PSO: FY11 EPS is expected at PKR69.59

4QFY11 EPS expected of PKR15.61; FY11 EPS at PKR69.59: PSO is scheduled to announce its financial result for FY11 on August 9, 2011. We expect the company to post profit after tax of PKR2.7bn (EPS: PKR15.61) for 4QFY11, up 26% QoQ and 77% YoY, which shall take FY11 earnings to PKR12bn (EPS: PKR69.59), up 32% YoY. We also expect final payout of PKR8/share, taking cumulative dividend to PKR16/share in FY11. Full year EPS of PKR69.59 include a tax reversal of PKR13/share. Barring tax reversal impact, earnings shall still be robust at PKR56.24/share.

Higher margins to offset 9% YoY lower volumes in FY11: PSO’s FY11 volumes were down by 9% YoY, which is expected to be offset by an estimated 26% YoY higher margins per ton during FY11 and estimated full year inventory gain of PKR2.2bn. We estimate 4QFY11 inventory gains at PKR1.1bn.

Finance cost shall decline by 18% QoQ in 4QFY11: PSO is expected to book net finance cost (financial charges less interest income) of PKR8.1bn, 114% YoY higher primarily due to all time high estimated finance cost of PKR12bn in FY11 and lower recovery of penal mark up from IPPs. Post receipts of PKR101bn and subsequent disbursement to refineries during 4QFY11, PSO financial charges are expected to fall by 18% QoQ in 4QFY11. We also expect PSO to have expedited recovery of penal mark up from IPPs during the quarter, which along with lower finance cost shall result in 42% QoQ lower net finance cost in 4QFY11.

Investment perspectiveSFO: At yesterday’s closing price, PSO trades at an attractive FY12 PER of 4x and offers an upside of 74% to our Jun-12 PT of PKR397/share. BUY

Higher margins to offset 9% YoY lower volumes in FY11

PSO’s FY11 volumes were down by 9% YoY primarily due to weak FO sale along with lower HSD volumes. However, lower sale is estimated to be offset by higher margins per ton, which is estimated 26% YoY higher in FY11 and cumulative FY11 estimated inventory gain of PKR2.2bn. PSO’s 4QFY11 sale was up by 16% QoQ, though down by 9% on YoY, as except for Jet Fuels all other energy products witnessed QoQ growth, lead by FO which was up by 23% QoQ. PSO lube sale is also estimated to increase by 6% QoQ during 4QFY11. 4QFY11 inventory gain is estimated at PKR1.1bn as against PKR152mn in 3QFY11.

Finance cost shall decline by 18% QoQ in 4QFY11

PSO is expected to book all time high finance cost of PKR12bn during FY11, up 17% YoY, as it is recognized on accrual basis. Penal mark up income on overdue receivable, on the other hand, is likely to clock in at PKR3.5bn; down 43% YoY due to slower recovery from IPPS. This shall result in 114% YoY higher net finance cost in FY11, estimated at PKR8.1bn. During 4QFY11 PSO received PKR90bn on May 03, 2011 and an additional PKR11bn on May 24, 2011, out of which a total of PKR80bn was disbursed to refineries and GOP, while the remaining was deployed to reduce short term borrowings. Thus, we expect financial charges to decline by 18% QoQ during 4QFY11. PSO is also expected to have accelerated penal mark from IPPs during 4QFY11, as despite an increase in receivables PSO recognized a mere 2.5bn in penal mark up income in 9MFY11 against PKR4.6bn recorded in corresponding period last year. Due to higher expected interest income along with lower finance cost, net finance cost is expected to decline by 42% QoQ to PKR1.1bn during 4QFY11.

Investment perspective

We maintain our buy stance for PSO as at yesterday’s closing, it offers an upside of 74% to our Jun-12 Price Target of PKR397/share and trades at an attractive FY12 PER of 4x.

Economic & Political News

Forex reserves rise to record USD18.31bn

Reserves held by the State Bank of Pakistan (SBP) jumped to USD14.78bn from USD14.74bn a week ago, while those held by commercial banks fell to USD3.53bn from USD3.56bn, said SBP chief spokesman Syed Wasimuddin.

Pakistan will have to repay USD8bn to IMF in 4 years

According to the repayment schedule agreed between the IMF and Pakistan, which is available with The News, Pakistan will have to return the first due installment of USD413mn to the IMF on February 24, 2012. This will be paid back to the Fund from foreign currency reserves held by the SBP. The second installment worth USD413mn on May 25, 2012; and 3installments of USD113mn on June 29, 2012,
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