External broker reports(aggregated public sources), Topline Securities

Topline Securities

External broker reports(aggregated public sources)

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Thematic (Sector/Industry)

<ul><li>Investment Thesis: Oil marketing sector (OMCs) of Pakistan is set to benefit from strong sector dynamics and improving economic fundamentals. The sector outlook remains encouraging mainly led by: 1) strong demand driven by white oil products (Petrol &amp; Diesel) sales, 2) higher margins on white oil products compared to black oil (FO) &amp; margins linked with Consumer Price Index (CPI), 3) fixed margins in rupee terms for white oil products, 4) improvement in circular debt scenario and 5) expectations of stability and gradual rise in oil prices to contain inventory losses.  </li><li>Oil volumes to grow at a 3-year CAGR (FY17-19) of 9%: Oil sales of OMCs are anticipated to grow at a 3-year (FY17-19) CAGR of 9% as against last 3-year growth of 7% and last 5-year growth of 4%. Robust demand of white oil is anticipated to lead this strong growth.  Within white oil, petrol sales (MOGAS) is likely to grow at a 3-year (FY17-19) CAGR of 18% driven by rising car &amp; bike sales and affordable pump prices. Along with high petrol sales, high speed diesel sales (HSD) are also anticipated to grow at a 3-year (FY17-19) CAGR of 3% vs. last 10-year CAGR of 1%. Increased transportation activity led by China Pakistan Economic Corridor (CPEC) &amp; development of road infrastructure will drive diesel growth. Furnace oil (FO) sales are anticipated to grow at a 3-year (FY17-19) CAGR of 6% vs. last 3-year CAGR of 3%. The growth however is anticipated to slowdown gradually as the Govt. is focusing on installation of coal and LNG based power plants. We anticipate FO growth of 18% in FY17, 2% in FY18 and flat growth in FY19.</li><li>Relatively high &amp; fixed margins on white oil: Margins on white oil are regulated and fixed in absolute terms at Rs2.41/ltr (6% of ex-refinery prices). This compares favorably with deregulated margin of 3-3.5% on FO (black oil). Hence, margins on white oil is independent of oil prices and low oil prices do not mean lower margins. Thus, rising volume of white oil products will generate better profits for OMCs.</li><li>Margins on white oil also linked with CPI : has approved linkage of white oil margins with CPI from Jul 1, 2016. Thus, rising margins in absolute terms along with volumes will boost OMCs bottom-line. We expect inflation to average 5-6% during FY17-19. Previously, the Govt. used to revise margins on ad-hoc basis.</li><li>Circular debt issue to subside: Circular debt issue is anticipated to subside as FO growth is expected to relatively slowdown.  Circular debt is a commonly used term for OMCs which arises due to delay in payments to OMCs mainly by power sector on the sale of FO. With increasing white oil sales and slowdown in FO usage, circular debt or OMCs receivables would gradually come down as a percentage of total sales. Govt. has planned projects of more than 10,000MW which are expected to come online by 2018 and are mostly based on RLNG (Regassified Liquid Natural Gas) or Coal.</li><li>Expectations of higher oil prices to contain inventory losses: We anticipate average international oil prices to gradually rise from US$40/bbl in FY16 to US$44/bbl in FY17, US$51/bbl in FY18 and US$56/bbl in FY19. This is expected to contain inventory losses seen in last few years and may result in inventory gains.     </li><li>Outlook: We have a ‘Overweight’ stance on the sector as strong fundamentals and improving macros will drive OMCs bottom-line. Topline OMC sample is estimated to post  3-year (FY17-19) earnings CAGR of 25%. The sector is trading at a 2017 PE of 8.6x with ROE of 20%. Pakistan State Oil (PSO) and Hascol Petroleum (HASCOL) are our top picks in the sector.</li></ul>

