Morning Briefing for December 30, 2013 – Standard Capital

Karachi, December 30, 2013 (PPI-OT): PSO – Turnover increased in 5MFY14 alongwith margins

Dunya newspaper website reported that PSO turnover increased during 5MFY14 to Rs 621bn against Rs 525bn reported in same period last year.

According to Standard Capital, the 18% YoY increased in turnover is mainly due to increasing petroleum prices plus increasing volumetric petroleum products sales. PSO market share remained at 63.8%.

Meeting Furnace Oil requirement
PSO, the state owned company has advantage to cater the huge market share and it is market leader in the OMC industry. With increasing furnace oil demand by IPPs, PSO is also taking corrective steps to meet their demand. Monetary conditions of PSO were improved due to circular debt payment made by the government. This enabled PSO to enhance its capacity of supplying furnace oil to power plants and meeting the requirement created by the power plants as reported by Dunya newspaper.

PSO- OMC margins likely to increase
Recently government has formed committee to analyse and revise the OMC margins since they are unchanged since August 2011. Despite the fact of swinging crude oil prices, depreciating PKR against USD margins are not revised, therefore companies are emphasising more on revision of margin.

They are also under pressure from own dealers to get enhanced margins. OMC players have not revealed the exact demand made to government but Standard Capital sees margins may increase by 12%-15%. Currently OMCs are receiving margin of 1.6% on final per litre price of diesel and 1.9% of final per litre gasoline price, deregulated products; which is calculated as Rs 1.86/litre and Rs 2.14/ litre for diesel and gasoline respectively.

The Number game
During 1QFY14 PSO reported net profit of Rs 7.8bn (EPS: Rs 31.6) showing massive increase by 83% as against Rs 4.26bn (EPS: Rs 17.3) in 1QFY13.Though company reported higher earnings but did not announce any interim dividend for 1Q. PSO yields FY14 PE of 6x – 6.2x (based on Standard Capital’s pretext of Rs 55/sh EPS forecast). Increasing turnover and expected revision of OMC margins are key triggers for PSO during FY14 earnings. Standard Capital remain positives in PSO. The scrooge of circular debt has also risen again (reaching Rs225bn in totality). Hence PSO may still get amount to repay streamline payments.