PSO rides its luck

Its hard to please investors, isn it? PSOs full-year profits roared back in the green to Rs9 billion in fiscal year 2010 from a staggering loss of Rs7 billion in FY09.
Yet, on Friday, the day its results were announced, PSOs market price was axed by more than 3 percent as the company reported earnings-per-share of Rs52.7 as against the market expectation of around Rs60.
What did everybody miss one may ask. The effective tax rate! Yes, the amount that PSO paid as taxes in FY10 was nearly Rs9 billion or half of the pretax profits - taking the tax rate to as high as 50 percent for the year.
The effective tax rate in the past seven years has averaged 35 percent, but what everybody forgot in the flurry of massive earnings, is the fact that PSO incurred massive losses last year and received tax benefits of Rs4.6 billion - an amount which had to be reversed.
The energy crisis in Pakistan could not have been timed better for PSO as it coincided with rising global oil prices - leading to substantial inventory gains and higher margins on traditionally low margin products.
The company took full advantage of power sector inefficiency by increasing its black oil sales by 18 percent during the year, which is not necessarily a sign of economic recovery as the white oil sales remained largely flat.
The company was both the beneficiary and the victim of another inefficiency issue i.e. the inter-company circular debt.
On the one hand, the circular debt woes inflated PSOs finance cost as the firm had to rely on short-term borrowings to manage its working capital requirements and to stay afloat to secure the import letter of credits.
At the other, the breather came in the form of higher other income stemming from the penal interest income, as the company charged its debtors especially Hubco and Kapco huge interest penalties on account of outstanding payables that crossed Rs100 billion during the year.
In the current fiscal year, PSO will remain at the mercy of global oil prices. Unless prices fall dramatically, PSOs profits will remain reasonably intact.
Should global oil prices go down, PSOs bottomline could nosedive to FY09 levels, as there are no signs of abatement in the circular debt crisis. And the company seems to be reading the situation well, as evident by a paltry Rs8/share dividend announced for the year. If circular debt remains and global oil prices ease, Fridays 3 percent fall could be just the tip of the iceberg.

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PSO P&L

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Rs (mn)                  FY10      FY09   % chg

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Sales                 742,758   612,696     21%

Cost of sales         713,592   609,685     17%

Gross profit           29,166     3,010    869%

Gross margins             3.9%      0.5%   699%

Other income            7,574     2,228    240%

Finance cost            9,882     6,532     51%

Operating expenses      8,081    10,815    -25%

PAT                     9,050    -6,699      NM

EPS (Rs)                52.76    (39.05)     NM

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Source: KSE notice

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