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Karachi: AKD Securities has revised estimates and target price for Pakistan State Oil Company with a 3% upgrade to earnings in FY12 underpinned by recent spike in oil prices, expected to unwind positive NRV adjustments on inventory.
According to AKD Securities, however, AKD Securities cuts FY13F earnings by 19% and target price by 24% to PkR330/share where continuing circular debt accretion is likely to keep volume growth tepid while cash flows will likely remain stretched. Based on management guidance, circular debt accretion is averaging PkR10-PkR13bn a month and AKD Securities expects pace to have moved to a more brisk clip with the recent run up in international oil prices. Government’s recent move to provide energy system liquidity through TFC conversion and settlement mapping is likely to provide marginal room, in AKD Securities’ view. AKD Securities’ target price indicates upside of 26% from current market price where margin expansion underscores a stronger core earnings base in AKD Securities’ view. However, payout capacity is likely to be restricted.
Estimates Revision
| (PKR) | FY11A | FY12F | FY13F | FY14F | TP |
| EPS New | 86.17 | 63.06 | 57.42 | 70.76 | 330 |
| EPS Old | 86.17 | 61.36 | 70.85 | 76.36 | 434 |
| Change | 0% | 3% | 19% | -7% | -24% |
1HFY12 Result Recap: Pakistan State Oil Company posted 1HFY12 earnings of PkR26.72/share, down 36%YoY mainly due to a higher base recorded last year on a one-off tax reversal and higher currency losses this year with PKR depreciating by 4.7% vs. the US$ through the review period. PSO has increased exposure to currency losses with increase in Usance L/C tenors for fuel oil to 60 days from 30 days previously in an effort to lower reliance on short term bridge financing for working capital. During 1HFY12, PSO has realized currency losses amounting to PkR337bn translating into a per share post tax impact of PkR12.77. Net of tax inventory gains logged in at PkR835mn versus PkR640mn last year and AKD Securities expects windfall gains with 3QFY12 results backed by the recent run up in international oil and refined product prices.
Investment Perspective: Over the past one month, PSO’s stock price has underperformed the broader market by 4.8% and AKD Securities expects price performance to remain restricted with continuing stretched cash flow and low payout capacity. That said, upcoming 3QFY12 results should provide some upside from current market price as PSO realizes positive NRV adjustments on inventory as well as a stronger margin base, in AKD Securities’ view. At current market price, AKD Securities recommends a Buy stance on PSO with a revised target price of PkR330/share (upside: 26%).