ATRL (ICML)

7/31/2019 ATRL (ICML)

1/20

Nauman Khannaum an@investc ap ital.co m

9221-111 111 097 (ext 8636)

Global recovery to overpower pa rad igm shift

Crac k spreads improving on the bac k of quantitative easing

ATRL the c hief beneficiary amongst the loc al p layers

Attock group ATRLs inherent strength

Immune to circular debt

Our Rec ommendation Buy Jun-11 TP of Rs165/ sh.

November 2010

COMPANY UPDATEA Public ation o f InvestCap Research

Pakistan Equity Resea rch

www.investca pital.com

InvestCap is the brokerage arm of:

Invest Capital Investment Bank Ltd .

Attoc k Refinery- ramping up to full throttle

Buy!

Bloomberg Code ATRL PK

Reuters Code ATRL KA

No. of Shares 85.29mn

Avg. Daily Vol. (1-Y) 1.07mn

Shr. 52 Weeks High, Low R156 Rs76Last Closing Rs120.22

Target Price Rs165.00

Upside Potential 37.25%

7/31/2019 ATRL (ICML)

2/20

Contents

Attoc k Refinery Limited . - Ra mp ing up to fu ll throttle!

Investme nt Them e 1

Refinery sector 1

Pakistan Refinery sector 3

Pa kista n s oil cha in 7

Rec ent Developme nts 8

Attoc k Refinery Limited 9

Potential Dampeners/Weaknesses 9

Valuation 13

Risk to va luat ion 15

Financ ial High ligh ts 16

Date of c omp letion: Novemb er 10, 2010

November 2010



Pric es are a s of Nove mb er 08, 2010

7/31/2019 ATRL (ICML)

3/20

1InvestCap Research

November 2010


Pakistan Equity Research

Investment ThemeWe are initiating our coverage with a 'Buy' stance on Atto ck Refinery Limited (ATRL). We

have employed Sum-of-Part (SoTP) method to va lue comp any's core-refinery op erations

along with its strategic investments particularly in National Refinery Limited (NRL) and

Attock Petroleum Limited (APL). Through Discounted Cash Flow (DCF) methodology,using a CoE (Cost of Equity) or WACC (Weighted Averag e Cost of Capital) of 24.75%

(due to debt-virgin ba lance sheet) and terminal growth rate of 3%, we have a rrived a t

company's core-refinery operation value of Rs82/share. Furthermore, we have also

assigned a va lue of Rs83/share to ATRL's investment portfolio, translating into our Jun-11

Target Price (TP) of Rs165/share. At current leve ls, the scrip offers an a ttrac tive upside of

37% from current levels, while trad ing a t a P/BV (Book Va lue) a nd P/SPS (Sales Per Share)

of 0.61x and 0.11x against its historic averages of 1.41x and 0.16x (FY06-10) respectively.

Resurging mid dle d istillate c rac k sprea ds - shifting d irec tions

Substantial dec line in crude o il demand on the b ac k of globa l economic rec ession

along side wa ve of new refinery capa c ity resulted in a shift w ithin the refinery sec tor. The

shift wa s charac terized by a significant dec line in midd le and low d istillate c rac k spreads,

which crea ted ad verse op erating environment fo r c rude oil refineries sec tor ac ross the

globe . However, the rec ent w ave of quantitative ea sing has rejuvenated interest in

commodity markets, including crude oil. As a result, middle distillate crack spreads,

pa rticularly of gasoil (premium product) improved by a significant 172%YoY and 64%QoQ

in 1QFY10. The e nhanc ed spread s have c rea ted a favorab le environme nt for

internationa l as we ll as domestic refineries.

Dom estic refineries - b ene fiting from intl pricing sce narioThe favorable development in the international ma rket is expec ted to b ode w ell for the

domestic refinery sec tor, as the fo rmer holds a major bearing on the latter's operation

and profitab ility. The favo rab le price movements in the international oil prices and

rejuvena ted middle d istillate c rack sprea ds translate into a significant hike in domestic

GRMs (1QFY11 GRMs stood at an average USD2.60/b bl as against fa r below levels of

USD0.40/bbl during FY10).

However, gauging the still wea k co mp etitive p osition o f the sec tor with regards to its

international peers along with domestic issues of notorious-circular debt, we are

compe lled to ma intain our 'Neutral' stance on the sec tor. Saying so, we b elieve ATRL

would stand out compa red to the rest of the sec tor.

ATRL - ramping up to full thro ttleDespite our 'Neutral' stanc e on the sec tor, our liking for ATRL stems from the follow ing:

The c ompa ny holds central position in the o nly cong lomerate o f the c ountry that is

highly integrated throughout the o il cha in. At one end, ATRL forms a vital linkage

between the upstream and downstream companies of the group. On the other

end , the compa ny enjoys a central position in the group's holding pa ttern having

strateg ic investme nts in Nationa l Refinery Limited and Attock Petroleum Limited .

Among st d ome stic ref ineries, we b elieve the c omp any w ould b e the c hiefbe nefic iary of the resurgenc e in the midd le distillate c rac k sprea ds due to its superior

prod uc t m ix. It is wo rth m ent ioning he re tha t, ATRL has the best Yield Effic iency Ratio

(YER) a t 1.84x against the industry ave rage of 1.52x, which is the roo t o f c om pa ny's

sup erior GRMs as c om pared to its industry pee rs. As per our ca lcu lations, ATRL's

1QFY11GRMs stoo d a t USD4.92/ bb l, far ab ove the industry averag e of USD2.97/ bb l.

Due to its low yield of Furnac e O il (FO) in its produc t m ix, ATRL is less exp osed to the

notorious inter-corporate debt, which has trapped the cash flows of the entire

energy chain in the country.

