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Dull activities persist; budgetary proposals, major results key direction

During the week ended 16th March 2018, activities at Pakistan Stock Exchange remained lackluster amid lack of positive triggers, continued political noise and flattish international oil prices. The benchmark index closed at 43,363, up 0.82%WoW. Average daily traded volumes improved by 15%WoW to 174.86million shares, but trading activity remained skewed towards second tier stocks.

The top volume leaders of the week were LOTCHEM, NRSL, PAEL, FFL and ANL. Key news flow impacting the market included: 1) the country’s exports during February 2018 growing by 16% YoY to US$1.9billion, while imports inching up 8.43%YoY to US$4.8billion, 2) OGRA granting provisional or construction licenses to 15 new oil marketing companies (mostly local) to build storage infrastructure across the country, 3) GoP planning to raise gas prices for generating additional revenue of Rs 18 billion to cover losses of Sui twins with retrospective effect, 4) auto industry sales rising by 15%YoY to 22,654 units during February, 5) GoP considering relief package for stock market and withdrawing super tax/tax on bonus shares in the upcoming budget and 6) HUBC disclosing sale of 172.58million shares of the company to Mega Conglomerate (Pvt.) Limited.

Major gainers of the week were: BAFL, INDU, ASTL, OGDC and PSMC; while laggards included: CHCC, FFC, HASCOL, ENGRO and NML. Foreign participation remained in the negative zone with outflows of US$10.46million as compared to repatriation of US$3.87million in the preceding week. In the absence of any major triggers, market is likely to take its direction from budgetary proposals, where positive proposition in this regard can renew investor’s optimism about the local bourse. Beside this, major results announcements (HBL, PSMC and DAWH), update on windfall levy case and commodity price movements can also trigger stock-specific performance in the coming weeks.

A closer look at the recently released detailed accounts of Pakistan State Oil Company (PSO) for 1HFY18, highlights key hardships faced by the nation’s largest OMC are: 1) increasingly risky debt exposure from both foreign currency loans and concessionary FE-25 loans which came with un-booked receivables, 2) circling near the edge’ circular debt scenario where additions at these levels were last seen before June’14 oil price decline and 3) size, scale and dependability minimize the room for agile operations, which smaller, international-backed OMCs are able to employ. In a nutshell, PSO’s size can be its greatest liability, where the shift to retail fuels and other segments and away from furnace oilenjoying long term fuel supply agreements – requires significant cash, CAPEX and commitment.

Continuing with its double digit growth trend seen in the past seven months, total dispatches during February 2018 registered a healthy growth of 10%YoY to 3.78million tons. The growth in dispatches was led by strong domestic sales of 3.48million tons, where domestic demand grew by 9.4%YoY. Exports on the other hand, turned positive for the first time in FY18 to 0.301million tons during the month, up 18.4%YoY. On a cumulative basis, total dispatches grew by 14.3%YoY in 8MFY18 led by local demand growth of 18.7%YoY. With the elections drawing close, sector experts anticipate total dispatches growth to remain strong for the remainder of the year. This optimistic perception is based on: 1) strong PSDP and provincial spending in 2HFY18 ahead of national polls. The unutilized federal PSDP was 45% at the end of the month and 2) impressive growth in private sector credit related to construction activity, up nearly 32%YoY in January 2018). While risk of pricing indiscipline prevails with each expansion (particularly in the South region), price recovery in the Northern zone was Rs30/bag, offering attractive entry points especially when growth dynamics remain intact.

 

Sale of a total 23,433 units by the industry during February 2018 was 4.4%MoM lower due to the shortest month of the year, whereas an increase of 4.8%YoY number exhibits a robust demand for the domestic OEMs. The share of passenger cars was above 19,000 consecutively for the second month with sales of 19,027 for the month under review. While Tractors sale showed an unexpected, off-season hike, to 6,454 units, LCVs sales remained resilient with 3,627 units. A review of segment-wise sales indicates that the 1000CC and below segment maintained strong demand with sales rising +24.9%/+27.5%YoY for 1000cc/800 and below segment. On a cumulative basis, the 8MFY18 industry sales have been reported at 176,632 units as compared to 159,378 units for the corresponding period last year, up 10.8%YoY. This quantum jump can be attributed to LCVs sales climbing almost 42%YoY during 8MFY18 to 27,970 units. Riding the wave of wider LCV sales growth in a rather thinly crowded segment (which could get crowded further as new entrant’s eye this segment), PSMC emerged as the strongest contender. Backed by the same, cumulative Ravi and Bolan variants took sales to 29,000 units during 8MFY18 as compared to 27,377 units sold during 8MFY16, the peak of the Rozgar sales period.

United Bank (UBL) posted consolidated NPAT of Rs26.2 billion (EPS: Rs21.39) for CY17 as compared to net profit of Rs27.7 billion (EPS: Rs22.70) for CY16, registering a decline of 6%YoY. Key CY17 result highlights included: 1) flattish net interest income, 2) provisioning of Rs2.7billion, up 73%YoY as compared to a year ago, 3) a 3%YoY decline in non-interest income and 4) total expenses rising by 7%YoY. Sequentially, there was 8%QoQ increase in earnings on the back of lower expenses, higher non-interest income and lower tax rate.

Alongside the result, UBL also announced a higher than expected final interim dividend of Rs4.0/share taking total payout to Rs13.0/share. Performance of UBL is likely to remain subdued during CY18 particularly on account of the one-off impact of revision in the bank’s pension obligation after SC raised minimum pension rate to Rs8,000/month. While this regulatory change should lead to earnings declining by 11%YoY, the bank otherwise remains sound. Over the years earnings of the Bank are likely to remain robust due to: 1) continuous expansion of loan book, 2) restructuring of the investment portfolio and 3) steps to arrest fee income decline.

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