AttockRefineryLimited

Holdyourhorses,toughtimenotoveryet!
HOLD
TargetPriceDec14:PKR215 CurrentPrice:PKR217

Bloomberg Reuters MCAP(USDmn) 12MADT(USDmn.) SharesOutstanding ATRL.PA ATOR.KA 174 2.0 85

ThursdayDecember19,2013

We resume our active coverage onAttock Refinery Limited (ATRL) withDec14 target price of PKR215/share with refinery operations contributing PKR105/share and portfoliovaluecontributingPKR110/sharetowardsthetargetprice The refinery reported a gross loss of PKR167mn in 1QFY14 as compared with gross profit of PKR1.9bn during 1QFY13. This dive in profitability is attributable to weak GRMsduringtheperiod For 2QFY14, we believe the profitability to remain depressed as estimated GRMs do notrepresentapromisingpicture Crack margins on Mogas and HSD has started posting a recovery. Therefore, 2HFY14 is expected to be the period of recovery given distillate prices continue their northwardmarch Ourdiscussionwiththemanagementupdatesusonprogressofupgradationprojects which are going satisfactorily and management hopes the projects to be completed bySep15 The stock is currently trading at FY14 PE and PB multiple of 9.41 and 0.65 times respectively ATRL is trading close to our Dec14 target price of PKR215/share and we recommend aHOLDforthescrip!

Valuations
EPS DPS FY14FDividendYield(%) CapitalGain(%) TotalGain(%) 2013A 45.9 5.0 2014F 23.1 4.0 2015F 39.1 5.0 2% 1% 1%

ATRLvs.KSE100RelativeChart
KSE100Index ATRL

Aboutthecompany
Attock Refinery Limited (ATRL) is the oldest refinery of Pakistan, formed in 1922. The companyproducesarangeofpetroleumproducts,suchasLiquefiedPetroleumGas(LPG), petroleum solvent grade, naphtha, motor gasoline, mineral turpentine, aviation fuels, kerosene oil, high speed diesel, light diesel oil, jute batching oil, furnace fuel oil, residual fuel oil, asphalts and polymer modified bitumen. Attock Refinery is a subsidiary of The AttockOilCompanyLimited,UKanditsultimateparentBayViewInternationalGroupS.A. ATRL also holds sizeable stakes in National Refinery Limited (NRL, sole lube oil producer) and Attock Petroleum Limited (a vertical forward integration as Attock Petroleum is involvedinmarketingofpetroleumproducts).

170 155 140 125 110 95 80 Dec12 Jan13 Mar13 Feb13 Apr13 May13 Jun13 Jul13 Aug13 Sep13 Oct13 Nov13 Dec13

Valuationsupdated
WeresumeouractivecoverageonAttockRefineryLimited(ATRL)withDec14targetprice
of PKR215/share. To value ATRL, we have used Sum of The Parts methodology with refinery operations contributing PKR105/share and portfolio value contributing PKR110/share towards the target price. In order to value refinery operations, we have used Free Cash flow to Equity (FCFE) valuation method while the cost of equity is calculated using CAPM. Our assumptions include a risk free rate of 13% (equivalent to 10 yearPIByield),equitymarketriskpremiumof6%,terminalgrowthrateof4%,andbetaof 1.2.

ATRL Profile: Attock Refinery Limited (ATRL) is the

oldest refinery of Pakistan, formed in 1922. Attock Refinery is a subsidiary of The Attock Oil Company Limited, UK and its ultimate parent Bay View International Group S.A. ATRL also holds sizeable stakes in National Refinery Limited and Attock PetroleumLimited.

Butshorttermoutlookfailstoexcite
TaseerAbbas
taseer.abbas@bmacapital.com +92111262111Ext:2056 Pakistan refineries are facing a tough time as Gross Refinery Margins have slipped on a negative side in 1HFY14 so far (refer to our report dated 4th Dec13). As far as ATRL is concerned, the refinery reported a gross loss of PKR167mn in 1QFY14 as compared with
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

gross profit of PKR1.9bn during 1QFY13. This dive in profitability is attributable to weak GRMs during the period as we estimate the refinery managed to have earned marginal positive gross refinery margins (USD0.5/bbl including 7.5% deemed duty on High Speed Diesel).However,otherexpenses(repairsandmaintenance,salaryandwagesetc)pushed therefineryintogrossloss.Moreover,ATRLrealizeditsdividendincomeofPKR1.4bnfrom associatesin1QFY14whichhelpedthecompanycrawltowardsnetprofitofPKR602mn. For 2QFY14, we believe the profitability to remain depressed as estimated GRMs do not represent a promising picture. Though thecompany enjoys a more profitable productmix than its peers, still the product prices in international markets (particularly motor gasoline) have moved in unfavorable direction, posing a threat to refinery profitability. To mention, refineries earn positive margins on gasoline and high speed diesel while furnace oilandnaphthaeatuptheprofits.GivenrecentproductpriceswheresupportfromMogas wasrelativelyweak,weexpect2QFY14profitstoremaindepressed. PrjectedIncomeStatement
PKRmn Netsales Lesscostofgoodssold GrossProfit Otherincome Financecost PATfromrefineryoperations PATfromnonrefineryoperations Totalprofitfortheyear EPS(PKR) DPS(PKR)
Source:BMAResearch