Comp any Desc ription

At tock Ref ine ry i s a

s u b s i d i a r y o f A t t o c k O i l

C o m p a n y , UK, a n d i sp r i n c i p a l l y e n g a g e d i n

proc essing of c rude o il, with

h a v i n g s t r a t e g i c

i n v e s t m e n t s i n NRL a n d

APL. The c om pa ny ha s a

p a id - u p c a p i t a l o f

Rs852mn (USD9.88mn ). `

7/31/2019 ATRL (ICML)

4/20

2InvestCap Research

November 2010



Pag e 1 of

Refinery sec torSubstantial dec line in c rude o il de ma nd on the b ac k of wo rst ec onom ic pe riods

observed since the Great Depression, congruent with the recent wave of new

refinery c apa c ity, led to d ep ressed profitab ility of internationa l refinery sec tor of

late. Additional 7.3mn ba rrels pe r da y (bpd) produc tion of refining c apa c ity is further

expec ted to be ad ded by the end of CY15. This ad ditional ca pa c ity is ac co mpanied

with a chang ing refining configuration to wa rds high yields midd le and low d istillate

produc ts, pa rtic ularly in the Asiatic region. The p arad igm is now shifting from hyd ro-

skimming to hydro-crac king tec hnology.

With ea rly signs of econo mic rec ove ry kicking-in, the said pa rad igm shift is expe c ted

to ha ve a ma rk imp lica tion on the midd le and low d istillate s c rac k spread s, as the

sam e could stay lower c ompa red to pre-rec ession levels. With this ba c kground in

p lac e, we no w sta rt our discussion on the g loba l oil refining sec tor.

Fac tors affec ting refinery sec torChang ing g lobal eco nomic dynamics have c hanged the o il market dynamics and

subseq uently, the global oil refining sec tor. Though the trad itiona l econom ic p ower

houses i.e. USA a nd Europe , still co ntribu te 43% of the tota l world refining c apac ity,

the new c ap ac ities with adva nced te chnology are taking their root in the emerging

economies.

Alongside m ovements in the internationa l oil prices, fac tors tha t p lay an imp ortant

role in the determination of spreads are

Refinery outages

Cyc le of the c rude o il i.e. d riving season, winter sea son a nd two lag sea sons Dema nd and supp ly scena rio of the individua l prod uc ts, with respe c tive to

global ec onomic e nvironment a nd c rude o il cycle

Cha nge in technolog y in the refinery op erations tow ards minimizing yield

of loss-making p roduc ts (as evide nt by the sudde n dip in c rac k sprea ds

tow ards the end of CY08 as Relianc e Industry cam e online)

Exploration and prod uc tion

Refineries

Oil marketing c omp anies

Final conusmer

Oil chain

1856

World 1st c rude oil refienry

Basic d istillation proc ess

Early 1900

Boom of auto industry

Thermal c racking

Post wa r rec overy and foc us on e nvironme ntal

issues

Catalytic Processes

Post World w a r II to

19702000's

Rise of emerging economies

Adva nement inHydroskimming and

coaking

Evo lution o f refinery industry

Source : Bloom be rg, InvestCap

WORLDREF. CAPACITY

(000' b p d) C a p . UC Pla n

US 23,636 - -

C a na d a 3,611 135 -

C hina 7,244 549 -

Russia n 6,116 - -

Ja p a n 4,909 - -

Ind ia 3,520 480 -Pa kista n 275 - -

Ot. Asia 17,543 140 800

Euro p e 17,945 - -

La t Am. 6,659 1,380 -

O the rs 3,654 - -

To ta l 95,112 2,684 800

7/31/2019 ATRL (ICML)

5/20

3InvestCap Research

November 2010



Pakistan Refinery Sec torOp erationa l issues restrict c ap ac ity exp ansions

Tota l crude o il refinery c ap ac ity of the c ountry stood at 12.95mn tons by the end of

FY10, with five ma jor refineries c ont ributing ~99% of to ta l co untry's c rude oil refining

ca pa city. In a broad er mac roec onomic percep tive, the c ap ac ity is only sufficientto fulfill ~67% of Pakistan's ove ra ll pe troleum p roduc ts dem and.

However, ope rationa l issues (pa rticularly with reg ards to BYCO Petroleum Com pany)

along side imp ac t of exog enous fac tors in a highly regulate d industry have forced

the sec tor to ope rate at an ave rag e 75% (FY05-10) of its nam ep late c ap ac ity.Moreove r, with no substantial ad dition to country's refining c ap ac ity, dep icted by

the last 5-yea r CAG R (Comp ound Averag e Growth Rate) of me re 0.3%, the sec tor

has only been able to fulfill on an average 64% of country's overall petroleum

PAKISTANSMAJORREFINERIES

(mn tons) Ca p a c ity Utiliz.

Attoc k Refinery 1.92 90%

BYCO Industry 1.5 49%

National Refinery 2.71 71%

Pak-Arab Refinery 4.5 73%

Pakistan Refinery 2.1 72%

Others 0.22 86%

12.95 73%

PRLNRL

BYCO

PARCO

ATRL

Sourc e: Ministry of Petroleum & Na tural Resourc es (MoP&N), InvestCa p Resea rch

-

5

10

15

20

25

FY05A

FY06A

FY07A

FY08A

FY09A

FY10E

Refining ca pa cityRefining throughputPetroleum prod. co nsump tion

mn tons Consumption and throughput comparison

7/31/2019 ATRL (ICML)

6/20

4InvestCap Research

November 2010



produc ts demand with the last 5-year (FY05-10) CAGR at 5.9%. Therefo re, the c ountry

is also a net impo rter of pe troleum p rod ucts with the p ricing and op erational

dyna mics of the internationa l refineries having a signific ant impa c t on c ountry's

dom estic oil refining industry.

An Oligopo ly - not rea l lyFive refineries co ntribute 99% of country's tota l refining c apac ity. This propo sition

seems to be standing as an 'Oligopoly' from the naked eye. However, the sector

fails to d ep ict tw o e ssentia l cha rac teristics of a n Oligo po ly 1) ab ility to set p rices

and 2) profit maximization c ond itions, a rising out of its we ak position w ith respe c t

to c omp etition dyna mics.

Firstly, the sec tor is highly reg ulated as ex-refinery pric es of e ight p etroleum prod uc ts

are announc ed by the Oil & Ga s Regulatory Authority (OGRA) on a monthly basis

through Imp ort Parity Price (IPP) Formula. Only one prod uc t is unregulate d prod uc t

i.e. Furnac e Oil (FO), how eve r, the d om estic p rices of this produc t a lso tra ils tha t of

the internat ional p rices.

