The Bell about PSO: Earnings tweaked on lower FO volumes and higher FO margin - Elixir Securities Limited

Karachi, March 15, 2011 (PPI): 8MFY11 HSFO volumes decline at 15% YoY for PSO due to lower demand from Gencos: According to Elixir Securities Limited, while industry HSFO volumes contracted by 4% YoY during 8MFY11; PSO witnessed a 15% YoY contraction in HSFO sales due to lower demand from Gencos. Elixir Securities Limited understands that Gencos are being under utilized by PEPCO to keep generation cost low. Elixir Securities Limited now expects PSO’s HSFO volumes to contract by 13% YoY in FY11 (previous: -7.5%)

Elixir Securities Limited revises its long term FO outlook: Rising oil prices and resulting increase in electricity generation cost on HSFO will likely keep HSFO volume growth under check. This has led us to revise Elixir Securities Limited long term HSFO volume outlook. Elixir Securities Limited has cut their FY12 HSFO volume growth forecast to 5% (previous: 7.5%).

Reinstatement of monthly power tariff hikes is a positive: Govt has reportedly agreed with the IMF to resume 2% monthly power tariff hike, while instantly putting into effect the increase for Mar-11. Power tariff rise shall limit subsidy, while improving Pepco’s cash collections, and is a step towards circular debt resolution.

Margin gains on HSFO to offset impact of lower volumes: Higher HSFO prices shall allow margin expansion, given price linked margins for the product. This shall more than offset the impact of lower HSFO volumes. As a result, Elixir Securities Limited has revised up its FY11 EPS forecast by 3%, while raising its Dec-11 Price Target to PKR370/share.

PSO’s HSFO volumes fall 15% YoY during 8MFY11 due to lower demand from Gencos

Although HSFO volumes for OMCs contracted by 4% YoY during 8MFY11, PSO witnessed a much steeper decline of 15% YoY during the period, which has led us to review its FY11 HSFO volume forecast for the company. While 1HFY11 HSFO volume decline for PSO was largely explained by post flood shutdown of Lalpir and Pak Gen, PEPCO seemed to have reduced utilization levels of Genco’s during the last three months, substituting it with more efficient new capacities that commenced during CY10, while compromising on total electricity generation. With lower HSFO burnt by the Gencos, HSFO volumes for PSO shall take a hit. Elixir Securities Limited has lowered their HSFO volume forecast for PSO and now expect FO volumes to contract by 13% YoY in FY11 (previous: -7.5%).

Elixir Securities Limited revises their long term FO outlook

Rising oil prices and resulting increase in electricity generation cost on HSFO, will likely keep HSFO volume growth under check going forward, as evident from 4% decline in FY11 HSFO volumes despite large additions in power generation capacity. Elixir Securities Limited now expects FY12 HSFO volume growth at 5% against Elixir Securities Limited previous estimate of 7.5%. Furthermore, with lower FY11- 12 HSFO volume growth, coupled with possible delays in commencement of production from gas fields under development, Elixir Securities Limited sees little likelihood of FO volume contraction in FY13 and assumes volume growth of 3% from FY13 onwards. Elixir Securities Limited initially incorporated a 5% decline in HSFO volumes for FY13.

Reinstatement of monthly power tariff hikes is a positive Govt has reportedly agreed with the IMF to resume 2% monthly power tariff hikes, while instantly putting into effect the increase for Mar-11. Govt initially agreed to increase power tariffs by 2% every month from Oct-10 onwards; however the tariff increase program was suspended after three increments. Media reports also indicated GoP will possibly have to make one-time 6% increase in tariffs, in order to compensate for no power tariff increases during Jan-11 to Mar-11. Power tariff rise shall limit subsidy, while improving Pepco’s cash collections, and is a step towards circular debt resolution.

Margin gains on HSFO to offset impact of lower volumes SFO Higher HSFO prices shall allow margin expansion, given price linked margins for the product. OMC margins for HSFO are generally 4% of ex-refinery price; however, average margins for PSO is around 3.4% due to lower margin on supplies to Gencos (2.7%). Lower contribution of low margin sales to Gencos shall further support average HSFO margins for PSO. Elixir Securities Limited estimates 1HFY11 and FY12 HSFO margins at PKR 1,717/ton and PKR 1,664/ton respectively, 13% and 9% higher than 2QFY11 HSFO margins. As a result, Elixir Securities Limited has revised up its FY11/13 EPS forecast by 2% and 3%, while FY12 EPS forecast is trimmed by 3% on account of lower HSFO volumes. Elixir Securities Limited has raised their Dec-11 Price Target for PSO by 3% to PKR370/share.

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