BMA Research5
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We maintain our conviction on PSO with a strong ‘BUY’ stance as we roll forward our TP to Dec14 to PKR411/sh offering a total return of 25% Going forward, we expect the pace of buildup in circular debt to significantly slowdown in 2HFY14 given a) full scale impact of increase tariffs, b) initiation of structural reforms and c) release of subsidy by Ministry of Finance We maintain our previous estimate of PKR0.20‐0.22/ltr increase in margins of both MOGAS and HSD translating into an annualized earnings impact of 8%‐9% The stock is trading at PER of 4.5x and 4.7x to our FY14E and FY15E EPS respectively More positives to unlock in CY14: Dec14 TP at PKR411/sh; total return of 25% The outgoing CY13 remained another eventful year for Pakistan State Oil (PSO) marked by a) final settlement of circular debt (in Jun13‐Jul13), b) initiation of long awaited power tariff increase (from Aug13), c) consistent volumetric growth and d) business diversification plans (though a distant possibility). Marked by aforementioned positive triggers, PSO outperformed the benchmark index by 23% in CY13. The stock witnessed fresh rally in last two months (Nov13‐Dec13) owing to 1) anticipation of uptick in MOGAS and HSD margins and 2) hike in power tariffs which geared up the confidence of market on serious implementation of power sector reforms (to bode well for PSO’s payouts in long run). Moving ahead into 2014, though we foresee payout to remain depressed in FY14, any improvement in payouts should be expected beyond FY14 where full scale impact of reforms will be reflected in cash flows. We maintain our conviction on PSO with a strong ‘BUY’ stance as we roll forward our TP to Dec14 to PKR411/sh offering a total return of 25%. As per our estimate we expect the company to post EPS of PKR75.7/sh, PKR72.3/sh and PKR74.1/sh in FY14, FY15 and FY16 respectively which depicts FY13‐FY16E CAGR of 13%. At current levels, the stock is trading at PE of 3.8x and 4.0x to our FY14 and FY15 EPS estimates respectively. Update on circular debt Due to 1) delay in power tariff hike for domestic consumers, 2) increased FO based generation amid low hydel based generation in winter season and 3) sluggish recovery from WAPDA, we expect receivables of the company to witness a slight uptick to PKR120‐ 122bn in 2QFY14 compared to PKR116bn in 1QFY14. Currently overdue receivable from WAPDA remains unchanged at PKR63‐64bn while HUBCO’s overdue stands at PKR22‐24bn in Jan14 (versus PKR14bn in Nov13). Though payables to both foreign and local fuel suppliers are expected to ease to PKR109‐111bn, we believe higher dependence on borrowing (estimated to remain unchanged PKR50‐51bn in 2Q) amid rising receivables will keep interest cost on the higher side. The government recently injected ~PKR30bn into the energy chain from which PSO received ~PKR18bn in first week of Jan14, as per our industry checks. Going forward, we expect the pace of buildup in circular debt to significantly slowdown in 2HFY14 given a) full scale impact of increase tariffs for both commercial and domestic consumers, b) initiation of structural reforms in the energy chain and c) release of subsidy by Ministry of Gearing up for another eventful year Wednesday January 8, 2013 Pakistan State Oil 1 BUY Target Price Dec‐14: PKR 411 Current Price: PKR 338 Bloomberg PSO.PA Reuters PSO.KA MCAP (USD mn) 791 12M ADT ( USD mn.) 6.7 Shares Outstanding 