AKD Quotidian
OMC: sales volume update
The Oil Companies Advisory Committee has released Petroleum, Oil and Lubricant offtake numbers for the month of July 09. Consumption is up 4% over the same period last year underpinned by a 23%YoY surge in black oil volumes. Consistent reliance on oil-based thermal power generation coupled with unplanned hydel outages during the month resulted in a 24%YoY increase in fuel oil offtake. Light distillates, posted growth due to comparatively lower prices while middle distillates with the exception of aircraft fuel, posted declines. The decline in consumption was primarily due to a higher base created last year due to artificial pricing distortions. As a result, white oil volumes declined by 9%YoY during Jul 09. On a MoM basis, volumes slipped 2% due to rationalising consumption for light and middle distillates. Fuel oil volume growth remained robust, up 24%MoM. We are in the process of updating our investment case for coverage oil marketing companies where resolution of inter-corporate circular debt, positive NRV adjustments on inventory and fuel oil volume uptick pose upside to estimates.
AKD Research
AKD Quotidian
Nishat Power Limited: offer for sale
A lack of electricity autarky amid sluggish capacity additions is pushing Pakistan’s peak power deficit to around 3,500MW. Within this backdrop, the Nishat Group with presence in major sectors, proven execution capabilities and an established track record has now ventured into commercial power generation through Nishat Power Limited (NPL). In this regard, NPL’s main sponsor, Nishat Mills Limited (NML) is offering 22.5mn ordinary shares of NPL for sale at an offer price of PkR10 per share amounting to PkR225mn. Public subscription is scheduled to be on the 28th, 29th, and 31st of August 2009 and the listing will take place simultaneously at Karachi Stock Exchange (Guarantee) Limited and Lahore Stock Exchange (Guarantee) Limited. Acting as sole advisor & arranger for the transaction, we are holding off on giving a recommendation opinion for NPL.
AKD Research
Shell: Heavy premium to volume growth
While we appreciate Shell’s expected market share recovery and likely inventory gains, we believe current valuations are punchy at CY10 P/E of 26x. We re-iterate our underweight stance on Shell. PSO remains our favorite pick in the OMC space.
With low margins and high inventory storage, volatility seen in Shell’s earnings in the last 1-2 years is likely to continue. This may warrant discount to market valuation in our view.
Given growing competition in transportation fuel, FO is a key upside risk to our thesis. However Shell’s earnings sensitivity to potential LT contract for FO supply remains nominal (PRs2.5-3.0/sh for 200MW power plant).
We estimate Shell’s CY09 earnings at PRs25.8/sh. Inventory gains and heavy tax benefit in 1Q09 (PRs350mn) would support CY09E earnings.
KASB Securities and Economics Research
benefit from strong inventory gains and firm margins. At US$71/bbl oil prices, we estimate PSO’s 1QFY09 earnings to touch PRs17-18/sh (including PRs9/sh timing gains). We maintain our future earnings estimates for now and reiterate our liking for PSO, trading at FY10E P/E of 6.5x, at 20% discount to the market. We believe strong 1QFY10 earnings and progress on inter-corporate debt would be key catalysts for a stock re-rating.
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Marketing margins are up 2-10%
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The latest revision in prices reflects the impact of both international prices (up 10% MoM) and weakening of the Pak Rupee (3%). Whilst the government has fixed HSD margins at PRs1.35/litre or US$2.6/bbl (40% of total volume), margins on furnace oil (deregulated) and gasoline (4% of ex-refinery prices) should increase by 2% and 10% respectively. On volume side, a 7-8% jump in retail prices should have limited impact on our FY10 estimates of demand growth of 4%. In the current low economic activity environment, near-term growth should be driven by higher furnace oil consumption (9-10%), in our view.
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17-26% jump in ex-refinery
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A key driver of huge inventory gains is the 17-26% jump in Pak Rupee based ex-refinery prices of different products in 1QFY10. The expected inventory gains in 1QFY10 should unwind heavy inventory losses encountered in FY09 (net total of PRs18.7bn or PRs71/sh). Lower FO prices in the latter part of Sep and sharp drop in crude prices before 1QFY10 results are the key risks to our earning estimates.
