AKD Quotidian about — PSO: Analyst Briefing Update and Estimates Revision

Karachi, March 04, 2014 (PPI-OT): PSO surprised yet again with its 2QFVI4 result, posting NPAT of PkR8.Obn (EPS: PkR32.4). a growth of 3.gxYoVI4.5%QoO.

According to AKD Securities, this brings IHFYI4 NPAT to PkRI5.8bn (EPS: 63.97), a growth of 2.5xYoY. The company held an analyst briefing yesterday to shed light on the result. Amid improved volumetric sales led by higher CNG curtailment and improved power sector liquidity, the earnings growth in I HFYI4 was led primarily by higher other income, lower than anticipated FX losses and a robust gross margin (buoyed by inventory gains).

AKD Securities upwards revise AKD Securities’ FYI4F earnings estimate for PSO by 19% post the surprise 2QFYI4 result, where AKD Securities expects the company to post NPAT of PkR22.6bn (EPS: PkR9I.47) for the year, a growth of 80%VoY. AKD Securities asia upwards revise AKD Securities’ TP for PSO by 3% to PkR346Ishare. At the same time, AKD Securities highlights materialization of the proposal to upward revise OMC margins for MS and HSD to unlock further upside in PSO. At current levels, PSO trades at an attractive FVI4F PIE of 4.Ox.

Analyst briefing takeaways and result review: PSO posted robust earnings growth of 2.5xYoY to PkR1 5.Sbn (EPS: PkR63.97) driven primary by higher other income (penal interest income from IPPs and interest on PIBs) and lower operating costs. In this regard, the company recorded a surprise FX gain of PkR1 .Sbn in 2QFY14, bringing down cumulative I HFY14 FX loss to PkR2.2bri, despite adverse currency movement. Moreover, inventory gain of PkR-4bn in 1HFY14 elevated gross margin to 3.7%, an increase of 1 .5ppt YoY. Financial charges during the period were higher by 18%YoY to PkR5.3bn, which included a hefty PkR3.4bn in penal interest to refineries. On the other hand, other income increased by 4.4xYoY to PkR14.lbn as the company received penal interest of PkRG.Sbn from HUBC and PkR1.Obn from KAPCO (mostly in 1QFY14). The result was also accompanied by a cash payout of PkR4/share on top of a bonus payout of 10%.

Estimates Revision: AKD Securities upwards revise AKD Securities’ FY14F earnings estimate for PSO by 19% post the surprise 2QFY14 result, where AKD Securities expects the company to post NPAT of PkR22.6bn (EPS: PkR91 47) far the year, a growth of 8O%YoY. At the same time, AKD Securities highlights additional irregular interest income/payments (-PkR4Obn pending from IPPs and -PkRlObn payable to refineries) as key risks to 2HFY14 earnings. Moreover, with increased FO volumetric sales (1 HFY14: +13%YoY) and higher power tariffs amid continued inefficiencies in the power sector, circular debt is expected to rise frther where financial charges in 2HFY14 could surpass expectations.

Investment Perspective: AKD Securities upwards revise AKD Securities’ TP for PSO by 3% to PkR346Ishare while highlighting materialization of the proposal to upward revise OMC margins for MS and HSD to unlock further upside in PSO. In this regard, while AKD Securities still awaits policy directives from the ECC, AKD Securities estimates an average PkRO.5/Litre hike in MS and HSO margins for OMCs to elevate PSOs TP to PkR39O/share. At current levels, PSO trades at an attractive FYI4F PIE of 4.Ox.

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