JS Securities Limited – Morning Briefing

Karachi, December 15, 2017 (PPI-OT): HASCOL: Attractive upside on offer – ‘Buy’ maintained on growth outlook

We revisit our estimates for Hascol Petroleum Limited (HASCOL) and tweak our EPS and DPS estimates down by 11.4% and 9.1%, respectively for 2017E.

Our SoTP based Dec-2018 Target Price for the company is tweaked down to Rs372 from Rs388 earlier.

We highlight that if we eliminate Furnace Oil (FO) sales from 2018F onwards, our EPS estimates will see a downward adjustment of 11-12% and our Target Price will be downgraded to Rs337, but still the stock offers a lucrative upside of 50% from present levels.

The stock is expensive in terms of P/E with 2017E/2018F P/E of 18.2x/13.8x. However, we highlight that HASCOL should be treated as a growth rather than a value play.

The investment outlook of company’s lube oil blending plant also remains strong. Our SoTP based Target Price for the company incorporates Rs26/share value from the lube business.

Shift from black oil to white oil products

We revisit our estimates for Hascol Petroleum Limited (HASCOL) and tweak our EPS and DPS estimates down by 11.4% and 9.1%, respectively for 2017E. Despite earnings cut for 2017E, our projections point towards a strong 5 year (2016A- 2021F) earnings CAGR of 30%. Earnings growth is most likely to be achieved by aggressive storage expansion (and resultantly fuel pumps). Our SoTP based Dec- 2018 Target Price for the company is tweaked down to Rs372 from Rs388 earlier. Despite this downgrade, the stock still offers a massive upside of 65%. We recommend “Buy” on the stock.

We highlight that if we eliminate Furnace Oil (FO) sales from 2018F onwards, our EPS estimates will see a downward adjustment of 11-12% and our Target Price will be downgraded to Rs337, but still the stock offers a lucrative upside of 50% from present levels. This may be a likely scenario going forward as the management may decide to shift its focus completely to white oil products rather than black oil where recent furnace oil import ban is causing problems for the energy chain. Other key risks to our investment thesis include (1) volatility in international oil prices, (2) volatility in exchange rates and (3) lower than expected market share grab.

A growth stock rather than value

The stock is expensive in terms of P/E with 2017E/2018F P/E of 18.2x/13.8x. However, we highlight that HASCOL should be treated as a growth rather than a value play. We believe that story of market share grab, albeit at a slower pace, will continue during the next five years. The stock has corrected by ~33% during YTD 2017 (underperformance of ~13% vs. KSE-100 index and ~11% vs. OMC sector).

Investment in lube and storages to boost profits

The investment outlook of company’s lube oil blending plant also remains strong. Our SoTP based Target Price for the company incorporates Rs26/share value from the lube business. Apart from investment in lubes and greases, company is also exploring various businesses such as LPG and LNG in collaboration with Vitol while continuing to focus on existing storage expansion. Recent financial reports highlight that the company has 470 fuel stations installed and with further storage expansion ongoing, we believe that this number will continue to rise at a faster pace as compared to the overall industry.

We had recently highlighted that storage expansions at strategic locations near the white oil pipeline are imperative for further growth as likely changes in regulatory regime will render transport of these products through bowsers impossible. Our discussion with industry sources suggest that trucks/bowsers which were initially being used as storages will soon be eliminated completely and companies with larger storage facilities will likely benefit from these changes.

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