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Politics and senate chairman election Mar index performance, range bound to persist

The bizarre politics and developments surrounding Senate Chairman Election marred performance of Pakistan Stock Exchange (PSX) during the week ended 9th March 2018. Statements of key international lenders (International Monetary Fund and Standard Chartered Bank) raising concerns over macroeconomic stability of the country, further dampened investors’ sentiments. The market closed at 43,011 points, posting a decline of 1.67%WoW.

Trading activity at the bourse remained weak as daily average trading volume plunged to around 152 million shares, down 16.07%WoW). Key news flow impacting the market during the week included: 1) cement sector registering 11%YoY increase in dispatches during February 2018, taking 8MFY18 offtake to 30.10million tons, up 14%YoY, 2) Supreme Court temporarily allowing the federal government to collect recently imposed regulatory duty until its final decision, previously halted for a brief period by Sindh High Court, 3) ECC approving a plan to obtain Rs80billion loan to retire part of the longstanding power sector’s circular debt and 4) foreign reserves falling to US$18.33billion, posting a decline of US$84million WoW during the week ended 2nd March 2018.

Major gainers for the week were: CHCC, EFOODS, FFC and HASCOL, while laggards included: BAFL, ASTL and PSMC. Foreigners continued to offload equity stakes, though of lesser magnitude) during the week amounting to US$3.87million as against a net outflow of US$11.38million a week earlier.

Analysts expect the market to remain range bound until clarity on political front. Additionally, news flows regarding upcoming budget can trigger sector-specific activity.

The IMF recently concluded its discussions with Pakistan, adopting a cautious tone on the country’s ability to sustain recent macroeconomic gains. The Fund also highlighted: 1) external and fiscal imbalances, 2) pressures on foreign exchange reserves and 3) debt sustainability as key risks to the sustainability of Pakistan’s growth. The fund expressed apprehension on current account deficit rising to nearly 5% of GDP in FY18 as compared to around 4% of GDP for FY17 on account of fiscal deterioration during the last financial year, monetary policy and rising CPEC related imports. The Fund advised Pakistan to focus on near term policies including: 1) greater exchange rate flexibility, 2) monetary tightening and 3) phasing out administrative measures aimed at supporting Balance of Payment. The Fund also warned that in the absence of structural reforms to enhance revenue and efforts to contain current expenditure slippages, fiscal deficit may rise to 5.5% of GDP as against the GoP’s target of 4.1%.

The Fund also highlighted concerns on debt sustainability and the need for caution against new external liabilities in light of significant decline in foreign exchange reserves. On the positive side, the Fund expressedoptimismon Pakistan’s growth momentum due to improved energy supplies, CPEC related investments, strong consumption and recovery in agriculture sector.

The flow of remittances into Pakistan remittance improved slightly during 7MFY18 to US$11.38billion from US$10.99billion during 7MFY17, up 3.5%YoY. This was primarily attributable to 15.4%YoYgrowth from non-GCC countries, which more than offset the drag from GCC countries down 3.3%YoY. Remittances from UK and USA contributed recorded high during the period under review. That said, challenging labor market conditions and weak economic activity in GCC hampered growth in overall remittances. Going forward, remittances are expected to remain under pressure on account of recent fiscal consolidation in GCC countries and analysts forecast the inflows to remain below US$20 billion during FY18. This is likely to take a toll on current account deficit that is already under pressure due to the expanding trade deficit. The drawdown in foreign exchange reserves is likely to wipe out US$2.3 billion over the last 3 months.

In a latest notice to the exchange, ASTL has announced its BMR plan SITE plant, which apart from cost optimization would enhance the plant capacity by 95,000 tons. This activity would cost around Rs2billion, which the Company intends to finance through debt/equity mix of 80:20. The planned BMR activity requires closure of the plant for a period of ten months (June 2019 to April 2020). ASTL’s lackluster price performance can be attributed to the delay in materialization of expansion project. With Dhabeji plant scheduled to start commercial production in March 2018, investors’ concerns regarding the same should potentially subside, leading to price performance.

Pakistan Petroleum Limited (PPL) has announced its half yearly financial results, posting profit after tax of slightly more than Rs22 billion (EPS: Rs11.17), up by 86.7%YoY as compared to the corresponding period last year. An increase of over 52%YoY in the top-line was provided by: 1) a hike of 16%YoY in international oil prices, 2) re-pricing of Sui field to almost double and 3) a one-off gain arising from the revision in pricing of certain TAL block fields. The result was below market expectations on account of exploration expenses rising to Rs4.27 billion that were partially off-set by above expectation other income of Rs4.48 billion from Rs2.24 billion on the back of exchange gains and overdue on outstanding receivables of AROL).

Settlement with AROL amounting to US$54.8 million and resultant revocation of AROL’s 10% working interest in Naushehro Firoze block can be termed the likely reason behind the abnormal surge in exploration expenses. On top of that, effective tax rate rose to 32.9% for 1HFY18 as against 27.9% for 1HFY17.

On a quarterly basis, earnings dropped by 26.3% to Rs9.35 billion (EPS: Rs4.74) as the Company booked a one-off gain during 1QFY18. Excluding the one-time impact, top-line remained flattish with significant increase in exploration expenses and hike in other income.Going forward, the company is likely to benefit from incremental output flowing from Gambat South fields, while developmental wells at Adhi will open up further upside avenue.

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