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Despite uncertainty emanating from international developments over FATF inclusion, sector-specific developments and legal impediments during the week ended March 2, 2018, the benchmark index of Pakistan Stock Exchange (PSX) gained 473 points to close the week at 43,740 points. Cement sector remained in the limelight, with major activity witnessed in the sector on the back of industry-wide price hike, enhancing profitability of domestic players. Volume leaders during the week were: DSL, AGL, TRG, ANL and PAEL.

Key news flows impacting the market during the week included: 1) Foreign office confirming Pakistan’s inclusion on the FATF ‘grey list’ from June this year, 2) PML-N electing Shahbaz Sharif as an interim party head following a verdict by the apex court disqualifying Nawaz Sharif to remain party chief, 3) CPI inflation for February 2018 declining to 3.8%YoY on account of seasonal decline in prices of perishable items 4) foreign reserves declining by US$416 million to US$18.34 billion and 5) urea sales rising to 539,000 tons for January 2018, up 33%YoY. Trading activity remained tepid during the week with average daily trading volume resting at declining to 181.15 million shares, a decline of 1.52%WoW.

Performance leaders during the week were: MLCF, PIOC, CHCC, FCCL and DGKC; while laggards included: UBL, PTC, BAFL, NML and MCB. Foreign portfolio investment continued to post outflow of US$11.4 million for the current week against previous week’s outflow of US$2.78 million. With Senate elections scheduled for 3rd March 2018, on the outcome of results, analysts expect clarity, where consolidation in the Upper House of Parliament by the ruling party could further improve external outlook. With no major results in sight for the upcoming week, the market is expected to track movements in the prices of crude oil and other commodities.

The lackluster performance of PSX in February 2018 can be attributed to ongoing political noise. The key developments during the month included: 1) Supreme Court of Pakistan declaring Nawaz Sharif ineligible to continue as party head while dismissing all political actions taken by him since 28th July 2017 after Panama case verdict and 2) inclusion of Pakistan in FATF’s watch-list. These in combination with event based negativity in key sectors and unabated foreign selling (net outflow of more than US$32 million in during the month under review further marred index performance. Result season was in full swing, but failed in creating much excitement as major sectors reported below expectation performance. Performance of the mainboard scrips remained dismal.

Automobiles sales were down on currency devaluation concerns, Cements lost over 6%MoM on subpar earnings performance as higher coal prices restricted margin growth. Legal impediments impacted price performance for Pharmaceuticals and Commercial Banks. Other laggards included Fertilizers, Textiles and Oil & Gas sectors. As part of a global pull-out strategy in the backdrop of a hawkish US Fed rate outlook, foreigners resorted to selling their holdings, concentrated in Commercial banks and Oil & Gas Exploration sectors.

Pakistan Petroleum Limited (PPL) has released its half yearly (1HFY18) financial results posting profit after tax of Rs22.02 billion (EPS: Rs11.17), a growth 86.7%YoY. The highlights include: 1) an increase in top-line by more than 52%YoYdue to 16%YoY rise in international oil prices, 2) re-pricing of Sui field, 90% hike, and 3) a one-off gain (Rs1.1/share) arising from the revision in pricing of certain TAL block fields. According to analysts, the result was below their expectations on account of deviation in exploration expenses at Rs4.27billion (partially set-off by above expectation other income at Rs4.48billion as against Rs2.24billion on the back of exchange gains and overdue on outstanding receivables of AROL. Settlement with AROL amounting to US$54.8million and resulting revocation of AROL’s 10% working interest in Naushahro Feroze block, which can be attributed to abnormal surge in exploration expenses.

On top of all effective tax rate rose to 32.9% for 1HFY18 as compared to 27.9% for the corresponding period of last financial year. Earnings for the second quarter declined by 26.3% to Rs9.35billion (EPS: Rs4.74) as the company booked a one-off gain from TAL block in 1QFY18 amounting to Rs1.1/share. Excluding the one-time impact, top-line remained flattish with significant movement in exploration expenses to Rs3.31billion and substantial increase in other income.

Going forward, PPL is likely to benefit from incremental output flowing from Gambat South fields, while developmental wells at Adhi will open up further upside avenue. However, key risk to the stock performance emanates from the ongoing case regarding windfall levy on crude.

February 2018 volumetric sales of POL declined to 1.46 million tons, down 19%MoM/16%YoY mainly due to weak furnace oil (FO) sales, down 37%MoM/54%YoY, along with this MOGAS/HSD offtake also declined by 11/16%MoM. Cumulative 8MFY18 volumes amounted to 16.4 million tons, softening 3%YoY exhausted by power demand as cumulative FO sales plunged by 20%YoY. Analysts fear that that muted FO sales were a follow through from higher inventory level at IPPs, as regulatory enforcement of storage regulations to IPPs instead of refiners, raising inventory lags in the purchase cycle.

From the point of view of market share, HASCOL continues to surpass peers, closing the month under review with a total volumetric share of 17%, with a 22% share in FO sales.Continuing to crumble, 8MFY18 demand for FO slowed by 20%YoY, while FO sales of APL/PSO tumbled, HASCOL maintained its market shares in this segment. Although maintaining market share in this segment is easier for PSO, as the state owned OMC has long term fuel supply agreements, the ordained decline in generation on the fuel, down 9%YoY to 3,234MW of dependable capacity) has remained unavoidable.

Growth in HASCOL’s volumes remain steady, with MOGAS/HSD offtake for 8MFY18 rising 48/60%YoY continuing to wade out of the low-base. Suffice it to say, HASCOL’s growth remains the most exciting, where the 529,000 tons of increased volumes sold during the period is the highest in the industry, particularly cogent in the backdrop of total industry volume decline. While total industry volumes declined by 539,000 tons YoY during 8MFY18, HASCOL’s continued growth translated to increased market share, signifying positive outcomes from the OMC’s previously completed storage and handling CAPEX.

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