value call- hascol- oct 09'2015

Value Call October 09, 2015

Oil M

arketing Company

TSL Rese

arch

Hascol Petroleum Ltd. Growing by leaps and bounds We initiate coverage on Hascol Petroleum Limited (HASCOL) with ‘Buy’ rating as the smaller

OMC would keep benefiting from i) efficient inventory management, ii) Immunity to circular

debt and iii) focus on high margin products i.e MS and HSD . In next 5 years, revenues would

grow by 28% CAGR while profit CAGR would be above 20%.

We have valued HASCOL on free cash flows and come up at Dec’16 price target of

PKR191/share, offering 30% price return, in addition to 5% dividend yield. Further, in CY15TD,

the price run in stock has yielded 100% return. The scrip is currently trading at a forward PE

and PB multiple of 9.1x and 3.5x, respectively.

Volumetric accretion; still more to come

As the demand for white oil products along with the overall energy requirements is continuously

growing, HASCOL is rightly positioned to reap the most benefits. Yielding the benefits of a smaller

player, the company is actively pursuing its retail expansion strategy where we expect above

normal volumetric growth for an extended period. We assert the company would speed up liters

sales of MS and HSD by a 5‐year CAGR (CY16‐20F) of 26% and 13%, to 1.2mntons and 1.0mnton,

respectively. Subsequently, revenue stream is likely to grow by 28% CAGR to PKR276.9bn in CY20

from PKR84.9bn in CY14.

Ace in hand; Inventory Management

To support growing retail network, the company is also investing in storage facilities to ensure

efficient supply chain management. The existing storage facilities (Mehmood Kot &

Machike) are situated near PARCO and PAPCO pipelines (Pakistan Oil Infrastructure Pipeline)

which not only permit effective inventory management but also bestow Hascol with the

leverage, in case of demand supply shocks. In next phase, Hascol would enhance storage capacity

of Mehmood Kot facility while a new storage would be build in Daulatpur. Moreover, Hascol is

successfully following its inventory management cycle by reducing the lead time (order placement

to delivery time) to around 24 hours compared to industry norm of 3‐4 days.

Rotating Cards; tilting revenue mix towards higher margin retail fuels

We project the product mix to skew towards high margin white oil products. Wherein, MS share in

volumetric mix would jump to 35% by CY18 from current 19% whilst FO volumetric share would

shrink to 33% from 44%. We opine, FO sales are likely to remain stagnant owing to altering energy

generation fuel mix towards more economical ones. In addition, company active involvement in

retail network expansion would result in higher reliance on MS, HSD and Lubricant business,

resulting in contracting FO share in sales mix.

Going forward; Entry in lubricants and jet refueling

In initial stages, Hascol is getting lubricants blended under a Toll Blending Agreement and will sub‐

sequently put up its own blending plant in Karachi. The company has inked a technical services

agreement with Emirates National Oil Company (ENOC), in order to start aircraft refueling.

CY15: Profitability to grow 104% to PKR1.3bn

We project Hascol’s profitability to double in CY15E PKR1.4bn from PKR640mn in CY14.

Subsequent to its stellar performance, we assert the company to payout a cash dividend of

PKR2.5/share in aforesaid year.

Please refer to the last page for Analyst Certification and other important disclosures.

