Strong recovery in Oct-10 volumes: Although up a slender 0.8% YoY, Oct-10 OMC volumes jumped 34% MoM. While 4MFY11 volumes still show a 4.5% decline on YoY basis, we foresee continuation of recovery to lead to 7% YoY growth in the rest of FY11, taking YoY volume growth for the year to 2.9%.
Broad based MoM recovery; HSD/JP volumes remain weak YoY: While all products witnessed MoM recovery in demand during Oct-10, YoY comparison portrays continuation of flood inflicted weakness in HSD, while Jet Fuel seems to have slowed due to likely higher stocks emanating from demand fervor earlier this year.
PSO fared better than peers in Oct-10: MoM recovery in Oct-10 was the strongest for PSO amongst its listed peers, up 29% MoM. Other small players (unlisted) coming from a dry Sept-10, however, pushed up industry average growth to 34% MoM during Oct-10.
Reiterate liking for PSO & APL: PSO and APL offers potential upside of 29% and 21% to their respective Jun-2011 Price Targets of PKR365/share and PKR370/share
Strong recovery in Oct-10 volumes
OMC’s sales rose 34% MoM in Oct-10, driven by broad based recovery across all products. YoY comparison, however, showed a slender 0.8% uptick in total volumes primarily due to weak HSD and Jet Fuel (JP) sales. While HSD is likely to have witnessed continuation of flood inflicted demand attrition; as damages to agricultural output would likely have lowered transportation needs; JP demand seems to have receded due to likely higher stocks emanating from demand fervor earlier this year. 1Q sales for JP were up 10% YoY while industry volumes shrank 6% YoY during the period. We foresee continuation of the recovery trend ahead as we factor in 7% YoY growth for the rest of FY11, taking YoY volume growth for the year to 2.9%.
PSO fared better than peers in Oct-10
While PSO was the only listed OMC to post YoY volume attrition in 1Q, MoM recovery in Oct-10 was the strongest for the company amongst its peers, up 29% MoM. Other small players (unlisted) coming from a dry Sept-10, however, pushed up industry average growth to 34% MoM during Oct-10. While YoY comparison does not look so encouraging for PSO, with volumes down 4% YoY in Oct-10 and 12% YoY in 4MFY11 (APL and SHEL up 7% YoY and 14% YoY in 4MFY11), it is interesting to note that major contributor to the wide variance was higher dedicated FO supplies for APL and SHEL and lower demand from PSO’s FO customers due to flood damages. Ignoring FO, 4MFY11 volume growth would have been -7% for PSO, -17% for APL, -6% for SHEL and -5% for industry on YoY basis. HSD sales for the company also lagged peers as refineries prefer other OMCs over cash strapped PSO. PSO’s Mogas volumes, however, +29% YoY during 4MFY10, were way ahead of 17% average YoY growth for the industry.
Reiterate liking for PSO & APL
We expect reduction in turnover tax to 0.5% to be notified soon, whereas monthly tariff hikes (2-3%) coupled with headways in power sector reforms are also in line with our theme of major ease in circular debt during FY11. PSO remains our top pick in such a scenario amongst the OMCs, offering potential upside of 29% to our Jun-2011 PT of PKR365/share. We also like APL for its FY11 dividend yield of 8.2% coupled with 21% upside (Jun-2011 PT of PKR370/share).
Economic & Political News
Margin Trading: Rules to be notified next week
Fearing reaction from the market players the Securities and Exchange Commission of Pakistan, in consultation with the Finance Ministry, has changed the name of upcoming leverage product Margin Trading System (MTS) to ‘Securities Leveraged Markets and Pledging Rules (SLMPR). The SECP has already forwarded the final draft of the new rules to the finance ministry. Sources in the finance ministry told that the new rules for the introduction of leverage products would be notified during the next week. The rules will not only cater the financing requirements of the individual investors but also the liquidity needs of the brokers through the margin financing by the banks. The draft SLMPR has highlighted that the rate of return for margin trading will not be higher than Kibor+8%. It has also been decided that the rate of margins will be 25% on, ‘Daily Mark to Market’ basis, under which the borrower will not only have to deposit 25% of the value of shares bought by him/her but the amount will have to be adjusted daily based on the value of shares.
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