PSO: Remain Neutral as circular debt buildup takes precedence
- We remain Neutral on PSO on balance of earnings growth amid stabilizing oil prices and rising cash-flow concerns due to LNG imports. We have lowered our TP by 2% to PkR509/Shr but increased our FY17F EPS by 4% to PkR66.93 (on 9M results beat).
- Negative factors abound. Circular debt will likely accelerate in the upcoming summer; LNG imports will double by end of year and migration of contract of Pakistan LNG seems delayed. PSO has not made significant inroads on its plans to ramp up petrol storage, crucial to arrest market share decline in that market.
- The stock is trading at 6.9x P/E and thus may have priced in much of the pessimism. Triggers to revive the stock include: (i) cessation on LNG imports for GoP by PSO and replacement by imports for private non-power-sector customers; and (ii) partial circular debt settlement but chances are thin. Oil price rally will be neutral however.
Pakistan State Oil is a petroleum group based in Pakistan. Co.'s principal activities are the procurement, storage and marketing of petroleum and related products. Co. also blends and markets various kinds of lubricating oils.
Intermarket Securities Limited (IMS) is a full service corporate brokerage firm based in Karachi, Pakistan. We service both domestic and international clients. IMS was ranked #2 Best Local Brokerage and #3 Best for Overall Country Research for 2016 by AsiaMoney.
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