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Lackluster persists, imminent Govt and Eid-Ul Azha can guide investors

During the week ended 10th August 2018, trading at Pakistan Stock Exchange (PSX) remained lackluster and the benchmark Index closed at 42,842 points, up 0.7%WoW. Daily trading volume remained largely inconsistent with mid-earnings season activity receding 26.6%WoW to slightly more than 208 million.

Key news flow driving market sentiments included: 1) Pakistan expressed plan to borrow more than US$4 billion from the Saudi-backed Islamic Development Bank (IDB) as part of its attempts to boost foreign exchange reserves, 2) caretaker prime minister Justice Nasir-ul-Mulk formally recommended 13th August 2018 (Monday) for the first session of the National Assembly in a summary sent to the President, 3) A bipartisan group of 16 US senators urged the Trump administration to block the IMF from bailing out countries that have obtained loans from China under its infrastructure development plan mentioning Pakistan among countries that have accepted billions of dollars in loans from China and 4) Asad Umar, the likely finance minister stated to separate economic matters from politics, vowing on Tuesday to give administrative independence to key government institutions and public sector enterprises, through the formation of a sovereign wealth fund, in a bid to turn around their fortune.

Major gainers of the week at PSX included: INDU, MLCF, PIOC, and LUCK, whereas laggards were: PSMC, HASCOL, NBP and POL. Volume leaders at the bourse were: LOTHCEM, PAEL, EPCL and FCCL. Earnings are expected to continue driving sentiment as Index blue chips PSO, ENGRO, and APL announce results. Additionally, the shorter trading week (off on Tuesday due to Independence Day) in the run-up to Eid-ul-Azha may lift volumes, raising individual investors’ participation in retail favorites. Commencement of National Assembly and provincial legislatures, coupled with formation of government at the center are likely to drive sentiments of investors.

The total liquid foreign exchange reserves held by the country were reported at US$17,005 billion on 3rd August 2018. The break-up of the foreign reserves position indicated that the reserves held by State Bank of Pakistan amounted US$10,369.1 million, whereas net foreign reserves held by commercial banks were US$6,635.9 million. During the week under review reserves held by SBP posted a paltry increase of US$19 million. Remittances continue to be one of the major sources in containing the balance of payment crisis. Overseas Pakistani workers remitted US $ 1929.76 million in the first month of FY19 as compared to US$ 1541.67 million received during the same period in the preceding year. This was 21.03% more than June 2018 and 25.17% higher as compared to July 2017.

The country wise details for the month of July 2018 show that significant inflows from Saudi Arabia (US$437.48 million), UAE (US$437.48 million), USA (US$280.34 million), UK (US$277.51 million), GCC countries including Bahrain, Kuwait, Qatar and Oman (US$199.31 million) and EU countries (US$64.90 million). Remittances received during July 2018 from Malaysia, Norway, Switzerland, Australia, Canada, Japan and other countries increased to US$236.80 million from US$161.22 million received in July 2017.

 

Amongst mounting set of dampeners for the OMCs, volumetric growth remains hinged on retail fuel sales. The analysis of quarterly sales volumes for HSD and MOGAS matched with increase in retail outlets during the quarter hinting towards future growth. For 2QCY18, the strong retail network growth came from HASCOL, PSO and APL with QoQ additions of 47, 18, 11 outlets respectively, whilst SHEL continued to contain its retail footprint. Average sales per outlet for listed OMCs exceeded 673,000 liters posting growth of 6.1%QoQ but remaining flat YoY, signifying the limited impact of CNG and slowing discretionary demand for POL products. PSO’s focus on retail operations seem to be paying off, as the state owned OMC grew its retail footprint, 18 outlets added during the quarter under review. This kept sales per outlet on upward trajectory.

Engro Fertilizers (EFERT) announced its 2Q2018 financial results, posting EPS growth of 31% YoY to Rs2.40/share, above the market expectations. Earnings were higher mainly on the back of lower than anticipated effective tax rate of 33%. This was also lower than the historical rate of 42% and 52% for2Q2017 and 2Q2016 respectively. In line with expectations, the Company’s urea gross margins were reported at 35% due to: 1) rupee devaluation as gas sales to the company is US$ denominated and 2) closure of EnVen for maintenance that increased weighted average cost of gas. Company recorded 33% YoY growth in its sales revenue due to increase in urea and DAP price by 10% and 20% YoY respectively. While, selling and distribution cost went down by 14% YoY due to lower handling cost. Financial cost during the quarter under review went down by 42% YoY to Rs362million as the company managed to retire its short term borrowings by utilizing surplus cash, arising out of accrual of GIDC. Other income went down by 75% YoY to Rs509million as the company recorded subsidy on urea for half of the quarter as prices of urea were increased in May 2018. Further, absence of cash subsidy on DAP is also another reason behind lower other income. In the days to come the company is likely to faces the following threats: 1) PKR depreciation, 2) regulatory control on fertilizer industry, 3) poor crop season and 4) any unfavorable decision related to GIDC.

Previewing FY18 financial performance of selected exploration and production (E&P) companies, AKD Securities foresee combined earnings of OGDC, PPL and POL to rise by 21%YoY to Rs131.5 billion. This will be broadly led by: 1) increase in international price of crude oil and 2) more than 5% depreciation in PKR value against the US$. On company basis, OGDC and PPL are expected to remain ahead of POL in terms of bottom-line growth, each forecasted to post 21%YoY higher earnings per share of Rs18.0 and Rs21.9. On the other hand, adopting a conservative approach, the brokerage house expects POL to declare EPS of Rs46.5 due to TAL block revenue reversal. Along with the result, the brokerage house expects these E&Ps to announce attractive final dividend per share: OGDC (Rs3.00), PPL (Rs6.00) and POL (Rs22.5). POL’s board meeting is scheduled on 15th August 2018, while the other two companies are yet to announce their meeting dates. AKD has stated that 4QFY18 forecast have been prepared on older gas prices for TAL block, as windfall levy case still lingers in the court.

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