was not high, in our view. Also, these positive adjustments have effectively helped PSO avoid a net loss.

    • PSO booked an inventory loss of about PKR2.1bn in 2QFY20 results, coming from HSD and Mogas (last year majorly on FO inventory) compared to a gain of PKR1.3bn in 1Q.
    • LNG margins declined due to lower volumes and international prices. PSO also used sales discounts on retail fuels to increase market share, which further trimmed gross margins.
    • Penal income of PKR5.3bn received from the Power sector. PSO had pleaded the Ministry of Energy to let the IPPs and Gencos pay more penal charges during the period so that it could offset significant borrowing costs with the same. 
    • Opex in 1H was higher by PKR1.1bn than usual due to ramp up of marketing efforts. Exchange gains of about PKR1.3bn.

    PSO has retired most of its FE-25 borrowing, on the directions of Ministry of Finance, with a shrunken limit of about US$250mn (US$700mn at peak since 2013). Since this is replaced by more expensive local currency borrowing, the company’s borrowing cost has increased substantially. ECC has approved that the government will settle about PKR27bn of past exchange losses related to FE-25 borrowings in piecemeal. However, PSO has not yet received any such payment.

    Circular debt: PSO’s overall receivables fell by PKR10bn to PKR223bn by December 2019 from PKR233bn in June 2019. Almost all of this reduction was due to payments from the Power sector. Receivables from SNGP, however, rose by PKR7bn to PKR70.4bn. By 17 February 2020, PSO’s overall receivables have risen to PKR236bn (PKR85.1bn due from SNGP). The latter increase is largely due to poor recoveries of SNGP, which supplied LNG to domestic consumers in winter at subsidized rates.

    PSO skipped dividends in 1H results, in order to assess liquidity position ahead of the Energy Sukuk-II issue and peak summer demand before any distribution.