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Forthcoming earnings season likely to drive the market

The benchmark index of Pakistan Stock Exchange posted a gain of 957 points for the week ended 21st July 2017. This translates into a 2.16%WoW gain as the market closed the week at 45,294 points. The market remained under pressure due to the news flows emanating from Panama Papers case hearing. Political uncertainty kept the investors on the sidelines.

The average daily trading volume went down by 23%WoW to a little less than 134 million shares. The trading volume on 17th July plunged to 35-month low. Key news flows during the week included: 1) FBR started paying pending sales tax refunds, 2) GoP allowed 300,000 tons additional export of sugar, 3) current account deficit rose to all time high of over US$12 billion due to falling exports and remittances, 4) LSM posted 6.3%YoY growth in May’17, while 11MFY17 LSM growth of 5.7%YoY came close to a target of 5.9% YoY for the full year, 5) GoP signed a loan agreement of euro165 million with French Development Agency for power sector up gradation.

Scrips leading the bourse during the week were: APL, HASCOL, OGDC, POL and CHCC, while laggards included: PIOC, MLCF, KEL, FFBL and ENGRO. Foreign participation remained lackluster with a net outflow of US$2.0 million against a net inflow of US$0.989 million a week ago. With the Supreme Court reserving verdict on Panama Papers case, analysts expect investors to follow a cautious approach till the announcement of the final judgment. Result season, commencing next week, is likely to drive the market. Scrips in key sectors (power, cements and autos) are likely to remain in the limelight on anticipated full year payouts.

Lucky cement (LUCK) is scheduled to announce its 4th quarter results on 31st July 31. According to an AKD Securities report, the company is expected to post net profit of Rs2.97 billion (EPS: Rs9.19) for 4QFY17 as compared to Rs3.33 billion/Rs3.38 billion (EPS: Rs10.30/Rs10.47) for 4QFY16/3QFY17. Earnings are expected to fall due to: 1) expected dip in topline that can be attributed to lower dispatches and 2) lower gross margins due to the recent hike in energy prices. On a full year basis, earnings are expected to rise to Rs13.39 billion (EPS: Rs41.41) for FY17 as compared to Rs12.94 billion (EPS: Rs40.03) for FY16 on account of 2%YoY growth in topline (owing to 3.6%YoY growth in total dispatches). While, 1.3% dip in gross margins, resulting from higher energy costs is expected to keep the bottom‐line under pressure during FY17. Along with the result LUCK is expected to announce a dividend of Rs12/share.

The Board of Directors of Kot Addu Power Company (KAPCO) is scheduled to meet on 22nd August to approve its FY17 financial results. Leading brokerage house, AKD Securities said the Company is expected to post profit after tax of Rs2.79 billion (EPS: Rs3.16) for 4QFY17, down by 26%YoY but up 8% on the quarterly basis. This will take annual profit to Rs9.55 billion (EPS: Rs10.84), lower by 4% YoY. Significant drop in quarterly earnings is likely to be underpinned by 1) high load factor (86.8%) on inefficient plants reflecting excessive demand during summer peak load, 2) suppressed gross margins with cost of inputs rising significantly and 3) worsening liquidity scenario where Days Receivables Outstanding at 425 days, the highest ever number, in turn burdening the bottom‐line with Rs1.3 billion finance cost, up by 53%YoY. Keeping these factors in view, analysts expect the Company to pay dividend per share of Rs8.50.

According to the data released by APCMA, total cement dispatches during Jun’17 plunged by 27.8% MoM/20.1%YoY, primarily due to a significant decline in domestic dispatches to 2.33 million tons. Local dispatches declined owing to: 1) seasonal slowdown due to Ramazan, 2) extended Eid holidays and 3) price rationalization following budgetary measures (up 10% YoY). Exports continue to falter, down 11%YoY to just 0.344 million tons during the month under review. On a cumulative basis, total dispatches grew by 3.6%YoY during FY17, significantly lower than the 9.8%YoY growth witnessed in FY16 primarily on slower domestic demand growth (7.9% YoY for FY17 as compared to 17.0%YoY for FY16). Going forward, analysts anticipate continuation of double digit growth in domestic dispatches, based on: 1) increasing construction activity on higher PSDP spending during 2HCY17 particularly in the backdrop of election year and 2) impressive growth in private sector credit related to construction activities.

Lately, the Government of Pakistan has allowed exports of 300,000 tonnes of sugar provided the industry maintains stable domestic prices. The decision was taken at a meeting of the Cabinet’s Economic Coordination Committee (ECC) presided over by Finance Minister Ishaq Dar. The committee rejected a call for the export of 600,000 tonnes of sugar recommended by the ministries of commerce and industries. Instead, it decided that sugar exports would be immediately stopped in case of abnormal increase in domestic prices. The exports would entail no rebate or subsidy.

The Finance Minister had postponed the decision for sugar export about two months ago to avoid price surge during Ramazan as demanded by the Sugar Advisory Board (SAB), a body comprising the Ministry of Industries and Production (MoIP) and the sugar industry. The sugar exports are allowed on the written assurance provided by the Pakistan Sugar Mills Association (PSMA) that the instructions of the government regarding price stability of sugar will be adhered to in letter and spirit.

Various foreign investors have shown their interest in investing in the auto sector under the new Auto Development Policy (ADP) 2016- 2021 announced last year.

In a meeting held under the joint chairmanship of Secretary, Ministry of Industries and Production (MoIP), Khizar Hayat Gondal, and Secretary, Board of Investment (BoI), Azher Ali Choudhry, Mr Gondol said the Category-A Greenfield investment status has recently been granted to four auto investors to Nishat Motor, Kia Lucky Motors Pakistan, Regal Automobiles Industries and United Motors.

The companies awarded with green fields status would be required to enter into `agreement` with the ministry to ensure compliance to the conditions of the ADP 2016-21 relevant SRO’s and various timelines for completion of the projects for availing incentives under the said policy. Once the agreement is signed between the investors and the ministry, the concerned auto sector investors would be available for signing and countersigning of all concerned. The meeting was attended by the representatives of various auto companies and high officials of the relevant firms, the senior joint secretary and other officers of the industries.

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