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Meeting external woes brings back normalcy; investors see corrective measures

During the week ended 19th October 2018, the benchmark index of Pakistan Stock Exchange (PSX) posted modest recovery, gained 912 points to close at 38,430 level, up 2.4%WoW. The average daily trading volume rose to 199 million shares, up 6%WoW.

Investors gained confidence amid government’s efforts to address the external woes. The government’s intention to rationalize the taxation regime for the capital market has been greeted with a great optimism. Key news flows impacting the market included: 1) Finance Minister announcing that the IMF team would visit Pakistan during first week of November 2018 to negotiate potential bailout, 2) FBR notifying regulatory duty on 570 imported items ranging from electronic items, woven fabrics, ceramic items, paper, bars/rods, and iron products, 3) Federal cabinet delaying hike in consumer power tariff, while announcing uninterrupted gas supply to five zero-rated export sectors, 4) Credit rating agency, Moody’s, terming IMF financing facility as a positive sign for Pakistan, an imperative to address macroeconomic imbalance and restore confidence in the economy, and 5) SBP slashing GDP growth rate 5.00% for FY19 as against GoP’s target of 6.2% considering tough macroeconomic backdrop.

Major gainers were: INDU, DGKC, FCCL, EFOODS and MLCF, while laggards included: MCB, HBL, KAPCO and FFC. Foreigners continued to offload their equity stakes in domestic equities during the week, with a net outflow of US$19.13 million. Near-term market performance hinges upon news flow, particularly foreign exchange inflows. Key events to watch are: 1) PM Imran Khan’s visit to Saudi Arabia scheduled on 23rd October 2018 and 2) IMF team visit to Pakistan on 7th November. Moreover, result season is in full swing with major players in Banking (NBP, ABL, MCB and HBL) Cement (FCCL, BWCL, KOHC, and DGKC) Power (KAPCO and HUBC) and Auto sectors (PSMC and INDU) scheduled to announce their results next week.

Pakistan has a history of lending in Balance of Payment crisis after almost every 5 years, primarily due to shrinking foreign exchange reserves to very low levels. The making of crises is almost similar be it 2008, 2013 or 2018. Drawing parallels, on the external front, financing gap in FY08 grew to US$10.23 billion (6.0% of GDP) with current account deficit exceeding 8%, import cover reducing to one month and PkR depreciating by 22.5%. Current situation appears to be the same with gross funding requirement rising to US$20.4 billion (6.5% of GDP), current account deficit at 5.8% and import cover of 2 months.

Historically, periods of commodity price shocks and demand pressures emanating from capacity expansions have been the primary reason for widening current account deficit. FY08 witnessed trade deficit jumping to 8.7% of GDP on account of higher oil and food import bills while FY18 has been much the same with trade deficit rising to almost 10% of GDP. That said, with the potential entry into an IMF program, Pakistan is once again likely to see stabilization phase in the medium term, where financial inflows are likely to shore up reserves. However, long term stability hinges on how the new economic setup uses the monetary and fiscal space available under the program. From the market’s perspective, analysts don’t see much improvement until some corrective structural measures are undertaken.

 

Pakistan’s foreign exchange reserves fell 1.60% to US$14.6 billion during the week ended 12th October 2018. The reserves were reported at US$14.9 billion a week ago. The reserves held by the State Bank of Pakistan (SBP) decreased by US$219 million to US$8.1 billion due to external debt servicing and other official payments.

Foreign direct investment (FDI) flows into the country dropped by 42.6% to US$440 million in the first quarter of the current fiscal year, dragged down by continuously declining Chinese inflows, eroding investor trust, and macroeconomic concerns.

AKD Securities has prepared a forecast of commercial banks part of its investment universe scheduled to announce their 9MCY18 results in the following weeks. The brokerage house expects these banks to post anaggregate profit after tax of Rs81.1billion. 3QCY18 earnings growth would be a function of NIMs expansion, enough to offset the drag from balance sheet contraction, re-pricing mismatch and lower NFI income. That said, the brokerage house does not expect any major surprises in this quarter results as the effects of 200bps tightening in the 3Q would be seen in the final quarter of CY18. HBL’s business revamping and compliance costs, and UBL’s pension costs are likely to keep C/I ratio of its universe elevated in comparison with historical levels, though it is expected to be lower than that in 2QCY18. Banking sector continues to remain under pressure due to overall market dynamics despite the interest rate hike.

Al-Ghazi Tractors Limited (AGTL) announced its 3Q2018 results, posting EPS of Rs4.40, down 63% YoY. This fall in earnings was due to 1) a 34% YoY decrease in sales 2) a 45% YoY fall in other income and 3) a 173x YoY increase in finance cost.

Abbott Laboratories Limited (ABOT) revealed its 3Q2018 results, announcing EPS of Rs8.35 as compared EPS of Rs11.35 for the same period last year. The bottom-line was affected by an 8ppts YoY decline in gross profit margins, along with a 28% YoY rise in administration expenses and a 12% YoY increase in finance cost.

Pakistan Refinery Limited (PRL) announced its 4QFY18 results, recording LPS of Rs0.65 as compared to LPS of Rs0.02 for the same period last year. The increase in losses can be attributed to a 400bps YoY decrease in gross profit margins and a 9% YoY increase in administration expenses, even a 39% YoY rise in sales was unable to contain increase in losses.

Dolmen City REIT (DCR) released its 1QFY19 results, reporting EPS of Rs0.33, up 5% YoY. The improvement in earnings can be attributed to a 7% YoY rise in sales and a 9% YoY fall in administration and operating expenses.

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