PSO Huge Inventory Loss to Turn Earnings in Red

By Newztodays Team

With the significant decline in international oil prices during 2QFY24, Pakistan State Oil (PSO), the country’s largest Oil Marketing Company (OMC), is expected to post a loss per share of Rs21 in 2QFY24.

PSO has been placed ‘Under Review’, and we will provide our revised valuation once the December 2023 accounts are published.

These accounts will determine the outlook on the LNG business, specifically relating to cash recovery and the level of short-term borrowing in this segment.

Despite a volumetric decline, PSO’s retail business is performing well, thanks to rising per-liter margins.

2QFY24 Loss Expected at Rs21/share

PSO is anticipated to post a net loss of Rs9.8 billion (Rs21/share) during 2QFY24, compared to a loss of Rs4.5 billion (Rs10/share) in the same period last year.

The increase in loss is mainly due to an expected higher inventory loss of Rs19 billion during 2QFY24, as opposed to Rs14 billion during 2QFY23.

The actual inventory loss may vary depending on the timing of product procurement and inventory levels.

Our assumption for inventory loss is based on a 10-11% QoQ drop in product prices during 2QFY24, with the company maintaining an average of 25 days of inventory during this period,” Sherman Research said in a report.

Net Revenue to Improve by 7.5% YoY, Volumes to Plunge by 16% YoY

PSO’s net revenue is expected to be Rs906 billion during 2QFY24, up 7.5% from Rs843 billion in the same period last year.

This revenue growth is likely to stem from the LNG business, where revenue is expected to improve by 23% YoY, mainly led by better prices (up 29% YoY). In contrast, net revenue from petroleum products is expected to grow by a mere 2% YoY.

The sluggish growth in the petroleum products segment is likely due to a reduction in the company’s volume sales of retail products, i.e., MS & HSD, by 12% YoY (in line with the industry), while sales of other non-retail products, including furnace oil (FO), are expected to see a major dip of 39% YoY. Inventory Gains: PSO Profits to go up further

Key Data

Company: Pakistan State Oil
Symbol: PSO
Current Price (Rs): 184
Target Price (Rs): Under Review
52 Weeks Range (Rs): 99 – 217.2
Current Volume (mn sh): 4.3
Outstanding Shares (mn sh): 469
Current Market Cap. (Rs mn): 86,590
Free Float (mn sh): 211
Free Float M. Cap. (Rs mn): 38,965
Note: Prices as of Jan 03, 2024
Source: PSX, Sherman Research

PSO – EPS Estimates

The following table shows the estimated earnings per share (EPS) for PSO:

Net Sales: Rs906,084 million (up 7.5% YoY)
Gross Profit: Rs7,559 million (up 56.2%)
Other Income: Rs3,083 million (down 2.4%)
Distribution Expenses: Rs3,987 million (up 34.9%)
Administrative Expenses: Rs1,347 million (down 21.5%)
Other Expenses: (Rs321 million) (Not Measurable)
Finance Cost: Rs10,245 million (up 33.7%)
Profit Before Tax (PBT): (Rs5,257 million) (up 35.4%)
Tax: (Rs4,530 million) (Not Measurable)
Profit After Tax (PAT): (Rs9,788 million) (up 114.7%)
EPS (Rs): (20.85) (up 114.7%)

The Decline in Sale of POL

The decline in overall petroleum products is mainly due to a slowdown in economic activity and lower demand after a 40-42% YoY increase in retail prices of two major products, HSD and MS, which affected consumer purchasing power.

Higher finance costs, distribution expenses, and turnover tax are expected to further drag the bottom line.

The company’s finance cost is expected to increase by 34% to Rs10.2 billion, mainly due to a higher reliance on short-term borrowing owing to an increase in circular debt.

Average borrowing is expected to increase by more than 65% YoY to Rs400 billion during 2QFY24, mainly led by a more than 32%