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Revision in MS pricing positive for refineries

ToP by ToP
June 21, 2011
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Revision in MS pricing mechanism: While OMCs remain largely unaffected by the deregulation of oil price’s, refineries will benefit as deregulation has resulted in change in MS pricing mechanism. MS produced by the local refineries will now be priced equal to PSO’s preceding month average import cost of Mogas. In absence of PSO import, the old formula with unitary RON penalty shall be applicable.

ATRL tops the beneficiary list: Amongst the listed refineries, ATRL will be the major beneficiary of this change as MS comprises 22% of its product slate. Annual earnings impact for ATRL using FY10 production level for MS is estimated at PKR9.58/share. NRL and PRL’s EPS will likely rise by PKR3.67 and PKR8.49, respectively. PRL’s EPS impact is inflated mainly due to lower number of shares (35mn).

No impact on our fuel business value and thus PT: While change in MS Pricing mechanism have resulted in improvement in our future earnings estimate, our price target for ATRL and NRL remain unchanged as we have valued the fuel business of both companies using distributable discounted free cash flows to equity. Refineries distributable cash is capped at 50% of 2002 paid up capital.

Revision in estimates: Owing to revision in MS pricing mechanism we have revised up our annual GRMs assumption for ATRL and NRL by 21% and 6%, respectively, which has increased EPS by 63-82% for ATRL and 6-7% for NRL. We also have roll forwarded our discounting timeline from Dec-11 to June-12, which has increased our PT for ATRL and NRL to PKR140/share and PKR370/share, respectively. We have a buy stance of NRL offering total stock return of 15%, while we have upgraded ATRL to buy (total stock return of 22%).

Revision in MS pricing mechanism

While OMCs remain largely unaffected by the deregulation of oil price’s, barring stoppage of PDC accumulation on MS import, refineries will benefit as deregulation has resulted in change in Mogas pricing mechanism. Previously local MS prices were being benchmark against the Arab Gulf price of Gasoline 95RON which was being reduced to 87RON by applying unitary adjustment, thus made MS a low margin or often a loss making product especially in high oil prices scenario. MS price at refiner level will now be equal to the PSO’s preceding months average import cost of Mogas. However, in absence of PSO imports, the old formula with unitary RON penalty shall still be applicable. Ex-refinery price for Mogas for the month of June was PKR64.06, which was PKR2.66/liter higher than the price calculated using the old formula. June-11 ex-refinery price is almost the same value obtained by using 91 octane rating.

ATRL tops the beneficiary list

Amongst the listed refineries, ATRL will be the major beneficiary of this change as MS comprises 22% of its product slate. ATRL produces nearly 50% of total MS production of the listed refineries.  Annual earnings impact for ATRL using FY10 production level of MS is estimated at PKR9.58/share. NRL and PRL’s EPS will likely rise by PKR3.67 and PKR8.49, respectively, as MS comprises just 8-9% of their product slate. PRL’s EPS impact is mainly inflated due to lower number of shares (35mn).

No impact in our fuel business value and thus PT

We have valued the fuel business of both the companies by using the distributable discounted free cash flows to equity, which is capped at the 50% of the 2002 paid up capital, attributable to the fuel segment. Thus, despite the favorable change in MS pricing, our value for fuel business and thus our PT for ATRL and NRL remain unchanged.

Revision in estimates

Owing to revision in MS pricing formula we have revised upwards our annual GRMs assumption for ATRL and NRL by 21% and 6%, respectively. With this upward revision ATRL’s EPS for the future periods have increased by 63-82%, while NRL’s EPS have jumped by almost 6-7%. We also have roll forwarded our discounting timeline from Dec-11 to June-12, which have increased our PT for ATRL and NRL by PKR23/share and PKR10/share to PKR140/share and PKR370/share, respectively. NRL offers FY11 dividend yield of 11% and offers an upside of 4% to our June-12 PT of PKR370. We maintain our buy stance for the NRL. We, however, upgrade our stance to buy for ATRL, as it offers FY11E dividend yield 5.5% and trades at a discount of 16% to our June-12 PT of PKR140/share.

Economic & Political News

FBR to collect PKR158bn in last 10 days of June

The Federal Board of Revenue (FBR) has to collect PKR157.8bn in the remaining 10 days of June 2011 to meet the revised annual revenue collection target of PKR1,588bn for 2010-11. FBR has provisionally collected PKR1,430.2bn from July 1 to June 20 (2010-11).
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

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