FY13A

FY14E

FY15F 176,683 175,064 1,619 3,332 1,402 1,766 1,572 3,338 39.13 5.00

163,301 165,975 160,271 165,139 3,029 3,082 549 2,618 1,298 3,916 45.91 5.00 836 3,130 2,549 394 1,572 1,966 23.05 4.00

However, as evident in the graph below, crack margins on Mogas and HSD have started posting a recovery. HSD margin reached a low of USD7.44/bbl in Sep13 and have recovered to USD9.84/bbl in Nov13 while Mogas margins continued their downward journey till Oct13 before eventually recovering. The combined effect of these two distillates is evident from ATRLs overall GRMs which witnessed a low of USD2.2/bbl in Sep13andhaveimprovedtoUSD0.4/bblinNov13.Therefore,2HFY14isexpectedtobe theperiodofrecoveryifdistillatepricescontinuetheirnorthwardmarch. ATRLsGRMs

CrackMargins
Mogas 14.2 13.8 10.3 9.1 7.4 5.2 3.2 1.7 3.2 9.8 HSD 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0

5.0
4.0

3.0
2.0 1.0

3.8

(1.0) (2.0) (3.0)

(0.1) (0.4) Jul13 Aug13 Sep13 Oct13 Nov13 (1.6) (2.2)

Jul13

Aug13 Sep13 Oct13 Nov13

Source:CompanyReports,BMAResearch
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

Exchangelossisanotherearningsdragger
ATRL registered an exchange loss of PKR857mn during 1QFY14; all blame falls on 6% PKR depreciation during the quarter against US dollar. However, we expect PKR depreciation to be at least 10% in FY14 while our long term PKR depreciation assumption is 5% per annum.Resultantly,wehaveincorporatedexchangelossofPKR2.4bnduringFY14andthe intensityisexpectedtocooldowninyearstocome. ExchangelossandPKRdepreciation

Ex.Loss 900 800 700 600 500 400 300 200 100 0 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 PKRDep 7% 6% 5% 4% 3% 2% 1% 0%

Source: BMAResearch

Upgradationprojectsinpipeline
ATRL has been working on different projects including preflash unit, naphtha isomerization unit, diesel hydrodesulphurization (DHDS) unit and expansion of existing captive power plant up to 18MW. Our discussion with the management updates us on progress of these projects which are going satisfactorily and management hopes the projects to be completed by Sep15. Timely completion of these projects would lead to incrementindeemedduty(collectedonHSD)by150bpsto9%. These projects have an expected cost of USD251mn and benefits are good too. Adding 10kbpd to refinery capacity would take total nameplate capacity to 53kbpd (up by 24%). Moreover, Naphtha Isomerization Unit will help company increase Mogas production by 0.2mn tonsper annum. Recall thatNaphtha is a negativemargin product where asMogas is a profitable distillate. Thus, Naphtha Isomerization can improve GRMs by USD15/bbl if MogascontributesUSD8/bblwhilelossofUSD7/bblonNaphthaisavoided. Project PreflashUnit Benefit Wouldenhanceproductioncapacityby24%

NaphthaIsomerization

Mogasproductionwillbeenhancedby0.2mntons/annum. LossofNaphthawillbeconvertedintoprofitfromMogas Wouldmakedieselmoreenvironmentalfriendlyand compliantwithEurollstandards.Elementalsulphurcanalso besoldseparately Wouldenablerefinerytomeetincreasedpower requirements

Diesel Hydrodesulphurization CaptivePowerPlant

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

To finance the total project cost of USD251mn, the company intends to raise new capital in debt equity ratio of 80:20. The latest financial statements of the company indicate that it has entered into syndicate finance arrangement with consortium of banks for a term finance facility of PKR22bn for upgradation projects. The facility carries mark up of three monthsKiborplusaspreadof170bpspayableonquarterlybasis.Thetenureofthisfacility is 10 years plus a grace period of 2 years. Moreover, equity portion is to be financed by reserves built up by deemed duty received on sale of HSD as per the arrangements with governmentauthorities.

OutlookandRecommendation
Though refineries are going through a tough period amid negative GRMs, projects like Naphtha Isomerization and desulphurization can ultimately lead to improved product mix and margins. Further, we believe deemed duty withdrawal does not seem a possibility given refineries have already started working on expansion and desulphurization projects (argument supported by PKR2.2bn investing cash outflow during 1QFY14 by ATRL). Still, we have not yet incorporated any cost or benefit of planned expansions in our financial model. The stock is currently trading close to our Dec14 target price of PKR215/share. We have optimistic view for refineries in longer run (after recovery in GRMs and completion of up gradationprojects)butshorttermmacroeconomicpressuresmakeusrecommendaHOLD forATRL!

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.