Sec ond ly, Pakistan is a net impo rter of c rude oil. Therefore, the raw ma terial pric ing

is also a func tion of international p ricing. Weak b arga ining po sition o f the sec tor on

either ends limits sec tors ab ility to set p rices and op erate at its ma ximum c ap ac ity.

Hence, it is a misconception that the sector is an 'Oligopoly' as it lacks pricing

po we r which a lso keep s rivalry a mongst the individua l refineries at ba y.

Chang ed dy nam ics in 2002 invok ed ea rnings vola tilityIn Jul-02, the Government o f Pakistan (GoP) abo lished gua rantee d return formula

for the local refineries, in favor of a more market-based return, where ex-refinery

pe troleum p rod uc t prices would be de termined. The c onve rsion linked loca l refinery

profitab ility to internationa l oil dynamic s, and thus invoking vola tility in core-refinery

operation. .

However, understand ing the te chnologica l draw ba ck fac ed by local refineries as

compa red to its international peers, the go vernment emb ed de d a 10% Deeme d

Custom Duty o n HSD and 6% ta riff each on Light Diesel Oil (LDO), Jet Propulsion (JP-

4) and Kerosene (KERO), thus creat ing a favorab le env ironment for the industry.

How ever, when c rude oil prices rallied to their rec ord highs, go v't withdrew tariff on

LDO, JP-4 and KERO, w hile red uc ing 10% ta riff to 7.5% on HSD. Therefo re, keep ing in

view the tec hnologica l pe rspec tive, the embe dd ed dee med duty stand s vital for

sec tor's p rofitab ility. The g raph above illustrate s the same tha t the listed refineries'

GRMs would be slashed by a ma ssive ~99%, in case the de emed duty is completely

abolished.

Petroleum supp ly break- up FY10

0

2

4

6

8

10

MS

Kerosene

JP-1

HSD

LDO

FuelOil

Others

Refinery Imports

(mn tons)

Source: Source: Oil Comp anies Advisory Com mittee (OCAC ), InvestCa p Resea rch

Base

Plus

Back charges

Handling charges

Warfage

Conversion From USD to PKR

Deemed Duty 7.5% on HSD prices

Conversion From M. Ton to Litre

Import Equivalent

Incidents

IPP formula

Monthly Arab

Gulf Mean

Marine Insurance

LC commission

Sourc e: O GRA, InvestCa p Res.

7/31/2019 ATRL (ICML)

7/20

5InvestCap Research

November 2010



PARCO hold s the b igg est chunk , ATRL bette r off with u tiliza tion

With respec t to ma rket share, PARCO trad itiona lly enjoys a lion share of a bove 41%.

However, on account of the recent flood scenario, the biggest refinery had to

c lose its op erations for ab out a month w hereby its ma rket share d rop pe d to 26% in

1QFY11. The lost g round wa s prima rily pic ked up by NRL and ATRL increa sing the ir

ma rket sha res to 25% and 23% respec tively, followed by PRL at 21%. BYCO, on the

other hand , witnessed a p lant c losure in Jun-10 and as a result, its ma rket share

stoo d at a mere 2.5%.

For the same pe riod, c ap ac ity utilizat ion of the individua l refineries stoo d at 97% for

ATRL and 86% for NRL fo llowed by PRL with utiliza tion leve l of 74%. Co nve rsely, BYCO

and PARCO's c ap ac ity utiliza tions stoo d a t only 39% and 19% respec tively.

(25)

(20)

(15)

(10)

(5)

0

5

10

15

Sep-05

Feb-06

Aug-06

Feb-07

Jul-07

Jan-08

Jun-08

Sep-08

May-

Dec-09

Nov-10

Without With

NRL GRMs Compa risons(USD/ bb l)

(20)

(10)

0

10

20

30

Sep-05

Mar-06

Oct-06

May-07

Nov-07

May-08

Oct-08

Jun-09

May-10

Without With

ATRL GRMs Comparisons(USD/ bb l)(USD/ bb l)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

Sep-05

Feb-06

Aug-06

Feb-07

Jul-07

Jan-08

Jun-08

Sep-08

May-

Dec-09

Nov-10

Without With

BYCO GRMs Comparisons(USD/ b bl)

Sourc e: OGRA, OCAC , MoP&N, Bloom be rg, InvestCa p Resea rch

(25)

(20)

(15)

(10)

(5)

0

5

10

15

Sep-0

5

Mar-0

6

Oct-0

6

May-0

7

Nov-07

May-0

8

Oct-0

8

Jun-0

9

May-1

0

Without With

PRL GRMs Comparisons(USD/ bb l)

Sourc e: MoP&N, OCA C, InvestCa p Resea rch

Cap ac ity utlization

0%

20%

40%60%

80%

100%

120%

ATRL

BYCO

NRL

PARCO

PRL

FY08 FY09 FY10 1QFY11

27%

21%

25%

23%

2% 2%

PARCO PRL NRL

ATRL BOSI Other

Refinery Sha res in 1QFY11

Source: OCA C, InvestCa p Resea rch

7/31/2019 ATRL (ICML)

8/20

6InvestCap Research

November 2010



Prod uc t mix - a key to suc c ess

With uniform p ricing struc ture fo r bo th p rod uc t and raw ma terial, the d ifferentiating

factor between the GRMs of various refineries is the product mix of individual

refineries. Refineries with superior p roduc t m ix i.e. having high yields of p rem ium

prod uc ts (MOG AS and HSD) along with low yields of sc rap pricing p rod uc ts (FO) w ill

fare be tter as compa red to the ir pe ers having a n unfavo rab le produc t mix. For thispurpose, we have developed 'Yield Efficiency Ratio' (YER) to gauge the relative

effic ienc y of the individua l refineries a t dom estic front. In simple terms, higher the

ratio, the supe rior the p rod uc t m ix and therefore, supe rior GRMs of a pa rticular

refinery.

