Morning Call about – Hascol Petroleum Limited – Arif Habib Limited

Karachi, March 04, 2014 (PPI-OT): Solid growth ahead; Subscribe

According to Arif Habib Limited, Hascol Petroleum Limited (Hascol) is undergoing an IPO of 25mn shares, out of which 18.75mn shares would be offered through book building at a floor price of PKR 20/share, while the remaining 6.25mn shares would be offered to the general public at the strike price determined through book building process.

Purpose of the issue
The company is planning to raise a minimum PKR 500mn equity through the issue to fund its Machike Storage Facility and expansion of the retail fuel network. HPL is planning to add 50 retail outlet during this year.

Arif Habib Limited recommends Arif Habib Limited’s investors to subscribe to the issue, with Arif Habib Limited’s Dec-14 target price of PKR 38/share, projecting an upside of 96% from the floor price. Arif Habib Limited’s liking for Hascol primarily stands due to its aggressive growth strategy mainly emanating from its expanding retail network and storage facilities. In addition, prudent credit policies for power sector has shielded the company from the illness of circular debt. At the offer price HPL is trading at a PER and PB of 3.2x and 0.7x based on CY14 earnings.

Rising volumes paved the way for growth
The company has posted a solid earnings growth at 119% CAGR during CY11-13 to PKR 4.38/share, which mainly stemmed from strong volumetric growth. This was mainly on account of aggressive market penetration strategy of the company which led its market share in MS and HSD improving from a meager 0.6% and 0.8% in FY11 to ~2% and ~2.5% in 1HFY14, respectively.

Infrastructural development sets the launching pad for future growth
Continuing its aggressive market penetration strategy, HPL has been focusing on improving supply chain dynamics with both back end storage facilities and expansion of retail fuel networks. The company plans to add another 91 fuel station till CY16 (current 210), out of which 50 retail outlets would be established in CY14 alone. To fuel its expanding retail outlets, the company has already commissioned a storage facility of 6,500MT in Shikarpur Sind, while another 6,500MT storage facility is expected to come online this year at the strategic location of Machike. This would be pave the way for future volumetric growth at 3 year CAGR of 23% in CY13-16 to ~1mn tons. The company is expected to post a solid earnings growth at 3 year CAGR of 42% to PKR 12.26/share in FY16 from PKR 4.33/share in CY13.

Prudent credit policy shielding from circular debt
Despite posting a healthy growth in the FO market (HPL had a market share of only ~1% in FY11 to 3.3% in 1HFY14), the company protected itself from the chronic circular debt problem by following a defensive commercial sales strategy. HPL has shielded its self from the issue through irrevocable financial instruments, while supplying HSFO to the debt ridden power sector.

Absorption of tax losses may lead to abnormally higher effective tax rate
As per the managements’s estimates, the company will keep on benefiting from low effective tax rate in next five years due to deferred tax advantage. However it is pertinent to mention here that available tax losses to the company till Dec-13 stand at PKR 320mn, exhaustion of which may drag the company in minimum turnover tax regime (0.5% of the topline), increasing its effective tax rate to 42%.

Offering attractive multiples
At the floor price, HPL available at a 16% and 27% lower PER and PBV offered by its listed peers based on CY13 figures. Healthy growth story, cheap multiples and market enthusiasm about IPOs lately is expected to keep the issue in the limelight.

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