Dear Clients,

Pakistan State Oil (PSO)’s half-yearly earnings depicted a growth of 48% Y/Y to PKR 9,522mn (EPS: PKR 20.28) during 1HFY21 against PKR 6,435mn (EPS: PKR 13.71) recorded during 1HFY20. Earning growth largely stemmed from: 1) inventory gains amidst rising oil prices (vs. inventory losses the preceding period), 2) higher core OMC margins, and 3) lower financial charges. Sequentially, earnings dipped by 15% Q/Q to PKR 4,378mn (EPS: PKR 9.32) largely because of a lower quantum of inventory gains. Along with the result, the company announced an unanticipated interim cash dividend of PKR 5.00/sh.

Key highlights

– PSO’s top-line fell by 12% Y/Y to PKR 567bn during 1HFY21 despite higher OMC sales (MS: +12% Y/Y; HSD: +18% Y/Y; and FO: +26% Y/Y) as lower domestic petroleum prices during the period limited potential revenues growth.

– PSO’s gross profits increased by 16% Y/Y to PKR 20,489mn during 1HFY21 largely because of: 1) inventory gains compared with inventory losses the preceding period, and 2) higher core OMC margins. Sequentially, gross profits undershot our estimates and fell by 22% Q/Q to PKR 8,993mn during 2QFY21 primarily because of a lower quantum of inventory gain.

– PSO’s financial charges dipped by 85% Y/Y to PKR 579mn during 2QFY21 on account of a sharp reduction in the company’s borrowings. Recall that post the Energy Sukuk-II, PSO’s cash-flow position improved considerably, allowing its short-term borrowing to fall down to PKR 42bn as of Sep20 compared with PKR 119bn SPLY. The 625bps cut in interest rates also supported the overall decline in financial costs. The surprise cash dividend is largely a result of the aforementioned improvement in cash-flows.

– We have a BUY stance on PSO with a Jun21 TP of PKR 274/sh. Our preference for the stock is underpinned upon: 1) high sales growth in view of recovering economic activity and the government’s resolve to curb smuggled petroleum, 2) changes in pricing mechanism to insulate the company against oil price and exchange rate volatility, and 3) significant progress on clearing the circular debt, further enhancing the company’s flow position. The stock presently trades at an FY22 PE of 7.3x.

Regards,
KASB Research