▪ Pakistan State Oil (PSO) reported its 3QFY20 earnings earlier today, where the company announced a loss of PKR 3,426Mn for the quarter (LPS: PKR 7.30/sh), lower than our estimated loss of PKR 0.73/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.

▪ On a cumulative basis, the 9MFY20 Profit after Tax came in at PKR 3,009 MN (EPS: PKR 6.41/sh), lower by 49.2% Y/Y.

▪ We believe inventory losses for PSO during the period were a lot more profound than expected, with the gross profit coming in at PKR 2,465 MN for the three-month period, lower by 65% Q/Q and 69% Y/Y. We had projected for the company to report gross profit of PKR 4,821 MN, which would have been lower by 31% Q/Q and 39% Y/Y.

▪ Our inventory loss thesis was predicated by the reduction in MS and HSD ex-refinery prices by PKR 18.85/liter and PKR 14.45/liter, respectively, during March.

▪ To recall, PSO’s sales volumes saw a 34% Q/Q dip to 1.32 MN tons during the three-month period, with HSD/MS/FO volumes declining by 38.7%/13.5%/60.3% Q/Q, respectively.

▪ Furthermore, exchange losses were muted during the quarter, indicating lower foreign liabilities as the import of crude oil was banned amidst lower demand.

▪ A further dampener to the company’s profitability during the quarter was the lower other income, coming in at PKR 1,303 MN, lower by 76% Q/Q. We believe this is likely driven by the absence of late payment surcharges from customers. However, we await full accounts for details regarding this matter.

▪ Some respite came in the form of lower distribution expenses, recorded at PKR 2,315 MN for the quarter, or 0.94% of net sales, compared to 1.02% in the earlier quarter.

▪ We have an “Outperform” rating on PSO, with a Target Price of PKR 198/sh, representing an upside of 37% over current levels. The stock is currently trading at 4.58x its FY21 projected earnings, and P/B of 0.51x.