The next couple of months will be crucial for Pakistan State Oil (PSO) as the government has declared its intent to ease the circular debt by issuing TFCs worth Rs100 billion, more than $500 million, worth in exchangeable bonds of state owned enterprises.
Moreover, the new management’s efforts to recover dues from the power sector will be critical for the company’s future performance. PSO announced lower than expected third quarter earnings of Rs 12.4 per share (down 13 percent annually); with recognition of a deferred taxation charge of Rs 540 million raising the effective tax rate to 43.3 percent during the quarter.
However, we retain our earnings forecasts for the company on the back of rising margins on furnace oil sales, said Atif Zafar at JS, adding that the company also announced a second interim cash payout of Rs 3.0 per share, taking the cumulative dividend to Rs 8.0 per share.
According to the key points in the briefing, a key impediment that led to PSO announcing lower than expected 9M earnings was recognition of Rs 540 million deferred taxation charge in the third quarter. This led to an effective tax rate of 43.3 percent during the quarter. Similarly, PSO booked pre-tax inventory gains of Rs 820 million during 3Q alongside an inventory loss of Rs 230 million in the corresponding period last year. As a result, during 9MFY11, inventory gains rose to Rs 1.8 billion standing in comparison to 9MFY10 of Rs 1.5 billion.
With the international price of oil on an upswing during 9MFY11 ($112 per barrel), an average margin on FO sales rose to Rs 1,529 per tonne in contrast to Rs 1,349 in the corresponding period last year (up 13 percent). In addition, margins have risen to Rs 2,034 per tonne as of April 15, 2011. As highlighted earlier, FO prices are likely to remain firm given a supply shortage in the international market (Saudi Arabia becoming net importer), resulting in higher margins, going forward.
PSO received Rs500 million of interest accrued on late payments from the power utilities during the 3Q. However, the company incurred interest worth Rs 2.2 billion owed to refiners. During 9MFY11, the company’s sales volumes dropped by nine percent annually versus industry’s fall of two percent, resulting in a market share loss of 5.5 percent to 65.4 percent. The larger than industry’s decline was due to the temporary shutdown of power plants (because of floods) to which it supplies FO.
He stated that optimism was reduced on high margin lubricant business as the company has so far failed to make any headway into the re-launch of the said segment. It is worth noting that PSO had earlier announced the re-launch of the lubes business by converting its product to Group 2 base oil from the existing Group 1 base oil.
The company’s management also sounded less hopeful on the acquisition of PRL, citing low margins for the refinery as a key factor. The management sounded slightly more confident on government’s efforts to ease the circular debt by injecting nearly Rs 100 billion via issuance of TFCs. Moreover, receipts from the issue of exchangeable bonds worth more than $500 million will further ease liquidity concerns. This may allow the company to announce a better than expected final cash payout. This along with a surprise Rs 3.0 per share payout in 3Q, results in raising our DPS expectation for FY11 to Rs 16 per share from Rs 11 per share. However, the key concern remains that the gap between the cost of power generation and its selling price will once again lead to accumulation of the circular debt, until bridged, he added.