GRMs - On route to rec overy

As d iscussed , the parad igm shift in the internationa l refinery operations and g loba l

ec ono mic rec ession bodes hea vily we ll on the d om estic GRMs. The d eve lopm ent

slashed dom estic GRMs by a ma ssive 10.01x from USD7.16/bb l ba ck in FY08 (pre-

rec ession p eriod ), to only USD0.40/bb l in FY10. However, rec en t reviva l in the

internationa l oil p rices has improve d m idd le distillates c rac k spread s. The c hangehas reflec ted positively in the d om estic G RMs, which stoo d at USD2.60/ bb l during

1QFY10 and e xpected to be a round USD2.66/bbl in 2QFY11.

Going forward, we believe that global economic recovery would improve

petroleum product margins. However, the same are expected to remain below

the levels of the pre-recessionary period on account of changing paradigm in

interna tional refinery operations. We e xpec t d om estic G RMs to rec ove r at least to

USD3-4/bbl in FY11 and beyo nd .

PRODUCTMIXOFREFINERIES

A TRL BYC O N RL PA RC O PRL Ind ustry

M OG AS 18% 7% 6% 19% 6% 12%

KERO/ AF 16% 0% 9% 13% 14% 12%

HSD 26% 36% 31% 30% 28% 30%

FO 24% 48% 21% 27% 39% 27%

Na p htha 11% 7% 12% 11% 13% 8%Non-energ y 5% 1% 16% 0% 0% 5%

Othe rs 1% 1% 6% 0% 0% 7%

YER Ra t io 1.85 0.898 1.76 1.83 0.86 1.52(20)

(15)

(10)

(5)0

5

10

15

20

25

Sep-05

Feb-06

Aug-06

Feb-07

Jul-07

Jan-08

Jun-08

Sep-08

M

ay-

Dec-09

Nov-10

NRL ATRL PRLBOSI PARCO

GRMs comparisonsUSD/ bbl

Source : MoP&N, OGRA, Bloom be rg, InvestCap Research

Spread Com pa rison

(40)

(30)

(20)

(10)

0

10

20

30

Naphtha

FO

Kero

HSD


USD/ b bl

(5 )

0

5

10

15

NRL ATRL PRL BYCO


Dome stic GRMs(USD/ b b l)

Sourc e: MoP&M, Bloo mb erg, OGRA, InvestCap Research

7/31/2019 ATRL (ICML)

9/20

7InvestCap Research

November 2010



Pakistans oil cha in

ImportsRefinery

Supply

MS

Kerosene

JP-1

HSD

LDO

FuelOil

Others

Others

Power

Transp ort

AgricultureIndustry

Domestic

Demand

1.90.2 0.7

7.4

0.07

9.2

0.8

Domestic E&P

30%

OG DC - 54%

BP - 15%

MO L - 11%

O the rs - 20%

Crude Oil Import

70%

Arab Gulf

Refinery

67%

PARCO - 41%

ATRL - 18%

PRL - 17%

NRL - 16%

BYCO - 8%

Imported

POL

products

33%

Arab Gulf

Oil Marketing

Companies

PSO - 70%

Others - 30%

Domestic

0.4%

Industry

5.2%

Power

43.3%

Agriculture

0.3%

Tran spo rt

47.7%

Others

3.0%

Source : MoP&N, OCAC , InvestCa p Resea rch

7/31/2019 ATRL (ICML)

10/20

8InvestCap Research

November 2010



Rec ent DevelopmentsDeregula tion of pricing - oil c hain integration to be leverag e

A rec ent issue tha t is impac ting, d om estic refineries is the revision in IPP formula on

the directive of the apex court of the country. In this regard, the proposal of

de regulation of the pe troleum p rod uct pricing ha s atta ined the c entral stag e. Inadd ition, the scheme a lso e ncom pa sses deregula tion of the IFEM (Inland Freight

Equa liza tion Ma rgin) that is app lied a fter the e x-refinery prices to eq ua lize freight

charge ac ross the c ountry.

As pe r our unde rstand ing, influenc e o f the international refinery dynam ics will restric t

the b enefits for the d om estic refinery sec to r a t the e x-refinery pric es. Furthermore,

the de -reg ulation of the IFEM w ill indirectly impa c t the refinery sec tor whe re the

emerging b ene fit w ill be restricted to refineries that are p art of integ rate d oil cha ins.

Therefore, we deem the chang e in the pric ing formula to ha ve a favorable imp ac t

on refineries tha t can generate positive synergies on a ccount o f their group profiles.

Attoc k Group, in this reg ards, is expec ted to b ene fit the most a s the g roup is bo th

backward and forward integrated (from Oil & Gas Exploration to Refining to

Ma rketing & Distribution).

Turnove r tax - resolving in favo r of refineries

In the federal budget FY11, the GoP enhanced the turnover tax from 0.5% to 1%

(higher of corpo rate o r turnover tax to be p aid). This step had a n ad verse p rofitability

impa c t on the com pa nies plac ed w ithin the quad rant of high-volume-low-margin

businesses (distribution sec tor) inc luding refineries. The effec tive tax rate , as of the

latest q ua rterly results of the refineries, doub led to ~70% from 35%, whic h e rode d

sector's profitability quite significantly. Recently, the Federal Board of Revenue

(FBR) has reverted bac k the turnove r tax to 0.5%, which w ould sca le ba c k sec tor's

profitability with its previous normal-tax levels, going forward.

The Deem ed Duty - a c ata lyst unlikely to g oAnother conc erned fac ed by the loc al refinery sec tor is the reduc tion in the deemed

duty o n HSD from the existing 7.5%, wh ich as mentioned ea rlier is signific antly c rucialfor refinery sec tor's bot tomline (earning sensitivity ana lysis is p rovided in the e nd ).

However, we be lieve tha t the scenario w ithout the d eemed duty is quite imp robab le,

as we term the g ove rnment to b e the chief bene fic iary of this reg ime. The c ountry

meets 45-50% of its pe troleum product d emand through imports, therefore, deem ed

duty o n impo rts is an important source of revenue fo r the government (petroleum

and mineral co ntribute 16% to tota l custom duty c ollec tions). Thus, unde r the c urrent

ec onomic scena rio with high fisc al need s, we b elieve tha t the g ove rnment is not

expe c ted to o pt to red uc e o r elimina te th is vital source of revenue s. Thus, we also

do wnp lay a ny risk of the c hang e in the p reva lent d uty structure in the foreseea ble

future.

