Result expectation

Attock Petroleum Limited (APL) is scheduled to announce its 9MFY15 financial results on 13th April 2015. We expect the company to post 9MFY14 EPS of PKR26.9, down 39% YoY. 3QFY15 EPS is estimated to clock in at PKR9.3/sh, down 21% YoY.

Volumes to bolster core earnings

Core earnings for 3QFY15 are estimated to clock in at PKR12.2/sh (↑13% YoY) on the back of: 1) increase in cumulative volumes by 12% YoY and 2) alteration in sales mix away from FO towards retail fuels (↑5% YoY) which offer better margins relative to FO at current oil prices. Volumetric growth was led by 16/45% YoY growth in HSD/Mogas while FO volumes remained flat during the period. Market share for the company dropped 53bps to 9.6% relative to the same period last year primarily due to 1.64% decline in market share of HSD from 12.6 % to 11.0 %

Increased retail margins to partially offset weak FO margins

FO margins are estimated to have declined by 46% for the quarter YoY, which is estimated to have an adverse earnings impact of PKR2.0/sh, which would be partially offset by impact of hike in margins of retail fuels by PKR1.03/sh.

Inventory losses to blunt spike in volumes

We estimate inventory losses for the period to clock in at PKR3.7/sh, around one-third of what was realized in 2Q while higher than estimated inventory levels could result hpw in negative earnings surprise. Inventory losses would materialize on the back 6% decline in oil prices during the quarter. Inventory losses for 9MFY15 are estimated to clock in at ~PKR1.9-2bn (i.e. PKR17-18/sh) depressing earnings for the current fiscal year. However we underscore expansion of 32% in the bottom-line in the subsequent years in the absence of inventory losses and volumetric accretion. Moreover we estimate that every USD10/bbl increase in oil prices is estimated to add PKR2.88/sh to core earnings going forward. Also the same would result in net inventory gains of PKR5/sh.

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Weak 3q earnings offer a good entry point

APL at current level offers a CY15 dividend yield of 8.2% relative to yield of 8.7% on 5 year PIBs along with 3 years earnings CAGR of 11% relative to 6% for the broader Elixir universe. Earnings growth would emanate on the back of continued exuberance in volumes of POL products in the backdrop of weak oil prices. Immunity from circular debt along with comparable yields to IPPs makes APL a safe bet on volumetric surge with mellow 3Q to provide an apt opportunity for entry. At current levels APL offers an upside of 26.4% to our DCF based Dec-15 PT of PKR690/sh along with a FY15/16 dividend yield of 7.7/9.5%. While upsurge in bitumen sales on the back of upcoming infrastructure projects offers an additional upside to our estimates. BUY!