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Inter-corporate debt – PRs90bn TFC planned
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The progress on elimination of inter-corporate debt is mixed in our view. The disagreement on return on proposed energy bond (Term Finance Certificate) and participation by financial institutions has protracted negotiations, expectedly leading to the deadline of 31 August being missed. On a positive note, the government remains committed to resolution of the issue and is likely to issue a PRs80-90bn TFC. From our discussion with different stakeholders, we understand any delay in TFC issuance is likely to be limited to two-three weeks. To us, the energy bond represents only a partial solution to the energy sector’s debt issue. Timing and effectiveness of future measures to address the structural issues of the energy sector (removal of power tariff subsidy, inefficiencies in the energy chain and under-investment) would set the direction for sustainable solution ahead. We highlight some of the measures may prove to be politically difficult to implement. From our perspective, the planned power tariff hike of 10% in October remains the second major milestone for a sustainable resolution of inter-corporate debt.
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KASB Securities and Economics Research
POL: on cusp of strong volume growth
We raise our earnings estimates for POL (June fiscal year-end) by 3-7% over FY10-13 and upgrade our PO to PRs241.4, up 19%.
We reiterate our Buy rating on the stock based on strong fundamentals. We believe POL is ideally placed to deliver strong returns over the next 3-6 months as expected strong exploration and development price triggers unfold.
POL production woes are finally culminating. We see volume ramp-up and reserve monetisation of recent finds steering the company to a four-year volume CAGR of 23% over 2009-2013. We think our growth estimates are conservative.
With a total of five exploration wells currently under way, we believe POL is undergoing a phase of increased exploration activity that should continue for many years. This should address market concern on low exploration historically.
KASB Securities and Economics Research
NRL: Favorable risk-return profile
NRL posted 4QFY09 earnings of PRs8.5/sh, translating into FY09 earnings of PRs19.2/sh. While cash payout of PRs12.5/sh is inline with market expectation, earnings surprised negatively.
Confluence of weak GRMs and absence of inventory gains should expose weak underlying core earnings for pure fuel refiners in 1QFY10. Given its advantage in base oil, we expect GRMs for NRL to fare relatively better.
We think NRL offers an attractive risk-return profile at FY10E P/BV of 0.8x (ex PRs12.5/sh cash dividend) and P/E of 5.4x.
We see 10-15% upside to FY10E earnings estimate from concurrent implementation of deemed duty increase and processing cost. However, timing for implementation of both proposals remains uncertain
KASB Securities and Economics Research
A solid performance in FY09; Buy
PPL unveiled a solid set of numbers for FY09 with earnings of PRs27.7bn (PRs33.38/sh), up 41% YoY driven by strong growth in sales and interest income. FY09 EPS is inline with market consensus (KASB est. PRs34.0). DPS of PRs3/sh (FY09 PRs13/sh) fell short of expectation and was partially offset by stock dividend of 20% (Stock prices closed up 5%). We maintain our future estimates for now and reiterate Buy on PPL, our top pick in Pakistan Oil & Gas universe. (1) Attractive valuation (FY10E P/E of 6.8x); (2) strong earnings growth (16% CAGR over 2009-2012E); (3) heavy appraisal upside; (4) high impact exploration program and (5) near-term triggers underpin our Buy rating on the stock.
Key highlights
35% growth in top line. Rupee based oil prices are up 6%, gas up 30%. Oil volume grew by 3%, overall volumes were down 4-5% in-line with industry trend.
Lifting cost is under control at US$1.1/boe in FY09, down 4% YoY. Rupee based cost is estimated to have jumped by 20% (Pakistan FY09 CPI of 22%).
A key highlight of FY09 is restart of production drilling on Sui field with Sui 88 after a space of almost 8 years. Improving drilling situation has allowed PPL to expand its scope of activity. We see more such drilling in future.
