1

WE Detailed Report
April 2013

Pakistan State Oil

KEY DATA
KATS Code
PSO
Reuters Code
PSO.KA
Current Price (Rs)
198.97
Year High, Low (Rs)
251.74 , 198.45
Market Cap (Rs' bn)
49
Market Cap (US$ mn)
496
Shares Outstanding (mn) 247
Free Float (%)
46
Source: KSE & Reuters

PSO: Pessimism overplayed

We continue our coverage for Pakistan State Oil with "BUY" recommendation having December'13 target price of Rs 235/share, currently
offering an upside of 18%. Our optimism about the stock is mainly
derived from surge in absolute margin on the back of stable oil prices
along with higher furnace oil (FO) sales expected given the country's
increasing dependence on thermal power generation. We admit that
company is facing liquidity crunch but it would not hurt the investors
from payout wise as company is now issuing bonus shares to compensate cash dividend. Trading at FY13E &FY14E PER of 3.9x and 4.15x
respectively with ROE of 20.2% for the period FY13, we estimate stock
to provide alpha for investors. The key risks to our thesis include
lower International oil prices resulted into severe inventory losses,
PKR depreciation by more than 5% annually, lingering circular debt
and increase in discount rate.

Higher margins and inventory gains to escalate earnings

PKR

185

3000

170

Volume

PSO

Source: KSE & WE Research

Mar-13

Feb-13

Dec-12
Jan-13

Oct-12

Nov-12

Sep-12

Jul-12

Aug-12

Jun-12

Apr-12

May-12

140

Mar-12

155

0
Feb-12

1500

Price per share

200
4500

Jan-12

Volume in '000

6000

We expect company to post a PAT of Rs 12, 525 million (EPS: Rs 50.71),

translating into an impressive increase of 38% compared to PAT of Rs
9,056 million (EPS: Rs 36.67) in CY11. Healthy earnings growth on YoY
basis during FY13 is expected owing to improved product margins on
HSD & MS, rise in product prices which would translate into inventory
gains of around Rs 1,670 million (after tax) in FY13, lower exchange losses and fall in financing cost. Amid flattish YoY volumes expected, gross
profit to surge 12.6% YoY, primarily driven by inventory gains coupled
with higher absolute margins.
PSO Financial Snapshot
FY12A
FY13E
FY14F
FY15F
Net Sales (Rs mn)
1,024,424 1,085,414 1,144,971 1,208,414
Gross Profit (Rs mn)
34,323
38,638
36,418
37,858
Profit after Taxation (Rs mn) 9,056
12,525
11,831
13,542
EPS ( Rs)
36.67
50.71
47.90
54.83
Book Value (Rs/share)
202.28
250.71
290.98
337.14
DPS (Rs)
5.50
7.00
8.00
9.00
P/E (x)
5.43
3.92
4.15
3.63
P/BV(x)
0.98
0.79
0.68
0.59
Dividend Yield (%)
1.9
3.5
4.0
4.5
Payout (%)
10.4
13.8
16.7
16.4
ROE (%)
18.1
20.2
16.5
16.3
ROA (%)
2.6
3.8
3.7
3.9
Source: Company Reports & WE Research

WE RESEARCH IS AVAILABLE ON THOMSON REUTERS, BLOOMBERG, S & P CAPITAL IQ

WE Detailed Report
April 2013

Valuation: BUY with a Target Price of Rs 235

We have estimated a target price of Rs 235/share for PSO using
DCF based valuation method. A discount rate of 18%, comprised of
12% risk free rate, 5.5% equity risk premium and a beta of 1.1 is
used. The risk free rate is based on the secondary market yield on
10 year PIBs. PSO provides an upside of 31% to our DCF based
December end 13 target price worth of Rs 235/share.
Discounted Cashflow Model
FY13E
12,525
1,232
(5,183)
(1,433)
7,141
7,141

FY14F
11,831
1,263
(6,764)
(1,190)
5,140
4,731

FY15F
13,542
1,365
(5,629)
(1,262)
8,017
6,253

51,050
39,818
246.99
235

PSO misery overstated

The stock of PSO has underperformed by 8% with KSE 100 Index
since the start of the year CY13 mainly due to unresolved circular
debt. However, we remain optimistic on the resolution of the
Relative performance
issue once new government
PSO
KSE 100 Index
takes charge. Trading at
FY13E &FY14E PER of 3.9x
and 4.1x respectively, PSO
appears to be the cheapest
stock on relative valuations
basis with industry average
PER of 6.2x.
75%
60%
45%
30%

Source: KSE & WE Research

Apr-13

Mar-13

Jan-13

Feb-13

Dec-12

Oct-12

Nov-12

Sep-12

Jul-12

Aug-12

Jun-12

Apr-12

Mar-12

Jan-12

0%

May-12

15%

Feb-12

Trading at FY13E &FY14E PER of

3.9x and 4.1x respectively, PSO
appears to be the cheapest stock on
relative valuations basis with
industry average PER of 6.2x.

