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Index grows marginally, lackluster activity likely to take over

The benchmark index of Pakistan Stock Exchange (PSX) managed to close marginally high at 38,586 pointed for the week ended 14th December 2018. The week began with market continuing with last Friday’s performance where sentiments improved further after Prime Minister and Finance Minister gave assurances on Tax/Regulatory concessions for the equity market and positive outcome of the OPEC meeting (OPEC members and Russia agreed to a cut output by 1.2 million bpd effective January 2019). However, the rally did not last long with bears taking hold of the market as economic and political concerns came at the forefront.

Major negative news flows were: 1) uncertainty surrounding IMF program, 2) delay in issuance of US$3 billion bonds and 3) US placing Pakistan on the blacklist (before removing it shortly). Adding to negatives, SSGC suspended gas supply to captive power plants as the company faced gas shortage while resuming it after three days.

Investors being swamped by the negative news flow, remained on the sidelines with average daily trading volume falling to a 6-week low to 163.3 million shares (KSE-All share) whereas: 1) possible release of US$2 billion short term loans from China, 2) Supreme Court decision to allow high rise construction in Karachi, and 3) positive developments surrounding KE sale, failed to invigorate any interest.

However, Friday blessed market again with a positive close as Pakistan received another tranche of Saudi package of US$ one billion.

Apart from macro news flow, ENGRO sold 24% of outstanding shares of Elengy Terminal Pakistan Limited (EPTL) to VOPAK for US$31.4 million.

Top performers of the week were: EFOODS, ABL, PPL, LUCK and ENGRO, whereas laggards included MLCF, HASCOL, PSMC, ASTL, and FFBL.

Lackluster activity is likely to dominate the market next week with downside risks as Mutual Funds face redemptions. In this regard, sovereign rating downgrade by Fitch to ‘B-‘ from ‘B’ could affect market sentiments particularly when Pakistan looks to issue US$ denominated bonds.

Cement sales during November 2018 slipped to 3.9 million tons, down 1.1/14.0% YoY/MoM with the decline in temperature. However, crucial support came from hike in exports, recorded at 0.56 million tons, up 61.3%YoY driven by southern players exploring new markets, but down 8.5% MoM (second consecutive month of decline). Local sales were down by 7.1/14.9% YoY/MoM during the month, led by the fall in demand in North, where players continued to face demand pressure due to tepid release in PSDP due to oversight/accountability for on-going projects of the previous governments. South continues to remain strong, witnessing a 12.6%YoY jump in cement off take primarily steered by private construction. Overall, cement dispatches for 5MFY18 rose to 19.2million tons, up 4.0%YoY where exports take the lead with a growth of 42.8%YoY.

 

During the month under review, coal prices declined to an average US$94.7/ton (down 5.3%MoM), defying historical upward in winter season. The pressure on coal prices is in the backdrop of China shutting coal imports until at least next year. The ban is due to China producing enough coal to meet at least to 30 days demand of power companies in the peak winter period. To recall, limits to imports were initially put in place in the middle of 2018. The news flow suggests Chinese authorities have now halted coal procurement from across the globe. This recent trend in coal prices should act as a saving grace for the cement players particularly those in the North, amidst PKR currency devaluation and surge in other input costs, and constrained pass-on ability. While winter season slows down construction activity, cement off takes in the current season could potentially face additional stress with lower PSDP disbursements. This should continue in the medium run as well, where economic climate and fiscal tightening are expected to keep pressure on volumes.

The picture is not promising particularly for North based players due to: 1) construction of big ticket projects and housing construction suffering a major hit, 2) limited opportunities for exports, and 3) additional capacities of CHCC and MLCF in FY19 of cumulative 4.5mn tons, possibly resulting in supply glut in the region. However, South seems to be relatively stable in terms of growth in cement offtake with exports contributing heavily in keeping market balance. Further, lifting of ban of high-rise buildings recently should keep cement demand growth intact in the medium to long run.

During November 2018, the number of vehicles were sold under passenger car categorywere 15,334. The launch of the new Cultus variant in April 2017 seems to have garnered higher sales through CY18, pushing 1000CC segment sales higher, while lower displacement variant demand tapered off. The absence of major new model launches in the premium space, and slowdown in sales of Mehran in the run-up to PSMC’s launch of the Alto (likely by March’19) could further dampen sales for the passenger car segment in 1QCY19. While cumulative 11MCY18 numbers for LCV and Pickup sales are marginally higher, up 2%YoY, weakness in November 2018 offtake allude to a likely downturn in the demand cycle. As the majority of sales in the segment are made to commercial buyers, transporters and logistics service providers, wider slowdown in domestic economic activity is likely to impact these buyers first.

For PSMC and INDU, 28% and 14% of total sales volume consists of commercial LCV/pickup respectively. Trucks segment, where INDU relies on its premium offerings and PSMC must accelerate new product/variant launches (particularly for the Bolan and Ravi) to cope up with slowing growth in commercial sales. Sales for the OEM during November 2018 declined by -12%MoM but were up 9%YoY. The MoM drop was heightened by the OEMs reduced cost pass-on for customer deliveries during October 2018, showed prominently in +9%YoY growth in Corolla sales for the month. Management’s guidance on slowing Fortuner sales is playing out where analysts anticipate average monthly sale of 217 units for FY19. Combined Civic and City sales are showing weakness as November 2018 sales of 3,152 units mark declines of 30%MoM and 2%YoY. Additionally, the underpowered BRV failed to hold its own, where the variants sales fell to 300 during the month, the lowest monthly number since the its launch in April 2017.

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