Pakistan State Oil with many reasons to stay bullish – FS Research
By: Mohammad Fawad Khan,
92 21 5612290- 94 Ext 338
Foundation Securities (Pvt) Limited
Back in early Sep’13 we were non-consensus, bullish voice on the street on Pakistan State Oil (PSO). Our positive view was premised on significant relief on circular debt post tariff hike and big pay-down of overdue amount in June’13. Our thesis seems to be playing out as 2Q debt numbers have not budged much QoQ. We now see five reasons to remain positive on PSO despite 41% price run-up in 6-mths, (1) concerns on lower FO sales due to coal conversion are abating, (2) rupee has become more stable, (3) penal income has added new element of excitement which we believe may continue in future quarters, (4) tangible earnings upside via likely revision in margin regime and (5) value hunting in the market which has brought PSO in the limelight (30% discount to market P/E on FY15E earnings). We reiterate Outperform on PSO with revised TP of PKR456.35/sh implying 25% upside.
Debunking 2Q earnings surprises: PSO delivered a major positive surprise in 2Q earnings with EPS of PKR32.4/sh vs consensus estimate range of PKR16-18/sh. PKR44.0/sh cash dividend and 10% stock dividend also added to excitement on above expected earnings. All in all, there are three drivers of surprise in 2Q, (1) ~PKR5bn penal interest income on overdue receivables to Hubco & Kapco, (2) PKR2.8bn inventory gains in 2Q taking cumulative 1H inventory gains to PKR6.1bn, and (3) FX gains of PKR1.6bn in 2Q vs market expectation of currency losses on US$ based supplier credit. We estimate PSO adjusted earnings of PKR16.4/sh which is inline with our estimates.