Pakistan State Oil Company Limited (PSO) is due to release its 1QFY12 financial results on 31st October 2011, in which the company is expected to earn profit after tax (PAT) of Rs1,716 million (EPS Rs11.06) compared to Rs810 million (EPS Rs4.72) in the corresponding quarter last year.
This estimated 134 per cent YoY growth is mainly on account of 68 per cent effective tax charged in the 1QF11, when the government lifted minimum turnover tax rate to 1 per cent from 0.5 per cent charged previously. Besides this, strong volumetric growth (due to lower base effect of last year’s floods) particularly in Furnace Oil (FO) and Motor Spirit (MS) is also expected to play its role in this profitability growth.
Gross profit is likely to jump by 10 per cent YoY
PSO is likely to bag a 10 per cent YoY jump in the gross profit on account of strong volumetric sales recovery and healthy price movement particularly in Furnace Oil (FO). The company is likely to achieve a YoY growth of 33 per cent and 3 per cent in Motor Spirit (MS) and FO volumes, respectively. Although the company suffered from a 39 per cent MoM drop in FO volumes during September 2011, however lower base effect of 1QFY11 (due to floods), led to a modest 3 per cent YoY growth in FO volumes. Besides PSO is likely to benefit from a 43.8 per cent YoY increase in the average FO prices during 1QFY12, which is likely to fuel the gross margins due to deregulated nature of the product.
Finance Cost is likely to swell by 10pc YoY
Finance cost of the company is expected to record a rise of 10 per cent YoY to Rs3,261 million in1Q FY12. This is mainly on account of rising trade payables, which as per latest financials jumped to Rs192 billion as compared to Rs156 billion by the end of September 2010, a 16 per cent YoY rise.
Circular debt continues to downplay the stock price
Increasing intensity of the circular debt continues to create negativity for the stock of PSO, which since June 2011 has underperformed the benchmark KSE-100 Index by 6.2 per cent. At closing price of Rs222.44 per share, the stock offers an attractive upside potential of 96.7 per cent from our June 2012 target price of Rs436.7 per share. Besides sizeable upside potential, the stocks offers is trading at an attractive Price to Earnings Ratio (PER) of 3.7x based on FY12 earnings.