PSO concerns overplayed

KARACHI: PSO is the one stock that could outperform the broader index during the next twelve months, according to an analyst  Topline Securities. Currently the scrip has underperformed the market by 18 per cent so far and has been posting negative returns of 10 per cent.

“This could be linked to their ongoing liquidity crisis, turnover tax anomaly and the ongoing deregulation issues of the oil pricing mechanism,” according to Topline Securities’ analyst, Farhan Mahmood. He added that the scrip was trading at a price to earnings ratio of 4.0x along with a dividend yield of 10 per cent in the fiscal year 2011.

At its current levels, PSO is offering more than 50 per cent return in the next 12 months. This will be higher than the average 34 per cent annualised return; calendar year wise, provided during the last decade. Moreover, Lahore High Court has recently restored the PSO-Petrosin LPG contract which will benefit PSO in long-term.

Turnover tax could be the main problem

OMCs’ representatives are meeting FBR officials to reduce the turnover tax of one per cent approved in the Finance Bill 2010.

PSO earnings are likely to decrease by 20 to 24 per cent during the next two years; the fiscal years of 2011 and 2012, if the government maintains the one percent turnover tax.

This is due to the fact that the top line of the company is expected to grow by an average of 10 per cent during the next two years mainly due to higher sales of furnace oil to meet the country’s growing electricity needs.

PSO has largest annual turnover of around Rs800 billion, $9.4 billion, and Analysts at Topline securities believe that the government will eventually reduce the one per cent turnover tax to 0.5 per cent. They think this will happen because OMCs’ gross margins are already thin; 2 to 2.5 per cent, their reported profits will be affected if charged with a higher turnover tax because in that case their turnover tax would be higher than normal corporate tax.

Circular debt & IFEM

The government has formulated the strategy as per the IMF requirements to clear the outstanding dues to the energy companies. “The government will likely to settle this via gradual repayments. The government has disbursed Rs31 billon to PSO in last couple of weeks,” said Mahmood.

He added that on the flip side, the probability is low that existing circular debt of Rs100 to Rs115 billion will grow further as Wapda’s financial health has improved, thanks to more than 60 per cent increase in electricity rates in the last two years.

Published in The Express Tribune, July 15^th, 2010.