Company Update - PSO
Circular debt – Only increasing!
The beginning of New Year has brought no positive developments on the circular debt front
as yet. It has been reported to reach an accumulated volume of PKR 800bn, higher by 20%
from ~PKR 665bn as on Nov 18’11. The total debt includes petroleum sector’s circular debt
of PKR 450bn and PKR 350bn debt volume of the power sector. It continues to harm the
energy chain, as according to news reports, it has led to the decline of 35% in production
of crude oil by refineries. With expected increase in demand of POL products during the
year, the shortage will have to be met through increased imports.
According to FBS data, oil import bill had reached USD 6.3bn during Jul-Nov11, an increase
of 48.7% YoY. With expected increase in oil imports, we believe it will put additional
pressure on the country’s import bill. Adding to the misery is the devaluation of PKR against
USD as it depreciated by 3% MoM in Dec11, and reached a low of 91.33 as on Jan 04’12.
Hit by debt
The leading OMC as well as the major importer of POL products remains cash strapped due
to the circular debt that keeps increasing. According to recent figures, the receivables of
PSO have reached PKR 185.2bn as on Jan 08’12, up by 24% from PKR 173bn as on
Dec12’12. Power sector remains to be the major defaulter of PSO with PKR 164bn
outstanding dues, which makes up 89% of the total receivables.
Similarly, the payables grew by 24% to cross PKR 199bn as compared to PKR 161.5bn as
on Dec 12’12. This includes payables to local refineries worth PKR 85.5bn and to
international suppliers worth PKR 114bn, up by 7% and 39% respectively, from the values
as at Dec 12’12.
Resultantly, the gap between payables and receivables has expanded by 24% to PKR
14.3bn as compared to PKR 11.5bn as on Dec 12’12. The increase may lead to higher short
term borrowing by the company, further affecting the company’s balance sheet position
and financing cost.
With an increase in imports expected due to reduced production by local refineries, PSO will
be further burdened in terms of import payments. Recall that PSO booked penal expense of
PKR 1.4bn during 1Q FY12 where total payables stood at ~PKR 161bn. With payables
reaching PKR 173bn as on Dec 24’11, up by ~8% QoQ, we expect penal expense to be
higher for 2Q FY12.
Another key risk is the exchange loss that may result, following increase in imports as well
as devaluation of PKR against USD as it booked PKR 1.2bn loss due to 2% devaluation
during 1Q FY12. On the positive side, we believe PSO will book inventory gains for the 2Q
FY12 as prices of heavy weights FO and HSD have increased by 8% QoQ and 6% QoQ
Our valuation incorporates the assumption of gradual resolution of circular debt, beginning
FY14, which brings us to our Jun12 target price of PKR 415/share. With periodic injections
expected by the government, we may witness short term price performances. However, the
valuation will remain capped until sustainable resolution of circular debt is reached.