Investment Thesis: Oil marketing sector (OMCs) of Pakistan is set to benefit from strong sector dynamics and improving economic fundamentals. The sector outlook remains encouraging mainly led by: 1) strong demand driven by white oil products (Petrol &amp; Diesel) sales, 2) higher margins on white oil products compared to black oil (FO) &amp; margins linked with Consumer Price Index (CPI), 3) fixed margins in rupee terms for white oil products, 4) improvement in circular debt scenario and 5) expectations of stability and gradual rise in oil prices to contain inventory losses.  Oil volumes to grow at a 3-year CAGR (FY17-19) of 9%: Oil sales of OMCs are anticipated to grow at a 3-year (FY17-19) CAGR of 9% as against last 3-year growth of 7% and last 5-year growth of 4%. Robust demand of white oil is anticipated to lead this strong growth.  Within white oil, petrol sales (MOGAS) is likely to grow at a 3-year (FY17-19) CAGR of 18% driven by rising car &amp; bike sales and affordable pump prices. Along with high petrol sales, high speed diesel sales (HSD) are also anticipated to grow at a 3-year (FY17-19) CAGR of 3% vs. last 10-year CAGR of 1%. Increased transportation activity led by China Pakistan Economic Corridor (CPEC) &amp; development of road infrastructure will drive diesel growth. Furnace oil (FO) sales are anticipated to grow at a 3-year (FY17-19) CAGR of 6% vs. last 3-year CAGR of 3%. The growth however is anticipated to slowdown gradually as the Govt. is focusing on installation of coal and LNG based power plants. We anticipate FO growth of 18% in FY17, 2% in FY18 and flat growth in FY19.Relatively high &amp; fixed margins on white oil: Margins on white oil are regulated and fixed in absolute terms at Rs2.41/ltr (6% of ex-refinery prices). This compares favorably with deregulated margin of 3-3.5% on FO (black oil). Hence, margins on white oil is independent of oil prices and low oil prices do not mean lower margins. Thus, rising volume of white oil products will generate better profits for OMCs.Margins on white oil also linked with CPI : has approved linkage of white oil margins with CPI from Jul 1, 2016. Thus, rising margins in absolute terms along with volumes will boost OMCs bottom-line. We expect inflation to average 5-6% during FY17-19. Previously, the Govt. used to revise margins on ad-hoc basis.Circular debt issue to subside: Circular debt issue is anticipated to subside as FO growth is expected to relatively slowdown.  Circular debt is a commonly used term for OMCs which arises due to delay in payments to OMCs mainly by power sector on the sale of FO. With increasing white oil sales and slowdown in FO usage, circular debt or OMCs receivables would gradually come down as a percentage of total sales. Govt. has planned projects of more than 10,000MW which are expected to come online by 2018 and are mostly based on RLNG (Regassified Liquid Natural Gas) or Coal.Expectations of higher oil prices to contain inventory losses: We anticipate average international oil prices to gradually rise from US$40/bbl in FY16 to US$44/bbl in FY17, US$51/bbl in FY18 and US$56/bbl in FY19. This is expected to contain inventory losses seen in last few years and may result in inventory gains.     Outlook: We have a ‘Overweight’ stance on the sector as strong fundamentals and improving macros will drive OMCs bottom-line. Topline OMC sample is estimated to post  3-year (FY17-19) earnings CAGR of 25%. The sector is trading at a 2017 PE of 8.6x with ROE of 20%. Pakistan State Oil (PSO) and Hascol Petroleum (HASCOL) are our top picks in the sector.

Oil Marketing Sector – Major Beneficiary of Improved Macros

Pakistan

Shell Pakistan Limited markets petroleum and petrochemical products. The Company also blends and markets different types of lubricating oils.

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Shell Pakistan Ltd (Pbs) (SHEL PA)

Oil Marketing Sector – Major Beneficiary of Improved Macros

Investment Thesis: Oil marketing sector (OMCs) of Pakistan is set to benefit from strong sector dynamics and improving economic fundamentals. The...

Topline Securities

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