Shell Pakistan Ltd (SHEL) posted an NLAT of PKR6.0bn (LPS: PKR56.69) in 9MCY20, compared to a loss of PKR0.88bn (LPS: PKR8.20) in same period last year. Profitability was significantly eroded by large inventory and exchange losses as the Covid-19 pandemic led to a collapse in both international oil prices and volumes locally, along with PKR depreciation.
9MCY20 Financial Highlights:
During 9MCY20, SHEL booked inventory losses of PKR5.44bn, exchange losses of PKR1.07bn and bore PKR0.66bn due to minimum tax regime (combined impact of c.PKR47.6/sh after tax). In 3Q, however, SHEL booked inventory gains of c.PKR0.35bn
SHEL has remained the market leader in the Lubricants segment (c.29% share in CY19) for the 14th consecutive year.
Notwithstanding recent increase in oil prices, which have led to higher base oil prices (main raw material for lubricants), SHEL has maintained its margins on the product segment.
The huge losses in 9M completely eroded the company’s equity to negative PKR1.8bn as of September 2020, to replenish which the company recently announced a 100% right issue at a price of PKR108/sh (PKR11.5bn if fully subscribed).
Outlook
SHEL has 745 retail outlets (pumps) of which 650 are owned by dealers. SHEL will look to expand pumps if the volume growth and margins improve. We think it will opt for generating more sales out of its existing network than expanding aggressively.
SHEL will focus on growing its non-fuel sales, without increasing the number of Select store on its pumps. It has recently collaborated with McDonalds and some other brands for sales on Shell pumps.
SHEL welcomes the measures taken by the government during CY20 – biweekly price revisions, subsequent prices accommodating exchange rate movement and not using PSO import prices any more – which significantly improves the working environment and reduces earnings volatility for future.
OMC margin increase: A proposal to the government is presently in motion, and the matter is likely to be tabled in the next ECC meeting. We expect a revision of PKR0.30/liter from PKR2.81/liter presently; by our estimates, this will have an annualized earnings impact of about PKR3.30/sh for SHEL.
White oil pipeline: The capacity upgrade project at the pipeline – which stretches from Karachi to Multan (Central Punjab) – is close to completion. It will materially shift volume transport from roads to the pipeline and benefit consumers with lower prices and more reliable availability of fuel. PSO and SHEL have stakes in the pipeline and are likely to gain most out of the project (more share in HSD and petrol sales), in our view. We have a Sell stance on the stock with the TP of PKR215/sh.
(Intermarket Securities Limited)