PSO with volumetric growth amid anticipated regulatory changes – AKD Research
By: Raza Hamdani,
AKD Securities Limited
PSO’s 5MFY14 oil sales depict an 8%YoY growth in total volumes to 5.6mn tons, where MS and FO volumes have increased by an encouraging 15%YoY and 13%YoY, respectively. The growth has been led by continued gas curtailment to the CNG sector and higher than expected electricity generation post circular debt retirement. Going forward, while winter gas load management could result in increased MS volumes during Dec’13-Feb’14 presenting a muted earnings upside of ~2% in FY14 for PSO, a potential revision in OMC margins remains the key near-term trigger, in our view. In this regard, we estimate every 10% hike in OMC margins for MS and HSD to result in a 7% annualized earnings impact and a similar increase in TP. While we await ECC’s decision in this regard to revise our estimates (current TP of PkR335/share implies limited upside form current levels), PSO’s current P/E of 3.9x, which is a discount of 54% to the broader market P/E, is too compelling to ignore.
5MFY14 oil sales up by 8%YoY: PSO’s total oil sales in Nov’13 clocked in at 1.09mn tons, higher by 20%YoY/6%MoM, where the growth was led by FO sales (481k tons: +25%YoY) on higher electricity generation, MS (155k tons: +17%YoY) on increased curtailment to the CNG sector and HSD (409k tons: +21%YoY) on a seasonal uptick from the agricultural sector. On a cumulative basis, PSO’s total oil sales in 5MFY14 clocked in at 5.62mn tons (+8%YoY), where MS volumes grew by 15%YoY to 0.77mn tons and FO volumes grew by 13%YoY to 3.05mn tons. With MS volumes largely in line with our expectations, we highlight that higher than expected FO volumes could result in a swifter build up in receivables albeit KAPCO (which accounts for ~18% of PSO’s FO sales) shifting to an advance payment mechanism from Jul’13 onwards.
Winter Gas Load Management to increase sales: According to latest media reports, the MoPNR has sent a summary for approval of the winter gas load management program, where CNG stations in Punjab could face a complete shut-down from mid-Dec’13 to Feb’14 and 85% curtailment thereafter in Mar’14 and Apr’14. According to PSO’s management, a complete CNG shut-down in the country could result in an incremental ~US$150mn/month in increased oil imports as MS remains the closest substitute to CNG. This could potentially translate into additional MS volumes of upto 40% YoY for PSO during Dec’13-Feb’14, resulting in incremental FY14 earnings of 2% (EPS: PkR78.54)
OMC Margin revision awaited: PSO’s management remains optimistic on an upward revision in OMC margins, where the ECC is reportedly expected to announce a decision on the matter this month. According to our estimates, every 10% upward revision in OMC margins for HSD and MS increases PSO’s annualized earnings by 7% and TP to PkR358/share. We await developments in this regard and will update investors accordingly.
Investment Perspective: While long-term energy sector reforms continue to drive PSO’s investment theme, anticipation of an upward revision in OMC margins could prove to be the key upside trigger in the near-term. While we await ECC’s decision in this regard to revise our estimates (TP of PkR335/share implies limited upside form current levels), PSO’s current P/E of 3.9x (discount of 54% to the broader market P/E) is too compelling to ignore.