Elixir Securities Limited – Elixir Insight

Karachi, June 29, 2018 (PPI-OT): Oil and Gas Development Company Limited – Supply Flush Likely off Valuations

OGDC’s valuations have remained relatively downward sticky likely due to supply flush from foreign selling of around 52mn shares (8.1% of free float) in Apr-18 and resultant dip in domestic appetite for the stock.

While current international oil prices offer a significant upside for the stock, we remain skeptical on their sustainability and continue to anchor our valuations and EPS projections at USD60/bbl. Falling oil prices may result in rout in valuations of E and Ps where OGDC is expected to be more resilient due to relative undervaluation compared to other E and P stocks.

We roll forward our valuation to Jun-19 and revise our exchange rate forecast and risk free rate assumption (to 9% from 8.5%), which raises our PT by 3% to PKR198/share, offering 27/33% capital/total upside from last close.

Selling Pressures Keeping a Lid on Stock Price: Oil and Gas Development Company (OGDC) has underperformed E and P stocks as it returned 18%/-1% during FYTD/CYTD compared with E and P sector ex-OGDC’s return of 37%/8% during FYTD/CYTD. The dismal performance is likely attributable to ample free float and foreign selling pressures. OGDC has fallen 11% from its calendar year high (April 12, 2018) even though oil prices rose 10% and PKR depreciated by 5% during this period, likely due to supply flush from foreign selling of around 52mn shares (8.1% of free float) on April 16, 2018 and resultant dip in domestic appetite for the stock. The biggest chunk of the block was absorbed by mutual funds as they mopped 9mn shares. This drove up OGDC’s shareholding in mutual funds by 10%MoM to 100mn shares in Apr-18 (a level maintained into May-18).

Lower Risk of Rout due to Undervaluation: While current international oil prices offer a significant upside for the stock, we remain skeptical on their sustainability and continue to anchor our valuations and EPS projections at USD60/bbl. Falling oil prices may result in rout in valuations for domestic E and P stocks where OGDC is expected to be more resilient due to relative undervaluation compared to other E and P’s. In this regard, we estimate OGDC to be currently trading at implied oil price of USD32/bbl which is at 58% discount to international oil prices.

The stock has traded in the PE band of 7-10x in recent years while it has fallen from a PE of 9x to 8x since the off-market stake sale in Apr-18. We believe that cheaper valuation is attributable to supply overhang and relatively lower ‘incremental’ appetite for the stock as locals remain overweight (OGDC’s holding in mutual funds stood at 7% as at May-18 compared to a weight of 5% in KSE-100 Index).

Earnings/Valuations Revised up on Higher PKR/USD Depreciation Forecast: We revise up our FY19F/FY20F EPS by 6%/10% to PKR20.8/PKR21.4 owing to revised average PKR/USD exchange rate depreciation of 14%/8% for FY19F/FY20F (average FY19F/FY20F PKR/USD: 125/136) compared with 4% depreciation p.a. earlier. Similarly, our rolled forward Jun-19 PT is revised up by 3% to PKR198/share after incorporating a higher risk free rate of 9% vs. 8.5% earlier. The stock offers capital upside of 27% and its FY19F dividend yield of 5.8% takes total upside to 33%. Buy.

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Elixir Securities Limited – Elixir Insight

Karachi, June 29, 2018 (PPI-OT): Oil and Gas Development Company Limited – Supply Flush Likely off Valuations

OGDC’s valuations have remained relatively downward sticky likely due to supply flush from foreign selling of around 52mn shares (8.1% of free float) in Apr-18 and resultant dip in domestic appetite for the stock.

While current international oil prices offer a significant upside for the stock, we remain skeptical on their sustainability and continue to anchor our valuations and EPS projections at USD60/bbl. Falling oil prices may result in rout in valuations of E and Ps where OGDC is expected to be more resilient due to relative undervaluation compared to other E and P stocks.

We roll forward our valuation to Jun-19 and revise our exchange rate forecast and risk free rate assumption (to 9% from 8.5%), which raises our PT by 3% to PKR198/share, offering 27/33% capital/total upside from last close.

Selling Pressures Keeping a Lid on Stock Price: Oil and Gas Development Company (OGDC) has underperformed E and P stocks as it returned 18%/-1% during FYTD/CYTD compared with E and P sector ex-OGDC’s return of 37%/8% during FYTD/CYTD. The dismal performance is likely attributable to ample free float and foreign selling pressures. OGDC has fallen 11% from its calendar year high (April 12, 2018) even though oil prices rose 10% and PKR depreciated by 5% during this period, likely due to supply flush from foreign selling of around 52mn shares (8.1% of free float) on April 16, 2018 and resultant dip in domestic appetite for the stock. The biggest chunk of the block was absorbed by mutual funds as they mopped 9mn shares. This drove up OGDC’s shareholding in mutual funds by 10%MoM to 100mn shares in Apr-18 (a level maintained into May-18).

Lower Risk of Rout due to Undervaluation: While current international oil prices offer a significant upside for the stock, we remain skeptical on their sustainability and continue to anchor our valuations and EPS projections at USD60/bbl. Falling oil prices may result in rout in valuations for domestic E and P stocks where OGDC is expected to be more resilient due to relative undervaluation compared to other E and P’s. In this regard, we estimate OGDC to be currently trading at implied oil price of USD32/bbl which is at 58% discount to international oil prices.

The stock has traded in the PE band of 7-10x in recent years while it has fallen from a PE of 9x to 8x since the off-market stake sale in Apr-18. We believe that cheaper valuation is attributable to supply overhang and relatively lower ‘incremental’ appetite for the stock as locals remain overweight (OGDC’s holding in mutual funds stood at 7% as at May-18 compared to a weight of 5% in KSE-100 Index).

Earnings/Valuations Revised up on Higher PKR/USD Depreciation Forecast: We revise up our FY19F/FY20F EPS by 6%/10% to PKR20.8/PKR21.4 owing to revised average PKR/USD exchange rate depreciation of 14%/8% for FY19F/FY20F (average FY19F/FY20F PKR/USD: 125/136) compared with 4% depreciation p.a. earlier. Similarly, our rolled forward Jun-19 PT is revised up by 3% to PKR198/share after incorporating a higher risk free rate of 9% vs. 8.5% earlier. The stock offers capital upside of 27% and its FY19F dividend yield of 5.8% takes total upside to 33%. Buy.

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