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Morning Call about Pakistan State Oil Company Limited – Arif Habib Limited

Karachi: 1QFY12 Result Review and Analyst Briefing Takeaways

Pakistan State Oil Company Limited (PSO) bagged more than 3x YoY growth in the profitability by posting profit after tax (PAT) of PKR 2,487mn (EPS: PKR 14.50) in 1QFY12, compared to PKR 810mn (EPS: PKR 4.72) in the corresponding quarter last year.

According to Arif Habib Limited, this magnified profitability jump is the effect of a 68% effective tax charged 1QFY11 due to increase in the turnover tax rate. Besides this turnover tax, increase in the margins of both regulated and deregulated products, a 93% YoY increase in Inventory gains, a 114% YoY rise in interest received from the power sector and a 37% YoY decline in the finance cost, were the major earnings booster for the company.


Financial Highlights
PKR mn 1QFY12  1QFY11 YoY
Net sales 238,736  170,362 40%
Cost of sales  231,057 163,649 41%
Gross profit 7,678  6,713 14%
Other operating income  487  365 34%
Operating expenses   3,566 2,138 67%
Other income   896 419 114%
Operating profit   5,496  5,358 3%
Finance cost 1,873 2,975 -37%
Taxation  (1,254)  (1,707) -27%
Profit after taxation  2,487 810  207%
Earnings per share 14.50 4.72 207%
Sources: KSE Notice


Healthy inventory gains and increase in margins have led to 14% jump in gross profit

Although volumetric sales of the company remained stagnant at 3.1mn tons during 1QFY12, but strong recovery in FO margins (up by 21.8% YoY to PKR 1,680/ton) and a 10% increase in MS and HSD volumes have led to a 14% jump in the gross profit. As per the management of the company, last increase in the proposed margins have taken place in November 2011 and fixed margins on HSD and MS now stand at PKR 1.76/ltr and PKR 1.98/ltr, respectively. Besides the margins improvement, the company also posted a 93% YoY increase in the inventory gain to PKR 460mn (PKR 2.7/share) in 1QFY12.

Exchange loss have swelled the operating expenses by 67% YoY

Due to increased reliance on the foreign financing and PKR depreciation, the company suffered an exchange loss of PKR 1.2bn in 1QFY12 as compared to PKR 0.1bn in the corresponding quarter last year. This increase has led to a 67% YoY increase in the operating expenses to PKR 3.6bn in the period under review.

Penal interest received have fuelled the other income by 114% YoY

The management in the analyst briefing has disclosed that the company has received PKR 708mn from Hubco and KAPCO as penal interest on the overdue receivables. This has improved the other operating income by 114% YoY to PKR 896mn in the period under review.

Lower refineries’ payables and LIBOR based financing put a lid of finance cost

The company witnessed a 37% YoY drop in finance cost to PKR 1.9bn, which stands the lowest in last 7 quarters. As per the management, this was on account of lower refineries’ receivables and LIBOR based financing. PSO booked refineries’ interest to the tune of PKR 1.4bn in 1QFY12, compared to PKR 2.1bn in the corresponding quarter last year. Although the company put a lid on finance cost through LIBOR based financing, however this exposed the company to the fluctuation of the exchange rate, which cost the company an exchange loss of PKR 1.2bn.

Circular Debt issue; proposal of LC opening is in initial stages

In response to the news in the print media regarding WAPDA opening LCs for PSO and PSO opening LCs for Refineries, the management of the company revealed that it was just a proposal and nothing in this regard has been finalized. However management was confident that if this proposal is materialized then the liquidity of the whole energy chain could improve.


Arif Habib’s DCF based target price for PSO works out to PKR 437.6/share, which offers an attractive upside potential of 77.5% from last closing price of PKR 246.5/share; thus Arif Habib Limited recommends Buy for the Scrip. The problem of circular debt continues to pose a risk however government’s decision to gradually increase the power tariff, improve the collection from DISCOs and focus of donor agencies on power sector reforms are shedding some light at the end of the tunnel.

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