Recovering Profitability
After two consecutive poor quarters, Pakistan State Oil Company Limited (PSO) managed to achieve a net income of Rs 10.15 billion in the third quarter ending March 30, 2023. While this figure represents a 70% decline compared to the earnings in the corresponding quarter of the previous year, it a significant improvement from the loss of Rs. 4.6 billion incurred in the second quarter and the modest profit of Rs. 1.2 billion generated in the first quarter of this year.
The profitability of PSO is primarily influenced by its volatile gross margin rather than fluctuations in revenue. Changes in revenue growth or decline are typically insignificant. For instance, in comparison to the second quarter, there was a 4% decline in revenue, yet the gross profit experienced a substantial increase. Similarly, when compared to the same quarter of the previous year, revenue witnessed a significant 43% increase, while the corresponding rise in gross profit was merely 6%.
In the reported third quarter, gross margin recovered to 5.7%, compared to less than 1% in the first and second quarters of this year.
The other key note on PSO's 3rd quarter financials is the huge increase in financial costs. In absolute terms, the finance cost is almost nine times higher compared to the same quarter last year. For the current quarter, finance costs are 31% of the operating profit. The circular debt issue in the Pakistan energy sector and increasing interest rates are the primary drivers of the increasing finance costs of PSO.
In the third quarter ending March 2023, PSO earned Rs. 29 per share and announced no dividend.
On a trailing twelve-month basis, PSO EPS is now 67.6, trading at a price-to-earnings ratio of less than 2, and is down 31% in one year.