Pakistan State Oil (PSO), in its Security Analyst Briefing held yesterday, presented a detailed review of its 1HFY16 earnings and outlook on company’s operations. During the period under review, earnings of the company increased by 57%YoY to PKR6.7bn primarily on account of i) lower inventory losses (down 66%YoY), ii) 39%YoY decrease in finance cost and iii) reversal of provision against trade debts. On core operations front, 26%YoY growth in MOGAS sales and addition of LNG in the product mix further added to the bottomline growth. The pile‐up in circular debt was also contained as receivables from the power sector remained unchanged QoQ at PKR137bn in 2QFY16. The management also highlighted its intention to increase the volume of LNG to four shipments/month by Mar’16 from current two shipments/month. In addition, with improving liquidity position, the company also plans to ramp‐up the expansion of both its storage capacity and outlet network in the coming years to counter increasing competition and also benefit from growing demand of petroleum products in the country. We maintain our ‘BUY’ stance on PSO where our long term conviction on the stock remains contingent on the complete overhaul of the downstream power sector. Increasing MOGAS sales and addition of LNG in the portfolio will continue to unlock upside in core earnings of the company

Better earnings on stable oil prices: Pakistan State Oil witnessed an impressive 1HFY16 where core profitability of the company, excluding inventory losses, improved by 20%YoY. The uptick in recurring profitability was driven by i) 26%YoY growth in MOGAS sales, ii) higher margin on HSD and MOGAS (w.e.f. from Nov’14), iii) addition of LNG fuel and iv) 39%YoY reduction in finance cost. On the flip side, 21%YoY decline in other income owing to ~50%YoY contraction in late payment surcharge due to easing circular debt contained the upside in earnings. Including the impact of inventory losses (down 66%YoY), overall earnings of the company reported a marked improvement of 57%YoY in 1HFY16.

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By: BMA Capital Management Limited

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