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Healthy volume witnessed, support packages from China and UAE in spotlight

For the week ended 2nd November 2018, the benchmark Index of Pakistan Stock Exchange (PSX) closed above 42,000 points, up 3.57%WoW. Investors awaited details of support packages from China and UAE, while closely watching the on-going country-wide protests. Moreover, healthy volumes were witnessed at the bourse with average daily trading volume rising by 7.07%WoW to 322.32 million. Volume leaders included: BOP, KEL, PAEL, LOTCHEM and PIBTL.

The key news flows impacting the market sentiments included: 1) Advisor to Prime Minister on Commerce asking cement manufacturers to be ready for an unexpected surge in demand due to PM’s housing scheme, 2) Privatization Commission coming up with an updated list of entities including State Life Insurance, SME Bank, First Women Bank, OGDC, PPL and Mari Petroleum while dropping loss making entities including PIA, PSM and the discos amongst others, 3) Government of Pakistan (GoP) reviving the ADB sponsored smart metering project worth US$900 million initially for 2 DISCOS, 4) Pakistan rising 11 places on the World Bank’s Doing Business Global Ranking to reach 136th among 190 countries, 5) IMF team arriving Pakistan on 7th November 2018 for talks on a bailout package and 6) Pakistan’s total foreign exchange reserves falling to US$14.18 billion, including SBP’s reserves at US$7.78 billion.

Cement sector scrips grabbing 4 of the 5 top gainers’ positions that included: MLCF, DGKC, CHCC, NCL and PIOC, while laggard were: POL, PPL, FFC, FATIMA, and EFOODS. During the outgoing week, foreigners further offloaded equities worth US$12.62 million, in addition to nearly US$400 million already sold in CY18. The details regarding the quantum and composition of the Chinese support package will be the most sought after news by the market participants. While an amicable solution to the ongoing country wide protests is a welcome sign, inflation rate for October 2018 rising higher than estimates at 7.0%, hints towards further hike in interest rate by the central bank, which can put leveraged sectors under pressure.

Habib Bank (HBL) posted 3Q2018 EPS of Rs1.15.00, down by 82% YoY (3Q2017 earnings adjusted for New York State Department of Financial Services US$225million penalty on HBL). The decline is primarily due to high provision for diminution in value of investments, high expense growth as well as flattish net interest income growth. The impairment on investments (Rs1.8billion) has been booked due to poor stock market performance but potential for reversal exists given market continues its recent bull run. The management restated its previous stance that non-interest expense will normalize post 1H2019. It was also informed that excluding expenses related to NY operations, pension charge and business transformation, normalized expense growth is in single digits. During 9M2018, expenses include Rs4.7billion pertaining to NY operations, Rs2.5billion related to business transformation and Rs1.9billion pension charges. Moreover, Rs0.8billion of expense is due to impact of rupee devaluation on overseas expenses of which Rs400million is attributable to 3Q2018. Fee income declined primarily due to lower share in home remittances segment. Management believes that non-interest income will show a much better performance in 4Q2018. The management said its focus would remain on maintaining strong capital adequacy, however, as earnings improve going forward, there is potential for better payout.

 

The management also intends to focus on digital banking and be a market leader in this segment. HBL’s branchless banking platform, Konnect, has 32,000-33,000 agents while 900,000 clients have been on-boarded. The Bank expects to add another 2-3 million clients through Konnect in 2019. Gross non-performing loans (NPLs) have increased by Rs2.3billion over December 2017 due to a Rs3.3billion impact of currency depreciation on overseas NPLs while domestic NPLs have reduced by Rs1.9billion during the same period. The asset quality has improved. Domestic advances growth was recorded at 16.7% while overseas advances decreased by 21.5%. Domestic current account deposits have increased by 9.6% over December 2017.

Lucky Cement (LUCK) reported 1QFY19 consolidated earnings of Rs3.00 billion (EPS: Rs9.1), down 23% YoY, which fared better than expectations mainly due to cement operation’s lower effective tax rate. Net sales were up 10% YoY during the quarter, supported by its subsidiary, ICI Pakistan’s revenue growth of 17% YoY. While cement volumes grew by 5% YoY thanks to higher exports (+85%), lower retention prices (down by average Rs10/bag) restricted cement revenue growth to 2% in 1QFY19. Higher exports were on the back of LUCK’s South cement line extension last year, which allowed the company to increase its exports by sea. Consolidated gross margins declined to 22% during the quarter, mainly on the back of decline in margins of cement operations, down to a 6 years low of 30%. Margins continued to fall amid rising input costs and weak pricing power. While pretax cement profits fell 22% YoY for 1QFY19, lower effective tax rate restricted net earnings decline to 17%.

Moreover, the company’s 660MW coal fired power plant, which achieved financial close on 25th June 2018, will commence its operations in 2021. The automobile venture is expected to commence commercial production from 2Q2019. Analysts hint towards four likely threats: 1) price weakening, 2) lower than anticipated local demand, 3) unanticipated increase in gas and coal prices and 4) delay in its upcoming ventures.

Pakistan State Oil Company (PSO) posted profit after tax of Rs4.20billion (EPS: Rs10.7), down 17% YoY, higher than expected likely due to inventory gains of around Rs2.00 billion. Other than this, the company also earned substantial margins on inventory of Furnace Oil (FO) and lubricants. Sales increased by 8% YoY despite the decline in FO, HSD and MS sales volume by 84%, 32% and 13% YoY respectively. Rise in sales could be attributed to increase in FO, HSD, and MS prices by 75%, 44%, and 34% respectively. Other income witnessed a fall of 56% YoY that can be attributed to: 1) absence of PIBs income that matured last year on 19th July 2017 and 2) lower markup on delayed payments. Effective tax rate during the quarter was at 37% as compared to 32% in corresponding period of last year. Key risks to the company include: 1) volatility in oil prices and inventory losses, 2) rupee depreciation and exchange losses and 3) sharp pile up in circular debt.

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