Attock Refinery Ltd: Downgrade to Neutral on exceptional price performance

Downgrade to Neutral; though FY11 EPS revised up 43%: ATRL has risen 42% since we initiated coverage on October 13, 2010, helped by exceptional 1QFY11 results. While we raise our FY11 EPS by 43% to PKR22.9 on strong 1Q earnings, we maintain our Price Target. The scrip now offers a meager 4% upside to our Jun-2011 PT of PKR130/share. NEUTRAL!

Higher realized GRMs behind splendid 1QFY11 earnings: 1QFY11 EPS clocked in at PKR6.84, 113% higher than our estimates, primarily due to higher realized GRMs due to timing gains on crude oil procurement / product sales. ATRL’s realized 1QFY11 GRM at USD5.4/bbl was 54% higher than the running GRM of USD3.5/bbl.

Stronger 2Q likely: GRMs for the first two months of 2QFY11 clocked in at USD3.8/bbl which yields an EPS of PKR3.2 from refining operations. With no dividend from AGL booked in 1Q, we increase our non refining income estimate for 2QFY11 to PKR7.8, leading to 2QFY11 overall EPS of PKR11.0.

Strong 2Q EPS should be used as an exit opportunity: We estimate 1HFY11 EPS shall comprise 78% of FY11 EPS; hence 2QFY11 earnings should be used as an exit opportunity. The scrip remains highly sensitive to GRMs, with weekly priced local crude oil breeding additional GRM volatility. Key upside remains dividend income from AGL (We have assumed PKR300mn in dividends from AGL in FY11).

Downgrade to Neutral; though FY11 EPS revised up 43%

We downgrade ATRL to Neutral owing to exceptional share price performance during the last one month. The scrip has risen 42% since we initiated coverage on October 13, 2010, helped by above expected 1QFY11 results. While we raise our FY11 EPS by 43% to PKR22.9 on strong 1Q earnings, we maintain our Price Target as value of the refining operation is constrained by payout restriction and contributes a mere 8% to our PT. The scrip now offers a meager 4% upside to our Jun-2011 PT of PKR130/share. NEUTRAL

Higher realized GRMs behind splendid 1QFY11 earnings

1QFY11 EPS clocked in at PKR6.84, 113% higher than our estimates despite higher taxation (1QFY11 tax rate stood at 42%) and no non-refining income (we expected PKR150mn in dividend income from AGL), primarily due to higher realized GRMs.  ATRL’s realized 1QFY11 GRM at USD5.4/bbl was 54% higher than the estimated running GRM of USD3.5/bbl, primarily due to timing gains on crude oil procurement / product sales. ATRL’s local crude is priced on weekly basis, at preceding Monday’s price of a comparable crude oil from the Arab Gulf region whereas its products are priced monthly based on preceding months average price in the Arab Gulf region.

Stronger 2Q likely

GRMs for the first two months of 2QFY11 clocked in at USD3.8/bbl (9% higher than 1QFY11 running GRM) which yields an EPS of PKR3.2 from refining operations. With no dividend income from AGL booked in 1Q, we believe AGL dividends would be booked in 2QFY11. We therefore increase our non refining income estimate for 2QFY11 by 30% to PKR7.8 (previous estimate PKR6.0) leading to 2QFY11 overall EPS of PKR11.0 (previous estimate PKR7.5).

Strong 2Q EPS should be used as an exit opportunity

We estimate 1HFY11 EPS shall comprise 78% of FY11 EPS; hence 2QFY11 earnings should be used as an exit opportunity. With the scrip up 42% since October 12, 2010, we foresee likelihood of weak returns ahead. Our Jun-2011 PT at PKR130/share suggests an upside of a meager 4%, coupled with FY11 dividend yield at 5%. The scrip remains highly sensitive to GRMs, with weekly priced local crude oil breeding additional GRM volatility. Key upside remains higher than expected dividend income from AGL (We have assumed PKR300mn in dividends from AGL in FY11).

Economic & Political News

Taxpayers to pay surcharge; govt clears RGST

Facing possibly the toughest moment in the court of people, the PPP-led coalition government approved what is being described here as a `mini-budget` which includes some politically risky taxation measures of over PKR65bn. These will be taken to parliament for approval by the government in a bid to share the political burden and also backlash. The measures include imposition of a 10% flood surcharge on income tax paid by individuals for a period of six months and an increase in the special excise duty on luxury items from 1% to 2%. These measures are estimated to yield over PKR40bn. The cabinet also approved a draft of the reformed general sales tax (RGST) bill. “Taxpayers over the exemption threshold of PKR300,000 who pay income tax will be subjected to the flood surcharge,” Finance Minister said at a press conference. Dr Sheikh, however, did not mention that the flood surcharge would also be imposed on withholding tax paid by various businesses which, economic experts believe, will pass it on to end-consumers. The government decided to continue GST exemptions on food items. The rate of GST on sugar will be revised to 15% from the current 8%. The tax on telecommunication will come down to 15% from the existing 19.5%. Dr Sheikh said that about PKR10bn would be generated from an increase in special excise duty on luxury items like cosmetics, cigarettes, soft drinks, etc, PKR27-31bn from the 10% flood surcharge and PKR25bn from withdrawal of GST exemptions on goods and services. A senior FBR official was of the view that the revenue measures would increase tax-to-GDP ratio to 12% from the current 9%. But, he said, this estimate depended on 100% compliance level as against the current 30% to 40%.
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