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Stock Review

Buyers shun trade over increase in political, economic uncertainty

The rising political uncertainty with news flows suggesting Pakistan to be added on terrorist financing watch list further dampened investors’ confidence. The benchmark index of Pakistan Stock Exchange (PSX) lost 360 points and closed the week ended 23rd February at 43,267 points. Increasing international oil price along with higher than expected reserves size for Jhandail field kept index heavy Oil & Gas sector in limelight. However, concerns about Senate elections allayed fears of postponement of the general elections. Key news flows impacting the market during the week included: 1) current account deficit widened to US$9.156billion – up 48%YoY – reflecting mounting pressure of trade deficit up by 24% YoY, 2) European Parliament’s Committee on International Trade (CIT) passed the GSP+ scheme, enabling Pakistan to enjoy preferential duties on exports for the next 2 years, 3) Pakistan’s foreign exchange reserves fell to US$18.829 billion, with the reserves held by central bank fell by US$130million due to external debt servicing, 4) BOI and EDB both agreed to recommend Ghandhara Nissan investment plan under the new auto policy.

Average daily traded volume declined by 7.46%WoW to about 184 million shares, with volume leaders being ANL, DSL, TRG, LOTCHEM and FFL. Gainers for the week were: POL, KAPCO, LUCK, FATIMA and EFOODS; while the laggards included: PIOC, MLCF, FCCL, NBP and KEL. Foreigners continued to off-load their holding, selling stocks worth US$2.78million during the week.

Analysts expect the market to take clue from developments about upcoming Senate elections (scheduled on 3rd of March, 2) easing political uncertainties, 3) FTSE rebalancing scheduled on 28th February and 4) clarity on inclusion of Pakistan in FATF grey list. Additionally, key result announcements for next week include GWLC, PPL, NCL, BAFL, SEARL, & SNGP, which may keep the respective scrips in limelight.

Fiscal deficit for 1HFY18 was reported at Rs796.3billion (2.2% of GDP), reflecting a slowdown from 1HFY17 (2.5% of GDP), while current account for January 2018 surged to US$1.62billion as compared to US$1.256billion in December 2017, up 28.7%MoM/4.0 YoY. As regards fiscal deficit, the slowdown is largely a function of higher revenue collection during the period (revenue collection was recorded at Rs2,384billion – up 20%YoY, while total expenditure scaled up by 16%YoY to Rs3,16billon for 1HFY18. Growth in development expenditure remained healthy at 23%YoY beating 14%YoY growth in current expenditure, supporting the ongoing economic growth momentum. On the other hand, the hike in current account deficit can be primarily attributable to increasing trade deficit reported at US$2.76billion for January 2018 as compared toUS$2.29billion, up 20.6%MoM/9.8%YoY. While imports grew to on US$4.87billion, up 13.2% MoM/12.6%YoY, while export growth at 4.8%MoM/16.5%YoY lagged behind. Remittances, recorded at US$1.64billion, down 4.9%MoM further added on to the pressure.

Pakistan’s total exports during January 2018 grew by 11%YoY to US$1.97billion. Category wise, all the key segments witnessed an upward trend, with food exports registering double digit 29.6%YoY growth, while textile exports marginally growing by 2.1%YoY to US$1.08billion. In the textile group, value added exports continued to grow at a steady pace, with segment exports reported at US$821million (+7.1%YoY), while low value added exports declined 11%YoY to US$265million, as the domestic demand for cotton yarn picks up.

 

On a MoM basis, both value and low value added exports went down 2.3%/9.3%MoM, likely on account of end of high demand of Christmas season. On a cumulative basis, 7MFY18 textile exports grew at 6.8%YoY to US$7.72billion as compared to US$7.23billion for 7MFY17. Value added exports were up 9.7%YoY to US$5.66billion while low value added remained flat at US$2.06bn.

Sector experts expect textiles and clothing exports growth to average out at 7.5% in FY18, where recent rupee depreciation coupled with revised export package are expected to drive exports growth.

United Bank (UBL) has posted consolidated profit after tax of Rs26.2billion (EPS: Rs21.39) for CY17 as compared to net profit of Rs27.7billion (EPS: PkR22.70) for CY16, registering a decline of 6% YoY. Along with the result, UBL also announced a higher than expected final dividend of Rs4.0/share taking full year payout to Rs13.0/share. Sequentially, there was 8% QoQ increase in earnings on the back of lower expenses, higher non-interest income and lower tax rate (27% in 4QCY17). Key CY17 result highlights included: 1) flattish net interest income, 2) higher provisioning, 3) decrease in non-interest income, and 4) increase in total expenses. The bank has also decided to raise its capital base by Rs10billion via issuance of additional tier-1 capital subjected to requisite approvals. This will either be done through private placement or a public offer, aiming to strengthen the bank’s CAR. While asset quality has deteriorated, growth in fee income after continuous slowdown, along with capital enhancement measures are encouraging positives.

Hub Power Company (HUBC) announced its 1HFY18 results reporting net income of Rs5.34billion (EPS: Rs4.61), up 3.6%YoY. The result are above expectations as it is believedthat the Company did not undertake 36,000 running hours’ maintenance of any of the Narowal engines thereby reducing operating costs and lifting gross margins to 16.14%. The Company also announced an interim dividend of Rs1.5/share in-line with its payout policy. Revenue during the period took a quantum leap of 12.6%YoY to Rs54.29billion on account of higher fuel prices while finance cost also rose by 4.6%YoY as circular debt payments of the power sector reach alarming levels once again. Sequentially, profitability went up 19.2%QoQ due to 1) increase in gross profit to Rs4.59billion, 2) controlled expenses and 3) lower effective tax rate. The plant operated on high load factor in December 2017.

Hot Addu Power Company (KAPCO) also announced its 1HFY18 results posting profit after tax of Rs4.40billion (EPS: Rs4.99), in-line with market expectations. Along with the results, the Company also announced an interim dividend of Rs4.35/share. Gross profit of the company jumped by 11.6%YoY to Rs6.65billion as load factor increased to 58% as against 48.5% in 1HFY17. Moreover, other income also increased to Rs2.98billion (up 29.5%YoY) due to higher receivables outstanding with the power purchaser while finance cost moved up to Rs3.09billion on the back of heavy short term borrowings. Enjoyingmulti-fuel fired benefits, the plant is expected to operate mostly on RLNG going forward. While this would enhance its gross margins, higher outstanding dues are likely to continue until resolution of circular debt keeping finance cost on the higher side. With PPA expiring in FY21 and no significant investment required in the plant, analysts believe the Company to continue its payout policy.

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