Azee Securities (Pvt) Ltd.

After FY15 proved to be the difficult year for oil sector and particularly for Pakistan State Oil (PSO), company once again posted decline in earnings by 38% to Rs 3.25 billion (EPS: Rs 11.97) against Rs 5.24 billion (EPS: Rs 19.30) in 1QFY15. This is primarily due to inventory losses of Rs 109 million on account of plunge in crude oil prices, lower volumetric sales of 4.6% YoY, reduction in absolute margin of non regulated product, reduction in other income and higher effective taxation. However, lower financing cost supported bottom-line.

Revenue drop by 36% YoY

Net sales fall by 36% to Rs 185.27 billion in 1QFY16 against Rs 290.43 billion in same period last year chiefly owing to lower petroleum product prices and 4.6% drop in volumetric growth at 3.1 million tons in 1QFY16 versus 3.25 million tons in 1QFY15. Lower volumetric sales mainly driven by lower Furnace oil sales which declined by 15.7% to 1,559k tons in 1QFY16 against 1,850k tons in 1QFY15 owing to circular debt. Similarly, HSD sales drop by 5.7% to 778k tons in 1QFY16 compared to 824k tons in 1QFY15. On the other hand, Mogas consumption hike by 37.6% to 631k tons in 1QFY16 against 458k tons due to better demand at lower prices and avoiding CNG consumption. Likewise, cost of sales dip by 36% at Rs 178 billion versus Rs 279 billion in 1QFY15. Gross profit decrease by 35% to Rs 7.54 billion versus Rs 11.61 billion in 1QFY15 due to inventory losses of Rs 110 million versus Rs 1.87 billion in 1QFY15.

Lower penal income also limit growth

Other income down by 19% to Rs 2.74 billion against Rs 3.37 billion in 1QFY15 mainly due reduction in penal interest income form IPPs worth of Rs 996 million against Rs 1,708 million in 1QFY15.

Outlook

Moving forward we expect the performance of the company to remain relatively weak on expectation of inventory losses in 2QFY16. As per initial estimates, we anticipate company to post 89% decline in earnings with profit after taxation of Rs 366 million (EPS: Rs 1.35) in 2QFY16. We have market weight stance on company and stock is currently trading at Rs 337.5/share offering an upside potential of 19% to our June’16 target price of Rs 401/share.