Usman Riaz AC [email protected] Direct: +92‐21‐35216403

Continued on page 2

HASCOL PA BUY

Stock price 147.0

Target price 190.9

Current upside/(downside) 29.9%

Outstanding shares (mn) 120.7

Market Cap (PKR bn) 17.7

Free float 35%

3M Avg. daily value traded (PKR mn) 112.5

3M Avg. daily volume (mn) 1.0

3M High 140.8

3M Low 98.3

Key financials PKR bn

Year end CY14A CY15E CY16F CY17F

Net sales 84.9 80.5 105.1 143.5

Cost of sales 82.9 77.3 100.8 138.1

Gross Profit 2.0 3.2 4.3 5.5

Oper. profit 1.2 2.2 3.0 3.7

Finance costs 0.3 0.3 0.3 0.3

Net Profit 0.6 1.3 1.9 2.4

Key matrics

EPS 7.8 10.8 16.1 19.7

DPS 3.2 4.0 6.0 9.0

BVPS 30.7 32.0 41.7 52.5

P/E (x) 18.8 13.6 9.1 7.4

P/BV (x) 4.8 4.6 3.5 2.8

Dividend Yield 2% 3% 4% 6%

EPS growth 11% 38% 49% 23%

ROA 5% 8% 11% 11%

ROE 33% 39% 44% 42%

Debt/Equity 14% 13% 10% 9%

Price Performance

Source: Taurus Research

0

30

60

90

120

150Aug‐14

Oct‐14

Dec‐14

Feb‐15

Apr‐15

Jun‐15

Aug‐15

Oct‐15

Hascol KSE100

Value Call TSL Research

Initiating coverage with lucid ‘Buy’; TP @ Rs191/share We initiate our coverage on newly listed OMC, Hascol Petroleum Limited (Hascol), by foreseeing

Dec’16 price target of PKR191/share, offering a capacious 30% upside from its last closing price.

Our primary valuation methodology is discounted cash flow (FCFE), with a cost of equity of 15.6%.

Wherein, we have assumed risk‐free rate of 9%, beta 1.1 and risk premium at 6%.

At current levels, the scrip is trading at an attractive CY16F PE and PB of 9.1x and 3.5x,

respectively. In addition, we estimate Hascol to pay a cash dividend of PKR6.0/share till CY16F

translating into a 4% dividend yield.

Skewing revenue mix towards high margin white oil products

Reaping benefits of being an aggressive new entrant, HASCOL’s top‐line has grown at super

normal CAGR of 71% during CY11‐14. We believe the company has long way to go before its

saturation point and would continue to enjoy the accelerated ride, though with slower pace. In

upcoming five years, we expect company’s market share would climb up to 10% (in 2020) from the

current 5% which translates into revenue CAGR of 28% (CY16‐20). We opine, current FO heavy

sales mix to tilt towards MS which would take HASCOL market share in FO, HSD and MS from

6.0%, 5.6% and 4.4% to 9%, 11.1% and 12.5% , respectively.

Heads up for profitability growth; 20% CAGR during CY16‐20

In line with rising volumetric flows, we estimate PAT to grow at a CAGR of 20% during CY16‐20.

Further, we believe that profitability of the company would remain intact in foreseeable

future on the back of i) fixed margins (2.35/litre) on white oil products (MS & HSD) and ii) bottomed

out oil prices, resulting in largely stabilized FO prices hence intact FO margins.

Additionally, with no expectation of further dip in oil prices, we expect inventory losses to remain

muted.

Taurus research is available on Bloomberg under TAUR & Capital IQ

Continued on page 3

Discounted Cash Flows Dec‐16 Dec‐17 Dec‐18 Dec‐19 Dec‐20

Net Income 1,942 2,383 2,699 2,946 3,254

Add: Depreciation 158 174 184 195 207

Less: Capital Expenditure (517) (568) (444) (471) (499)

Working Capital (44) (58) (202) (314) (402)

Net Borrowing 30 103 181 214 244

FCFE 1,569 2,033 2,418 2,569 2,803

Discounted cash flows 1,569 1,759 1,810 1,663 1,569


PV of cash flows 8,370

Discounted terminal value 14,672

Total NPV 23,042

Number of shares 120.68

Value per share 190.9

3% 4% 5%

8% 195 208 223

9% 181 191 203

10% 168 177 187

Terminal Growth Rate

Risk Free rate

Risk free rate 9.0%

Beta 1.1

ERP 6.0%

Cost of equity 15.6%

Terminal growth rate 4.0%

Valuation Statistics

Hascol Volumes (Mn Tons) & Market Share

Source: OCAC & Taurus Research

3%4%

5%

6%

7%8%

9%

10%

11%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

Hascol PAT (PKR bn) and Net Margins

Source: Company Accounts & Taurus Research

0.0%

0.5%

1.0%

1.5%

2.0%

‐

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

Profit after tax Net Margins (RHS)



