KARACHI – Despite strong earnings, low cash payout of Rs 3.0-5.0 per share in the third quarter is seen as Pakistan State Oil’s working capital needs are likely to rise due to higher oil prices while a 14 percent jump in receivables to Rs160 billion would further strain cash requirements.
The third quarter earning per share of Rs 20.68 by the company is estimated that includes Rs 11.8 in core earnings. With higher oil prices, it is estimated that PSO can book Rs 2.2 billion in timing gains, said Mohammad Fawad Khan at KASB, adding that inventory gains estimate reflects 70 percent of the total estimated inventory gains based on movement in ex-refinery prices and estimated inventory holding with PSO during the quarter.
While interest income on overdue receivables remains a key grey area which can provide upside to core earnings, while lacking clarity, it is assumed that zero interest income (quarterly average of Rs 1.1 billion), he added. The 24 percent jump in oil prices has raised market expectations for the third quarter of FY11 earnings for Pakistan State Oil and this could be a key trigger for PSO’s stock price (down 14 percent from its January peak).
Concerns on energy debt seem to have unjustifiably hurt valuations. While margins on regulated products are fixed in rupee terms and do not move with oil prices, quarterly margins on furnace oil which contributes 50 percent to PSO’s total volume, are up 22 percent. With firm oil prices outlook in the fourth quarter, strong FO margins is seen sustaining in the period that will be a key source of future earnings upgrade.
While PSO volumes are down five percent quarterly; March sales data show a strong recovery in PSO’s market share to 65 percent from 58 percent in Feburary. In the ninth month of FY11, PSO market share had dropped to 65 percent from 71 percent the previous year which is attributed to lower share in FO due to supply disruption in the first quarter in the wake of summer floods and commencement of power projects which have exclusive supply agreements with other players.
