PSO: Tax reversal to lift 1HFY11 EPS to PKR40.8

PKR21.7/share tax reversal to lift 1HFY11 EPS to PKR40.8: PSO’s board meeting for announcement of 1HFY11 results is scheduled on February 9, 2011. We expect the company to post PAT of PKR7.0bn for 1HFY11 (EPS: PKR40.80) up 38% YoY and announce an interim dividend of PKR5/share. 2QFY11 earnings shall clock in at PKR6.2bn (EPS: PKR36.0) up 94% YoY, mainly driven by PKR21.7/share in tax reversals. Barring tax reversals, core earnings shall still be robust at PKR14.3.

Volumes flat QoQ as robust HSD offsets weak HSFO: Volumes remained flat on QoQ basis for PSO during 2QFY11, as 27% QoQ uptick in HSD volumes offset 12% QoQ contraction in HSFO.  2QFY11 volumes were down 7.6% on YoY basis.

Lower HSFO in product mix to prop up margins 6% QoQ; inventory gains further helped: HSFO contribution in product mix fell to 51% in 2QFY11, as opposed to 58% in 1QFY11 and 53% in 2QFY10. As a result, per ton margins would likely expand 6% QoQ and 7% YoY, despite margin reduction on four products in Dec-10. PKR930mn inventory gains shall provide further support to bottom line.

Interest income – expense gap would likely contract: We expect interest income – expense gap to contract to PKR914mn during 2QFY11 as opposed to PKR2.6bn in 1QFY11, as PSO would likely have expedited recovery of late payment markup from IPPs, a trend similar to last year.

Earnings trimmed on lower volumes: We have trimmed our volume estimates to reflect 4% YoY decline in FY11. Resultantly, we trim our FY11-13 EPS by 3-5% and our PT by 4% to PKR360/share.

PKR21.7/share tax reversal to lift 1HFY11 EPS to PKR40.8

Following reversion to 0.5% turnover tax for OMCs, PSO shall book PKR21.7/share in tax reversals during 2QFY11, and likely report 2QFY11 EPS of PKR36.0, which shall take reported

1HFY11 EPS to PKR40.8. Barring tax reversals, core earnings shall still be robust at PKR14.3, +46% QoQ, driven by inventory gains and higher other income.

Volumes flat QoQ as robust HSD offsets weak HSFO

Volumes remained flat on QoQ basis for PSO during 2QFY11, defying expectations of post flood recovery as 27% QoQ uptick in HSD volumes offset 12% QoQ contraction in HSFO. While 2Q HSFO volumes generally contracts QoQ, we believe FY11 could have flouted the trend due to weak 1Q base amid floods. Moreover, HSFO volumes for PSO underperformed industry as the incumbent posted YoY volume attrition in two consecutive quarters during FY11 (1Q: -15%, 2Q: -11%) while industry volumes recovered in 2Q (1Q: -8%, 2Q: +2%). Weak HSFO volumes for PSO indicate possible lower demand from Gencos, a likely result of keeping utilization of inefficient capacities at lowest possible levels. 2QFY11 volumes were down 7.6% on YoY basis, as all major products have shown YoY weakness except Mogas, up 25% YoY for PSO.

Lower HSFO in product mix to prop up margins 6% QoQ; inventory gains further helped

We expect 2QFY11 core margins to rise 6% QoQ to PKR1,811/ton, +7% YoY. Rise in margin shall occur despite GoP reducing margins for Mogas, HOBC, Kero and LDO in Dec-10, primarily due to lower contribution of HSFO in sales mix. HSFO contribution in sales mix fell to 51% in 2QFY11, as opposed to 58% in 1QFY11 and 53% in 2QFY10. Further support to bottom line shall emanate from PKR930mn in inventory gains due to rising local fuel prices during 2QFY11.

Interest expense – income gap would likely contract

While interest expense – income gap widened to the highest ever PKR2.6bn during last quarter, we expect the differential to narrow down significantly to PKR914mn during 2QFY11 as we expect PSO would likely have expedited recovery of late payment markup from IPPs. Our expected decline in interest expense – income gap is in line with last year’s trend, where 2QFY10 witnessed shrinkage in net interest expense to PKR83mn from a hefty PKR1.5bn during 1QFY10.

Earnings trimmed on lower volumes

In view of weak 1HFY11, we have trimmed our volume estimates to reflect 4% YoY decline in FY11, as opposed to our previous expectation of flattish YoY volumes. Resultantly we trim our FY11-13 EPS by 3-5% and our PT by 4% to PKR360/share.

Economic & Political News

Body formed to examine PC proposal: top international banks offer favourable view on OGDC convertible bonds

The Privatisation Commission (PC) has reportedly informed the Cabinet Committee on Privatisation (CCoP) that ten top international investment banks have provided a favorable view on the pricing of convertible bonds in Oil and Gas Development Company Limited (OGDC). The transaction will allow OGDC to raise efficient funding which can be utilized to fund future exploration projects and enhance the company’s value. The banks have provided a favorable view on the pricing (the coupon rate is ranging from 4% to 6% on average). Some banks have also demonstrated a commitment to underwrite the transaction prior to the official launch of the transaction. According to the PC, benefits for OGDC are as follows: (i) low financing costs compared to straight debt instruments; (ii) attractive fixed income funding; (iii) sale of shares at a premium to the current price levels; (iv) diversify funding source; (v) voting and dividend rights on underlying shares retained by the issuer; (vi) positive signals on the company’s share price going forward and; (vii) improve the float of the stock.

PKR59.6bn retired under commodity financing

Retirement of loans under commodity operations picked up sharply as the procurement agencies retired PKR59.6bn during 7MFY11. With the current retirement, the outstanding stock of commodity operation narrowed down to PKR353.6bn in January 2011 as compared to PKR413.2bn on June 30, 2010.