Circula r-de bt o nly a n issue for High y ielding FO refineries

Ano ther issues fac ed by the refinery sec tor is of c irc ular debt. Roo t c ause a na lysis ofthe situation revea ls tha t c ircular deb t p rimarily stem s from high c ost o f therma l

generation a rising from our dependency o n FO a nd government inab ility to reco ver

the cost from the final consume r. For this reason, refineries wh ich have h igh yield o f

FO in their p rod uc t mix are ad versely affec ted from the issue, with minimal impa c t

on c om pa ny's having low yield o f FO. Therefore, revisiting the p roduc t mix of the

refineries presented early, PARCO, BYCO and PRL are adversely affected by the

issue, while ATRL and NRL are relat ively imm une to the situa tion.

7/31/2019 ATRL (ICML)

11/20

9InvestCap Research

November 2010



Attock Refinery LimitedAbout the com pany

Attoc k Refinery Limited (ATRL), a subsidiary of Atto ck Oil Co mp any Limited , UK, wa s

incorporated in Pakistan o n 08 Nov, 1978 as a private limited compa ny and wa s

later co nverted into a pub lic comp any on 26 Jun, 1979. The c omp any is principa llyengaged in the refining of crude oil with annual refining capacity of 14.784mn

barrels or 1.92mn tons situated at Morgah, Rawalpindi. In addition, the company

ha s a stra tegic inve stment in Nat iona l Refine ry Limited (Rs8.05bn or USD93.4mn)

and Attoc k Petroleum (Rs4.46bn or USD51.7mn).

Part of Attoc k g roup - its inherent streng thenATRL's inherit streng th c om es from its assoc iation with the A tto c k Group wh ich

possesses high business acumen reflecting in well-built balance sheets of their

business ventures so far. The group is the only c ong lome rate in Pakista n tha t is we ll-

integrated througho ut the o il c hain. At one hand , with its investme nt in Pakistan

Oilfields Limited (POL), the g roup has exposure to the up stream sec tor cont ributing

7% and 2% to c ount ry's oil and g as prod uc tion respec tively. On the othe r hand, its

strateg ic ho lding in ATRL, NRL and APL ma kes the group a formidable player in thedow nstream sec tor of the c ount ry. ATRL and NRL, with cum ulative refining c apac ity

of 4.63mn tons, the g roup c ontrols 36% of the tota l refining cap ac ity of the country,

ec lipsing PARCO tha t c ont ributes 34% to sec tor's tota l ca pa c ity. In the d ow nstream

oil sec tor, APL is the fourth largest OM C (Oil Ma rketing Com pany) in the c ount ry,

having a ma rket share of ~8% as of FY10. In a dd ition, the group a lso ha d auxiliary

business in the LPG a nd pow er industries of t he c ountry, p roviding further strength

to the overall group.

With ATRL be ing in the c entral tier of the predominant p yram id holding p atte rns

along side a vital link between the upstream and downstream oil sectors, the

Bloomberg Code

ATRL PK

Reuters Code

ATRL KA

No. of Shares

85.29mn

Avg. Daily Vol. (1-Y)

1.07mn

Shr. 52 Weeks High, Low

R156 Rs76

Last Closing

Rs120.22

Target Price

Rs165.00

Upside Potential

37.25%

Sourc e: Com pa ny Rep orts, InvestCa p Research

Attock

Group

Attoc k Oil

Company

Pharaon

Investment

Pakistan

Oilfields

Attock

Refinery

Limited

Attock

Petroleum

Limited

Attock

Ge n

Limited

NationalRefinery

Attock

Information

Tec hnoloy

7/31/2019 ATRL (ICML)

12/20

10InvestCap Research

November 2010



company reaps the maximum benefit arising from the synergies created by the

group compa nies. At one end , the co mp any forms a c ruc ial link betw een POL (E&P)

and APL (OMC), while holds its strategically diversified investments in NRL, APL,

Atto c k Ge n Limited a nd At toc k Informa tion Tec hnolog y Servic es, on the o ther

hand.

Surging mid dle disti llate c rac k sprea dIn addition to the strong group profile, our liking for the company also stems from

the resurge nc e in the midd le d istillate c rac k sprea d . With surge in int'l crude oil

p ric es, Gasoil c rac k spread show ed a significant improve me nt of 65% QoQ, while

surging b y a ma ssive 136% YoY during 1QFY11. On the o ther hand , negative margin-

prod uc t FO, dec lined by a mere 5% QoQ a nd 9% YoY. The said improvem ent w ill

reflec t p ositively on th e d om estic refinery sec to r with ATRL b eing t he c hief

bene ficiary on ac count of its superior YER, as explained ea rlier.

Sup erior prod uc t m ix translating into superior GRMsAs me ntione d befo re, ATRL's YER stands highe r at 1.84x as com pared to the industry

average of 1.52x. This superior YER sta nds prima rily on account of ATRL's ability to

process light-sweet grade crude oil, resulting in low yield of FO and high yield of

Ga soil and Mogas. The recent estima tes revea l ATRL's FO yie ld hovers at 22% aga instthe industry averag e of 27%, while the c umula tive yield o f Mog as and G asoil stands

significantly be tte r a t 44% tha n the industry averag e o f 32%. .

Immune to c irc ular de bt - sti ll a c ash rich b ala nc e sheet

Low FO yields have also minimized ATRL's exposure to the notorious c ircular deb t saga

which has trapped ma ny an ene rgy-sec tor comp any so far. ATRL's balance sheet

continues to show strong cash position while any adverse impa ct of the c ircular debt

has been effic iently managed through e ffective c ash management so far.

