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ECONOMIC AND POLITICAL CONCERNS KEEP INVESTORS AWAY; UPCOMING EARNINGS REPORT MAY SUPPORT

Though, political noise subsided but investors’ sentiments over prevailing external account weakness and a lackluster results season, eroded the benchmark index by 2.33%WoW during the week ended 27th October 2017 to close at 41,105 points. Average daily volume also declined by 27.14%WoW to 134.5 million shares. Key news flows during the week included: 1) US Secretary of State during a visit stressed the importance of Pakistan for United States and emphasized that the country’s leadership needs to undertake ‘certain measures’ for working together for achieving the common objectives, 2) A consortium of six banks including Citi, DB, IDBC, DIB, Noor Bank and SCB was given a mandate to raise US$2 billion through Sukuk to ease pressures on external account, 3) HUBC secured US$1.5 billion in financing for CHPGC, the 1,320MW coal fired power plant, 4) the country’s total foreign exchange reserves declined by US$150.8 million to US$19.9 billion during the last week ended 20th October, 5) GoP settled Rs2 billion out of Rs20 billion of subsidy claims of fertilizer manufacturers pending since last year and, 6) during the week under review major results announcements included INDU, OGDC, PPL and PSO.

Foreign participation continued to recede with net selling of US$5.34 million as compared to selling of US$7.36 million a week ago. During the week investors chose to remain on the sidelines. Healthy earnings for E&P, OMC and Auto sectors went largely unrewarded, but likely to initiate a rally in the medium term.

Ironically, Pakistani Finance Minister is still reluctant to accept the harsh reality that the country is inching towards serious balance of payment crisis. The country’s liquid foreign exchanges are on the persistent decline. During the week ending 20th October 2017, SBP’s reserves decreased by US$216 million to US$13,942 million due to payments on account of external debt servicing. The total liquid reserves held by the country declined to US$19,902.1 million during the week under review.The break-up of the foreign reserves position was: reserves held by the State Bank of Pakistan were reported at US$13,941.6 million and reserves held by commercial banks amounted to US$ 5,960.5 million. While declining reserves is a serious concern, the bigger issue is that lenders seem least interested in discussing the issue with the incumbent finance minister.

Pakistan’s largest exploration and production company, OGDC has released its first quarter (1QFY18), posting profit after tax of Rs17.01billion (EPS: Rs3.95), higher by 16.0%YoY as compared to 1QFY17. The earnings improved by 9%YoY increase in oil production coupled with 17%YoY rise in international oil prices. Oil production went up significantly from Nashpa (+28%YoY) while tie-in of production from Dars, Dars Deep and TAY fields also aided in higher output. Absence of dry wells during the quarter kept exploration costs minimal, albeit consistent emphasis on prospecting and seismic data collection. Other income was down 39%YoY as compared to the corresponding quarter last year, as the Company placed funds received on account of matured PIBs in low yield TDRs. Along with the approval of financial results, the Board of Directors also approved payment of an interim dividend of Rs1.75/share. It is pertinent to mention here that the company in its annual conference call highlighted the possibility of a higher payout to disburse some of the funds received on account of matured PIBs.

Pakistan’s largest private power generation company, HUBC is scheduled to release its 1QFY18 financial results on Monday, 30th October 2017. According to the forecast prepared by country’ largest brokerage house, AKD Securities, the Company is likely to post profit after tax of Rs2.98 billion (EPS: Rs2.57) as compared to net profit of against Rs2.47billion (EPS: Rs2.13) for 1QFY17. The expected increase in earnings can be attributed to lower O&M costs as the company undertook overhaul of one unit of base plant and maintenance of Narowal plant in 1QFY17 while notifying in the annual report that 72% engines of Narowal plant had been overhauled in FY17.

Payables to PSO are expected to surge this quarter by Rs7 billion, while the company paid Rs0.7 billion on account of LPS to the oil marketing company, Both the events are expected to raise financial costs of HUBC by 13%YoY. The result is anticipated to be accompanied by an interim dividend of Rs1.5/share.

PPL also announced its 1QFY18 results, wherein the company’s net earnings have grown by 120%YoY to Rs12.68 billion (EPS: Rs6.43), as compared to net profit of Rs5.75 billion (EPS: Rs2.92) for 1QFY17. Improved earnings are a function of higher gross profits of Rs19.59 billion as compared to Rs10.06 billion for 1QFY17. The highlights were: 1) net sales increased by 71%YoY mainly due to revised Sui gas pricing, 2) surge in international oil prices by 17%YoY, and 3) a 20%YoY growth in oil production offsetting the slight dip in gas production over the year. Royalty and levy payments also shot up by 118%YoY as it incorporates 10% additional levy to Balochistan government on account of Sui lease extension bonus. On a surprising note, exploration expenses were recorded at Rs1.7 billion, which we assume incorporates the reversal of AROL’s commitments previously recorded by PPL in Naushehro Firoz, Kotri North, and Gambat South blocks.

Analysts believe that after the reversal of exploration expenses, remaining amount out of US$54.8 million received from AROL reflects capitalized costs with regards to PPE and field development in Gambat South. In case a certain working interest owner (AROL in this case) does not fulfill its liabilities with regards to the block’s work commitments for some stipulated time (90 days as per the PCA), the operator (PPL in this case) has to arrange for the necessary finances. We believe that since AROL did not fulfill its commitments, PPL and GHPL arranged for the finances and having received a sum of US$54.8 million, PPL has reversed its exploration expense recorded previously.

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