National Refinery Ltd: EPS raised on higher GRMs despite removal of incidentals

Incidentals removed from refinery pricing on MoP directive: Dec-10 oil products prices notified by OGRA did not include incidental charges equaling 1.01% of crude oil price; 15% of 2QFY11 GRMs. The change was implemented by OGRA on directives of MoP as per our understanding.

FY11E EPS raised 4% on higher GRMs: Removal of incidentals trim our FY11 EPS by PKR5.2, however, the impact was more than offset by higher GRMs. We raise our FY11 average GRM assumption to USD 5/bbl (up 11%) and raise our FY11E EPS by 4%. We believe refineries’ protest (underway) would likely move petroleum ministry to reinstate incidentals in refinery pricing mechanism and continue to factor in incidentals for FY12 revenues.

Cash exceed current market cap; unrealized interest income could prop up near term profits: Sep-10 cash holdings at PKR288/share exceed market price by 12%. Furthermore, NRL had PKR14.1/share of net unrealized interest income, which could prop up earnings in the coming quarters.

Price Target maintained; liking intact: Revision in fuel refinery earnings doesn’t affect our Price Target as we have capped fuel refinery valuations at distributable earnings and maintain Jun-2011 Price Target at PKR310/share. BUY

Incidentals removed from refinery pricing on MoP directive

Dec-10 oil products prices notified by OGRA did not include incidental charges, marine insurance, LC commissions, oceans losses and wharfage, totaling 1.01% of crude oil price. With current oil prices topping USD85/bbl, removal of incidentals would likely trim NRL’s GRM by 15% or USD0.86/bbl. The change has been implemented by OGRA on directives of Ministry of Petroleum and Natural resources, applicable Dec-10 onwards.

FY11E EPS raised 4% on higher GRMs

We understand that refineries have already lodged their protest against the decision and view high likelihood that it would be reversed, as removal of incidentals would price refined products lower than import parity prices. We thus continue to factor in incidentals for FY12 revenues, but remove the same for the remainder of FY11 (which trim our FY11 EPS by PKR5.2). The impact, however, would be offset by prevailing high GRMs, which force us to raise our FY11E GRM for NRL by 11% to USD5/bbl (USD5.4/bbl in 1HFY11) and thus raise our FY11 EPS by 4%.

Cash holdings exceed current market price; PKR14/share in unrealized interest income

Sep-10 cash holdings at PKR23bn – equaling PKR288/share – exceeds NRL’s market cap (PKR21bn) by 12%. Furthermore, NRL‘s unrealized penal interest income at PKR2.4bn (Jun-10) exceeded unrealized penal markup expense (PKR1.3bn) by PKR1.13bn or PKR14.1/share, which could prop up earnings in the coming quarters.

Price Target maintained; liking intact

Revision in fuel refinery earnings doesn’t affect our Price Target as we have capped fuel refinery valuations at distributable earnings. We, thus, maintain our Jun-2011 Price Target for NRL at PKR310/share. At yesterday’s closing, NRL trades at FY11E PER of 4.8x, offers FY11E dividend yield of 10.5%, along with a 20% upside to our PT. BUY

Economic & Political News

BP agrees to sell upstream interests in Pakistan to UEG

BP has announced that it has entered into an agreement to sell almost all of its exploration and production assets in Pakistan to United Energy Group Limited (UEG). According to a press release issued, the UEG will pay BP a total of USD775mn in cash for these assets which consist of nine producing and exploration blocks in Sindh province and four offshore exploration blocks in the Arabian Sea.
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Contributed By