Continued on page 4

HASCOL Petroleum Limited: Financial Snapshot

Income Statement (PKR mn) CY14A CY15E CY16F CY17F CY18F CY19F CY20F

Net Revenue 84,914 80,471 105,077 143,518 183,275 241,912 276,859

Cost of sales 82,877 77,275 100,809 138,058 176,725 234,221 268,310

Gross Profit 2,037 3,196 4,269 5,460 6,550 7,691 8,550

Distribution expenses 769 885 1,050 1,435 1,649 2,177 2,491

Administrative 329 402 525 717 916 1,209 1,384

Other Income 299 248 326 388 454 531 616

Operating profit 1,237 2,158 3,019 3,696 4,439 4,836 5,290

Finance Cost 264 304 294 306 321 342 326

Worker welfare fund 108 111 136 169 206 225 248

Profit before tax 865 1,743 2,589 3,220 3,912 4,270 4,716

Profit after tax 640 1,307 1,942 2,383 2,699 2,946 3,254

Balance Sheet (PKR mn) CY14A CY15E CY16F CY17F CY18F CY19F CY20F

PPE 3,291 3,587 3,946 4,340 4,601 4,877 5,169

Long term investments 782 860 946 1,040 1,144 1,259 1,385

Total Non ‐ current Assets 4,642 5,021 5,463 5,952 6,318 6,708 7,126

Stock in trade 3,474 3,178 4,184 5,762 7,418 9,872 11,391

Trade debts 4,549 3,204 4,218 5,808 7,478 9,953 11,534

Deposits and prepayments 1,025 1,025 1,025 1,025 1,025 1,025 1,025

Cash and Bank balances 1,761 3,140 3,832 4,721 5,810 6,939 8,156

Total current assets 10,975 10,748 13,477 17,511 21,936 27,994 32,307

Total Assets 15,617 15,769 18,940 23,463 28,254 34,702 39,433

Share capital 906 1,207 1,207 1,207 1,207 1,207 1,207

Reserves 1,873 2,657 3,822 5,133 6,617 8,238 10,027

Total shareholders equity 2,779 3,864 5,029 6,339 7,824 9,444 11,234

Trade and other payables 8,103 7,025 9,001 12,110 15,235 19,849 22,547

Short term running finances 1,272 1,399 1,539 1,616 1,696 1,781 1,870

Total current l iabilities 12,059 11,017 13,023 16,180 19,396 24,121 26,939

Total l iabil ities 12,518 11,585 13,591 16,803 20,109 24,937 27,879

Total Equity and Liabilities 15,617 15,769 18,940 23,463 28,254 34,702 39,433

Hascol ‐ Key Ratios CY14A CY15E CY16F CY17F CY18F CY19F CY20F

EPS 7.8 10.8 16.1 19.7 22.4 24.4 27.0

DPS 3.2 4.3 6.4 8.9 10.1 11.0 12.1

BVPS 23.0 32.0 41.7 52.5 64.8 78.3 93.1

P/E (x) 18.8 13.6 9.1 7.4 6.6 6.0 5.5

P/BV (x) 6.4 4.6 3.5 2.8 2.3 1.9 1.6

Dividend Yield 2% 3% 4% 6% 7% 7% 8%

Earnings growth 63% 104% 49% 23% 13% 9% 10%

ROA 5% 8% 11% 11% 10% 9% 9%

ROE 33% 39% 44% 42% 38% 34% 31%

EV/EBITDA 11.8 6.3 4.4 3.4 2.6 2.1 1.7





Continued on page 5

Current Market Share of OMCs


56%

10%

10%

5%

18%

PSO APL SHELL HASCOL Others

Hascol PAT (PKR bn) and net Margins


0.0%

0.5%

1.0%

1.5%

2.0%

‐

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

Profit after tax Net Margins (RHS)

Hascol Gross Profits (PKR bn)


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

0.0

2.0

4.0

6.0

8.0

10.0

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

Gross Profit Gross Margins (RHS)

Hascol Return on Equity & Return on Assets


0%

10%

20%

30%

40%

50%

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

ROE ROA

Hascol Retail Outlets


Punjab Sindh KPK Baluchistan AJK

Hascol Earnings & Payout (PKR/share)

Source: PPIS & Taurus Research

‐

5.00

10.00

15.00

20.00

25.00

30.00

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

EPS DPS


Hascol; Upcoming Robustly

Rejuvenating Industry demand

Pakistan fuel demand, which had grown at a steeper pace till the end of 90s, remained slow

afterwards due to rising petroleum prices and shift of consumption towards low cost gas. In last 30

years ending FY71‐00, Pakistan total oil/petroleum consumption has grown at a CAGR of 7%.

