shell pakistan limited unexciting despite respite from to tax reduction

TO tax – behind 9MFY10 losses – now halved: While 9MCY10 pre-tax earnings down 42% YoY was already a dismal performance; 70% YoY increase in taxation due to rise in turnover tax brought bottom-line in red during the period. With turnover tax halved, SHEL will likely reverse PKR752mn (PKR11.05/share) in tax expense in 4QCY10.

CY10 estimates trimmed on higher operating expenses during 3QCY10: Higher distribution expense during 3QCY10 force us to raise our full year distribution expense estimates, trimming our CY10 EPS expectation by 23%. We had already factored in reduction in turnover tax in our estimates.

Effective tax rate shall still clock in at 42% in CY10: With 9MCY10 pretax margin at 0.8%, SHEL will likely incur an effective tax rate of 42% during CY10 in 0.5% turnover tax regime, assuming no deferred tax assets are booked by the company.

Investment perspective: At yesterday’s closing of PKR191.3/share, SHEL trades at a premium of 16% to our revised Jun-2011 PT of PKR160/share with CY11 dividend yield of 9.5%. HOLD!

TO tax – behind 9MFY10 losses – now halved

9MCY10 pretax earnings for SHEL clocked in at PKR1.5bn down 42% YoY, as 47% YoY increase in distribution expenses compounded the impact of 7% YoY attrition in gross profits. However, tax expense rising 70% YoY, as SHEL booked taxation at 1% turnover (TO) tax rate, led 9MCY10 after tax profits into the red zone. With GoP finally deciding to lower TO tax rate back to 0.5% (official notification expected soon), we expect reversal of PKR752mn (PKR11.05/share) in tax expense in 4QCY10. Barring the impact of turnover tax, while 9MCY10 EPS would likely have been PKR10.88 (down 56% YoY), 3QCY10 would have still been in losses with quarter’s LPS at PKR7.29

Effective tax rate shall clock in at 42% in CY10

With 9MCY10 pretax margin at 0.8%, SHEL will likely continue to suffer from higher tax incidence even at 0.5% turnover tax. We have factored in pretax margins at 1.25% for 4QCY10, as we expect decent inventory gains (PKR600mn) during 4Q, given recent increase in oil prices. However, this shall prop up full year CY10 pretax margin only marginally to 0.9%, leading to CY10 effective tax rate of 42% assuming no deferred tax assets are booked by the company.

CY10 estimates trimmed on higher operating expenses during 3QCY10

Distribution expense during 3QCY10 rose 35% QoQ and 101% YoY, taking the quarter’s operating expenditure to PKR2.4bn, 95% of gross profits. 9MCY10 distribution expense was up 47% YoY, whereas admin expense was up 8% YoY. Higher operating expense forces us to raise our full year distribution expense estimates, trimming our CY10 EPS expectation by 23%. We also revise up our CY11/12 operating expenditure assumption leading to 10%/6% reduction in CY11/12 EPS. We also trim our Jun-2011 Price Target by 6% to PKR160/share.

Investment perspective

At yesterday’s closing of PKR191.3/share, SHEL trades at a premium of 16% to our revised Jun-2011 PT of PKR160/share (our PT implies 8.3x/7.6x CY10/11 earnings) with CY11E dividend yield at 9.5%. We maintain a HOLD stance, given a total return of -8% over the investment horizon. We factor in reduced margins (capped at USD62.5/bbl oil price) from Jan-11 onwards. Further reduction in turnover tax rate; below 0.5% remain the key upside to our estimates.

Economic & Political News

SBP raises PKR150bn through T-bills

The benchmark 6-month T-bills rate was slightly increased while the State Bank raised PKR150bn through the auction. The SBP sold 6-month T-bills worth PKR65bn at the cut-off yield 13.16%, which was higher than the previous rate of 13.11%. However, the highest amount was raised for 3-month T-bills of which the cut-off yield remained unchanged. The Central Bank sold 3-month T-bills worth PKR82.5bn. The bids for 12-month T-bills were rejected. The banks came up with PKR234bn in their bags to buy treasury bills and park their liquidity into the government’s safe haven.
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