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Market ends week down, but post nab verdict will likely bring relief rally

On Friday, the last day of the weekend 6th July 2018, the accountability court announced its verdict imposing severe punishments and hefty fines on Nawaz Sharif (elected prime minister of Pakistan for the third time) and his family members. Due to high political uncertainty, investors preferred to remain on the sideline. This was evident from average trading volume plunging by more than 39%WoW to less than 111 million shares. The benchmark Index of Pakistan Stock Exchange (PSX) closed the week at 40,284 points, down 3.88% WoW.

Concentrated interest was witnessed in K-Electric (KEL) as the regulator announced revised tariff, albeit giving a meager PkR0.047/KwH raise (under O&M expenses) over the previous one. As a result the scrip emerged as the top volume leader with 79.37million shares exchanging hands. The list of volume leaders also included PAEL, UNITY, BOP and TRG. The key news impacting the market included: 1) extension in tax amnesty scheme till 31st July 2018, with latest reports claiming collection of PkR100billion, 2) China reportedly lending US$ one billion to Pakistan, boosting the reserves held by State Bank of Pakistan, 3) the Government of Pakistan(GoP) raising MS and HSD prices significantly, 4) Fitch Ratings warning GoP authorities about the deteriorating economic situation, specifically foreign exchange reserves and revising GDP growth target downward for FY19 to 5.0% from 5.5% and 5) inflation for June 2018 rising to 5.2%YoY, averaging at 3.92%YoY for FY18. KAPCO remained the only scrip closing the week in green, up 1.21%WoW, while losers included: ASTL, CHCC, MLCF, EFOODS and NML. Foreign selling continued during this past week with outflow of US$8.73million as against US$15.52million a week ago.

Post accountability court’s verdict, reaction from various political factions (most important being PML-N) will be of the prime interest for market participants, especially as general elections draw closer. However, a relief rally cannot be ruled out as discounted valuations could entice investors’ interest post clarity over the said case. Although economic concerns still loom, some of the blue-chip stocks offer good opportunities to accumulate based on strong fundamentals enjoyed by them.

Pakistan’s leading brokerage house, AKD Securities Limited was assigned mandate to act as Consultant to the Initial Public Offering (IPO) of Mughal Manufacturing Modaraba, scheduled for subscription on 11th and 12th July 2018. The brokerage house has informed that keeping in view the current market conditions and looming political uncertainties, the management of Mughal Manufacturing Modaraba has decided to defer its IPO. Mughal Manufacturing Modaraba is a multi-purpose and perpetual Modaraba. It had announced to issue of 10 million Modaraba Certificates at par value of PKR 10 each through (IPO). The total fund size of Modaraba is PKR 250 million of which the sponsors have already subscribed PKR 150 million and remaining PKR 100 million were to be offered to general public. The Modaraba plans to acquire re-rolling mill on Ijarah (operating lease) for a minimum period of ten years for manufacturing and sale of T-Iron. The proceeds from the IPO were to be utilized primarily for meeting raw material and other operational requirements. The Modaraba is backed by one of the largest players in the steel industry, Mughal Iron and Steel Industries Limited.

 

Due to the persistent increase in input costs, one of Pakistan’s leading brokerage house has revised down its earnings estimates of cement manufacturers by an average 18% for FY19 and 14% for FY20 incorporating: 1) spike in international coal prices and 2) sharp currency depreciation to PKR121.5 per US$ in June 2018. The brokerage house has also revised gross margins (GM) estimates downwards for the cement manufacturers. The cement scrips have witnessed erosion in value since May 2017 on the back of pricing indiscipline, particularly for players located in the Southern region, due to substantial increase in coal prices.

Sale of petroleum products in Pakistan posted a decline of 5% YoY to 25 million tons primarily due to the drop in Furnace Oil (FO) sales. This decline came after a lag of five years when the industry posted a decline of 4% in FY12. During FY18, FO sales dropped by 27% to 7million tons, owing to reduced offtake by the power generation companies.

In the recent past the GOP imposed ban on the use of expensive FO for power generation and ample availability of RLNG. The usage of FO resumed post commencement of summers as demand picked up, despite that FO use remained on lower side.

Analysts believe this situation will prevail over going forward as upcoming power plants are based on coal or RLNG which is likely to gradually replace FO use.

Oil sales growth excluding FO was reported at 8% for FY18 as compared to sales growth of 13% for FY17. This was also lower than the last 3-year (FY15-17) average growth of 12%, which analysts believe was an effect of rising pump prices. Petrol and Diesel Prices have risen by 35-40% in FY18 on the back of higher international oil prices. This has started impacting industry’s white oil sales. It is also evident from June oil sales, which were down 12% YoY amid 9% decline in Diesel sales along with lower FO sales. Hascol Petroleum (HASCOL) outperformed the market, posting growth of 28% YoY during FY18. Analysts attribute this impressive performance of HASCOL to higher concentration in Petrol and Diesel sales and expanding storage capacity as well as retail network.

Pakistan State Oil (PSO) and Shell Pakistan (SHELL) remained underperformers during the year. PSO, the biggest stakeholder in FO market posted sales decline of 16%. On the other hand, SHELL witnessed considerable decline in its sales.

Going forward, rising pump prices of petrol and diesel and lower FO sales along with currency devaluation would be some of the key challenges to be faced by the industry. However, inventory gains and revision in OMC margins could offer some respite.

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