However, growth turned negative with the start of 21st century owing to rising prices and lower

electricity generation on high cost furnace oil.

Over the period of last 10 years, Pakistan annual oil consumption has grown at a much lower CAGR

of 4.5% to 22.6mn tons. Rising electricity generation on FO/HSD was the only major growth driver

during the period while transportation and industrial demand for petroleum remained more or less

stagnant on account of sluggish economic growth.

We assert that the fuel demand would once again rise towards its historical averages and this time

on the back of higher consumption in transportation, industrial and Households segments. Our per

capita fuel consumption currently stand at ~140 liters. With growth foreseeing ahead, we foresee

this ratio would rise towards other Asian countries such as India(178 litres) & Sri Lanka (274 litres).

Product mix of Pakistan oil marketing companies is primarily dominated by FO, HSD and MS,

where Furnace oil is largely used for electricity generation while HSD is consumed in both power

and transportation sectors. During CY14, FO and HSD contributed 43% and 32% in total volumes,

respectively, while MS share stood at 19%. In coming years, we expect FO & HSD sales would

advance at much lower pace due to lack of new investments in FO based power plants, however

low oil prices might lure industries to restart their FO based power plants to improve productions.

Rising income levels to keep driving MoGas/Petrol sales; HASCOL to yield maximum benefit

Pakistan MS sales (MoGas) have depicted healthy 18% volumetric CAGR during CY09‐14 compared

to overall petroleum CAGR of 1% during the same period. Since MS sales are more inclined

towards disposable income levels, we attribute the rise to i) growing middle class, ii) development

of domestic bike industry, iii) improving car sales, iv) lower domestic fuel prices and v) curtailment

of CNG supply due to gas deficiency.

With the rapid economic recovery ahead, our per capita income would keep rising at accelerated

pace, which would eventually strengthen the middle class. As a result, we expect higher growth in

bike and car sales. Further, urbanization is widening the cities’ radius and augmenting daily

travelling of commuters to the city centers. Additionally, low petroleum prices are also pushing the


Continued on page 6

Forecasted Volumes (000'Tons)

Source: Taurus Research

‐

2,000

4,000

6,000

8,000

10,000

12,000

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

FO HSD MOGAS

Historical Energy Consumption of Pakistan

Source: Economic Survery of Pakistan

0

5

10

15

20

251973‐74

1977‐78

1981‐82

1985‐86

1989‐90

1993‐94

1997‐98

2001‐02

2005‐06

2009‐10

2013‐14

Petroleum Consumption per Capita (Litres)

Country 2011 2012 2013 2014

Bangladesh 39 40 40 43

Nigeria 95 92 92 97

Pakistan 127 130 133 140

India 161 168 170 178

Sri Lanka 242 262 261 274

Vietnam 276 289 297 325

Indonesia 416 428 415 439

Source: IEA & TSL Research

Industry Historical Volumes (000'Tons)


‐

2,000

4,000

6,000

8,000

10,000

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

FO HSD MOGAS


volumetric surge. In this scenario, HASCOL is rightly poised to reap maximum benefits on the back

of increasing number of outlets and strengthening brand value. Ultimately, this would result in

rising market share along with growing industry volumes.

Hascol HSD volumes to start growing at steady pace

High Speed Diesel (HSD) off takes, which directly moves with economic activity (especially in

transportation sector) and electricity generation levels on HSD, remained subdued in the recent

past on the back of i) stagnant transportation sector, ii) dismal performance of Pakistan

Railways and iii) unfeasible electricity generation owing to elevated HSD prices. Resultantly, HSD

market share in white oil has dried to 32% (6.9mn tons) in CY14 from 43% (7.8mn tons) in CY08.

Since petroleum prices have slashed around 30% from its peak levels a year ago, HSD sales have

started to pick up with 15% YoY growth witnessed in 1HCY15. Just to mention, HSD prices in

Pakistan have reduced by 25% to PKR85.1/litre. Further, economic recovery has also reciprocated

in growing transportation sector along with 40% high Commercial Vehicle (HCVs & LCVs) sales.

