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Hascol Petroleum (HASCOL): Multiple additions on way; BUY Maintained; Earnings Revised

• We update our investment thesis on Hascol Petroleum (HASCOL) after accounting for 1) downward revision in High Speed Diesel (HSD) and Motor Spirit (MS) sales due to higher prices and economic slowdown and 2) commissioning of new business segments at large scale mainly Lubes, LPG, and Oil Terminals.
• We maintain ‘BUY’ recommendation on HASCOL as our Dec 2019 target price of Rs258/share suggest return of 19% (including dividend yield of 5%). Our revised earnings estimates for Hascol are Rs8.9/17.0/23.7 for 2018E/2019/2020 vs. Rs 13/15/18 previously, down 32% during 2018E, while up average 23% in later years.
• We have revised down our industry oil sales assumption where we expect HSD sales to post decline of 10% during FY19 (4MFY19 sales -18% YoY) vs. earlier expectations of +2% YoY. Downward revision in HSD sales is underpinned by 1) continued smuggling of diesel from Iran; 2) increase in HSD prices by around 44% during 4MFY19; 3) decline in power generation from HSD by around 97% YoY (19mn kwh in 1QFY19 vs. 732mn kwh in 1QFY18) and 4) overall economic slowdown where GDP growth for FY19 is expected at 4.0-4.5% vs 5.8% in FY18.
• Similarly, we have revised down our estimates for MS sales for FY19 to +4% YoY vs +10% earlier as 4MFY19 sales are down 2% YoY. Lower expected MS sales are due to increase in petrol prices by around 30% during the said period.
• We expect likely phase out of Furnace Oil (FO) by 2021 as Pakistan’s energy shortfall as of Jun 2018 is substantially reduced to 3,762MW vs. 6,000-7,700 MW during FY13-14. Further, upcoming alternate fuel IPPs (RLNG and Coal) of around 3,500MW are expected to come online by next calendar year. We therefore, estimate FO sales during FY19 to be 4mn tons, down 44% YoY.
• HASCOL’s 2019F earnings are likely to increase by 91%YoY to Rs17.0 as this year (2018E) earnings are likely to be marred by exchange loss of nearly Rs15/share (after tax). Further, higher expectations of CPI (at around 9% average for 2019) will ensure better margins for CPI indexed products HSD and MS oil.
• Lube blending plant of Hascol with 40k tons of capacity is likely to come online by the end of 2018, which will boost its volumetric sales going forward as the company will be able to target bulk (industrial) consumers on account of cost efficiencies. Currently company is selling around 7k tons of lubes annually, which we expect to reach 22k tons by 2022.
• Other business like LPG plant and Hascol Terminal (where Vitol has the majority stake and Hascol owns 15%) are set to start operations where former will be operationalized soon as HASCOL has acquired assets of Marshal LPG beside its own upcoming 1,050 tons storage tank at Port Qasim and latter’s first phase of HSD (75k tons) will be operational by the end of this year.