Elixir Securities Limited – Result Review

Karachi, November 03, 2015 (PPI-OT): PSO: Estimates revised; reiterate BUY

Result announcement

PSO’s 1Q earnings reported at PKR 3.3bn translating into an EPS of PKR11.97/sh, down 38% YoY and 12% QoQ. However, earnings significantly outperformed the street consensus of ~PKR4.8/sh.

Lower inventories mitigated inventory losses

Inventory losses for the period were limited at a mere ~PKR12mn albeit 27% decline in oil price during the quarter. Elixir Securities Limited believes, muted inventory gains on account of Mogas and FO had offset losses on HSD. Losses on HSD emanated from inventory levels that were higher than the pricing lag (i.e. 1 month) that resulted in losses in receding oil prices. However, with inventory levels lower than the pricing lag for FO and Mogas (i.e. fortnightly and monthly respectively), it has resulted in gains during falling oil prices as the company was able to import at a lower international prices while prevalent prices in the country were set at a higher previous period benchmark.

while exchange gains too remain restrained

During 1QFY16, exchange losses remained in check which clocked in at ~PKR95mn (i.e. PKR0.23/sh) despite a 2.6% depreciation during the period. Exchange losses were constrained as depreciation was non-linear and primarily concentrated to a single day devaluation of 2% (i.e. on 24 Aug-15).

LNG business to be value accretive

The company imported 6 vessels of LNG equivalent to 18.77mmbtu with contribution of ~PKR619 (PKR1.48/sh) based on 4% margins. Margins have subsequently been decreased to 1.82%, however the management expects the same to be revised upwards. The company expects to import ~48-50 vessels on an annual basis; Elixir Securities Limited estimates a contribution of PKR5.77/sh based on margins of 1.82%, which would increase to PKR12.7/sh in case margins are revised back to 4%. However, GoP is considering setting up “Pakistan LNG terminal”, a subsidiary of GHPL to import LNG which may erode market share of the company.

Moreover, though the current payment arrangement between the gas discos and the company is based on advance payments (i.e. equivalent to 4 cargoes), however Elixir Securities Limited estimates that given margins of 1.82%, receivable pile up in the segment of ~78days, notwithstanding incremental penal mark up income, would erode incremental gains for the company. However improving liquidity dynamics for the company and the sector where accretion has remained muted belie such a scenario.

Sequential improvement in liquidity remains encouraging

Receivables accretion has remained in check since Jan-15 with outstanding stock of net circular debt on PSO’s books relatively stagnant yielding positive operating cash flows of PKR47bn from Jan-Sep 2015. Net receivables have actually declined by PKR28bn as of Oct15 relative to Jun-15. Stock of receivables on PSO’s books declined by 21% YoY in 1QFY16, declining by PKR47.5bn and 4% QoQ (↓PKR6.4bn).

Estimates revised; Reiterate BUY

Elixir Securities Limited haves revised Elixir Securities Limited’s estimates after incorporating for 1) recent results, 2) LNG volumes (at a 72mmcfd based on 1Q sales) and 3) revising Elixir Securities Limited’s oil estimates (↓4%). Resultantly, Elixir Securities Limited’s revised PT stands at PKR430/sh (↓2%), offering an upside of 26% from last closing where Elixir Securities Limited believes 1) alleviating liquidity constraints, 2) improving core earnings (i.e. 3yr CAGR of 9%) and 3) earning accretion from LNG business to feed into positive momentum of the stock going forward. The stock is trading at an undemanding valuation with FY16 PE of 5.92x; a 34% discount to the benchmark index. BUY.