Equity Analysis /

Shell Pakistan: Q2 CY 19 results: Heavy losses from exchange rate, minimum tax charge

    Intermarket Securities
    21 August 2019

    SHEL announced Q2 CY 19 loss of PKR1,704mn (LPS: PKR15.93) vs a profit of PKR247mn (EPS: PKR2.31) in Q2 CY 18. The Q2 loss came in higher than our LPS estimate of PKR7.50 due to higher-than-expected exchange losses and tax charge, despite bumper gross profits.

    Key highlights: 

    • Gross profit of PKR5,296mn, highest in company’s history for a quarter, due to sharp increase in retail prices of MS/HSD (up 26%/18% qoq excluding sales tax). This came in despite 8% yoy decline in volumes during Q2.
    • Both distribution and admin expenses came in slightly higher than our estimates. We suspect that higher depreciation (related to new lorries) and technical fees are elevating operating expenses.
    • Other expenses of PKR2,845mn, almost a record-high, due to 11% PKR depreciation against the USD during Q2 (normalised expenses would have been cPKR175mn).
    • Tax charge of PKR664mn due to application of minimum tax (0.75% of turnover). Recall that the government increased the turnover threshold to 0.75% from 0.50%in the FY 20 budget.

    Gross profits will likely decline in the coming quarters as they normalise, especially if OMC margins do not increase in line with CPI. Additional concern on SHEL is the heavy capex (particularly in supply chain), which will weigh on medium-term earnings through higher opex.

    Risks: (i) Inventory/exchange losses, (ii) slowdown in sales growth, and (iii) poor working capital cycle.