Drilling should pick up in FY10
Drilling was restricted to five wells relative to target of 8-10 wells in FY09. FY10 should see higher drilling activity (8-10 wells) dominated by non-operated areas and importantly should include 1-2 offshore wells in Indus basin.
News flow heavy period ahead
We see a positive news flow heavy period ahead which should drive future stock price performance in our view. Explorations (results on Nashpa, Tal block drilling), Development (Sui field, Manzalai), and progress on tight gas reserves
KASB Securities and Economics Research
Kapco: Positive DPS surprise with 09 results
Kapco reported solid FY09 results where 100% payout (dividend of PRs6.45/sh was 18% higher YoY and beat estimates) reads positively for FY10 in our view.
We see hefty payout as a signal of higher comfort on near term circular debt resolution and receipt of delayed Wapda payment and raise FY10E dividend by 6% to PRs6.70/sh (13.3% D/Y).
Note that we still peg payout at a conservative 88% over FY10-12E as we factor in less-than-ideal liquidity until clarity emerges on tariff hikes. 100% payout over FY10-12E would imply 13% DPS & ~7% PO upside vs. current estimates.
We believe US$ indexation and positive interest-earned vs interest-paid spread will continue to drive EPS momentum in FY10 and maintain Buy with a PRs58/sh PO.
KASB Securities and Economics Research
IPPs — earnings/PO’s up on US$ indexation
We have raised FY10-11E earnings for Hubco and Kapco by 4-6% and dividends by 1-5% on the back of higher expected PRs vs. US$ deval in FY10E. We have raised US$ indexation factor in the companies tariff by ~7% on account of the same.
Rising confidence on the near term settlement of circular debt (the government has committed to retiring the same by Sep 09) suggests the issue could be close to its end. An improving power sector liquidity outlook and consequent balance sheet strengthening increase our liking for Hubco and Kapco a notch.
Adjusting for higher FCF over the period and rolling forward valuation, we raise our PO for Hubco to PRs37/sh (from PRs34/sh) and to PRs58/sh (from PRs53/sh) for Kapco. We maintain Buy ratings on both IPPs.
KASB Securities and Economics Research
KAPCO: FY09 Result Review
Inline with expectations, the Kot Addu Power Company Ltd. (KAPCO) announced full year FY09 NPAT of PkR5,672 (EPS-PkR6.44). On the face of it, earnings were 29%YoY lower than last year. However, on a normalised basis FY09 earnings were 8%YoY higher compared to FY08. In this regard, FY08 earnings were artificially inflated due to tax reversals of prior years. Adjusting for this extraordinary item, EPS for FY08 would have been PkR5.96. FY09 earnings were achieved on the back of 1) PkR-US$ depreciation and 2) on the back of spread earned between interest on late payments by Pepco and markup on short-term borrowing. Alongside the result, Kapco announced a final cash dividend of PkR4.20/share, taking full year FY09 DPS to PkR6.45/share. At current levels the scrip trades at a forward PER of 7.6x and a PBVS of 1.9x. Furthermore, the scrip offers a forward dividend yield of 12%. Current price implies a Reduce stance to our target price of PkR46/share.
AKD Research
2nd TFC to boost energy sector liquidity
Energy sector companies confirm that the govt. has reached an agreement with banks for issuance of a 2nd PRs85bn TFC (banks’ share PRs82bn) by tomorrow in order to pay down the outstanding dues of companies in the power chain.
With the receipt of ~2-yrs delayed payments, we see clear improvement in cashflows and balance sheet position of IPPs (Hubco and Kapco), OMCs (PSO) and refineries. We maintain Buy ratings on Hubco, Kapco and PSO.
While wiping off accumulated govt. liabilities from the books of energy companies is a key positive, sustainability of improved liquidity is contingent on LT structural sector reforms including (1) power traiff hikes; (2) ramping up Wapda efficiency.
KASB Securities and Economics Research
