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Stock Review

Stocks underperform on in the course of crucial financial decisions

The market during the week ended 12th April 2019 remained under pressure, where a benchmark index of Pakistan Stock Exchange (PSX) touched 36,579 points mid-week, lowest level since PTI’s government came to power. The rumour of a potential price war in cement sector led to a further drag on the market performance. Meanwhile, a delegation led by Finance Minister Asad Umar reached Washington for crucial discussions with the IMF. The discussions are expected to last till 15th April, which will be followed by official announcement of amnesty scheme. The government, which has yet to take stringent steps on the fiscal side, is expecting to mobilize around Rs150 billion from the new amnesty scheme.

The news flow during the week included: 1) Pakistan and IMF remained at odds over Rs5.4 trillion tax collection target for FY19 as against Rs4.0 trillion collected in the last financial year, 2) IMF’s forecast for Pakistan’s GDP growth rate was around 2.5% till 2024, and fiscal deficit to peak at 8.7% of GDP in FY20, without reforms, 3) government mulling over a gas price hike of 20-42%, effective July 2019 to reduce losses incurred by gas companies in the outgoing financial year, 4) trade deficit declined by 14% in 9MFY19 due to sharp currency depreciation since December last year, 5) flattish exports during 9MFY19, posting an especially bad performance during March 2019, down 11%YoY and 6) autos sales, which remained flattish at 160K units during 9MFY19, with cars of 800cc and below did exceptionally well due to removal of non-filer ban in March 2019.

Top gainers of the week included HUBC, PSO and NBP, while CHCC, PIOC and MLCF remained the worst performers. Average daily turnover increased 25%WoW to 148 million shares, led by KEL, WTL, MLCF, FCCL and BOP. The market during upcoming week is expected to be dominated by further news flow regarding development on IMF program, announcement of another amnesty scheme and submission of FATF’s third implementation report on 15th April. The result season has started on a weak note, with APL posting below expectation results.

As the market remains under pressure, a review of key events in March 2019 may be of some interest to the readers to revisit their investment strategy. Reportedly, trade deficit for the recently concluded month was US$1.9 billion, down 37% over the corresponding period last year. This was led by declining imports as well as exports. March 2019 was the 4th consecutive month that has shown a marked decline in trade deficit led by lower imports. Imports during the month under review were down 24%, or US$1.3 billion to US$4 billion, at around 28-months low.

Analysts believe that the primary reason for this decline was rupee depreciation and ongoing economic slowdown that has led to lower imports of Machinery, Food and Transport items. Oil imports also remained flat, even though oil sales in volume terms have come down, due to the hike in international oil prices. Exports were reportedly down, by 4.5% to US$2.1 billion in March 2019.

Analysts also believe that export of textile and food items that constitute over 70% of total exports remained flat. For the 9MFY19, the country reportedly posted trade deficit of US$23.5 billion, down 14% or US$3.8 billion. Imports for the 9-month period were down 8% to US$40.7 billion while exports were slightly up by 1.1% to US$17.1 billion.

 

Attock Petroleum (APL) has posted profit after tax of Rs284 million (EPS: Rs2.86) for 3QFY19, down 80%YoY. While volumes declined by 8.9%YoY, inventory losses on the back declining oil prices also played a part. According to analysts, the Company has incurred inventory losses of Rs1.3 billion for 3QFY19 against their expectation of Rs750 million. Sequentially, profit declined by 49%QoQ where higher inventory losses more than offset the gains from higher volumes. For 9MFY19, net profit slipped to Rs2.4 billion (EPS: Rs23.99), down 44%YoY as inventory losses and decreasing volumes weigh heavily on the profitability.

During 9MFY19, in-line the with the overall industry trend, APL experienced a dismal period where overall sales volumes of the company declined by 25%YoY with furnace oil taking the lead, down 48%YoY. Looking ahead, growth from retail outlet and storage facilities are expected to supplement earnings in the medium term. Encouragingly, the Company has held onto market share in an otherwise tepid demand environment and entrance of new players, where Company’s overall market share improved to 10.7% for 9MFY19.

According to a research report by Topline Securities, Pakistan auto sales were up by 2%YoY in March 2019 (up 16%MoM) led by higher sales from PSMC. In 9MFY19, auto sales were reported at 185,000 units, down by 4%YoY that can be attributed to slowdown in economy and recent hike in car prices.

Indus Motors (INDU) reported 11%YoY decline during March 2019 mainly on account of lower sales of Fortuner and Hilux, which were down 63% and 65%, respectively. This was due to 10% Federal Excise Duty (FED) imposed on above 1700cc engine cars. Corolla sales posted growth of 2%YoY.

Pak Suzuki (PSMC) reported 23%YoY growth in sales led by growth in Wagon R, up 63%YoY. Other major contributors in overall growth were Cultus, Bolan and Ravi, up by 17%, 38% and 36%YoY respectively. Swift was the only PSMC variant to record decline of 16%YoY.

Honda cars (HCAR) sales declined 29%YoY, steepest YoY decline during a month since May 2012. In addition to economic factors, decline in City and Civic variants can be attributed to anticipation of a launch of new variant, Civic 1.5 Turbo new variant launched in April 2019.

Going forward, overall demand of automobiles is expected to remain subdued due to recent hike in policy rate to 10.75%, resulting in higher borrowing cost for the borrowers. Furthermore, incremental cost as a result of rupee depreciation and rising inflation has led to higher car prices, impacting purchasing power of car buyers. To note, the Government of Pakistan is mulling over removal of 10% FED on engines with 1700cc and above. However no official announcement has yet been made, adding to the uncertainty to the car sales with engine capacity of over 1700cc.

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