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Index posts 16-week highest loss as investors stay gloomy over slow economic progress

During the week ended 5th April 2019, the benchmark index of Pakistan Stock Exchange (PSX) posted 16-week highest loss, losing 2.92% WoW to close at 37,522 level, with four sessions closing in red and one in green. Investors’ sentiments remained under pressure throughout the week owing to slow growth of economy and weak macro indicators due to 5-year high inflation and fiscal deficit. The hike in policy rate also encouraged investors to make their way to fixed income securities like National Saving Certificates and other government securities which offer double digit risk free returns, from equities.

During the outgoing week, trading in new scrip, Interloop (ILP) started, emerging as a volume leader with traded volume of 14.32 million shares on its first trading session. Unlike PREMA and AGP, ILP failed to maintain legacy of last two IPOs, which closed at their upper limits on first trading session, ILP lost Rs0.35 per share or 1% in its value.

Foreigners emerged net sellers of US$3.7 million as compared to net buyers of US$0.5 million a week ago. While banks were net buyers of US$4.7 million, mutual funds were net sellers of US$3.2 million. Other news flow moving the market included: 1) Pakistan’s foreign exchange reserves rising to US$17.3 billion for the week ended 29th March 2019, up from US$15.5 billion for the earlier week, 2) local cement dispatches declining to 29.45 million tons during the first 9MFY19, from 31.31 million tons during the same period last year posting a decline of 6%YoY. While exports increased to 5.13 million from 3.44 million tons, 3) OGRA increasing wellhead gas price by 34.9% for 22 gas fields with effect from January this year, 4) Asian Development Bank, announcing country’s GDP growth to decline to 3.9% for FY19 due to macroeconomic challenges, and 5) FBR is eyeing Rs300 billion in revenue under the proposed tax amnesty scheme.

Average daily turnover declined 7.5%WoW to US$118.7 million, with volumes leaders being: WTL, KEL, MLCF and UNITY. While gainers included: POL, OGDC, ABL, laggards were: ASTL, PSMC and HASCOL. Sagging volumes offered a bittersweet cushion to drastic market moves, where outflows from institutional investors indicate a wider shift away from equity exposures amidst rising yields on debt instruments.

Consequently, upcoming results season is likely to be significantly tamed in the run-up to Ramazan, with investors hunkering down and the current flight to blue-chip/main board stocks remaining in full-swing.

Hascol Petroleum (HASCOL) posted a dismal result for CY18. Profit after tax for the year declined by 85%YoY to Rs0.2 billion (EPS: Rs1.14) as compared to net profit of Rs1.4 billion (EPS: Rs7.74) for CY17. Along with the result, the company also announced a bonus share issue of 10% taking the total bonus issue for CY18 to 35%. The decline came mainly on the back of exchange losses of Rs3.9 billion due to 25.7% depreciation of rupee during the 2018. Net revenue increased by 35%YoY due to increase in average prices of MS and HSD by 26.3% and 29.8% respectively during the year. Increase in margins for MS and HSD by 6.8% and 4.8% respectively boosted gross profit by 39%YoY to Rs10.2 billion. Other notable thing was increase in HASCOL’s financial cost by 127%YoY for CY18 as borrowings grew to support the ongoing capital expenditures and increasing working capital needs. The story was even worse for 4QCY18 with company posting a loss of Rs1.3 billion (EPS: Rs7.2) as exchange losses of Rs1.4 billion played a major part where even the inventory gains to the tune of Rs0.6 billion failed to provide any significant respite. The key risks facing the company includes: 1) higher than expected depreciation of rupee, 2) slowdown of economy, 3) inventory losses and 4) increasing competition.

 

In a rising interest rate environment (policy rate up by 475bps since January 2018), banks with significant longer duration Pakistan Investment Bonds (PIBs) holding, yielding 8-10%, will likely lose out because current yield of PIBs has risen to 12-13%. Topline Securities has selected those banks, which have 10% or more PIBs on their books as percentage of their deposits as of end December 2018. It has then delved into greater detail and estimated PIBs that are maturing in 2019 and onwards, based on their annual accounts.

As of January 31, 2019, total outstanding PIBs were Rs3.2trillion (out of these Rs1.00 trillions are maturing in 2019 with weighted average yield of 9.8%), out of which banks own 60.4% or Rs1.9trillion, which is 14.6% of banks deposits.

Among big banks that may lose out the most due to exposure in longer term bonds are NBP, UBL and HBL. Other banks like HMB, JSBL, AKBL, BOK and SBL, having significant maturities post 2019 will also have funds stuck up in lower yielding PIBs, thereby affecting NIMs. Those banks that have PIBs to deposit ratio of less than 10% are not part of the exercise and above table include BAFL, SILK, ABL, FABL, SCBPL, and BOP.

The brokerage house believes that remaining PIB auctions in 2019 will likely see strong participation by the banks, especially those having short term duration of 3 and 5 years. Similar trend was seen in 2014 when banks’ exposure in PIBs increased to 30% of deposits in 2014 as compared to 9% in 2013.

Moreover, with clarity over Pakistan’s entry into IMF program by June 2019, it is likely that the Government of Pakistan may amend its debt profile with higher weightage in longer maturities.

The brokerage house apprehends that one of the IMF conditions would be to borrow from banking sector and also to extend the maturity of its debt repayment profile, similar to the large issues of PIBs post IMF program in 2013. The government has mobilized raised Rs2.5 trillion in PIBs in 2014. Banks having short tenor can reap maximum benefit if they invest in PIBs at the right time in 2019.

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