247 2013A 2014F 2015F EPS 50.8 75.7 72.3 DPS 5.0 10.0 15.0 2014F Dividend Yield (%) 3% Capital Gain (%) 22% Total Gain (%) 25% PSO vs. KSE100 Relative Chart 75 90 105 120 135 150 165 180 195 210 Jan‐13 Feb‐13 Mar‐13 Apr‐13 May‐13 Jun‐13 Jul‐13 Aug‐13 Sep‐13 Oct‐13 Nov‐13 Dec‐13 Jan‐14 KSE100 Index PSO PSO Profile: Pakistan State Oil Company Limited (PSO), a public company incorporated in 1976, is primarily engaged in the procurement, storage and marketing of petroleum products in Pakistan. The company holds the largest distribution network in the country with ~3,700 outlets. Also, the company has a storage capacity of ~1.0mn tons representing 74% of the total storage capacity owned by all the oil marketing companies in Pakistan. The major petroleum products being sold by the company are Furnace Oil, High Speed Diesel and Motor Gasoline. Muhammad Affan Ismail [email protected] +92 111 262 111 Ext: 2058
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Transcript of BMA Research5
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WemaintainourconvictiononPSOwithastrongBUYstanceaswerollforwardourTPtoDec14toPKR411/shofferingatotalreturnof25%
Going forward, we expect the pace of buildup in circular debt to significantlyslowdown in 2HFY14 given a) full scale impact of increase tariffs, b) initiation ofstructuralreformsandc)releaseofsubsidybyMinistryofFinance
WemaintainourpreviousestimateofPKR0.200.22/ltr increase inmarginsofbothMOGASandHSDtranslatingintoanannualizedearningsimpactof8%9%
ThestockistradingatPERof4.5xand4.7xtoourFY14EandFY15EEPSrespectively
MorepositivestounlockinCY14:Dec14TPatPKR411/sh;totalreturnof25%
TheoutgoingCY13remainedanothereventfulyearforPakistanStateOil(PSO)markedbya) final settlementof circulardebt (in Jun13Jul13),b) initiationof longawaitedpowertariff increase (from Aug13), c) consistent volumetric growth and d) businessdiversification plans (though a distant possibility).Marked by aforementioned positivetriggers,PSOoutperformed thebenchmark indexby23% inCY13.The stockwitnessedfreshrallyinlasttwomonths(Nov13Dec13)owingto1)anticipationofuptickinMOGASandHSDmarginsand2)hike inpowertariffswhichgeareduptheconfidenceofmarketon serious implementationofpower sector reforms (tobodewell forPSOspayouts inlongrun).
Moving ahead into2014, thoughwe foreseepayout to remaindepressed in FY14, anyimprovement in payouts should be expected beyond FY14 where full scale impact ofreformswillbereflectedincashflows.WemaintainourconvictiononPSOwithastrongBUYstanceasweroll forwardourTPtoDec14toPKR411/shofferingatotalreturnof25%.AsperourestimateweexpectthecompanytopostEPSofPKR75.7/sh,PKR72.3/shandPKR74.1/sh inFY14,FY15andFY16 respectivelywhichdepictsFY13FY16ECAGRof13%.Atcurrentlevels,thestockistradingatPEof3.8xand4.0xtoourFY14andFY15EPSestimatesrespectively.
Updateoncirculardebt
Due to 1) delay in power tariff hike for domestic consumers, 2) increased FO basedgenerationamid lowhydelbasedgeneration inwinter seasonand3) sluggish recoveryfromWAPDA,weexpectreceivablesofthecompanytowitnessaslightupticktoPKR120122bn in2QFY14compared toPKR116bn in1QFY14.Currentlyoverduereceivable fromWAPDAremainsunchangedatPKR6364bnwhileHUBCOsoverduestandsatPKR2224bnin Jan14 (versus PKR14bn in Nov13). Though payables to both foreign and local fuelsuppliers are expected to ease to PKR109111bn, we believe higher dependence onborrowing(estimatedtoremainunchangedPKR5051bnin2Q)amidrisingreceivableswillkeepinterestcostonthehigherside.
