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PSE index springs back sharply on election outcome; investors will keep wait and see policy

Bouncing back from a tumultuous pre-election run-up, the benchmark Index of Pakistan Stock Exchange (PSX) rebounded sharply. During the week ended 27th July, 2018 the Index rose to 42,786 points, up 3.8%WoW. Election proceedings dominated investors’ sentiment, guiding stock price escalations as polling formalities were completed with limited violence and sporadic occurrences of documented discrepancies.

Average traded volumes during the week surged more than 7% WoW to about 235 million shares/day. The volume leaders were: PIOC, BOP, KEL, PIBTL and LOTCHEM. Major news that influenced the market during the week included: 1) citing a slew of economic challenges, MNA-elect Asad Umar stated that all options, including approaching the IMF were on the table with urgency of reforms expected to be at the forefront of a PTI-led government, 2) the country’s total liquid foreign exchange reserves increased by US$46 million to US$15.73 billion, as against this reserves held by State Bank of Pakistan decreased by US$53million to US$9.01billion, 3) SNGPL reportedly refused to import Re-Gasified Liquefied Natural Gas until the Power Division commits to off-take on firm take-and-pay basis, 4) June 2018 export numbers released by the PBS show a 2%YoY decline in textile exports as GoP efforts to boost exports hit roadblocks and 5) the GoP released Rs32billion in cash support for promoting exports of textile and clothing under the special prime minister package aimed at accelerating exports of value added goods.

The major gainers of the week were: PIOC, ASTL, GWLC, FCCL and EFOODS. On the flipside, laggards were PSMC and HASCOL. Additionally, foreigners remained net seller of US$0.36million during the week as compared to net outflow of US$22.11million a week ago. As the process of post-election flash-points gains steam, market dynamics are likely to face uncertainty. Further down the line, as the PTI-led government firms up its cabinet, legislative priorities and policy imperatives, investors are likely to follow wait and see policy on perceived outcomes for sectors, capital markets and the domestic investment environment.

Commencing next week, fertilizer manufacturers are scheduled to declare their 2QCY18/1HCY18 financial results, the likely first being FFBL. According to AKD Securities, its fertilizer universe is expected to post aggregate profit after tax of Rs10.38 billion for 2QCY18 as compared to R5.84 million for 2QCY17 (up 92%) and Rs19.81 billion for 1HCY18 as compared to Rs14.53 billion for 1HCY17 (up 37%). Higher earnings are expected to come from significant jump in gross margins, despite flattish growth in total fertilizer offtake.

 

With exciting 2QCY18 results coupled with decent payouts, the brokerage house anticipates the sector to remain in limelight on the back of: 1) low inventory levels, 2) inevitable urea import at current elevated cost of imported fertilizers and 3) continuous upward trend in local product prices. After posting decent results in 1QCY18, the brokerage house expects that its universe, despite flattish growth in total fertilizer offtake and decline in financial charges on account of swift debt deleveraging and restructuring, would be able to post better results. EFERT and FATIMA are likely to emerge out as clear winners due to earnings growth. Along with the financial results, manufacturers are expected to announce impressive interim cash dividend. With exciting 2QCY18 results coupled with decent payouts, the sector is anticipated to remain in limelight on the back of: 1) low inventory levels (high demand against low production), 2) inevitable urea import at current elevated cost of imported fertilizers owing to higher international prices along with recent bouts of PKR depreciation against US$ and 3) upward trend in local product prices. Additionally, in case of urea imports in CY18, the pricing power of urea manufacturers is likely to improve further, keeping in view the prevailing high discount between local and international prices, thus further improving margins.

Pak Suzuki Motor Company (PSMC) reported its 2QCY18 financial results posting profit after tax of Rs394million (EPS: Rs4.78), down 43% YoY. The earnings are below expectations as the margin squeeze was higher than anticipated. Net sales of the company grew by 35%YoY to Rs30.1billion due to twin effect of price increases as well as volumetric growth of 25.5% YoY. Volume wise, Wagon-R led the growth, rising by 66% YoY, followed by Swift (up 37% YoY) and Ravi (up 33% YoY). Volumetric growth remained strong, reaching 37,621 units, as demand for smaller passenger cars from ride hailing services continued.

Cost of sales grew 39% YoY, outpacing the robust revenue growth, leading to significant gross margin erosion. Gross profit declined by 9%YoY due to margin shrinking that can be attributed to higher raw material costs (steel prices up by 22% YoY) as well as PKR depreciation (PKR down by 15% from December 2017 to June 2018) combined with the inability of the company to effectively pass on the impact to customers.

Earnings were further dragged down due to 24% YoY higher administrative cost as well as an effective tax rate of 46% due to incorporation of super-tax. For the 1HCY18, earning growth declined by 35% YoY despite 22% YoY volumetric growth, as gross margins fell due to aforesaid factors to 7.0% in 1HCY18 as compared to 10.3% in 1HCY17. Analysts anticipate further unfavorable movement in exchange rate and commodity prices, 2) regulatory changes, 3) increased competition from existing and new players and 4) disruptions in operations of principal company, as key risks for the company.

Production of petroleum products witnessed 13.53% increase during the fiscal year 2017-18 as compared to the corresponding period of the last year. The products that contributed in positive growth included motor gasoline posting increase in output by18.31%, while production of jet fuel oil increased by meager 0.77%. The production of high speed diesel surged by 14.72%, light diesel oil posted an increase of 28.59%. The output of furnace oil witnessed growth of 9.33%. The petroleum products that witnessed decline in production included kerosene oil, down by 14.69% and lubricating oil down by 10.74%.

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