Karachi, April 21, 2022 (PPI-OT): PSO: EPS to normalize to Rs29.15/share in 3Q
After the all-time high quarterly earnings of Rs43/share in 2QFY22, which were a function of inventory gains and late payment surcharge, we expect PSO to post PAT of Rs13.7bn (Rs29.15/share) for 3QFY22. The earnings will likely normalize during the period in the absence of other income from late payment surcharge which was a result of partial clearance of circular debt.
PDC will likely remain a huge dent on inventory gains for PSO since nearly the entire chunk of increase in ex-refinery price is absorbed into it, in order to keep prices capped at every fortnight revision. In doing so, during the quarter ending Mar-2022, the government has incurred a total fiscal expenditure of Rs27.7bn of which Rs13.78bn is borne by PSO. The amount strapped into the receivables on PSO books is equivalent to the inventory gains from 2Q and 3Q each.
The implementation of PDC and the skipping of cash or share payout despite windfall inventory gains for PSO succinctly explains the dampening of sentiments as the scrip continues to trade at a forward PE of 2.1x for FY23E. PSO will unlikely maintain cash payouts in the near-term owing to investment required in refinery upgradation for its subsidiary PRL.
EPS to normalize to Rs29.15 with low other income
After the all-time high quarterly earnings of Rs43/share in 2QFY22, which were a function of inventory gains and late payment surcharge, we expect PSO to post PAT of Rs13.7bn (Rs29.15/share) for 3QFY22. The BoD meeting is scheduled for Apr28’22 where we expect the announcement of normalized earnings during the period in the absence of other income from late payment surcharge which was a result of partial clearance of circular debt.
Inventory gains, which have been rising over the last few quarters owing to rising oil prices, will unlikely be realized in cash terms owing to Price Differential Claims (PDC) as the higher ex-refinery price continues to get buffered by PDC under a subsidy package from authorities. We do not expect the company to payout cash with the announcement, however, a share payout may not be considered a surprise as the company continues to build cash to be able to invest into PRL’s upgradation.
PDC is eroding working capital besides inventory gains
PDC will likely remain a large dent on inventory gains for PSO since nearly the entire chunk of increase in ex-refinery price is absorbed into it, in order to keep prices capped at every fortnight revision. In doing so, during the quarter ending Mar-2022, the government has incurred a total fiscal expenditure of Rs27.7bn of which Rs13.78bn is borne by PSO. The amount strapped into the receivables on PSO books is equivalent to the inventory gains from 2Q and 3Q each.
Even though ECC has approved a supplementary grant of Rs68.7bn to help OMCs/Refineries overcome the working capital requirements. This amount is possibly limited to the first fortnight for Apr-2022 and the funds are yet to be released by Ministry of Finance to assist OMCs in overcoming working capital constraints, thereby realizing the inventory gain as well.
Difficult to maintain payouts ahead
The implementation of PDC and the skipping of cash or share payout despite windfall inventory gains for PSO succinctly explains the dampening of sentiments as the scrip continues to trade at a forward PE of 2.1x for FY23E. Moreover, the receivables have continued to mount to Rs325bn as at Dec-2021 (power sector: Rs256bn) from Rs239bn in Jun-2021 owing to gas circular debt, which is dented further by the current subsidy package.
We have assumed RLNG based receivables to remain high for FY22 as the squeezed fiscal space may continue to allow the authorities to park some fiscal burden on books of State-Owned Enterprises (SOE). We believe PSO may not maintain strength of cash payouts in the near-term owing to investment required in refinery upgradation for its subsidiary (Pakistan Refinery Limited). We currently have a BUY stance on PSO where out TP of Rs275/share offers potential upside of 62% from current levels.