Pakistan State Oil Downgrading Estimates On Depressed Liquidity Position

We revisit our investment case for PSO as we downgrade our EPS estimates by 4%-10% over our investment horizon to account for i) lower than estimated HSD and MOGAS sales and ii) higher than expected finance cost.

PSO
Pakistan State Oil

This coupled with increased working capital outflow (on above expected build-up in receivables) leads to a downward 8% revision in our TP for the stock to PKR482/sh (8% lower than previous TP of PKR524/sh). Having said, we maintain our ‘BUY’ stance on the stock based on i) initiation of second phase of reforms aimed at reducing T&D losses, ii) robust net markup income (PKR28bn-PKR29bn approx.),

iii) potential upward revision in product margins and iv) stable PKR (to limit the burden of exchange losses). Furthermore, the recent appreciation in oil prices coupled with stable PKR will also limit the chances of further downward revision in petroleum prices as witnessed in 2HFY14 thus keeping the company immune from inventory losses, going forward.

At current level, the stock is trading at a P/E of 5.9x (based on next 3 years average EPS), a discount of 41% compared to average P/E of ~10x during FY03-FY07 period (the pre-circular debt era). Though we remain skeptical on a near term solution to contain persistent pile-up in circular debt; however, in long term we believe the government is likely to initiate the restructuring and privatization program of DISCOs and GENCOs (expected in 1HFY15) which will address the root cause (poor recovery and line losses) of recent build-up in circular debt.

Report by:

Muhammad Affan Ismail