PSO: FY14 underscores strong growth in core earnings

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Pakistan State Oil

-Post Pakistan State Oil’s ( PSO ) FY14 results; we trim our earnings forecast for PSO by 2-5% over FY15-16F, incorporating higher financial charges as short-term borrowings from banks have surged to Rs92bn.
-In tandem with our earnings revision, we lower our Target Price for PSO to Rs502 from Rs534 previously. That said, we maintain our ‘Buy’ rating on PSO, which trades at FY15F P/E of 5.8x vis-à-vis market’s FY15F P/E of 8.6x.
-Recall that PSO reported FY14 earnings of Rs80.31/share, 73% YoY higher vis-à-vis FY13 earnings of Rs46.52/share. However 4QFY14 earnings clocked in lower-than-expected at Rs12.0/share (-26% YoY & -33% QoQ) because of higher-than-expected inventory losses of Rs2.1bn.
-In post result analyst briefing, the management underscored build-up of circular debt at a rate of ~Rs10bn/month, while flagged its deal with one of the IPPs to collect interest income on a monthly basis. Our channel checks suggests, in 1QFY15 to date PSO has received Rs1bn on account of the same.

Pakistan State OilEarnings trimmed as borrowings surge; ‘Buy’ intact
Post Pakistan State Oil’s (PSO) FY14 results; we trim our earnings forecast for PSO by 2-5% over FY15-16F. We incorporate higher financial charges, as shortterm borrowings from banks have surged to Rs92bn. Note that in FY14, finance cost jumped by 26% YoY to Rs9.5bn despite circular debt payoff by the government just prior to start of the year – leading to short-term borrowings declining to Rs17bn. In tandem with our earnings revision, we lower our Target Price for PSO to Rs502 from Rs534 previously. That said, we maintain our ‘Buy’ rating on PSO, which trades at FY15F P/E of 5.8x vis-à-vis market’s FY15F P/E of 8.6x.

 

Pakistan State Oil vs Karachi Stock Exchange

Soft 4QFY14 takes shine of strong FY14 showing
Recall that PSO reported FY14 earnings of Rs80.31/share, 73% YoY higher vis-àvis FY13 earnings of Rs46.52/share. Profitability growth was led by (1) 8% YoY higher gross profit amid higher market share in Furnace Oil and Motor Gasoline products, (2) Rs4.5bn interest earned on PIBs issued against receivables by the government and (3) after-tax interest income of Rs7.0bn (vs. Rs1.0bn in FY13)
received from power utilities. During the year, inventory gains and exchange losses amounted to Rs4.0bn and Rs1.1bn respectively. Meanwhile 4QFY14 earnings clocked in lower-than-expected at Rs12.0/share (-26% YoY & -33% QoQ) mainly because of higher-than-expected inventory losses of Rs2.1bn (vs. Rs200mn in 3QFY14).

Pakistan State Oil

Post result analyst briefing takeaways
In post result analyst briefing, the management underscored build-up of circular debt at a rate of ~Rs10bn/month, despite receiving regular payments of ~Rs25bn/month from the government. At present, PSO receivables from the power sector stands at Rs182bn with Rs12bn owed to the refineries (net circular debt of Rs170bn). That said, PSO’s management flagged its deal with one of the IPPs
(negotiations ongoing with others) to collect interest income on a monthly basis. Our channel checks suggests, in 1QFY15 to date PSO has received Rs1bn (after tax ~Rs2.4/share) on account of interest income with outstanding interest income of Rs45bn (after-tax ~Rs107/share). Un-booked interest expense to refineries  stands at Rs10bn (after tax ~Rs24/share). Moreover, PSO’s management
highlighted that it is considering further raising its stake in PRL (presently 22.5%) by exercising its pre-emption right on Chevron shareholding to improve its source of fuel supply. We flag increase in stake to 25% (or above) would make PSO liable to make a tender offer to minority shareholders.

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