1. business and industrial

 Attock Petroleum Limited Core operations outlook remains upbeat – ‘BUY’ Friday March 13, 2015 APL ‐ BUY Attock Petroleum Limited (APL) announced a dismal 2QFY15 result as it posted a decline of 83%QoQ and 84%YoY in earnings to PKR2.5/sh, cumulating 1HFY15 EPS to PKR17.7/sh (down 45%YoY). The sharp deterioration in earnings can be attributed to i) hefty inventory losses of PKR1.6bn‐PKR1.7bn (~PKR14/sh) and ii) 13%YoY lower FO margins. Despite 16%YoY higher volumetric sales in 3QFY15TD, we expect another round of potential inventory losses in 3QFY15 due to 14%‐17% declines In HSD and MOGAS prices which may continue to keep earnings under pressure. Consequently, we now foresee FY15F earnings to clock in at PKR45.4/sh (down 13%YoY). The lackluster trend in the earnings may keep price discovery limited in near term. However, long term prospects remain intact given i) 3 year CAGR of 17% in MOGAS sales, ii) immunity against circular debt, iii) aggressive retail outlets expansion and iv) potential strengthening of Asphalt sales on infrastructural development (Karachi‐Lahore Motorway). Going forward, we believe i) increase in CNG prices (w.e.f Apr01’15) and ii) uptick in FO demand by industrial sector amid lower prices (down 38%FYTD) will remain the main driving forces behind volumetric growth. At our TP of PKR613/sh, the stock offers an upside of 16% plus a yield of 8%. Target Price: PKR 613 Current Price: PKR 528 APL Performance Absolute % Relative to KSE % 1M 3M 12M ‐2%
4%
4%
3%
1%
‐15%
Bloomberg APL.PA
Reuters APL.KA
MCAP (USD mn) 430
12M ADT (USD mn) 0.2
Shares Outstanding (mn) 83
1HFY15 EPS lower by 45%YoY on inventory losses: APL reported a disappointing 2QFY15 result as it posted an EPS of PKR2.5, down 84%YoY and 83%QoQ, cumulating 1HFY15 EPS to PKR17.7 (down 45%YoY). The steep downtick in earnings can be attributed to hefty inventory losses during the period compared to inventory gains in the same period last year. During 2QFY15, MOGAS and HSD prices were downward revised by 21%QoQ and 13%QoQ, respectively thus leading to significant inventory losses. This coupled with weak FO margins on 13%YoY lower average FO prices in 1HFY15 led to a 50%YoY decline in gross profit to PKR1,878mn. However, an increase of 15%YoY in MOGAS sales and 26%YoY in FO sales managed to contain the downward slide in earnings. APL vs KSE100 Relative Chart APL
30%
KSE100 Index
20%
10%
0%
Mar‐15
Jan‐15
Feb‐15
Dec‐14
Oct‐14
Nov‐14
Sep‐14
Jul‐14
Aug‐14
Jun‐14
Apr‐14
May‐14
Mar‐14
‐10%
Source: BMA Research Muhammad Affan Ismail, CFA Depressed petroleum prices to offset higher HSD/MOGAS margins: Petroleum prices continue to head southwards in 3QFY15 as both HSD and MOGAS prices are down PKR14/ltr (down 17%QTD) and PKR13/ltr (down 14%QTD), respectively. Thus, we foresee another round of potential inventory losses in 3Q as well. This coupled with reduced realized margins on deregulated FO due to 28%QoQ decline in prices will more than offset the impact of increased OMC margins (w.e.f Nov’14) on HSD (up 26%) and MOGAS (up 5%), keeping earnings under pressure. Long term prospects contingent on continued volume growth: Going forward, we believe the growth in earnings will remain heavily dependent on increase in petroleum sales. The company managed to add 23 new outlets (up 5%) to 491 outlets during 1HFY15 leading to 15%YoY growth in MOGAS sales. We expect MOGAS and HSD sales to continue strengthening on account of i) continued expansion in outlets and ii) lower petrol prices (now at 2% discount to CNG compared to average premium of 53% in FY14). Reduced FO prices will also help lift FO offtake by the industrial sector. Despite teething competition from similar sized OMCs, we expect APL to witness decent growth in petroleum sales given its solid customer base (industrial and armed forces). Investment Perspective: We maintain our ‘BUY’ stance on the stock with a TP of PKR613/sh (upside: 16% + dividend yield: 8%). Any dip in the stock on lackluster earnings in 3Q provides an attractive entry point. Our conviction on the stock is premised on i) a healthy yield of 8%, ii) strong sales outlook on continued expansion in outlets and reduced MOGAS and FO prices and iii) healthy cash generation amid immunity to circular debt. muhammad.affan@bmacapital.com +92 111 262 111 Ext: 2058 BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: bmaresearch@bmacapital.com or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.11
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