Reve rsa l of Turnove r tax- a nothe r question m ark resolvedTurnove r tax w as ano ther issue within the sec tor, ca sting unc ertainty on the

companies' future profitability in the form of inflating effective tax rates. At the

same pa ce, the imp ac t of the said deve lopm ent w as substantially visible on ATRL'sfinanc ial results during 1QFY11, as the c om pa ny's ma nagement op ted conservative

(18)

(13)

(8)

(3)

2

7

12

17

22

Jul-08

Sep-08

Nov-08

Jan-09

M

ar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

M

ar-10

May-10

Jul-10

Sep-10

Nov-10

ATRL Ind ustry

DomesticGRMs(USD/ BBL)Product yield c omp arison

0%

20%

40%

60%

80%

100%

120%

ATRL Ind ustry

MOGAS KERO/ AF HSDFO Na p htha Non-energyOthers

YER 1.82x 1.52xSourc e: Mo P&N, ORGA, InvestCap Research

TURNOVERTAXEFFECT

1QFY11A Def. Ta x 2QFY11E FY11E

6.84 2.07 6.92 28.61

Sourc e: InvestCa p Resea rch

7/31/2019 ATRL (ICML)

13/20


November 2010



approach and charged deferred tax assets to the P&L, resulting in increased

effec tive tax ra tes to 42%, over and ab ove c orpo rate ta x rate o f 34%. Therefore,

the reversal of the new tax at the sam e time wo uld reset c ompa ny's bo ttom line to

its pre-tax imposition levels going forward where we expect company's 2QFY11

ea rnings to augm ent by an incrementa l imp ac t o f Rs2.07/share to Rs11.65/share.

ATRL 1QFY10 financ ia l revie w - PAT rec ord ing a massive jum pThe com pany recently a nnounced its 1QFY11 result, posting a profit a fter tax (PAT)

of Rs588mn (EPS Rs6.08) a s c ompared to a LAT of Rs396mn (LPS Rs4.65) in t he

correspond ing p eriod of last year. The turnaround story is in co mp any's core-refinery

op eration that fac ed ad verse op erating environment last year. How ever, rec ove ry

in the internationa l energy prices reflec ted po sitively on com pa ny's GRMs in 1QFY11.

As pe r our calc ulations, co mp any's GRMs stoo d at USD4.89/bbl as com pa red to a

muc h lower USD2.04/bbl in the sam e pe riod last year. The turnaround in the GRMs

pulled com pany's c ore-refinery op era tion from a loss of Rs553mn (LPS Rs6.49) in

1QFY10 to a profit o f Rs583mn (EPS Rs6.08).

Further musc le to the bo ttom line a lso c am e from surge in com pa ny's othe r op erating

income (excluding dividend income from associates), massively up by 68% YoY.

However, the only ea rning d am pe ner was inflated effec tive tax rate a t 42% ove r

and ab ove c orporate tax rate o f 34%. The surge in effective ta x rate wa s on

ac co unt of the c hange in the taxation regime leading to comp any op ting to expense

out its defe rred ta x asset.

ATRL1QFY11FINANCIALHIGHLIGHTS

(Rs mn) 1QFY11A 1QFY10A Yo Y

Net Sa les 25,041 19,256 30%

Cost of Good So ld 24,164 19,779 22%

Gross Profit 877 (523) N/ A

Ad im, tra ns. & Selling exp ense 72 67 8%

Op era ting Profit 804 (590) N/ A

Fina nc ia l Cha rg es 42 128 -68%

Other c ha rg e s 82 5 1544%

Other inc o me 321 191 68%

Profit Befo re ta x 1,001 (532) N/ A

Ta xa t io n 418 21 1883%

Profit After Ta x (Core-refinery) 583 (553) N/ ANon-refinery inc ome - 157 N/ A

Net Inc ome 583 (396) N/ A

EPS @ 86m n sha res 6.84 (4.65)


13%

5%

5%

58%

11%

4%4% Assoc iated Cos.

Individuals

NIT/ ICP

Joint Stock Cos.Others

Foreign Investors

Financ a l Ins.

Sharehold ing pa tterns


7/31/2019 ATRL (ICML)

14/20


November 2010



Future p lansUnderstand ing the changing trends in the internationa l refining op eration, ATRL has

formulated a c omp rehensive plan that no t only enco mp asses cap ac ity by anothe r

12,400bp d, but a lso a ims a t improving c om panies Moga s and HSD yields by an

0.3mn to ns) and 0.6mn tons respec tively. As pe r new s repo rts the e stima ted c ost of

the se p rojec ts is USD100mn. The brief o f the se p rojec ts are:

Due to te ntative nature of these p rojects, we have not incorporated in the p roject

in to our financ ial mode l for the c ompa ny, how ever any positive develop ment in

this front will have a significa ntly positive imp ac t on com pa ny's valuat ion.

FUTUREPLANS

Projec t Aim Benefit

Prefla sh Unit Crud e p roc essing c a p a c ity enha nc ement 12,500p b s

Isomeriza tion Unit To inc rea se the g aso line RON a nd red uc e b enzene a nd aroma tic s 0.3mn tons

Diese l Hyd ro -Desulp huriza tion Diese l Hyd ro -Desulp huriza tion (HSD) Unit , Ca pa city 0.6mn tons

Sourc e: Com pa ny site, InvestCa p Research

7/31/2019 ATRL (ICML)

15/20


November 2010



WACC

Risk Fre e Ra te 14.25%

Risk Preimum 7.0%

Adjusted Beta 1.50

Cost of Eq uity 24.75%

Cost of Deb t -

WACC 24.75%Source: InvestCa p Resea rch Resea rch

WEIGHTEDAVERAGECOSTOFCAPITAL(WACC)

Rs/ sh. 19.75% 22.25% 24.75% 27.25% 29.75%

1% 171 167 163 160 157

2% 173 168 164 160 158

3% 175 169 165 161 158

4% 176 170 166 162 159

5% 179 172 167 163 160Source : InvestCa p Research Research

TER.GROWTHRATE

Sensitivity Analysis


FREECASHFLOW PROJECTIONS

(Rs mn) FY08A FY09A FY10F FY11E FY12E FY13E FY14E FY15E

EBIT 4,131 2,542 127 2,641 3,737 3,449 3,971 5,004

Adjustments

(+) Dep rec ia tion 392 127 124 304 304 286 255 281

(-) O ther Inc ome 578 994 983 1,282 540 293 514 561

Less

Ta x 880 667 294 783 1,149 1,036 1,206 1,550

Cha ng e NWC 8,032 (12,554) (3,033) 359 (5,252) 119 (2,358) (1,398)

