Pakistan: Time to buy PSO shares

PSOPakistan’s largest oil marketing company, Pakistan State Oil (PSO) has rallied 18% during second quarter so far on account of higher volume and likely margin hike by the government. In this brief an effort has been made to analyze prevailing situation and likely impact of changing economic fundamentals.

PSO posted profit after tax of Rs7.8 billion (EPS: Rs31.57) for July-September quarter (1QFY14) as against net profit of Rs4.3 billion (EPS: Rs17.28) for the corresponding period last year. The main reason behind this massive growth in profit was increase in other income rising to Rs10 billion for the period under review. PSO received accrued income from HUBC and KAPCO on account of fuel supplied to them.

PSO’s accumulated volume for major products i.e. high speed diesel (HSD), furnace oil (FO) and motor gasoline (Mogas) increased by massive17%YoY to 2.1 million tons during Oct-Nov’13. Higher FO based generation and heightened CNG load-shedding were main reasons behind this volume growth. December volumes of Mogas are likely to increase further on account of CNG stations shut down in Punjab and KPK provinces. Better profitability is anticipated for 2QFY14 on account of higher volumes. In addition to that, 2.1% depreciation in Pak Rupee during 2QFYTD as against 5% during 1QFY14 will lessen the currency losses impact and increase the profitability.

Sui Northern Gas Pipeline (SNGPL) has announced gas load management plan for winter and shut down of gas supply to CNG stations, captive power plants and industrial units in Punjab. At the same time, petrol pump owners in southern Punjab announced a complete shut down until margins on POL products will not be increased. Non-availability of CNG and POL products simultaneously made the case of margin hike stronger and analysts expect the government to take decision on much awaited issue of dealers’ margin.

PSO’s higher than expected product volumes and recent interest rate hike of 50bps are likely to improve profitability of PSO. The scrip is currently trading at PER of 4.6x and P/B of 1.2x on FY14 earnings estimates, analysts recommend ‘BUY’ on PSO with upside potential of 17% from last closing.

(One US Dollar = Pak Rupees 108)

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