Equity Analysis /
Pakistan

Pakistan State Oil: Q1 FY 20 preview: Expect lower volumes, higher effective tax rate, lower NPAT

    Intermarket Securities
    30 October 2019

    We expect PSO to post 1QFY20 NPAT of PKR2.1bn (EPS: PKR4.53), down 49%yoy/62%qoq. Major reasons for this sharp expected decline include:

    • Net sales of PKR322bn, up 15%yoy due to higher fuel prices while petroleum volumes declined by 9%yoy to 2.0mn tons.
    • Gross profit of PKR9.1bn, down 11% yoy due to lower volumes and inventory losses (PKR500mn assumed). Gross margins have also come off by 0.8ppt yoy to 2.8% because of higher prices and and delay in OMC margin increase. The 25% sequential decline in gross profit is partly due to inventory gains of about PKR3.4bn in 4QFY19.
    • Finance cost of PKR2.4bn, up 31%yoy due to higher interest rates even though PSO is receiving overdue payments from LNG supplies and power sector. This may reflect in other income, which is expected to jump by 55%yoy to PKR1.5bn. Recall that PSO recorded a surprise other income of PKR3.4bn in the previous quarter and this may repeat if it continues to receive late payments from its debtors.
    • Effective tax rates is expected to be 53%, due to increase in minimum turnover tax from 0.50% to 0.75% from FY20 onwards.

    We have a Jun’20 TP of PKR159/sh for PSO which implies a Neutral stance. A key trigger for PSO is an update on the second GoP Sukuk, where the government is looking to grant a sovereign guarantee by availing a waiver from IMF. However, an extended delay in the OMC margin increase remains a major concern, particularly amid higher turnover taxes.

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