PSO set to hit Rs645/Share

October 08, 2025 (MLN): Pakistan State Oil (PSX:PSO) is set to hit a target price of Rs645.1/share in June 2026, offering an upside of 36.5% from the last closing of Rs472.6/share.

Arif Habib Ltd has issued a BUY recommendation, supported by improving liquidity dynamics, market leadership, and the anticipated uplift from overdue OMC margin revisions.

After years of liquidity strain driven by circular debt in the RLNG and power sectors, PSO’s financial position is showing a marked turnaround.

With substantial progress achieved on power sector circular debt resolution, the company’s working capital constraints have eased significantly, while gas circular debt resolution is emerging as the next key re-rating catalyst.

PSO currently maintains an over 100% receivable rate from SNGP which shows improved recoveries and enhanced operational discipline.

Arif Habib Ltd projects earnings per share (EPS) to reach Rs79.71 in FY26e and Rs90.95 in FY27f, driven by lower finance costs, recovering fuel demand, and margin enhancement.

At current levels, PSO trades at 5.9x and 5.2x FY26/27 P/E, below historical and sector averages, highlighting attractive valuations relative to its improving fundamentals.

SOURCE: PSX, AHL Research

Following the government’s energy sector reforms  which incorporated diverted RLNG costs into gas pricing  PSO’s liquidity position has improved sharply.

Trade debts declined from Rs400bn in Dec’23 to Rs310bn in Jun’25, while short-term borrowings were reduced from Rs445bn to Rs356bn over the same period, according to the brokerage.

Supported by debt repayments and lower interest rates, finance costs fell to Rs34bn in FY25 (vs. Rs52bn in FY24) and are expected to decline further to  Rs23bn and Rs18bn in FY26/27, respectively.

The resolution of power sector circular debt alone is estimated to add around Rs 100/share to PSO’s valuation.

As payments from CPPA-G to RLNG-based power plants (NPPMCL, QATPL, and Nandipur) flow through SNGP, PSO is expected to benefit directly  though with some lag in cash realization.

Meanwhile, the revision in OMC margins remains a critical profitability lever.

OGRA has proposed a Rs1.13/litre increase in MS and HSD margins, lower than industry expectations but still supportive for PSO’s earnings.

 Arif Habib Ltd assumes margins of Rs8.53/litre effective 3QFY26, with future adjustments expected in line with inflation. As a result, gross margins are projected to improve to 3.02% in FY26 and 3.22% in FY27, up from 3.07% in FY25.

The petroleum sector posted a strong rebound in FY25, with total offtake up 7% YoY to 16.3mn tons, and continued momentum in 1QFY26 (+6% YoY to 3.9mn tons) despite adverse weather. PSO remains the market leader with a 41% share in MS and 46% in HSD, positioning it to capture the recovery in volumes.

Further liquidity gains are expected from the settlement of legacy claims, including Rs14.8bn received under HUBC’s settlement and recovery of nearly all Price Differential Claims (PDCs).

Outstanding PDCs of Rs2.2bn as of Jun’25 are expected to be recovered soon.

 Additionally, the government has approved a Rs1.87/litre increase in IFEM to address PSO’s Rs74bn sales tax refund backlog, ensuring liquidity continuity.

While the short-term outlook remains strong, certain medium-term challenges persist. The gas circular debt buildup is unlikely to accelerate during the IMF program but may resurface afterward, given Pakistan’s rising reliance on imported RLNG  a structure that appears increasingly unsustainable.

A price reopener for RLNG volumes scheduled in Feb’26 could bring some relief, but a sharp reduction in PSO’s contracted RLNG volumes appears unlikely due to Pakistan’s strategic ties with Qatar, declining domestic gas reserves, and PSO’s favorable long-term supply contracts.

Competition is also intensifying, with Gas & Oil Pakistan (GO) capturing part of PSO’s market through Aramco-backed discounted supplies, and WAFI Energy’s acquisition of Shell Pakistan including its outlets, lubricant plant, and 26% PAPCO stake  adding further pressure.

However, with improved liquidity and reduced leverage, PSO is well-positioned to strengthen its retail network and protect market share.

Meanwhile, OMCs continue to argue that OGRA’s proposed Rs1.13/litre increase remains inadequate given rising business costs, posing potential downside risk if inflation accelerates.

On the receivables side, recovery from GENCO (Rs68bn) remains uncertain despite ongoing asset swap discussions, while dues from PIA (Rs14bn) also appear doubtful.

Copyright Mettis Link News