PSO Normalization of cash cycle justifies O/P Rating

Despite lower profitability in FY15, we remain bullish on Pakistan State Oil, based on 1) reduced balance sheet stress, 2) improved governance following imminent formation of BoD and 3) expected clarity on LNG pricing.

Though we revise down our oil price forecast in line with our JV partners Macquarie Capital (12%), and subsequently cut our FY16/17E EPS estimates in the range of ~4%, we retain our Outperform rating on the scrip with our Jun-16 TP of Rs441.9/sh. The stock is currently trading at FY16/17 P/B of 0.9/0.8x respectively.

Positives overshadowing depressed earnings: While PSO posted depressed earnings in FY15 (EPS of Rs25.5) as a result of Rs7.9bn in inventory losses, we remain comfortable on its outlook based on the ongoing balance sheet cleansing. To highlight, lower oil prices have kept the build-up of receivables under control, resulting in a nominal increase of 3% YoY (Rs175bn, with past receivables frozen at ~Rs130bn). Furthermore, the management indicated formation of a BoD in a meeting recently held. We see this as a material positive for PSO, as it will pave way for resolution of governance issues.

Clarity on LNG pricing expected in near future: The management also indicated imminent development on the LNG pricing front. It is believed that OGRA may soon take up the task of fixing the LNG prices (estimated EPS contribution of Rs6 from LNG).

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It was further intimated that firming up of a mechanism on the said will result in advance payments to PSO for LNG purchases, and keep specters of receivable build-up at bay. As per the management, current LNG receivables stand at Rs20bn.