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Equities keep downward slide on uncertain economic scenario

Pakistan equities continued their downward slide for the sixth consecutive week and lost 643 points to close at 38,307 level for the week ended 15th March 2019, this was the lowest index level in 48 trading sessions. Simultaneously, volumes also remained subdued, with average daily traded volume for the week declining to 93 million, down 18% WoW. Commercial banks sector was the worst performing, followed by exploration and production and cement sectors.

During the first four trading sessions of the week, foreigners emerged net sellers with US$17.7 million as against net selling of US$3.5 million a week ago. On the local front, insurance companies and banks were net buyers with US$7.8 million and US$4.0 million respectively.

The announcement driving the market included: 1) as per data published by SBP, FDI for month of February 2019 was recorded at US$168 million, down 49%YoY, 2) the government estimated the size of Public Sector Development Program (PSDP) at about Rs675 billion for the next fiscal year – unchanged at the slashed allocation for the current year and the economic growth rate at 4.6% per annum, 3) Finance Minister Asad Umar said no final amount had yet been agreed as Pakistan continues negotiations for an International Monetary Fund (IMF) program, 4) the large-scale manufacturing (LSM) index witnessed erosion of 2.3% during first seven months of current fiscal year, indicating that economic activities have decelerated in the country and 5) Interloop Limited (INLO), the first public offer of shares for the current year, managed to raise Rs5.025 billion in the book building process held for two days, making it largest private sector Initial Public Offering (IPO) of the country.

Topline Securities has recently reviewed performance of listed banks (except SILK and JSBL whose 2018 annual accounts are not yet available). The most important observation is that the banks have made some changes in the format of financial reporting. The most impactful of those is the reclassification of cost of foreign currency swaps which are now classified under interest expense (previously these were netted against income from foreign currency). This has effectively reduced the net interest income, making previous year NII incomparable unless adjusted. The brokerage house has incorporated the restated financial statements in its working. Moreover, banks have started publishing break-up of fee income that was not available previously.

From a valuation perspective, banks are trading at PE of 9.9x compared to PE of 11.4x in March 2018. The brokerage house attributes this decline in PE ratio to the significant fall in prices of select banks like HBL and UBL. The bank with notable decline in PE ratio is SCBPL, down from 11.7x in 2017 to 8.4x led by exceptional EPS growth. Similarly, sector is also trading at PBV of 1.1x as compared to 1.3x for same period last year. HBL recorded significant decline in PBV, down to 1.0x as compared 1.5x in same period last year.

ROE of the sector fell slightly by 20bps to 13.3% due to flattish profitability growth and rising equity. The primary drag on ROE came from UBL, as its ROE declined by 8.9ppts to 10.6%. Notable decline was also witnessed in ROE of BOK, AKBL and NBP, down by 8.8ppts, 4.4ppts and 4.1ppts, respectively. Deposits of listed banks grew by 10%YoY to Rs13.1 trillion (up by Rs1.3 trillion) with SBL reporting significant growth of 19%YoY. However, in absolute terms National Bank added a significant Rs284billion to listed banks’ total deposits. Majority of growth in deposits stems from non-remunerative current accounts (CA) growth (up 15%YoY or Rs627billion) with current account to deposit ratio up by 156bps YoY. NBP increased CA ratio markedly (up 5.5ppts YoY) while SCBPL maintained notable CA ratio at 44%. BOP had low CA ratio at 21% with 4.1ppts decline YoY.

 

Packages (PKGS) announced 4Q2018 consolidated loss of Rs469 million (LPS: Rs4.8) as compared to EPS of Rs45 for 2017). The result were below expectations as PKGS posted operating loss of Rs96 million as compared to profit of Rs404 million in 4Q2017) mainly on the back of lower gross margins due to higher raw material costs resulting from depreciation of Pak rupee. PKGS had abnormal earnings for 4Q2017 due to a one-time gain of Rs2.5billion (Rs25/share) on the back of business combination gain that came out of acquisition of Bulleh Shah Packaging, an unlisted company. Total gain for 2017 was reported at Rs5billion.

Net revenues were up 25%YoY during the outgoing quarter that can be attributed to higher sales emanating from 1) packaging and paper and paper board division as well as 2) Packages Mall. Investment income for 4Q2018 fell by 86%YoY to Rs288million. Analysts await clarity from management in this regard. The potential threats likely to face the company include: 1) BSPL’s higher cost of production 2) delay in filling up the vacuum left from Tetra Pak dividend income, which is expected to cease distributing dividend to PKGS by the end of 2018, as per initial contract and 3) higher than expected fuel & energy costs.

Fauji Cement Company (FCCL) has released its 1HFY19 after company posting tax of Rs1.8 billion, up 44%YoY, mainly on the back of low base. Partial closure of Line-II during 1HFY18 led to FCCL opting for external procurement of clinker, hurting margins and profitability. For 2QFY19, net profit was registered at Rs1.0 billion, up 24%YoY as margins improved to 32% mainly on the back of improved local prices. The major surprise was other income which increased, primarily consisting of markup on bank deposits. Analysts do not expect the same to continue for next two quarters as cash will be required to pay off debt and the recently announced dividend (Rs0.75/share interim dividend announced for 1HFY19). Interestingly, the after effects of Katas Raj case have started showing on the company’s income statement as FCCL booked Rs79.8 million in water conservation charges for 2QFY19.

Despite most of local players going for expansion, FCCL has not announced any expansion as yet, which will lead to market share of the company declining to 7.5% in FY20 as compared to 9.2% in FY18. Though, the market share of the company remained resilient in 1HFY19 at 9.1%, even after BWCL commencing its capacity of 1.8 million tons in 1QFY19, commissioning of CHCC’s new plant has affected the company where CYTD numbers do not post a good picture of market share. Moving forward, with the expansion of MLCF (2.3 million tons) expected to come online in 4QFY19, market share of the company looks set to slide further down by the end of FY19 and then reach 7.5% in FY20 as more expansions come online in the region. The misery will increase further as decreasing market share, coupled with pressure on prices with weak demand in the backdrop will prove to be a double whammy for the company.

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