We assert HSD volumes would improve at better pace on the back of mega highway & motorway

projects along with firm demand in tractors and Heavy/Light Commercial Vehicle (HCV & LCV).

Once again, Hascol is rightly positioned to reap the benefits with its additional retail outlets, we

believe.


Continued on page 7

HSD Market Share


50%

11%

15%

5.6%

19%


MS Market Share


47%

7%

20%

4.4%

22%


Hascol MS Volumes (Mn Tons),Market Share


0%

2%

4%

6%

8%

10%

12%

14%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

Sales Mkt Share (RHS)

Hascol MS Volumes (Mn Tons),Market Share


0%

2%

4%

6%

8%

10%

12%

14%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

Sales Mkt Share (RHS)


FO sales to shrink in sales mix

Furnace oil sales have remained more or less stagnant in the recent years due to rising cost of

electricity generation on FO. Though, recent fall in petroleum prices could result in higher FO

based power generation, we see low chances of this happening considering the cost of generation

which is still high compared to other energy sources. However, individual companies which already

have FO based generators and are facing energy load‐shedding can bring respite in FO sales,

though seems unlikely as a lot of projects are in pipeline to covert FO/HSD based plants into

cheaper fuel (coal etc).

In CY14, country furnace oil sales have depicted a nominal rise of 4% YoY to 9.2nm tons owing to

rise in power generation backed by eager demand from the industrial and domestic sectors. Going

forward, we foresee FO demand to grow at much slower pace and flatten afterwards as

commencement of several coal fired power plants are en route.

At present, FO contributes 44% to revenue mix of Hascol. In our point of view, it would rise up to

47% in CY15 and afterwards follow a sliding trajectory. We estimate FO sales mix would dip to 34%

by CY20.

Just to mention here, contrary to per litre fixed margins on MS and HSD, FO margins are based on

ex‐refinery prices. Consequently, revenue from FO would take an adverse hit with the FO prices

bottoming out. On the positive side, declining FO share in sales mix would reduce earnings

vulnerability towards international oil prices.


Continued on page 8

FO Market Share


67%

10%

1%6%

16%


Hascol Volumes (Mn Tons) & Market Share


3%4%5%6%

7%8%9%

10%11%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F


Profitability to improve on stabilizing margins and minimal inventory losses

Abrupt fall in international crude oil prices resulted in shrinking FO margins and higher inventory

losses to Pakistan oil marketing companies. Though OMCs’s margins on retail fuels (MS and HSD)

are fixed at PKR2.35/litre, deregulated products, especially furnace oil (43% share in Hascol total

sales mix in CY14), have faced the brunt as the margins are determined as a percent of rupee price.

Further, inventory losses are also incurred on all petroleum inventories at the time of price dip. Just

to mention, Arab‐light crude oil price (a benchmark for Pakistan oil sector) has shed 60% from a

high of USD111.2/bbl (July’14) to a low of USD44.36/bbl (Sep’15).

Post Iran deal, the possibility of further weakness in international petroleum prices in 1HCY16

cannot be ruled out. However, the dip would not be as large as witnessed in last fiscal year. There‐

fore, we do not envisage further compression in margins while inventory losses would also remain

on lower side in remaining CY15.

Hascol: Smaller player to keep expanding in a larger market

Usually bigger pond complacency offers better opportunities to a smaller fish to keep growing at a

steeper pace. Same can be witnessed in HASCOL performance wherein, the company has reported

95% volumetric surge vs. industry growth of 4% in last 2 years. At present, Hascol is actively

pursuing its organic growth strategy with expansion in retail network and enhanced storage capac‐

ity. The company is pursuing to launch 25‐30 more outlets in remaining span of CY15, taking total

number of filling stations to 300.

Recently, Hascol has also inked an agreement with Motorway Operation and Rehabilitation

Engineering private limited, a subsidiary of FWO, in which the company has acquired 20 retail

outlets located at Lahore‐Islamabad motorway. The newly acquired filling stations are further

strengthening the volumetric accretion and would grab incremental market share.

