Pakistan State Oil (PSO) has posted an unconsolidated 4QFY20 NLAT of PKR9.5bn (LPS PKR20.18), compared to a loss of PKR3.4bn (LPS PKR7.30) in 3Q. This drags FY20 result into a loss of PKR6.5bn (LPS PKR13.77) vs. a profit of PKR22.55/sh in FY19. The 4QFY20 loss has come in worse than our estimate of PKR15.37/sh, due mainly to larger-than-expected inventory losses. On a consolidated basis, PSO has booked a loss of PKR14.7bn (PKR23.47/sh) for FY20, which includes the losses of its subsidiary Pakistan Refinery (PRL).
Key Highlights for 4QFY20:
- Net Sales of PKR221bn is down 10% qoq (34% yoy) which reflects over 20% qoq cumulative price reductions during 4Q; but that was offset by a good sequential pick-up in volumes (as lockdown conditions were eased). PSO also gained market share by 3/8ppt in petrol/diesel to 40%/50%, while some OMCs ostensibly restricted supplies amid sharply falling prices.
- The major deviation from our result came from a worse-than-expected gross loss, as in the June results of APL and SHEL as well. We were expecting an inventory loss of PKR9.0bn, whereas the actual loss has come in even larger. This is partly attributed to PSO handling more volumes than usual during the quarter.
- Operating expenses of PKR3.9bn (up 16% qoq) have come in as expected, but we suspect lower exchange losses than our estimate of PKR1.3bn. Recall that PSO had largely retired FE-25 borrowings until March 2020 (on government directions) and was more exposed to exchange rate gyration than in the recent past. We await clarity on this from the management.
- PSO has also booked (i) about PKR0.8-1.0bn of penal income from IPPs, (ii) hefty finance costs of PKR3.9bn (flat qoq) despite lower interest rates, and (iii) a tax credit of PKR3.3bn.
This is the first year of loss from PSO since FY09, due largely to a collapse in international oil prices. The potential implementation of biweekly revision in petroleum prices (by the government) will serve to reduce future earnings volatility, in our view. Also, the recent agreement between the IPPs and government can pave the way for better cash-flows with IPPs and ultimately with PSO. However, we think it is not certain that these will lead to a commensurate improvement in payouts from PSO, because the company needs significant cash to upgrade and turnaround PRL. We remain Neutral on the stock with a June 2021 TP of PKR187/sh. (Intermarket Securities Limited.)