- We revise down our Jun’20 TP for APL to PKR390/sh (vs PKR432/sh earlier), but maintain our Buy stance. The decline is emanating from higher-than-expected decline in HSD volumes during FY 20f, delay in OMC margin increase and a higher capital outlay in the near-term.
- APL remains our preferred stock in the OMC space given its expanded storage capacity, debt-free balance sheet and presence in deregulated products (asphalt, jet fuel and non-fuel products).
- Increase in OMC margins remains a key trigger for the sector including APL. The scrip currently trades at a relatively high FY 20f PE of 7.7x, but we see a 3-year CAGR of 19% during FY 21-23, which justifies premium valuations, in our view.
Reiterate Buy despite cut in TP
We revise down our Jun’20 TP for Attock Petroleum (APL) to PKR390/sh (vs PKR432/sh earlier) but maintain our Buy stance. Major reasons for this cut are (i) higher-than-expected decline in HSD sales, (ii) delay in revision of OMC margins and (iii) higher capital outlay in the near term. To recall, HSD sales have declined by 16%yoy to 1.5mn tons during 1QFY20 due to current economic slowdown and competition from smuggled products. We now expect HSD demand to decline by 11% yoy in FY20f (vs 5% decline assumed earlier). Another issue for the OMC sector is the delay in CPI-linked margin increase. OMCs were supposed to get 7.2% (or PKR0.18/sh) increase in MS/HSD margins from Jul’19. In our model, we have assumed the increase from Jan’20 prices as industry sources suggest that the matter is in final stages (only ECC approval is remaining).
Storage additions should increase market share
APL has been aggressive in its storage capacity expansion. In FY19, the company added 10k tons of storage, taking total capacity to 84k tons. Moreover, Sahiwal and Daulatpur are almost complete, adding 16k and 14k of capacity. Combining all storages, APL will boost total storages of 170k tons, equivalent to c.28 days of inventory (based on FY20f volumes). These measures should help APL in increasing market share on a sustainable basis. We expect the company to gradually increase its MS/HSD share from 9.5/10.0% in FY21 to 11/12% by FY23. APL’s strong presence in deregulated products like Jet fuel and Bitumen (8% of FY19 revenues) is another positive, which lends it a better margin profile compared to peers and enable it to avoid minimum turnover taxes, in our view. In 1HFY20f only, we expect effective tax rate to be slightly higher than corporate rate due to lower demand amid elevated fixed charges like depreciation from new storages.
Possibility of minimum turnover tax in 1QFY20f
We expect APL to record NPAT of PKR776mn (EPS: PKR8.81), down 43%yoy in 1QFY20. Reasons for the expected decline include lower gross profits due to volumetric decline, higher operating expenses amid increased depreciation charges, and loss from associated companies. Moreover, we expect the company to record a higher effective tax rate of 31%, as it will fall under minimum turnover tax regime, in our view. During 1QFY20, APL sold 465k tons of petroleum products, down 12%yoy. Prices of retail fuels remained stable on qoq basis (increased in Jul’19 but then decreased in Aug’19) and hence we are not incorporating any inventory gains.
Risks: (i) Exchange/inventory losses, ii) delay in increase in OMC margins, and iii) halt in group refinery operations.