AKD Quotidian about — PSO: Massive upside on OC margin revision

Karachi, December 16, 2013 (PPI-OT): PSO: Massive upside on OMC margin revision

The Pakistan Institute of Development Economics (PIDE) has reportedly recommended an upward revision in OMC margins by PkR0.8/litre on MS and HSD.

According to AKD Securities, this is substantially higher than the earlier expected hike of PkR0.3/litre to PkR0.5/litre and would result in earnings impact of +10% for PSO in FY14 and +18% across AKD Securities’ forecast horizon. Consequently, AKD Securities’ TP for PSO would increase by 26% to PkR422/share from PkR335/share at present. Moreover, AKD Securities expects MS volumes in FY14 to increase by 18%YoY to a record ~2mn tons, where higher regulated margin on the product should also partially offset downside from increased borrowing requirements as FO volumes remain on the uptrend post circular debt retirement in Jun’13. While AKD Securities still awaits endorsement of the proposed hike in margins by the MoPNR and ECC, AKD Securities believes the approval is very likely given persistent lobbying by industry heavyweights and rising inflationary pressures. At current levels, PSO trades at a 49% discount to the broader market P/E of 8.4x.

Margin Revision: As per reports, the Pakistan Institute of Development Economics (PIDE) has recommended an upward revision in margins for OMCs and petroleum dealers by PkR0.8/litre for MS and HSD. This comes after persistent lobbying by the industry to cover rising direct costs and inflationary pressures. Notably, the recommended HSD: 43%) is much higher than the expected increase of 10%-20% communicated by PSO’s management earlier. According to AKD Securities’ estimates, the proposed increase would result in an earnings impact of +10% for FY14 (EPS: PkR84.65) and +18% across AKD Securities’ forecast horizon. Consequently, AKD Securities’ TP for PSO would increase by 26% to PkR422/share from PkR335/share at present.

PSO: Impact of Margin Hike
                                              % EPS change
Margin Hike (PkR/litre)       FY14F       FY15F       FY16F          TP
          0.8                 10%         20%          20%           422
          0.7                  9%         18%          17%           411
          0.6                  8%         15%          15%           401
          0.5                  6%         13%          12%           390
          0.4                  5%         10%          10%           379
          0.3                  4%          8%           7%           367
Source: AKD Research

Volumes on the rise: MS volumetric sales of PSO have increased by 15%YoY in 5MFY14 largely due to higher demand from gas curtailment to the CNG sector. AKD Securities expects the trend to continue going ahead as the government recently announced a complete shut-down of CNG stations in Punjab till Feb’14. As per AKD Securities’ estimates, total MS volumes in FY14 should clock in at a record ~2mn tons (up by 18%YoY) while HSD volumes should remain flat (3.9mn tons), where potentially higher regulated margins on these favourable cash cycle products should partially offset downside from increased borrowing requirements as FO sales remain on the uptrend (5MFY14: up by 13%YoY).

Investment Perspective: While PSO currently trades close to AKD Securities’ TP of PkR335/share, the proposed upward revision in OMC margins on MS and HSD presents upside of 27% from current levels. However, AKD Securities awaits approval by the MoPNR and the ECC in this regard, and will update investors accordingly. In the longer-term, AKD Securities maintains AKD Securities’ liking for PSO on the back of sustained energy sector reforms and envisaged measures to reign in circular debt by the GoP which could trigger a valuation re-rating for the stock, in AKD Securities’ view. At current levels, PSO trades at a 49% discount to the broader market P/E of 8.4x.

The post AKD Quotidian about — PSO: Massive upside on OC margin revision appeared first on AsiaNet-Pakistan.

Leave a Reply