NRL: Stellar margins and other income led to record high EPS

FY11 EPS clocked in at PKR82.14: NRL posted profit after tax of PKR6.6bn (EPS: PKR82.14), up 100% YoY and announced final DPS of PKR25. 4QFY11 EPS stood at PKR21.56, up 31% YoY. FY11 DPS translated into payout ratio of just 30%, against last three years average of 47%, and remained the major disappointment.

Robust margins buoyed FY11 earnings: With 80% YoY higher GRM coupled with 43% YoY jump in base oil margins, NRL’s gross profit jumped nearly by two fold. NRL is estimated to have sold 8% higher volumes of base oil during FY11.

Other income further bolstered the bottom line: Other income, which primarily comprises of the return on deposits and short term investments, was up by a whopping 95% YoY during FY11, and further bolstered the bottom line.

Strong earnings likely to continue in 1QFY12: NRL’s 1QFY12 fuel GRM clocked in at USD7.4/bbl, up 49% YoY, which suggests likely continuation of robust fuel earnings, while base oil margins have also remained stable.  Our initial estimates suggest 1QFY12 EPS of PKR24.

EPS increased; BUY maintained: We have now incorporated the incidentals of 0.15% on HSD and 0.25% on MS which has raised our EPS by 2% (PKR1.23). At last closing price, the scrip offers an upside of 20% to our Jun-12 PT of PKR430. BUY!

Robust margins buoyed FY11 earnings

NRL’s FY11 GRM averaged USD5.86/bbl, which was up 80% YoY and was the highest in two years. This kept fuel business robust during the period under review as fuel segment contribution to total FY11 EPS is estimated to be 20% vs a loss of PKR8.8 in the last year. Along with robust margins, inventory gains are also estimated to have boosted the fuel segment earnings, as 9MFY11 inventory gains were estimated at PKR2.4/share. Besides this, FY11 base oil – FO spread averaged USD746/ton, up 43% YoY. Furthermore, NRL produced 4% YoY higher base oil during FY11, and we expect base oil sales to have risen by a higher rate (8%) due to high inventory levels at the beginning of the year.

Other income further bolstered bottom line

Other income, which comprises return on deposits and short term investment was massively up by 95% YoY, and further propped up earnings. Its contribution to FY11 EPS stood at PKR20/share or 25%. 4QFY11 other income, on the other hand, declined by 12% QoQ, probably due to lower cash balances.

Strong earnings likely to continue in 1QFY12

1QFY12 fuel GRM clocked in at USD7.4/bbl, up 49% YoY, which, as per our initial estimates, is estimated to yield fuel business EPS of PKR4. Base oil margins, however, are expected remain to stable QoQ, which would result in lube segment EPS of 20/share taking total EPS to PKR24.

Economic & Political News

Circular debt to be settled through PIBs
The federal government has decided to settle the power sector circular debt issue, including all accrued mark-up, and has asked banks to subscribe to Pakistan Investment Bonds (PIBs) against all loans and power related term certificates. Under the subscription, 20% loan, or interest, will be adjusted in 3-year PIBs; 30% in 5-year PIBs; and 50% will be adjusted through issuance of 10-year PIBs.

Current account deficit narrows to USD189mn
Pakistan’s current account deficit narrowed to USD189mn during the first two months of the current fiscal year against USD1.016bn in the corresponding month last year. The current account deficit for August stood at USD89mn, according to the statistics of balance of payment released by the State Bank of Pakistan (SBP).

Monetary policy statement on October 8
The State Bank of Pakistan (SBP) will release its next monetary policy statement on October 8. The monetary policy statements being delayed for a few days as State Bank Acting Governor Yaseen Anwar is proceeding to Washington on September 20 to attend the annual meetings of the International Monetary Fund (IMF) and the World Bank (WB).
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