Ca p ex (354) (114) (76) (621) (255) (257) (263) (269)

Free Ca shflows 10,744 (11,658) (4,135) 618 (3,154) 2,268 (116) 1,507

Disc ounted Ca shflows - - - 618 (2,527) 1,456 (60) 622

Te rmina l va lue 7,137

D isc o u n te d Te rm in a l v a lu e 2,945

Firm va lue 3,054

Less: Long term Debt -

Ad d : Ca sh b a la nc e 3,964

Enterp rise Va lue 7,018

Investment (40% Discoun t ) 7,053

Tota l Va lue o f Eq uity 14,071

Eq uity Va lue p er sha re 165

Valuation - BUYWe ha ve e mp loyed Sum of the Parts (SOTP) Disc ounte d Ca sh Flow m od el to va lue

the c ompa ny. Unde r this valuation scheme , we ha ve p rojec ted cashflows for the

next 5 years (FY10-15) inco rpora ting a Co st o f Equity of 24.75% (Weighte d Average

Cost of Ca pita l also stands at 24.75% due to no de bt o n compa ny's ba lance sheet ).We have ap plied a terminal growth rate of 3%, while ha ve sc aled up the beta to

1.5x, to c apture the vo latility in the sc rip . We ha ve a rrived at per sha re va lue from

FCFE of Rs82 from com pany's core refinery op erations. Furthermo re, we have arrived

at a va lue of Rs83/ sh for c ompa ny's investme nts, yielding a targe t va lue for the

company of Rs165/ share. We rec om mend a 'Buy' on the scrip, with our Jun-11 TP of

Rs165/ sha re

7/31/2019 ATRL (ICML)

16/20


November 2010




-1

4

9

14

19

24

29

34

39

44

49

Jan-06

Sep-06

May-07

Jan-08

Sep-08

May-09

Jan-10

Sep-10

ATRL PBV Band s

0.3x

0.9x

1.5x

2.5x

3.5x

(Rs bn)

-1

4

9

14

19

24

29

34

Jan-06

Sep-06

May-07

Jan-08

Sep-08

May-09

Jan-10

Sep-10

ATRL PS Bands

0.035x

0.1x

0.15x

0.25x

0.34x

(Rs bn)

7/31/2019 ATRL (ICML)

17/20


November 2010



Risk to va luationsWith little ma neuverab ility in compa nys plant set-up firmly plac ed in, the major risk to

our ea rning a rise from pricing scena rios. We have c lassified the ma jor pric ing risk that

ca n have an adverse impac t on companys valuation.

Change in the internat ional c rude oi l pr ic esTo b e c onservat ive, we have assumed c rude o il prices at USD70/bbl in FY11, with

contango effec t coming into p lay from FY13. Any deviation in the crude oil prices from

our base case scena rio, will imp ac t our earning expec tation. Sensitivity ana lysis with

respe ct to c rude oil prices is given b elow.

Change in c rac k spread

Another risk to our valuation is the subdued midd le distillate c rack spreads, which we

have emp loyed to generate future petroleum p roduct prices. However, we have also

conducted scenario analysis with regards to middle distillate crack spreads. For this

purpose, we have used crack spreads that were preva lent in the FY09 pe riod , as they

are the lowest in the rec ent history.

Abolishment of deem ed dutyThough we have downp lay the risk of deemed duty ab olishment, we c annot c omp lete

rule o ut the said scenario. The d evelopment w ould ha ve nega tive imp lications for

ATRL's profitability and would result in a down-ward revision o f our TP. The ea rning impact

of deemed d uty at various levels is presented be low a longside its impa ct on the scrip TP

Currenc y risk

With bo th product and raw-material be ing priced in USD terms, it provides a na tural

hedge for the organizat ion aga inst the c urrenc y risk. However, any ab rupt c hang e in the

PKR/USD parity (as in the case w as in FY08), will adversely a ffec t c ompanys ea rning.

However, this would be a short term phenomena, with companys cash rich balance

sheet ac ting a s its buffer.

DEEMEDDUTYSENSITIVITY

Rs/ sh. FY11 FY12 FY13 FY14 FY15 CR TP

10% 20.51 5.58 5.31 6.12 7.64 111

7.5% 17.82 4.58 4.13 4.81 6.18 165

4% 13.64 3.03 2.30 2.78 3.91 34

3% 11.93 2.39 1.55 1.94 2.97 26

0% 9.07 1.33 0.30 0.55 1.42 N/ A

Source : InvestCa p Research Research

CRUDOILPRICESSENSITIVITY

Rs/ sh. FY11 FY12 FY13 FY14 FY15 CR TP

-10 16.08 3.90 3.49 4.11 5.19 65

-5 16.95 4.24 3.81 4.46 5.68 74

Base 17.82 4.58 4.13 4.81 6.18 82

5 18.69 4.92 4.45 5.16 6.68 91

10 19.56 5.26 4.77 5.50 7.17 99

CRACKSPREADSSENSITIVITY

Rs/ sh. FY11 FY12 FY13 FY14 FY15

Base c ase 17.82 4.58 4.13 4.81 6.18

FY09 sp rea d s 1.83 1.64 0.80 0.44 1.76

Source : InvestCa p Research Research

7/31/2019 ATRL (ICML)

18/20


November 2010



ATRL - FINANCIALREVIEW& FORECAST

(Rs m n) FY08A FY09A FY10F FY11E FY12E FY13E FY14E FY15E

Net sa les 93,654 77,260 88,184 96,652 102,489 114,766 120,837 127,029

Cost of Sa les 89,647 75,344 88,694 94,675 98,639 110,881 116,616 121,781Gross Prof. 4,007 1,917 (510) 1,978 3,850 3,885 4,221 5,248

Op t. Pro f. 3,789 1,673 (780) 1,571 3,422 3,408 3,721 4,722

Ref. op era tion Inc . 2,007 404 (476) 1,520 391 352 410 527

Non-Ref. Inc . 377 611 602 714 853 942 1,004 1,004

PAT 6,147 1,015 126 2,234 1,243 1,295 1,414 1,531

EPS Rs @ 85m n sha re 27.95 11.90 1.48 26.20 14.57 15.18 16.58 17.95

Source : Comp any Repo rts, InvestCap Research

KEYRATIOS

FY08A FY09A FY10A FY11E FY12E FY13E FY14E FY15E

Basic Share Information (Rs)

