PSO: Inventory gains and tax reversal led to exceptional earnings

FY11 results beat expectations: PSO posted FY11 earnings at PKR14bn (EPS: PKR86.17), up 63% YoY, primarily due to massive inventory gains and lower tax rate recorded in FY11. 4QFY11 earnings clocked in at PKR32.19/share, up 264% YoY. Cash dividend of a mere PKR2/share remained a disappointing aspect. Total dividend payout for FY11 stood at PKR10/share.

Colossal inventory gains lifted FY11 gross profit: In addition to 23% YoY higher margins realized on FO, enormous inventory gains of PKR6.4bn (before tax) pushed gross profit to PKR34bn, up 17% YoY during FY11. Without inventory gains, gross profit would have been down by 4% YoY as volumes were 9% YoY lower compared with FY10.

Finance cost rose 20% YoY: PSO booked all time high finance cost of PKR12bn in FY11 primarily due to rising interest cost on overdue payables. Interest income on the other hand was down 41% YoY to PKR3.3bn which led to 51% YoY increase in net financial charges (finance cost less interest income) in FY11. However, with the recent payment to refineries, payables to refineries have declined by 46% during 4Q that shall result in lower net finance cost in 1QFY12.

Lowest tax rate at 18.3%: PSO booked effective tax rate of a mere 18.2% during FY11 owing to reversal of deferred tax asset that was created post reversion in turnover tax rate. Barring the tax reversal, FY11 earnings would have been PKR67.24/share.

Margin increase still on the cards: PSO management, in its analyst briefing, showed sign of confidence of possible increase in margins on MS and HSD. According to the management, this matter shall soon be thrown to ECC for approval. PSO shall be the key beneficiary of this possible upward revision as 39% of its sales come from HSD and MS.

Buy stance maintained: At yesterday’s closing price, the scrip offers an attractive upside of 76% to our Jun-12 price target of PKR397/share. BUY!

Colossal inventory gains lifted FY11 gross profit

Compared with FY10 inventory gains of PKR1.9bn (after tax), PSO recorded colossal inventory gains of PKR3.8bn (after tax) in FY11 with 70% or PKR2.7bn recorded in 4QFY11 alone. Before tax inventory gain was recorded at PKR6.4bn in FY11. Besides inventory gain, PSO realized 13% YoY higher margins on its FO sale during FY11. Without the inventory gains, FY11 gross profit would have fallen by 4% YoY as volumes were down 9% YoY during FY11.

Finance cost rose 20% YoY

Unabated circular debt continued to devoure company’s profitability in FY11 in terms of rising finance cost, as PSO booked all time high financial charges of PKR12bn owing to rising interest cost on overdue payables. Despite a payment of PKR89bn in May-11, PSO receivable has again swelled to PKR134bn as at 8 August 2011. However, payables to refineries have now declined by 46% to PKR56bn which shall result in lower finance cost during 1QFY12. Moreover, management also informed during its analyst briefing that PSO has managed to increase its letter of credit (for FO supplies) from previous 21 days to 60 days, which shall result in decline of finance cost by reduction in short term borrowing.

Lowest tax rate at 18.3%

Despite flood surcharge of 15% effective from March 15 2011, PSO’s effective tax rate was just 18.3% in FY11. This was due to reversal of deferred tax asset amounting to PKR3.2bn, with EPS impact of PKK18.93. Had the flood surcharge not been imposed during 4Q, PSO’s FY11 earnings would have been further up by PKR2/share to PKR88.19. Barring the tax reversal, effective tax rate would have been 37% which should result in EPS of PKR67.24.

Margin increase still on the cards

Management in its analyst briefing was confident of possible increase in margins especially on MS and HSD. According to the management, this matter shall soon be thrown to ECC for approval in a month times. PSO shall be the key beneficiary of this upward revision in margins as 39% of its sale comes from MS and HSD.

Economic & Political News

Pakistan hits record export of USD2.203bn in July

Pakistan’s exports during July 2011 were valued at USD2.203bn, which was 27.6% higher than the level of USD1.726bn during July 2010. Imports during July 2011 were valued at USD3.689bn registering a growth of 13.9% over the level of imports valued at USD3.239bn in July 2010.

Forex reserves decline to USD17.975bn

The country’s foreign exchange reserves declined to USD17.975bn in the week ending on August 6, 2011, as compared to USD18.312bn in the previous week, figures released by State Bank of Pakistan said Thursday.
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