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MARKET TO REMAIN DULL ON UNCERTAIN POLITICAL AND ECONOMIC SCENARIO

The week ended 22nd September 2017 was lackluster at Pakistan Stock Exchange (PSX) and closed almost flat at 42,750 level. Domestic politics continued to impact market sentiments with Lahore High Court (LHC) order to make the Model Town report public adding to pressure on the ruling junta. Average daily traded volumes was up by 8.59%WoW to 170.63 million shares and volume leaders were WTL, TRG, DSL EPCL and KEL. Major gainers were: FFC, ABL, MCB, UBL and EFERT; while laggards included: HBL, EFOODS, LUCK, PIOC and DGKC.

Foreign participation declined this week with a net inflow of US$0.377 million against US$27.7 million in the previous week. Key news affecting the market included: 1) PML-N winning in NA-120 bye- election, 2) Ministry of Finance seeking to appoint financial advisors for issuance of Sukuk up to US$ one billion, 3) UK reiterating its commitment to retain duty-free access for Pakistan, 4) increase in FDI to US$457.2 million during first two months of the current financial year, 5) IMF’s representative stating that Pakistan can address fiscal and external account challenges on its own and 5) Senate standing committee demanding resignation of Finance Minister Ishaq Dar. With the result season nearing its end, future rollover week round the corner and lack of any positive triggers, analysts expect market to remain lackluster in the upcoming week.

Pakistan’s largest Exploration and Production (E&P) company, OGDC announced its FY17 results posting a 6.4%YoY increase in profitability to Rs63.8 billion (EPS: Rs14.83) from Rs60.0 billion (EPS: Rs13.94) for the preceding year. Growth in earnings can be attributed to 1) higher Net sales rising to Rs171.8 billion, up 5.5%YoY due to higher International oil prices coupled with enhanced output and 2) an increase of 9% in other income to Rs16.0 billion. The Company announced Rs6.00/share total dividend for FY17. The management stressed upon consistent exploratory efforts especially in high prospect areas of Baluchistan with seismic teams currently operating in 28 blocks. The company endeavors to drill 25 new wells during FY18. Exploration expense remained on the higher side (excluding dry-well costs) with specific focus on seismic data acquisition.

Bank of China (BoC) has been allowed to commence banking business in Pakistan. It is the second Chinese bank that has been granted permission to operate in the country. Earlier, Industrial and Commercial Bank of China (ICBC) opened two branches in Karachi and Islamabad on May 20, 2011. The ICBC provides various services including corporate finance, investment banking, foreign deposits, project loans, and working capital loans. BoC aims to provide specialized banking services to serve the financing needs of China-Pakistan Economic Corridor (CPEC) related projects by exploiting its experience.

In line with market expectation, DGKC announced its FY17 result, posting unconsolidated earnings of Rs7.97 billion (EPS: Rs18.20) for FY17, down 9%YoY as compared to previous year. DGKC also announced a final cash dividend of Rs7.5/share with FY17 result. Key highlights of FY 17 performance included: 1) a 1.5%YoY increase in topline, 2) gross margins declining to 39.3% primarily on account of higher coal prices, up 22%YoY during the period under review, 3) increase in finance cost due to its increased debt structure related to upcoming Greenfield expansion and 4) a 11%YoY decrease in other income due to lower return on bank deposits.

PIOC is expected to announce its 4QFY17 result later this month and forecast to post earnings of Rs668 million (EPS: Rs2.94), down 14%YoY. Lower earnings are expected on decline in gross margin to 38.3% despite 11%YoY increase in topline to Rs2.80 billion (21%YoY growth in total dispatches to 444,000 tons. On a cumulative basis, FY17 earnings are expected to rise by 22%YoY to Rs3.07 billion (EPS: Rs13.51). Along with the result PIOC is expected to announce a final cash dividend of Rs3.5/share, taking FY17 payout to Rs7.8/share.

The Foreign Direct Investment (FDI) inflows jumped to US$457.2 million during the first two months of this fiscal year against $179.4 million during the corresponding period of last year. State Bank of Pakistan (SBP) reported that the investment from China grew rapidly to US$259.4 million during July-August period against US$48.4 million during the corresponding period last year, which is 56% of the total FDI received during the period. Chinese invested US$210 million in the power sector during the period mainly in coal-based electricity projects, which attracted US$171 million. During the same period of previous year, the coal projects attracted US$82.6 million. The coal power projects are under severe criticism from the environmental agencies since coal-based electricity generation is being abandoned the world over due to its health and environment hazards. The second highest inflow of FDI was from Malaysia with US$110.8 million during the July-August period. The Malaysian interest was new because the previous year investment was just US$1.3 million.

Gaining momentum, Pakistan’s total exports during August 2017 registered growth of 12.8% YoY/14.4%MoM to US$1.86 billion, where both textiles and clothing and food exports witnessed upward trend. As a likely impact of the export package, textiles and clothing exports increased by 8.6%YoY/16.5%MoM to US$1.17 billion. Category wise, value added segment posted healthy growth of 16.4%YoY/18.4%MoM to US$870 million, while low value added exports declined by 9.1%YoY to US$302 million. On a cumulative basis, 2MFY18 textiles and clothing exports grew by 6%YoY to US$2.179 billion as compared to US$2.059 billion during 2MFY17. Value added exports increased by 11.1%YoY to US$1,606 million, while low value added remained 6.5%YoY lower to US$573 million.

Going forward, analysts expect textiles exports to grow by 5-6%YoY during FY18 on likely support from export package and expected domestic currency depreciation. However, downward risks to the export sector exist in the form of bearish textiles demand, end of unconditional export subsidy and a negative EU GSP -PLUS status review.

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