Ea rning Per Sha re 27.95 11.90 1.48 26.20 14.57 15.18 16.58 17.95

Boo k Va lue Per Sha re 136.22 141.45 142.94 169.13 174.44 179.39 184.71 190.65

Free Ca shflow p er sha re 130.11 (135.35) (47.59) 14.52 (33.99) 29.60 1.72 20.83

Ca sh p er sha re 221.79 79.70 46.47 73.16 39.03 65.16 65.38 84.17

Business Perfo rma nc e

Return on Ca p ita l Emp loyed 23% 14% 1% 12% 15% 12% 12% 14%

Return on Eq uity 53% 8% 1% 15% 8% 8% 9% 9%

Return on Asset 12% 2% 0% 3% 2% 2% 2% 2%

Gross Ma rg in 4% 2% -1% 2% 4% 3% 3% 4%

Op era ting ma rg in 4% 2% -1% 2% 3% 3% 3% 4%

EBITDA m a rg ins 5% 3% 0% 3% 4% 3% 3% 4%

Net ma rg ins 7% 1% 0% 2% 1% 1% 1% 1%

Ea rning Gro wth 722% -83% -88% 1668% -44% 4% 9% 8%

Ope rationa l Performa nce

Gross Refine ry Ma rg ins (USD/ BBl) 9.29 1.82 1.77 5.71 6.05 6.41 6.41 6.41

Pla nt Ut liza tion 104% 89% 91% 95% 95% 95% 95% 95%

Ea rnings Qua lity (x)

Ca sh Rea liza tion Ra tio 1.81 (11.37) (32.11) 0.55 (2.33) 1.95 0.10 1.16

Ta x Ra t e 30% 62% -161% 34% 34% 34% 34% 34%

Ne t d e b t-to Eq uity Ra t io 1.68 2.12 3.48 3.08 3.38 3.54 3.63 3.61

Inte rest Co vera g e 3.32 1.73 0.41 7.80 10.41 8.58 9.38 11.25

Stand ard Valuat ions (x)

Pric e to Ea rning Ra tio 5.04 13.01 56.00 4.59 8.25 7.92 7.25 6.70

Pric e to Sa les p er sha re 0.13 0.17 0.08 0.11 0.10 0.09 0.08 0.08

Pric e to Book Va lue 1.03 1.09 0.58 0.71 0.69 0.67 0.65 0.63Free Ca shflow Yie ld 0.92 (0.87) (0.57) 0.12 (0.28) 0.25 0.01 0.17

EV/ EBITDA 3.11 5.27 56.49 4.77 3.48 3.77 3.33 2.66

Source : Comp any Reports, InvestCa p Resea rch

7/31/2019 ATRL (ICML)

19/20

November 2010

COMPANY UPDATEA Publica tion of InvestCap Research


RESEARCH (92-21) 111 111 097

Khurram Schehzad Eco nomy, Strateg y and Oi l

Fa rha n Ba shir Kha n Fertil izers, Cem ents, Construction a nd Telec om

Munib a Sa eed Ba nks, Po we r a nd Te xt ile s

Na um a n Kha n E& P, Re fine rie s a nd C he mic a ls

M a zha r A . Sa b ir In su ra nc e a nd M ut ua l Fun d s

Abdul Azeem Autom ob ile , G as Dist ribu tion , Text iles and Techn ica l s

Sa ee d Kha lid C om mo d it ie s, FM CG s a nd Pa p er & Bo a rd

Akhta r Na wa z Da ta b a se Inc ha rge

Asim Abb as Resea rc h Distrib ut ion

MONEY MARKET DESK

(92-21) 3520 8751, 3520 8757, 3520 8767

Naeem-ul-Hasan

Aa mir Saeed Khan

Mob in Wahid

Asif Hussa in

Na sir Suria

Mehmood Qureshi

EQUITY SALES DESK

(92-21) 3520 8727, 3520 8735, 3520 8730-31

Sha hrukh Na qvi

Noureen Mo in Khan

Nabe el Jafa r

Irfan A li Muha mm ad

FOREIGN EXCHANGE DESK

(92-21) 3520 8778-87

Imran Choha n

Atif Ali

Syed Atif Abbas Naq vi

Syed Ali Yazdan

Mohammad Waqa s

Moham mad Zain

COMMODITY SALES DESK

(92-21) 3521 35226-28

Ali Kazmi

Juna id Zakaria

7/31/2019 ATRL (ICML)

20/20

This repo rt is for information p urposes only a nd w e a re not soliciting a ny ac tion b ased up on it. The m at erial isba sed o n information we b elieve to b e reliable but we d o not gua rantee that it is ac curate and co mplete.Invest Ca pital Investment Bank Ltd. will not be respo nsible for the c onseq uenc e o f reliance upo n a ny op inion o rstate ment herein or for any omission. This rep ort or any p art of it ma y not b e reprod uce d or pub lished withoutprior permission.

www.investcapital.com

InvestCap is the brokerage arm of:

Invest Capital Investment Bank Ltd .

Karac hi Head OfficeC3C, 12th Lane , Itteha d Com me rcial Area ,Khayaban-e-Ittehad,

Phase- II Ext, DHA,

Karachi,

Te le pho ne + 92 ( 21) 111 111 097

Fax + 92 (21) 3531 3885

Email info@investc ap ita l.c om

Islama ba d Office

301, Muham ma d Gulistan Khan House82E, Blue A rea , Faza l-e-Haq Roa d ,Islamabad

Tele pho ne + 92 (51) 282 5904

Fa x: +92 (51) 227 5202

Peshawar Office1st Floor, Sta te Life Building 34 - TheMa ll, Peshaw ar C antt.

Te le pho ne +92 ( 91) 527 6025-28

Fax +92 (91) 527 3683

Lahore Office16A, Ma in Gu lbe rg ,Nea r MC B Tow er, Lahore

Te le pho ne +92 ( 42) 3577 6701-08

Fax +92 (42) 3577 6710

Documents

ATRL (ICML)