The Bell about Oil & Gas – Elixir Securities Limited
Karachi: PSO: Inventory gains and tax reversal led to exceptional earnings
According to Elixir Securities Limited,
|Pakistan State Oil||
Outstanding Shares: 171.5mn
|Cost of Products Sold||786,250||713,592||10%||249,571.72||202,237||23%|
|Other Operating Income||1,816||1,479||23%||370.00||388||-5%|
|Profit From Operations||29,361||27,329||7%||1,969.25||8,610||-77%|
|Share of Profits|
|Profit Before Taxation||17,974||17,963||0%||8,172.78||6,457||27%|
|Profit After Taxation||14,779||9,049||63%||5,521.38||1,515||264%|
Colossal inventory gains lifted FY11 gross profit
Compared with FY10 inventory gains of PKR1.9bn (after tax), PSO recorded colossal inventory gains of PKR3.8bn (after tax) in FY11 with 70% or PKR2.7bn recorded in 4QFY11 alone. Before tax inventory gain was recorded at PKR6.4bn in FY11. Besides inventory gain, PSO realized 13% YoY higher margins on its FO sale during FY11. Without the inventory gains, FY11 gross profit would have fallen by 4% YoY as volumes were down 9% YoY during FY11.
|EPS W/O Inventory gain/(loss) & Tax reversal||47.09||58.41|
|Tax Reversal/(Write Offs)||18.93||(16.73)|
Source: Elixir Research
Finance cost rose 20% YoY
Unabated circular debt continued to devoure company’s profitability in FY11 in terms of rising finance cost, as PSO booked all time high financial charges of PKR12bn owing to rising interest cost on overdue payables. Despite a payment of PKR89bn in May‐11, PSO receivable has again swelled to PKR134bn as at 8 August 2011. However, payables to refineries have now declined by 46% to PKR56bn which shall result in lower finance cost during 1QFY12. Moreover, management also informed during its analyst briefing that PSO has managed to increase its letter of credit (for FO supplies) from previous 21 days to 60 days, which shall result in decline of finance cost by reduction in short term borrowing.
Lowest tax rate at 18.3%
Despite flood surcharge of 15% effective from March 15 2011, PSO’s effective tax rate was just 18.3% in FY11. This was due to reversal of deferred tax asset amounting to PKR3.2bn, with EPS impact of PKK18.93. Had the flood surcharge not been imposed during 4Q, PSO’s FY11 earnings would have been further up by PKR2/share to PKR88.19. Barring the tax reversal, effective tax rate would have been 37% which should result in EPS of PKR67.24.
Margin increase still on the cards
Management in its analyst briefing was confident of possible increase in margins especially on MS and HSD. According to the management, this matter shall soon be thrown to ECC for approval in a month times. PSO shall be the key beneficiary of this upward revision in margins as 39% of its sale comes from MS and HSD.
|Up in Margin||EPS
|–||54.8||56.4||61.0||397 (Base case)|
Source: Elixir Research