KARACHI: Being one of the major beneficiaries of the recent clearance of Rs342 billion worth of inter-corporate debt out of a total Rs502 billion, Pakistan State Oil (PSO) is expected to post an income of Rs4 billion in the fourth quarter of fiscal year 2012-13, Global Research says in a report on Tuesday.
The brokerage house expects that the company will announce a dividend of Rs6-8 per share with the fourth quarter financial results, keeping in view working capital requirements for the coming quarters. “If the IPPs pay (PSO) on time, we may see an upside to our estimates,” it says.
The company is also expected to book earnings of Rs64.5 per share in FY14, an increase of 14% year-on-year.
When the government released money on June 28 to wipe off part of the circular debt, the receivables of PSO stood at Rs144 billion, of which Rs41.77 billion was overdue. At the same time, payables, including those to international fuel suppliers, were Rs164.43 billion.
This debt payment led to net positive cash flow of Rs55.21 billion to PSO, with the help of which the company retired its short-term borrowing, lowering finance costs for coming quarters.
PSO also invested in Pakistan Investment Bonds (PIBs) issued by the government to partially settle the liability and the bonds would be a source of other income for the company.
Debt continues to pile up
The government has not yet increased power tariff as planned in the first week of July, therefore, according to Global Research estimates, circular debt is still piling up at the pace of Rs1 billion per day. “This lack of urgency in raising power tariff will put all the companies in the power sector and PSO back to square one in a span of less than six months,” it cautions.
The finance minister has said the difference between the cost of power production and the tariff charged stands at Rs6 per unit and with an increase in electricity generation the debt pile-up will be more rapid.
Impact of shift to coal
One of the conditions of the recent money injection was that the independent power producers (IPPs) will shift from expensive oil to cheaper coal. Three IPPs – Hubco, Pakgen and Lalpir with a combined capacity of 1,900 megawatts – have agreed to switch to coal in the next 16 months. All the three IPPs are running under the Power Policy of 1994, which guarantees fuel supply from PSO.
Assuming 70% capacity utilisation, the three power plants buy 660,000 tons of furnace oil per quarter, which is about 35% of PSO’s furnace oil offtake. As per Global Research estimates, PSO will see a negative impact of Rs3.65 per share on its bottom line after a decrease in furnace oil purchases.
The company’s cash payout dropped to 8% in FY12 from 80% in FY07, but the company compensated the investors through share dividend with financial results of FY12 and second quarter of FY13. However, the management intends to move back to its historical trend of healthy payouts once the circular debt issue is resolved.
The company’s stock has appreciated by 16% since June 2013, outperforming the Karachi Stock Exchange 100-share index by 11%.
“Our June 2014 target price of Rs395 per share assumes that the circular debt will be settled in FY14 and Rs55 per share income will be realised,” Global Research says.
It also believes that PSO’s management will be looking for new business opportunities including the Khyber-Pakhtunkhwa refinery with a capacity of 40,000 barrels, Thar coal project with Engro and establishment of Jathropa plant for bio-diesel production in Balochistan.
The management is expected to capitalise on these opportunities once it has a better balance sheet and cash flow position.
Published in The Express Tribune, July 17th, 2013.
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