The new entrant would keep eating others’ market share by benefitting from competent

management, swift services and prompt response time. On the contrary, industry’s other players

are marred with bureaucratic barriers which results in more lead time and hassles for the dealers.

No circular debt; HASCOL supplies FO against unconditional bank guarantees

Circular debt is the one big issue for the domestic OMC Industry which considerably limits opera‐

tions and creates liquidity crunch. However, the issue lies with PSO mostly , which is a state con‐

trolled entity and provides fuel to the GENCOs and other IPPs under Govt. guarantees. On the

contrary, HASCOL’s FO sales are primarily reliant on the supplies to non Govt. entities such as

Nishat group and Liberty mills, which keep the company apart from the chain of inter‐corporate

debt. Moreover, Hascol follows a stringent payments mechanism, wherein the company require

irrevocable bank guarantee(s) from the buyer’s bank before FO supply.

We rule out any possibility of Hascol getting into the circular debt trap in future as the

management is not interested to tie‐up with any Govt. operated IPPs without unconditional bank

guarantees. On the contrary, however, this would result in slow FO sales growth for the company.


Continued on page 9

Hascol's Forecasted Volumes (000'Tons)


‐

200

400

600

800

1,000

1,200

1,400

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

FO HSD MOGAS

Forecasted Market Share


0%

2%

4%

6%

8%

10%

12%

14%

CY14A

CY15E

CY16F

CY17F

CY18F

CY19F

CY20F

FO HSD MS


Ace in Hand; Efficient inventory management

The company is aggressively developing its retail network along with efficient supply chain

management, which permits the company to efficiently manage its inventory. Moreover, Hascol is

successfully following its inventory management cycle by reducing the lead time (order placement

to delivery time). That said, it usually takes 3‐4 days from order placement to supply for other

OMCs, whereas, Hascol has been effectively supplying its liquid supplies within 24 hours.

Building infrastructure for future growth

The existing storage facilities (Mehmood Kot & Machike) are situated near PARCO and PAPCO

pipelines (Pakistan Oil Infrastructure Pipeline) which not only permit in effective inventory man‐

agement but also bestow Hascol with the leverage, in case of demand supply shocks.

Hascol has equipped its storage facilities at strategic locations such as Machike and Shikarpur. At

Keamari and Port Qasim, HASCOL has leased storage tankage under its own management

supervision. Moreover, the company has acquired land at Mehmood kot and Daulatpur to enhance

storage and logistics capacities. In order to further facilitate its MS supplies, the company has ac‐

quired 32k ton MS capacity at Port Qasim on 20‐year lease agreement.

Lubricants: Another segment yet to focus on

Hascol has inked arrangements with Fuchs Lubricants of Germany to produce and market full

range of Automotive/Industrial Lubricants & Greases. In the initial stages, Hascol is getting the

lubricants blended under a Toll Blending Agreement and will subsequently put up its own blending

plant in Karachi. At present, Hascol is a major supplier of Lubricants to the Pakistan Army.

Add Jet fuel to volumes

The company has inked a technical services agreement with Emirates National Oil Company

(ENOC), in order to start aircraft refueling. This would further ignite its supply side and open new

avenues of growth for the company.


Continued on page 10

Storage Facility Capacity (MT) Ownership

Port Qasim 32,400 Long term agreement ‐ VTT Port Qasim (Pvt.) LTD.

Kemari 12,150 Long term agreement ‐ Al Raheem Trading

Kemari Import Terminal 15,000 Long term lease agreement ‐ Al Abbas Group

Shikarpur 6,500 HPL Owned

Machike 6,500 HPL Owned

Amangarh 1,500 Long term lease agreement with an option to buy

Source: Company Accounts & TSL Research

Inventory turnover


‐

10.0

20.0

30.0

40.0

50.0

60.0

FY11

FY12

FY13

FY14

PSO Shell APL Hascol

Receivable turnover


‐

20.0

40.0

60.0

80.0

100.0

120.0

FY11

FY12

FY13

FY14

PSO Shell APL Hascol


Key Risks

Cap on volumetric growth/Delay in expansion plans

Any delay in acquiring new retail outlets would materially affect volumetric flows of the company

and would thus adversely impact our earnings estimations and valuations.

