Revision in MS pricing positive for refineries

Revision in MS pricing mechanism: While OMCs remain largely unaffected by the deregulation of oil price’s, refineries will benefit as deregulation has resulted in change in MS pricing mechanism. MS produced by the local refineries will now be priced equal to PSO’s preceding month average import cost of Mogas. In absence of PSO import, the old formula with unitary RON penalty shall be applicable.

ATRL tops the beneficiary list: Amongst the listed refineries, ATRL will be the major beneficiary of this change as MS comprises 22% of its product slate. Annual earnings impact for ATRL using FY10 production level for MS is estimated at PKR9.58/share. NRL and PRL’s EPS will likely rise by PKR3.67 and PKR8.49, respectively. PRL’s EPS impact is inflated mainly due to lower number of shares (35mn).

No impact on our fuel business value and thus PT: While change in MS Pricing mechanism have resulted in improvement in our future earnings estimate, our price target for ATRL and NRL remain unchanged as we have valued the fuel business of both companies using distributable discounted free cash flows to equity. Refineries distributable cash is capped at 50% of 2002 paid up capital.

Revision in estimates: Owing to revision in MS pricing mechanism we have revised up our annual GRMs assumption for ATRL and NRL by 21% and 6%, respectively, which has increased EPS by 63-82% for ATRL and 6-7% for NRL. We also have roll forwarded our discounting timeline from Dec-11 to June-12, which has increased our PT for ATRL and NRL to PKR140/share and PKR370/share, respectively. We have a buy stance of NRL offering total stock return of 15%, while we have upgraded ATRL to buy (total stock return of 22%).

Revision in MS pricing mechanism

While OMCs remain largely unaffected by the deregulation of oil price’s, barring stoppage of PDC accumulation on MS import, refineries will benefit as deregulation has resulted in change in Mogas pricing mechanism. Previously local MS prices were being benchmark against the Arab Gulf price of Gasoline 95RON which was being reduced to 87RON by applying unitary adjustment, thus made MS a low margin or often a loss making product especially in high oil prices scenario. MS price at refiner level will now be equal to the PSO’s preceding months average import cost of Mogas. However, in absence of PSO imports, the old formula with unitary RON penalty shall still be applicable. Ex-refinery price for Mogas for the month of June was PKR64.06, which was PKR2.66/liter higher than the price calculated using the old formula. June-11 ex-refinery price is almost the same value obtained by using 91 octane rating.

ATRL tops the beneficiary list

Amongst the listed refineries, ATRL will be the major beneficiary of this change as MS comprises 22% of its product slate. ATRL produces nearly 50% of total MS production of the listed refineries.  Annual earnings impact for ATRL using FY10 production level of MS is estimated at PKR9.58/share. NRL and PRL’s EPS will likely rise by PKR3.67 and PKR8.49, respectively, as MS comprises just 8-9% of their product slate. PRL’s EPS impact is mainly inflated due to lower number of shares (35mn).

No impact in our fuel business value and thus PT

We have valued the fuel business of both the companies by using the distributable discounted free cash flows to equity, which is capped at the 50% of the 2002 paid up capital, attributable to the fuel segment. Thus, despite the favorable change in MS pricing, our value for fuel business and thus our PT for ATRL and NRL remain unchanged.

Revision in estimates

Owing to revision in MS pricing formula we have revised upwards our annual GRMs assumption for ATRL and NRL by 21% and 6%, respectively. With this upward revision ATRL’s EPS for the future periods have increased by 63-82%, while NRL’s EPS have jumped by almost 6-7%. We also have roll forwarded our discounting timeline from Dec-11 to June-12, which have increased our PT for ATRL and NRL by PKR23/share and PKR10/share to PKR140/share and PKR370/share, respectively. NRL offers FY11 dividend yield of 11% and offers an upside of 4% to our June-12 PT of PKR370. We maintain our buy stance for the NRL. We, however, upgrade our stance to buy for ATRL, as it offers FY11E dividend yield 5.5% and trades at a discount of 16% to our June-12 PT of PKR140/share.

Economic & Political News

FBR to collect PKR158bn in last 10 days of June

The Federal Board of Revenue (FBR) has to collect PKR157.8bn in the remaining 10 days of June 2011 to meet the revised annual revenue collection target of PKR1,588bn for 2010-11. FBR has provisionally collected PKR1,430.2bn from July 1 to June 20 (2010-11).
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