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Markets stay under pressure; imf bailout warning impairs confidence

During the week ended 3rd August 2018, the benchmark Index of Pakistan Stock Exchange (PSX) mostly remained under pressure. The domestic post-election positivity was overshadowed by a statement of US State Secretary Mike Pompeo raising concerns regarding IMF program. Further bearish spell was caused by dismal banking sector results and market closed at 42,505 points, down 0.7%WoW.

Average daily traded volume during the week increased to 283.7million shares, up almost 21%WoW. The top volume leaders included: DSIL, EPCL, WTL, PIBTL and PAEL. The news impacting the market during the week included: 1) Chinese influx of US$2.0billion and extension of US$4.5billion oil financing facility by IDA, easing pressure on US$/PKR parity where local currency appreciated by 3.6% during the week in the interbank, 2)FX reserves held by the central bank surged to US$10.3billion, while reserves held by the commercial bank remained stable at US$6.7billion, 3) headline inflation surged to forty-five months high at 5.8%YoY, primarily driven by higher oil, food and housing rent, 4) during multi-party conference, leaders of various political parties expressed grievances over the election results, but voiced their intention to form the government and 5) NEPRA ordered reduction in power tariffs for consumers of K-Electric. Performance leaders during the week included: ASTL, KAPCO, NBP, MLCF and FFBL.

On the flipside, laggards were: UBL, HBL, CHCC, MCB and PIOC. Foreigners remained net seller with an outflow of US$14.62 million as compared to net outflow of US$0.36 million a week ago. Developments on the political front are likely to remain a focal point, as formalities of general election wrap up (appointment of reserved members and issuance of notifications) providing clarity regarding the formation of government. Moreover, market will continue to take direction from the ongoing results season where major companies scheduled to announce their financial results include EFERT, ABL, GSKCH and LOTCHEM.

FFC posted unconsolidated profit after tax of Rs2.45billion (EPS: Rs1.93) for 2QCY18 as compared to net profit of Rs1.62billion (EPS: Rs1.28) for 2QCY17, an increase of 51%YoY. The increase in 2QCY18 earnings resulted from: 1) a 20%YoY growth in topline on account of higher urea prices and healthy urea and DAP offtake of 653,000 tons and 81,000 tons respectively during the period, 2) gross margin improved on account of better product prices, 3) a decline of 42%YoY in finance cost on account of improved cash flow and 4) lower effective tax rate of 43% in 2QCY18 as against 46% for 2QCY17. On a cumulative basis, 1HCY18 earnings rose to Rs4.72billion (EPS: Rs3.71) as compared to Rs3.82billion (EPS: Rs3.00) for 1HCY17, up 24%YoY. Alongwith the result, the company also announced an interim cash dividend of Rs1.40/sharetaking 1HCY18 total payout to Rs3.15/share.


FFBL posted an unconsolidated net loss of Rs544million (LPS: Rs0.58) for 2QCY18 as compared to a net loss of R249million (LPS: Rs0.27) for 2QCY17. The result was below market expectations owing to higher cost of production. On a cumulative basis, 1HCY18 net loss surged to Rs994million (LPS: Rs1.06) as compared to a net loss of Rs384million (LPS: Rs0.41) reported for 1HCY17.Key highlights of 2QCY18 results were: 1) a 14%YoY increase in topline to Rs8.65billion caused by 5%YoY growth urea offtake along with higher product prices, 2) relatively stable gross margin at 7.8%, due to increase in urea and DAP prices, 3) significant jump in other operating expenses to Rs293million and 4) a 12%YoY increase in financial cost on account of higher debt structure. According to a notice send to PSX, FFBL announced that it has been approached by a potential acquirer for proposed acquisition of up to 51% voting stake in Fauji Foods limited (FFL), where FFBL currently hold 51% (227million shares) of FFL at an average cost of Rs18/share.

According to a report by AKD Securities, its cement universe is about to begin releasing financial results and expected to post combined profit after tax of Rs8.90billion for 4QFY18 as compared to Rs7.64billion for 4QFY17 – an increase of 16%YoY. This growth is a function of lower effective tax rate of 10% as compared to 30% in 4QFY17 (booking of tax credits on DGKC and CHCC new plants), on a pre-tax basis profits are expected to go down by 10%YoY. In full year FY18, AKD cement universe pre-tax earnings are expected to decline by 20%YoY owing to significant fall in gross margins to 30.4% (average coal prices increase was 20%YoY coupled with 4%YoY decline in local cement prices – FED adjusted), despite 14%YoY increase in total cement dispatches to 45.89million tons during FY18.

The short term outlook for the sector seems positive in response to recent currency recovery.The brokerage house expects its cement universe to post combined net profit of Rs9.91 billion for the quarter and Rs40.31 billion for the FY18 as compared to Rs10.94 billion and Rs50.36billion for the quarter and the year, posting earnings decline of 10% for the quarter and 20% for the year respectively.

On a quarterly basis, AKD cement universe after-tax earnings are expected to rise by 16%YoY during 4QFY18 owing to lower effective tax rate of 10% in 4QFY18 as compared to 30% for 4QFY17 (being a function of 69%YoY decline in tax expense due to expected recording of tax credits on DGKC & CHCC new plants).

Re-emergence of invertors’ confidence with smooth elections process along with surprising PKR appreciation against US$, has led to strong rally in cement sector, where AKD cement universe has shown robust recovery. While short term outlook for sector seems positive in response to recent currency recovery, staggered build-up in selected names is recommended. The brokerage house has already incorporated much of these adverse developments with regards currency depreciation and higher coal prices.

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