The government recently injected ~PKR30bn into the energy chain from which PSOreceived~PKR18bninfirstweekofJan14,asperourindustrychecks.Goingforward,weexpectthepaceofbuildup incirculardebttosignificantlyslowdown in2HFY14givena)full scale impact of increase tariffs for both commercial and domestic consumers, b)initiationofstructuralreformsintheenergychainandc)releaseofsubsidybyMinistryof
GearingupforanothereventfulyearWednesdayJanuary 8,2013
PakistanStateOil
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BUYTargetPriceDec14:PKR411CurrentPrice:PKR338
Bloomberg PSO.PA
Reuters PSO.KA
MCAP(USDmn) 791
12MADT(USDmn.) 6.7
SharesOutstanding 247
2013A 2014F 2015F
EPS 50.8 75.7 72.3
DPS 5.0 10.0 15.0
2014FDividendYield(%) 3%
CapitalGain(%) 22%
TotalGain(%) 25%
PSOvs.KSE100RelativeChart
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KSE100Index PSO
PSO Profile: Pakistan State Oil Company Limited(PSO), a public company incorporated in 1976, isprimarily engaged in the procurement, storage andmarketing of petroleum products in Pakistan. Thecompanyholdsthelargestdistributionnetworkinthecountrywith~3,700outlets.Also,thecompanyhasastoragecapacityof~1.0mntonsrepresenting74%ofthe total storage capacity owned by all the oilmarketing companies in Pakistan. The majorpetroleum products being sold by the company areFurnaceOil,HighSpeedDieselandMotorGasoline.
[email protected]+92111262111Ext:2058
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Finance.The improvedcash flowgenerationwill lowerrelianceonbankborrowing thusreducingtheburdenof increasedfinancialchargesoncompanysprofitability.Thestepstoreducepowertheftsand improverecoveriesofbillswillremainthekeytosuccessfulimplementationofreformistmeasures.Thatsaid,weremainskepticalofahealthypayoutin FY14 while expecting any improvement in cash flows to materialize in FY15 andonwards.
Robustvolumetricgrowthwarrantsattention
WeexpectpetroleumsalesoftheindustrytomaintainnorthwardjourneytakingfullyearFY14MOGAS,HSDandFOsales to4.0mn tons (upby18%YoY),7.0mn tons (upby3%YoY)and8.7mntons(upby3%YoY)respectively.Theupwardmomentum inpetroleumsaleswillbedrivenbya)prolongedclosureofCNGstations,b) improvedFOofftakebyIPPsand industry (amid increasinggassupplydeficit)andc)better industrialactivity (toliftHSDsales).Interestingly,PSOhasmanagedtorecoveritsmarketshareinHSDby4ppsFY14TD to57% inDec13whichcoupledwith risingMOGAS saleswillbodewell for thetotalvolumetricsalesofthecompany.Ontheotherhand,phasewiseimplementationofpowersectorreformswillalsokeepFOsalessteadywith limitedpileupofcirculardebt(unlikepast)thusposingnosignificantthreattocompanyscashflows.
Marginsrevision:Uncertaintyremainsontiming
Therecentoutperformanceofthestockduringlasttwomonthscanalsobeattributedtoanticipationofuptick inmarginsofHSDandMOGAS.However,given thegovernmentsfocustowardspopulistmeasurestokeeppetroleumpricesunchanged,weforeseelimitedchancesofmarginrevision in Jan14.Whatsoever,wemaintainourpreviousestimateofPKR0.200.22/ltr increase inmargins (nowexpected inFeb14)ofbothMOGASandHSDtranslating into an annualized earnings impactofPKR5.86.4/sh respectively (8%9%ofour base case FY15 estimates). The said deal will benefit PSO on two fronts i.e. 1)enrichmentofbottomlineand2) strengtheningcash flows (cashbasedgrossprofits) toreduceburdenofpenalexpenseandfinancecostonthebottomline.
Earningstomaintainpositivemomentumin2QFY14
Markedbya)steadyvolumetricsales,b)strongmarginsonFOandc)relativestabilityinPKR againstUSD (lower exchange losses),we foresee the company to post EPS in thevicinity of PKR1415/sh in 2QFY14. Barring the onetime impact of PKR8.3bn in penalincomerealizedin1Q,webelievethecoreearningstodepictrobusttrendonQoQbasisintheoutgoing2QFY14.Going forward,weexpect1) increasedHSDandMOGASsales,2)upwardrevisioninthemarginsofsaidproductsand3)containeddepreciationinPKRwillprovidenotablelifttoearningsin2HFY14.
Valuation
AtourDCFbasedrolledforwardDec14TPofPKR411/sh,thestockoffersatotalreturnof25%againstlastclosingpricethuswemaintainourBUYstanceonthestock.ThestockistradingatPERof4.5xand4.7xtoourFY14EandFY15EEPSrespectively.
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