Pakistan Refinery Ltd: LT asset write off dragged 3Q earnings

Disappointing headline 3Q earnings: PRL posted loss after tax of PKR833mn (LPS: PKR23.83) during 3QFY11, against a loss after tax of PKR105mn (LPS: PKR3.01) during the same period last year. 9MFY11 now shows PKR47mn in earnings (EPS: PKR1.34) against losses of PKR1.8bn (LPS: 51.58) during 9MFY10. High inventory gains owing to 20% increase in oil prices during 9MFY11 and tax reversal drove the earnings during the ongoing year.

One off eroded 3QFY11 profitability: Asset write off relating to capital work in progress amounting to PKR1.1bn was the main reason of behind reported loss during the 3QFY11. Barring its effect, 3QFY11 EPS would likely have been PKR5.5.

Inventory gain turned gross profit positive: PRL reported gross profit of PKR339mn (↑880% YoY) primarily due to inventory gain of PKR750mn (PKR14/share after tax). Oil prices during 3QFY11 rose by 21%. Excluding inventory gains, PRL would have posted a gross loss of PKR411mn during 3QFY11.     

Unattractive 4QFY11 GRMs and inventory gains: PRL’s GRMs for 4QFY11 averaged USD0.93 which would not be enough to allow gross/ operating level breakeven. Inventory gains on the other hand, will likely be 70% lower QoQ during 4QFY11.

Unpredictable earning stream: With loss making product slate, one off events like inventory gains and frequent tax reversal remain the main earning drivers for PRL. Inventory gains remain highly volatile, dependent on oil prices and inventory holding, that remain difficult to forecast. Lower number of shares further magnifies the impact of non-recurring events on the company’s EPS.  Thus, we refrain from presenting earnings forecast and PT, and maintain our sell stance for PRL.

One off eroded 3QFY11 profitability

PRL wrote off fixed asset amounting to PKR1.1bn during the 3QFY11, the major culprit behind reported loss during the quarter. Company had recognized PKR1.33bn as capital work in progress as at June-10 relating to cost associated with feasibility work on refinery up gradation project, out of which only PKR315mn were identified as utilizable while the remaining amount was written off. Excluding the asset write off impact, 3QFY11 EPS would likely have been PKR5.5.  Moreover, other income dropped significantly during 3QFY11 by 52% QoQ.

Inventory gains turned gross profit positive

Major thrust behind 880% YoY higher gross profit was PKR750mn in inventory gains as oil prices rallied by 21% during Nov-10 to Feb-11. Barring the inventory gains, PRL would have posted gross loss of PKR411 as average GRMs of USD0.42/bbl for 3QFY11 was well below breakeven levels. 3QFY11 GRMs at USD0.42/bbl were USD1.14 (lower 73% QoQ) lower than 2QFY11 GRMs.

Unattractive 4Q GRMs and inventory gains

Though 4Q average GRM shall be USD0.52/bbl higher than 3QFY11 but it shall still be lower than the breakeven GRM, estimated USD1/bbl. However, inventory gains during 4Q will continue to support bottom line but with 70% lower quantum compared to 3QFY11, as oil price increase during Feb-11 to May-11 was a mere 10% against 21% jump during 3QFY11.

Unpredictable earning stream

Due to least profitable product slate amongst the listed refineries, where FO contributes 40%, PRL is a loss making company. One off events like inventory gains and frequent tax reversal remain the main earning drivers for the company. Inventory gains remain highly volatile, being dependent on oil prices and inventory holding, which are difficult to forecast. Lower number of shares further magnifies the impact of non-recurring events on the company’s EPS.  Thus, we refrain from presenting earnings forecast and PT, and maintain our sell stance for PRL.

Economic & Political News

Forex reserves flat at USD17.5bn

Pakistan’s foreign exchange reserves ended flat at USD17.5bn by the week ended on June 18 against USD17.5bn a week ago, the State Bank of Pakistan (SBP) said on Thursday. During the current fiscal year, the reserves level of the country hit a record level due to inflows of home remittances and export receipts, besides foreign aid for the flood victims.

IMF turns down request for SBA review

The International Monetary Fund (IMF) has categorically declined a Pakistan request to hold next review of the ‘suspended’ USD11.3 bn standby programme on the basis of estimated figures of expenditure and revenues of the outgoing financial year.
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