PSO earnings up but receivables still mounting

The country's largest oil marketing and distribution company, Pakistan State Oil, posted a jump in first quarter net profits as strong volumetric sales, higher inventory gains amid efficient management of assets offset the impact of lower sale prices.
However, the firm's interim dividend of Rs3/share - disappointing investors who were expecting a return of Rs7-8/share - gives a clue that it is still facing a serious liquidity crunch on account of the industrywide circular debt. Despite a 42 percent decline in international oil prices year-on-year, PSO's revenues fell by only 10 percent as its sales volume rose spectacularly during the period. Sales jumped 14 percent, outperforming the industry's growth of 8 percent.
It was black oil again which saved the top line as furnace oil sales witnessed a massive 30 percent year-on-year growth amid electricity shortfall which created FO demand in the country. This also improved the company's black oil market share to 90 percent for the period - up from 81 percent during the corresponding period last year. The economic slowdown, however, had its say on the firm's HSD sales which were trimmed by 14 percent.
The most significant contributor to improved gross margins was the inventory gains as oil prices soared by 13 percent in the quarter. In the absence of balance sheet numbers, inventory gains are estimated to range between Rs1.45-1.5 billion (Rs5.9-6.5/share) for the period - compared with disastrous inventory losses of Rs14.2 billion (Rs58/share) in the same period last year. A massive reduction in excess of Rs2 billion on account of operating expenses, despite higher volume sales, boosted the bottom line considerably. Whether it is a case of reduction in employees' size, cut in marketing and advertising spending or simply more efficient resource management is yet to be seen.
But then, the devil of circular debt continued to erode the firm's bottom line with financial charges went through the roof exceeding Rs1.5 billion. The company's receivables reached an alarming level of Rs100 billion during the quarter, which forced the management to arrange financing for working capital resulting in high interest charges. Although, some of the worries were addressed by the Power Holding Company as the PSO received Rs41 billion of the Rs82 billion TFCs, that amount was quite sufficient to retire some import LCs and make partial payments to refineries. But with the furnace oil demand on a high - the receivables have crept up again and won't be long before they are touching the default benchmark level of Rs100 billion.
Going forward though, both demand and price factors seem to be in huge favour of the company as the IPPs and upcoming RPPs are likely to keep the momentum in FO sales, whereas oil prices are expected to move in a stable manner - reducing the downside risk of inventory losses. The financial charges nevertheless will remain an area of concern and would need another injection by the government by December.

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PSO P&L

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Rs (mn)              1QFY10    1QFY09   % chg

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Sales               169,268   188,980    -10%

Cost of Sales       162,875   196,384    -17%

Gross profit          6,394    (7,404)     NA

Gross margins (%)      3.8%     -3.9%      NA

Other income            371       309     20%

Operating expenses    2,487     4,781    -48%

Finance cost          1,573     1,072     47%

PAT                   2,727   (12,603)     NA

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EPS (Rs)              11.11    (48.88)     NA

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DPS (Rs)               3.00         -      NA

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