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Pakistan

Pakistan State Oil: Q4 FY 19 review: Lower-than-expected gross profits lead to earnings miss

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    25 September 2019

    PSO announced Q4 FY 19 unconsolidated NPAT of PKR4.7bn (EPS: PKR11.91), up 2.8x on both yoy and qoq basis. The result was lower than our expected NPAT of PKR4.8bn (EPS: PKR14.6). This took FY 19 NPAT to PKR10.6bn (PKR: 27.06), down 32% yoy. PSO also announced a final dividend of PKR5/sh (higher than our forecast of PKR3/sh), in addition to PKR5/sh announced previously. Along with cash dividend, PSO announced 20% bonus shares, similar to 20% bonus announced in FY 18.

    Key highlights of Q4 FY 19 results:

    • Healthy gross profits of PKR12.1bn, up by 36% qoq as higher fuel prices should have resulted in inventory gains. However, it was lower than our estimate of PKR15.3bn, where we suspect higher-than-expected losses on petrol imports amid rising international prices.
    • Other income of PKR3.7bn, up by a massive 2.9x qoq and much higher than our estimate, as PSO has likely received penal income from IPPs.
    • Finance costs of PKR2.2bn, up 51% qoq due to higher interest rates and delays in issue of Power Sukuk II. This will also include penal charge on delayed payments to PARCO.
    • Effective tax rate was 31%, close to normal tax rate, as gross profits elevated profitability.

    During FY 19, profits declined due to lower volumes of PSO (petroleum sales down by 37% yoy in FY 19) and higher finance cost due to higher interest rates in the year. The government did the first Power Sukuk of PKR200bn, where PSO received PKR60bn, but other sources contributed to increase in receivables. These include FX losses guaranteed by the government on FE-25 borrowing and payments due from Sui companies.

    PSO also reported financials on a consolidated basis as it increased its stake in Pakistan Refinery Limited (PRL) to 53% (from 24%) and treated it as a subsidiary. On consolidated basis, PSO’s NPAT decreased by 8.1% yoy to PKR15.1bn (EPS: PKR36.55). The decline should have been severe in our view, as PRL posted a loss of PKR5.8bn in FY 19, but this is offset by other income of PKR16.9bn on PSO’s consolidated accounts. We await clarity on this from management.

    Our Jun’20 TP of PKR191/sh for PSO implies a Buy stance. However, we are concerned with the delay in the OMC margin increase and Power Sukuk II, which are key triggers.

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