▪ Pakistan State Oil (PSO) is scheduled to report its 3QFY20 earnings on Wednesday, April 29, 2020. We expect the company to report Loss after Tax of PKR 344 MN (LPS: PKR 0.73/sh) for the quarter, taking our 9MFY20 earnings expectation to PKR 6,091 MN (EPS: PKR 12.97/sh).

▪ In comparison, the company reported earnings of PKR 6.19/sh in the earlier quarter, and PKR 3.57/sh in the same period last year.

▪ We expect Gross Profits to fall by 31% Q/Q to PKR 4,821 MN for the three-month period, underpinned by: 1) 33.5% Q/Q decrease in volumes; 2) Projected inventory loss of PKR 2,680 MN (PKR 5.71/sh). This was somewhat offset by higher OMC margins during the quarter with the PKR 2.81/liter being applicable during all three months, compared to only the last month of the previous quarter.

▪ Our inventory loss thesis is underpinned by a slump in international crude oil prices and POL products, which led to MS and HSD ex-refinery prices falling by PKR 18.85/liter and PKR 14.45/liter, respectively, in Pakistan.

▪ As earlier stated, the company’s volumes saw a 34% Q/Q dip to 1.32 MN tons during the three-month period. The brunt of the decline was in HSD volumes, which dipped by 316KT Q/Q or 38.7%.

▪ Additionally, due to the PKR losing 7% of its value against the USD during the course of the quarter, we expect exchange losses to adversely impact the company’s earnings this quarter, expected to come in at PKR 2,247 MN (pre-tax: PKR 4.8/sh).

▪ Furthermore, we expect the company to have responded to the COVID-19 pandemic and lowered its overheads, leading to our expectations of a 46% and 36% Q/Q dip in distribution and admin expenses.

▪ We hold an “Outperform” rating on PSO, with a Target Price of PKR 198/sh, representing an upside of 41% over current levels. The stock is currently trading at 4.45x its FY21 projected earnings, and P/B of 0.49x.