Equity Analysis /

Pakistan State Oil: FY 19 analyst briefing takeaways: Lower profits from decline in petroleum sales

    Intermarket Securities
    27 September 2019

    FY19 results highlights

    • PSO posted unconsolidated NPAT of PKR10.6bn in FY 19 (EPS: PKR27.06), down 32% yoy. Major reasons for lower profits were decline in petroleum sales (down 37% yoy to 7.9mn tons) and rising finance cost.
    • In Q4 FY 19, unconsolidated NPAT grew by 2.8x yoy to PKR4.7bn (EPS: PKR11.91) due to healthy inventory gains (PKR3.4bn), exchange losses (PKR2.3bn) and significant penal income from power sector (PKR2.6bn).
    • PSO also gave consolidated accounts for FY 19 as Pakistan Refinery (PRL) is a subsidiary now (shareholding up from 24% to 52.6%). Consolidated accounts show a massive other income of PKR16.9bn due to (i) PKR2.8bn gain recorded on increased stake in PRL as it was a bargain purchase (assessed fair value higher than what PSO paid – at par) and (ii) accounting adjustment on merging PRL’s accounts: PRL had not booked late payment surcharges from PSO in past years, while PSO had charged its P&L; therefore PSO booked the income now.
    • PSO’s overall market share in FY 19 has fallen to 42% in FY 19 from 50% in FY 18.

    Circular debt exposure evolving

    • Receivables stand at PKR339bn at present, vs PKR347bn on FY19 year end (including unbooked LPS and FX losses on FE-25 borrowing). Despite improving payments from power sector, SNGPL and FX loss receivables are building up. Gas tariff increases should help slow receivables buildup from SNGP.
    • Borrowing under FE-25 stand at US$200mn and will be retired by Dec’19. The same had protected PSO from booking massive exchange losses in the past years.
    • Regarding Energy Sukuk II of PKR200bn, PSO management thinks that government wants to issue it and is looking at options within IMF’s restriction on government guarantees. However, there is no timeline as of now.

    OMC margins revision require ECC nod

    • Most pressing concern for OMCs is the delay in upward revision of retail fuel margin (due since Jul’19). As per management, the Ministry of Energy has proposed the same to ECC, which will approve it again. It may happen any time now, but they will not receive any retrospective benefit. The industry is in talks with OGRA to incorporate FX losses into OMC pricing, but management does not see a concrete development in the near term. 


    • For FY 20, MS sales are expected to stay stable but HSD may continue to decline. However, the decline may not be large as seen in FY 19 (down 25% yoy) due to low base effect, weak competition, reduction in smuggled volume and PSO’s improved market share. Market share is expected to improve due to problems with smaller OMCs like HASCOL and PSO’s own marketing initiatives.
    • PRL will need healthy capital injection to upgrade its plant in order to produce more MS/HSD instead of furnace oil. As per PRL's material notice on 1 March, 2019, it will need about US$1bn for the project. PSO does see a capital call from PRL in future.
    • PSO has adopted IFRS-9 on all its customers except those payments where government backing is involved (from power sector) due to SECP allowing exemption until June 2021.

    Our Jun'20 TP for PSO is PKR191/sh. We have a Buy recommendation. Presently, key triggers of Sukuk-II issue and OMC margin revision are delayed, the materialisation can help in stock re-rating, in our view. However, an impending capital injection in PRL may cause moderate improvement in payouts as PSO's cash-flows continue to improve.

    Risks: (i) Inventory/exchange losses, (ii) slow down in sales growth, and (iii) build-up in circular debt.