AL Habib Capital Markets Pvt Ltd has re-initiated coverage on Pakistan State Oil (PSO) with a BUY rating and a target price of PKR 447/share by June 2027, implying a total expected return of 30.57% (26.27% capital upside and 4.3% dividend yield). Notably, the firm’s valuation assigns zero value to the recovery of PSO’s legacy gas circular debt receivables, positioning any resolution as an incremental upside rather than a core requirement of the investment thesis.
The brokerage highlights that PSO is trading at attractive forward multiples of 7.01x FY27E P/E and 5.6x FY28E P/E, with the market mispricing the stock by overemphasizing circular debt uncertainty while overlooking structural improvements reshaping earnings.
Key Catalysts Identified by AL Habib Capital Markets:
- Structural Margin Improvement: Government roadmap for phased OMC margin revisions, with CPI-based indexation expected to enhance profitability and reduce regulatory risk.
- Petroleum Demand Recovery: Improving macroeconomic indicators, rising industrial activity, and a recovery in auto sales will drive multi-year growth in diesel and petrol consumption.
- Industry Formalization: Digitization and anti-smuggling enforcement to shift volumes from undocumented to formal markets, benefiting compliant leaders like PSO.
- Working Capital Normalization: RLNG cost adjustments and lower interest rates to reduce finance costs and improve cash generation.
- Market Share Gains: Rationalization in downstream competition, coupled with PSO’s nationwide infrastructure and retail network, to support stronger operating leverage.
AL Habib Capital Markets concludes that PSO is well-positioned for sustainable earnings growth, even under conservative assumptions, and offers investors a compelling opportunity for re-rating in Pakistan’s energy sector.
Courtesy – AL Habib Capital Markets Pvt Ltd