Rs in million
Net Income
Non- Cash expenses
Change in working cap
Capex
Free Cash Flow to Equity
Discounted Free Cash Flow
Terminal Value
PV Terminal Value
Shares Outstanding
Target Price Dec'13 (Rs)
Source: WE Estimates

WE Detailed Report
April 2013

Circular debt - remains a hanging sword

As key trigger for PSO remains the

resolution of circular debt so we
have made three assumptions. In
our base case scenario, we expect
circular debt to linger on and company would face liquidity problem
resulted into lower operational efficiency.

The company is going through liquidity issues due to massive

receivables of over Rs 127 billion from various entities and needs
some concrete steps by the government to resolve it. The company has gone through a number of technical defaults in the recent
days. It should be noted that PSO's receivables include, Rs 53 billion from Hub Power Company (HUBCO), Rs 46 billion from
Water and Power Development Authority (WAPDA), Rs 12 from
Karachi Electric Supply Company (KESC), Rs 11 billion from Kot
Addu Power Company (KAPCO), Rs 1.55 billion from Pakistan
International Airline (PIA), Rs 1.30 billion from Pakistan Railways
and Rs 1.14 billion from Independent Power Producers. On the
other side, PSO has to pay Rs 73.5 billion to the international supplies and Rs 35 billion to refineries therefore any delay or non-payment from its receivables would certainly increase pressure to the
company. However, government is releasing an amount of Rs10
billion but this amount can be called as next-to-nothing versus the
huge size of receivables. While this would improve sentiments but
a long-term solution includes elimination of power tariff subsidy,
control on government financing and reduction in transmission &
distribution losses.
As key trigger for PSO remains the resolution of circular debt so
we have made three assumptions. In our base case scenario, we
expect circular debt to linger on and company would face liquidity problem resulted into lower operational efficiency. However
we maintain buy stance in this scenario. Second and third scenarios would depend on new government. As we have mentioned,
we value the stock using DCF Method, thus providing 3 scenarios
with different target price in table below.

Rs in million
Discounted Free Cash Flow
PV Terminal Value
Shares Outstanding
Target Price Dec'13 (Rs)
Source: WE Estimates

Best Scenario
20,936
57,713
246.99
318

Base Scenario
18,125
39,818
246.99
235

Worst Scenario
16,327
28,367
246.99
181

WE Detailed Report
April 2013

Margin revision to boost profits

Recently,
government
has
increased
margins
of
Oil
Marketing Companies for two
major products i.e. Motor Gasoline
(MS) and High Speed Diesel
(HSD). PSO would be the major
beneficiary of this margin revision
as it enjoys the highest market
share in both the products therefore it would get the major benefit
and would increase its earnings.

Recently, government has increased margins of Oil Marketing

Companies for two major products i.e. Motor Gasoline (MS) and
High Speed Diesel (HSD). The margins of Motor Gasoline are
raised by Rs0.25/liter - 12.6% while the margins of High Speed
Diesel are raised by Rs0.10/liter - 5.7%. After the revision in margins, new margin of MS would be Rs2.23/liter and the new margin of HSD would be Rs1.86/liter. PSO would be the major beneficiary of this margin revision as it enjoys the highest market share
in both the products therefore it would get the major benefit and
would increase its earnings by 4% in FY14. Further, it would also
take some pressure off circular debt. It is worth mentioning here
that in December'11 the government had increased the OMC margin by around 30%.
Rs/liter
11-Aug 11-Dec Chg 13-Apr Chg
MS (Petrol)
1.5
1.98
32.0% 2.23
12.6%
HSD (High Speed Diesel) 1.35
1.76
30.4% 1.86
5.7%
Source: OGRA
Bonus shares to Compensate Cash dividend
Though PSO has bad history (last 5 years) of announcing handsome cash payouts and it rarely announced bonus shares especially on interim basis. However during the recent 1HFY13 it
announced bonus issue of
DPS
Stock Dividend
20% out-of-blue along with 20
20% bonus shares in FY12 15
also. This is positive for the 10
shareholders as company 5
compensate lower cash div- 0
FY09A
FY10A
FY11A
FY12A
1HFY13A
idend with bonus share.
Source: KSE & We Research

WE Detailed Report
April 2013

Focusing on growth

The company intends to acquire a

50% stake of EPL's holding in Sindh
Engro Coal Mining Company
Limited (SECMC).

