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Benchmark index descends, upcoming positive news may enhance investors’ confidence

The benchmark Index of Pakistan Stock Exchange declined by 1.99%WoW for the week ended 31st August 2018 and closed at 41,742 points. Fearing gas price hike and its spillover effects on industries, investors’ sentiments turned negative even before the ECC meeting. An inconclusive outcome of the meeting with regards to fertilizer inventories, circular debt clearance and postponement of gas price hike led to further selling in the mainboard scrips. However, average daily trading volume increased by almost 20%WoW to 177.48 million shares. The volume leaders included EPCL, NRSL, AGL, STPL and UNITY.

Some of the news driving the market were: 1) World Bank delegation emphasizing that Pakistan needs to focus on private sector policies for a longer time horizon to encourage private investors, while committing an indicative financing of US$11 billion, 2) Moody’s identifying Pakistan as a country most vulnerable to US$ appreciation, 3) Pakistan’s budget deficit widening to Rs2.26 trillion, 4) Federal Cabinet setting up six committees to introduce reforms in different sectors and to carve out a new province from Punjab and 5) recent data from EAD showing that Pakistan has received US$439 million loans from various international lenders in July 2018.

Performance leaders included: HASCOL (+3.16%WoW), 2) FFBL (+2.88%WoW), 3) NBP (+2.29%WoW) and 4) BAFL (+1.82%WoW); while laggards included: MLCF, CHCC, PIOC, LUCK and FFC.

Foreigners continued to offload their stake in domestic equities with net outflow of US$10.0 million during the week under review. Policy focus of newly installed government is the most important determinant of the market direction. Investors await swift and prudent decisions on key areas i.e. gas pricing and circular debt. Moreover, a visit from US delegation led by Secretary of the State Mike Pompeo is of strategic importance, where positive developments could improve investors’ confidence.

In a meeting of the Board of Directors of National Bank of Pakistan (NBP) held on August 30, 2018 annual accounts for the first half of 2018 were approved. The Bank has posted profit after tax of Rs17.16 billion as compared to Rs13.61 billion for the corresponding period of 2017, up by 26%. The profit after tax profit for the period amounted was reported at Rs12.49 billion(EPS: Rs5.87) as compared to Rs8.55 billion (EPS: Rs4.02) for the corresponding period of 2017, up by 46%.

 

During the period under review, Bank’s net interest/mark-up income increased to Rs31.14 billion from Rs26.05 billion, posting an increase of 15.7%. This was achieved through maintaining an efficient asset-mix of high-yield loans and investments. The Bank has recently introduced changes in its operating structure for better service quality in order to enhance customer loyalty. However, dividend income and capital gains decreased due to the lackluster performance of the stock market. Similarly non mark-up/interest income for the period decreased marginally to Rs15.25 billion from Rs15.68 billion. The balance sheet size of the Bank grew by more than 12% to Rs2.66 trillion. The increase was supported by 10.6% increase inBank’s deposits to 1910.67 billion. The net advances also increased to Rs790.4 billion, showing an increase of 6.8%.

Adamjee Insurance Company Limited (AICL) has posted earnings per share (EPS) of Rs1.10 for the second quarter of 2018 (2Q2018), up marginally 3% YoY as compared to corresponding period of last year, mainly on back of higher taxation. Effective tax rate during 2Q2018 rose to 48% as compared to 33% for 2Q2017. This is primarily due to super tax paid by the company during the period. Lower tax rate during 2Q2017 was also due to tax benefits taken by the company. Net Premium of AICL increased by 2% YoY to Rs6.5billion, but was below market expectations. Net claims paid by the Company declined by 5% YoY to Rs3.4billion which supported underwriting business of the company during the quarter under review. Due to lower claims and marginal increase in expenses, underwriting income of the company improved to Rs191million during the period under review. Investment income of the Company was up 17% YoY to Rs538million in 2Q2018 that supported earnings of the company.

For 1H2018, EPS of AICL was almost flat at Rs3.00. Underwriting income improved by 55% during 1H2018, however, lower investment income kept bottom-line growth in check. Investment income was down 4% YoY due to lower income from equity investments. Key risks for the stock include 1) slowdown in insurance business, 2) fall in equity markets and 3) deterioration of Pakistan’s macroeconomic indicators.

The latest data shows that country’s export sector is facing the adverse impact of seasonal slowdown and softening of commodity prices in international markets. Exports during July 2018 posted marginal increase of 1.2%YoY to US$1.646billion. Amongst the major categories, food exports declined by 16.3%MoM to US$266million, while textile exports went down both on sequential and YoY basis, with group exports slipping to US$1,002million, down 16.1%MoM/0.5%YoY).

In the textile group, double digit sequential decline in both value (16.0%MoM) and low value added (16.4%MoM) exports was primarily attributable to softening final product prices and seasonal slowdown. On a cumulative basis, 7MCY18 textile exports increased by 8.1%YoY to US$7.90billion as compared to US$7.31billion for 7MCY17. The value added exports increased by 7.8%YoY to US$5.76billion. Low value added exports, which remained largely sanguine in the 2HCY17, strongly recovered in 1HCY18 reaching US$2.13billion, up 9.7%YoY in 7MCY18. Moving forward, sector experts expect textile sector to benefit from flexible exchange rate regime and continued government support in the form of export incentives.

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