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HASCOL: 2QCY18 Earnings preview

HASCOL is slated to release earnings for 2QCY18/1HCY18 today where we expect the OMC to post an NPAT of PkR498/1,228mn  (EPS:PkR3.44/8.48/sh, on diluted number of shares) marking increase of 20/55%YoY. Earnings are backed by continued growth in volumes and rising pump prices. In addition to the results, we expect the OMC to announce an interim dividend of PkR5.0/sh maintaining its payout ratio of 60%. From an operational frame the OMC continues to expand its retail network while developments on expanding into the LPG, LNG & Chemicals business streams are in process, where the continued push by management to diversify revenue streams fuels our bullish thesis on continued bottom-line growth at the OMC. Even so, our forecasts fail to incorporate these income streams as clarity on most fronts (margins from LPG business, COD of lubricant plant with annual capacity and margin expectations) remains elusive.

2QCY18E result preview: We expect the OMC to post 2QCY18E NPAT of PkR498mn (EPS:PkR3.44/sh) marking growth of 20%YoY on the back of: 1) total volumetric sales climbing 11%QoQ/15%YoY led by retail segment fuels, 2) product prices remaining rising drastically over the quarter, and 3) higher margin on MOGAS at PkR2.55/ltr vs. PkR2.41/ltr in the previous period. Expected exchange loss of PkR400mn and higher taxation expense are softening margins, with GM/NM expected at 4.4/0.9% for 2QCY18E vs. 4.9/1.3% in 1QCY18 signifying some weakness. In addition to the results we expect the OMC to announce an interim payout of PkR5.0/sh maintaining its payout ratio of 60%.

LPG update: Based on OGRA's pump-wise fuel price list HASCOL added 47 pumps in 2QCY17 taking the total retail pump count to 547 pumps (86 pumps added CYTD). On growth prospects, HASCOL disclosed in a notice to the exchange its plans for a PkR175mn acquisition of Marshal Gas Pvt Ltd, a licensed LPG distributor operating gas filling facility near Karachi under a hospitality agreement with SSGC, which is slated to add additional revenue streams for HASCOL. Of importance is the common shareholding between Marshal Gas (directors of private company include Mr. Liaqat Ali, also on the Board of HASCOL) and HASCOL, where Marshal Gas also owns a stake in HASCOL (9.32mn shares - a 6.44% stake as of Dec'17). Based on LPG filling station licensing data (by OGRA), Marshal Gas does not have a retail presence currently, selling only to downstream stockists/wholesalers. However, the management believes integration of filling station operations with HASCOL's existing retail network would entail minor expenses (PkR15-20mn) mostly on the distribution side, but would create room for margin expansion for the combined OMC.

Investment Perspective: Developments on expanding the non-fuel retail businesses are in process with first phase of lubes segment (~US$20mn oil blending and grease plant) expected to commence from 3QCY18. Continued push by management to diversify revenue streams fuels our bullish thesis on continued bottom-line growth at the OMC.  That said, we re-iterate our bullish outlook on the stock, citing lucrative additional revenue sources and persistent CAPEX on retail network infrastructure. At current levels, an accumulate call on HASCOL is implied at our TP of PkR318/sh.

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