Further slide in oil prices

Fluctuations in domestic POL prices are directly correlated with Arab light crude oil price and

variations in international oil prices. Any further downturn to our base case (USD50/bbl) would

adversely hit the company’s revenue as well as profitability. It is pertinent to mention that margins

from FO would be hit in case of further slide in international oil prices. On the flip side, profitability

from White oil products (MS & Diesel) would remain immune owing to their fix margins. However,

international oil prices variations might result in inventory losses to the company.

Revival of CNG sector with LNG arrival

Finalization of LNG agreement (with Qatar) might adversely impact the company’s volumetric

accretion. Since it is widely perceived that the consumers would shift towards cheaper fuel. Just to

highlight, Govt. has once again allowed the installation of CNG kits to Auto sector of Pakistan.




Fueling RoE

Return on equity of HASCOL is quite sturdy compared to peers, standing at 33.1% inCY14 . Digging into the details

revealed that the major factor behind the healthy ROE is above average asset turnover owing to efficient inventory

management and equity multiplier, which clocked in at 6.8x and 6.5x, respectively during CY14.



Company Net Margin Asset Turnover Equity Multiplier ROE

HASCOL 0.8% 6.80 6.46 33.1%

PSO 0.9% 3.58 4.62 15.1%

APL 1.9% 5.37 2.34 24.0%

Source: TSL Research

Dupont Analysis

Strengths

Competent Management

Efficient inventory management

Circular Debt Immunity

Weaknesses

Lack of infrastructure

Low brand value

Higher reliance on HSD sales

Opportunities

Large room to capture market

Rising local demand

Threats

Entry of new/revival of existing OMC

Revival of CNG sector

Rising tendency towards Solar energy

Stringent Regularity regime

Source: TSL Research

Swot Analysis


Company introduction

Hascol Petroleum Limited (Hascol) was incorporated in the very beginning of 3rd millennium

(2001), primarily to take advantage of the petroleum sector deregulation and undertake a

programme for owning, leasing and renting oil storage facilities as well as importing petroleum

products for its own account. The company markets petroleum products, compressed natural gas

and blend and markets various kinds of lubricating products. Hascol’s main operations include

purchase, storage and sale/marketing of petroleum products such as Fuel Oil, High Speed Diesel,

Gasoline, Jet A‐1, LPG and Lubricants.

Hascol has remained involved with developing a retail network under the brand name of ‘HASCOL’

after it was granted with full marketing license by the Government of Pakistan in February, 2005.

The company has commissioned over 270 retail outlets across the country. The company is mulling

to elevate this number to 300 by December, 2015.

At the point in time, Hascol has fuel supply arrangements with refineries in Pakistan, including

Byco, Attock, Pak‐Arab refinery, Pakistan Refinery and National Refinery. Further, the company

has started a bunkering division and will be able to provide bonded supplies of High Sulphur Fuel

Oil (HSFO) and Marine Gas Oil (MGO) at Karachi and Port Qasim.

Currently, the company has 120.7mn shares outstanding, wherein available free float is of 35%

(42.24mn shares). Within shareholding pattern, Directors & CEO and associated companies hold

around 65.8% (79.4mn shares) shareholding in the company while general public stake is at 26.6%

(32.1mn shares).

Key Agreements

Hascol has fuel supply arrangements with all refineries in Pakistan.

Hascol is in contract with OOPL as its blending partner for lubricants in Pakistan.

Hascol is in contract with Sui Sothern Gas Company (“SSGC”) for the supply of LPG.

Hascol is in contract with Marshal Gas (Pvt.) Limited for the supply of LPG.


Hascol Shareholding pattern

Source: Company Accounts

40%

26%

26%

8%

Mumtaz Hassan KhanMarshal Gas Pvt Ltd & Fossil Energy LtdGeneral Public

Others

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Frequently Used Acronyms

TP Target Price DDM Dividend Discount Model

FCF Free Cash Flows FCFE Free Cash Flows to Equity

FCFF Free Cash Flows to Firm PE Price to Earnings ratio

PBv Price to Book ratio BVPS Book Value per Share

EPS Earnings per Share DPS Dividend per Share

ROE Return on Equity ROA Return on Assets



value call- hascol- oct 09'2015

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