We expect FY14 would be relatively better year with previous two

years as new government would
improve efficiency in power generation.

Although circular debt remains a concern for the company, recently company has shown interest in different ventures to focus on
growth. We expect PSO to recognize its role and responsibility by
investing in vertical and horizontal integration business in Oil &
Gas. Three strategic plans that will be addressed growth story are:

MoU signed with Engro on Thar Coal

With an eye on diversification of its business line, company has
signed a Memorandum of Understanding (MoU) with Engro
Powergen Limited (EPL) to review technical and economical feasibility of the Thar Coal project. The MoU was signed keeping in
view the fact that coal is available easily and cheaper as compared
to other fuel sources thus become the fuel of choice for developed
nations across the world. The company intends to acquire a 50%
stake of EPL's holding in Sindh Engro Coal Mining Company
Limited (SECMC).

PSO to establish refinery in KP

PSO signed MOU with KP government for the establishment of
an oil refinery with a capacity of 40kbpd. Project cost is estimated around $800 million which would be financed with debt to
equity ratio of 80:20. The project would be commissioned by
FY17.

PRL acquisition - a pipedream

PSO has already showed its intention to increase its shareholding
in Pakistan Refinery Limited (PRL) to 48% from current 18%.
However, this is not the first time PSO has shown its interest in
PRL. Previously, Shell holding 30% stake and Chevron 12% were
not interested to divest their shareholding. We expect this acquisition would be good in the long-term where we estimate long
term gross refinery margin would be around $4-5 per barrel.
Furthermore, if this transaction materializes, PSO would increase
the lubricants business by up-gradation of PRL.

Offtake to improve in FY14

We expect FY14 would be relatively better year with previous
two years as new government would improve efficiency in power
generation by eliminating power tariff subsidy, control on government financing and reduction in transmission & distribution
losses.

WE Detailed Report
April 2013

Volume to improve with ease in circular debt

PSO's largest distribution network, with multi agreements of Fuel
Supply would be the biggest recipient after easing circular debt
resulted into increase in POL consumption. We expect company to
post 3-year volume CAGR of 4% largely driven by FO sales.
Furnace oil demand would surprise

We expect industry FO volumetric

sales to increase by 5% in next 3-year
(FY14-16). PSO being the largest supplier of FO is currently enjoying market
share of 75% is set to be a primary beneficiary of the expected increase in FO
demand

With a low level of water in dams and non availability of gas for
multi-fired power generation, we expect demand for furnace oil
(FO) would rise. With growing desire for power in the country,
reliance on thermal power generation has been on the consistent
rise, we expect industry FO volumetric sales to increase by 5% in
next 3-year (FY14-16). PSO being the largest supplier of FO is currently enjoying market
Market Share - FO
share of 75% is set to be 80%
a primary beneficiary of 70%
60%
the expected increase in 50%
FO demand mainly on 40%
the back of its substan- 30%
20%
tial market share, stable 10%
supply contracts and 0%
PSO
SHEL
APL
Other
efficient inventory manSource: OCAC & WE Research
agement.
Non-availability of CNG spurs petrol sales
While the overall Petroleum sales remain flat in 8MFY13, the
sales of MS (petrol) increased by 22% YoY to 1.1 million tons.
This is mainly due to the CNG crisis as a transport fuel.
During 8MFY13, the overall industry sales of MS increased by
18% YoY to 2.1 million
tons. We believe MS
Market Share - MS
sales to increase by 3- 60%
year volume CAGR of 50%
8% as country is fac- 40%
ing huge shortage of 30%
20%
gas which would 10%
increase the usage of 0%
gasoline in domestic
PSO
SHEL
APL
Other
generators to cope Source: OCAC & WE Research
with power shortages.

