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Recovery witnessed; results, amnesty report may keep investors optimistic

The market ended the week on 26th April on a negative note, losing 888 points or 2.4% in the first two trading sessions. Stocks later rallied in the remaining three trading sessions on earnings upbeat, recouping some of the earlier losses. The benchmark index declined 0.4%WoW to close the week at 37,130 points. Trading activity remained weak and skewed towards main board items.

Average daily trading volumes declined 30%WoW to 122.45 million shares. Key news flows impacting the market during the week were: 1) new economic team of government deciding to fine-tune the much-awaited tax amnesty scheme, 2) government kick starting the process of renegotiation of power purchase tariffs with the IPPs to ease of burden of mounting circular debts, 3) government and pharmaceutical companies agreeing on full implementation of Statutory Regulatory Order (SRO) 1610 pertaining to the hardship cases, 4) the budget deficit rising to 4.2% of GDP during first nine months of the current fiscal year, and 5) the Supreme Court restoring deduction of withholding tax, sales tax and service charges on pre-paid cellular scratch cards by vacating its earlier suspension order. Performance wise CHCC, UBL, FCCL, HMB and INDU were the major gainers, while laggards included FFBL, ASTL, FATIMA, PSMC and MLCF.

In near term, result announcements will continue to dictate the market direction, where continuation of upside surprises may extend the rally seen in the last three trading sessions. Announcement of amnesty scheme is another key flashpoint, which will keep investors optimistic. However, medium term market performance hinges on a formal entry into IMF program and policy clarity thereafter. The upcoming budget holds key importance, where investors are likely to build in budgetary expectations.

Pakistan’s first and the largest Islamic bank, Meezan Bank Limited (MEBL) has posted profit after tax of Rs2.9 billion (EPS: Rs2.4) for 1Q2019, up 49%YoY on the back of increase in net spread earned, up 57%YoY. It turns out to be slightly above market expectations on the back of 1) reversal in provisions and 2) foreign exchange gain. The bank also announced final cash dividend of Rs1.0/share and issue bonus shares of 10%. Analysts attribute significant rise in net spread earned to the non-applicability of Minimum Deposit Rate (MDR) on Islamic banks, which has resulted in higher sensitivity of income to the tightening monetary policy (policy rate up by 475bps since January 2018 to date to 10.75%). Other income grew by 7.7%YoY to Rs1.9 billion, whereas fee & commission income grew by 17.5%YoY. Further, the bank booked foreign exchange gain of Rs417 million as compared to gain of Rs373 million during the corresponding period last year. Other expenses during the outgoing quarter were up 24%YoY to Rs5.6 billion. This was on the back of 23% increase in operating expenses. While pretax earnings increased by a considerable 86%YoY in 1Q2019, net earnings growth was restricted to 49% owing to higher effective tax rate, up 13ppts to 48%.

 

The government in its last economic reforms package imposed super tax on banks for the year 2017 to 2020, due to which banks are now recording additional super tax (2017 annual earnings) in their 1Q2019 accounts. Key risks facing the Bank include: 1) deterioration in Pakistan macros, 2) uptick in provisioning charge, 3) lack of investment avenues and 4) lower than expected rate hike in the policy rate.

Pakistan State Oil Company (PSO) has released results for 9MFY19. Along with the result, the Company also announced an interim cash dividend of Rs5/share. The Company posted profit after tax of Rs5.93 billion (EPS: Rs15.2), down 55.2%YoY. The fall can be attributed to decline in sales volume by 42%YoY. On top of that inventory and exchange losses exacerbated the injury. For 3QFY19, net profit declined by 64.3%YoY to Rs1.67 billion on shrinking volumes and mounting inventory losses. However on sequential basis, an increase was witnessed, largely due to low base in 2QFY19. Finance cost increased to Rs2.92 billion for 3QFY19, up 53.1/43.9% YoY/QoQ. The hike can be attributed to the increase in short term borrowings despite receipt of Rs60 billion under circular debt clearance. Tax rate for the quarter declined to 52% from 89% in last quarter. However, for 9MFY19 tax rate was recorded at 45% on the back of turnover tax applicable on LNG sales.

Sui Northern Gas Pipelines (SNGPL) has announced its financial results for 4QFY18 and 1QFY19. The financial results were also accompanied by cash dividend of Rs5.5 for 4QFY18 and Rs1.5 for 1QFY19. The Company reported profitability growth of 105% (EPS: Rs8.1) and 35%YoY (EPS: Rs4.1) respectively. Higher profits during 4QFY18 were triggered by retrospective adjustment of UFG losses, contributing Rs1.2/share to bottom line of the Company. To recall, Sui companies were allowed to retrospectively adjust their UFG benchmark to 7.1% for FY13-17 against actual allowed UFG of 6.73%, 6.91%, 7.08%, 7.14%, and 7.11% during said years. Further, higher capitalization of fixed assets during 4Q was also a key reason behind improved profits. During 1QFY19, earnings of SNGPL were higher due to increase in asset base (as evident from 4QFY18 results). However, QoQ it was down 50%YoY due to absence of one off income and higher UFG of 11.57%. Current UFG of SNGPL is close to 10%. Financial cost of the Company drastically increased during both 4QFY18 and 1QFY19 by 297% and 152% respectively due to increase in borrowings and higher interests rates (up 475bps since Jan 2018). The key risks facing the company includes: 1) higher UFG losses, 2) delay in capex, and 3) regulatory changes.

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