WE Detailed Report
April 2013

Company Introduction
Pakistan State Oil is a public quoted company incorporated in
Pakistan under the Companies Act, 1913 -- now Companies
Ordinance, 1984 -- and is listed at all stock exchanges of Pakistan.
The principal activities of the company are procurement, storage
and marketing of petroleum and related products. It also blends
and markets various kinds of lubricating oils.
The primary shareholder of PSO is the government of Pakistan
with 22.45% direct shareholding and 54% aggregate shareholding
after adding the block shares in PICIC growth and Investment
funds. The general public has 11.7% of shares, financial institutions
own 23.62%, and public sector companies have 24.7% while foreign
investors have 3.83% per cent of total shares.
Shareholding Structure
13.68%

22.45%

3.83%

11.70%

23.62%
24.72%
Govt of Pakistan
Public Sector Cos.
Foreign Investors

General Public
Financial Instituution
Others

Source: Company Report & WE Research

WE Detailed Report
April 2013

PSO - Financial Highlights

Valuation
EPS ( Rs)
Book Value (Rs/share)
DPS (Rs)
P/E (x)
P/BV(x)
Dividend Yield (%)
Payout (%)
Source: WE Research & Company Reports

FY12A
36.67
202.28
5.50
5.43
0.98
1.9
10.4

FY13E
50.71
250.71
7.00
3.92
0.79
3.5
13.8

FY14F
47.90
290.98
8.00
4.15
0.68
4.0
16.7

FY15F
54.83
337.14
9.00
3.63
0.59
4.5
16.4

FY12A
1.15
18.1
2.6
3.35
2.1
24.85
-38.72

FY13E
1.21
20.2
3.8
3.56
2.4
5.95
38.31

FY14F
1.27
16.5
3.7
3.18
2.1
5.49
-5.54

FY15F
1.30
16.3
3.9
3.13
2.2
5.54
14.46

FY12A
1,024,424
990,101
34,323
2,134
19,143
17,313
7,551
11,659
469
13,674
4,618
9,056
36.67

FY13E
1,085,414
1,046,776
38,638
2,244
18,404
22,478
7,752
11,688
493
19,036
6,510
12,525
50.71

FY14F
1,144,971
1,108,553
36,418
2,360
17,610
21,169
6,332
10,038
518
17,980
6,149
11,831
47.90

FY15F
1,208,414
1,170,556
37,858
2,483
17,329
23,012
7,638
10,613
543
20,580
7,038
13,542
54.83

Key Ratios Analysis

Current Ratio (x)
ROE (%)
ROA (%)
Gross Margin (%)
Net Margin (%)
Sales Growth (%)
PAT Growth (%)
Source: WE Research & Company Reports

Income Statement
Rs in million
Net Sales
Cost of Products Sold
Gross Profit
Other Operating Income
Operating Expenses
Profit from operations
Other Income
Finance Costs
Share of Profit of Associates
Profit before Taxation
Taxation
Profit for the Period
EPS (Rs)
Source: WE Research & Company Reports

WE Detailed Report
April 2013

Balance Sheet
Rs in million
Share Capital
Shareholder Equity
Non Current Liabilities
Current Liabilities
Total Liabilities
Non Current Assets
Current Assets
Total Assets
Source: WE Research & Company Reports

FY12A
1,715
49,960
3,695
293,773
297,468
9,632
337,796
347,428

FY13E
2,470
61,922
3,784
264,884
268,668
9,729
320,860
330,590

FY14F
2,470
71,868
3,973
248,101
252,074
9,561
314,381
323,942

FY15F
2,470
83,270
4,171
263,204
267,375
9,368
341,276
350,645

FY12A
844
(967)
(562)
(685)
2,309
1,624

FY13E
8,574
(1,329)
(475)
6,770
1,624
8,394

FY14F
6,330
(1,094)
(1,696)
3,540
8,394
11,933

FY15F
9,279
(1,173)
(1,941)
6,165
11,933
18,098

Cash Flow Statement

Rs in million
Cash from Operations
Cash from Investing activities
Cash from Financing
Net change in Cash
Beginning Cash balance
Ending Cash balance
Source: WE Research & Company Reports

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offer or a solicitation to buy or sell any securities. WE Financial Services & its employees will not be responsible for the consequence of
reliance upon any opinion or statement herein or for any omission. All opinions and estimates contained herein constitute our judgment as
of the date mentioned in the report and are subject to change without notice.
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