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Deal with IMF amongst top rationale keeps equities falling

During the week ended 3rd May 2019, the benchmark index of Pakistan Stock Exchange (PSX) closed at 36,123 points, down 2.7%WoW due to a number of reasons. On top of the list was inordinate delay in signing a package with the lender of last resort, International Monetary Fund (IMF). Key news flow impacting equities market, during the week included: 1) ongoing negotiations with IMF for US$6.5 billion funding, IMF team pushing for power sector reforms including resolution of circular debt though 25% hike in consumer power tariff and gas prices, 2) CPI for the month of April’19 recorded at 8.8%YoY, in line with market expectations, pushed by higher food inflation, 3) petroleum division of the Ministry of Energy and OGRA stating that a hike in gas tariffs was imminent and necessary for curtailing persistent accruals in the domestic energy chain and 4) amongst a number of MoU’s signed in Beijing under the Belt and Road Forum being held there, KEL signing an agreement for setting up a 700MW coal fired power plant with CMEC.

Stocks leading the KSE-100 Index into the green included: PSMC, HMB, HASCOL, and PAEL, whereas laggards were: ASTL, PSO, FFBL and POL. Average daily turnover tumbled 14.2%WoW during the shorter trading week to settle slightly more than 105 million shares with volume leaders being: UNITY, MLCF, PAEL, and PIBTL. With the start of the holy month of Ramazan and shortening of trading hours, consolidation is likely to be the norm.

Major checkpoints in the coming month include the possible entry into an IMF program (and associated terms and conditions), mid-month MSCI review and Budget FY20, possibly furthering retrenchment amongst market participants.

Pakistan’s largest Exploration & Production (E&P) company, Oil & Gas Development Company (OGDC) has reported 9MFY19 profit after tax of Rs85.3 billion (EPS: Rs19.84), up 50%YoY, but slightly below market expectation of Rs20.35/share on account of lower than expected gross profits. Announcement of result was accompanied by interim dividend of Rs2.75/share, slighting higher than analysts’ forecast of Rs2.5/share raising the allure of this macro-hedged play. Major facets of the results included: 1) a 30%YoY growth in net sales, where favorable movements in macro variables outweighed stagnant production flows, 2) gross profits improving by 44%YoY with gross margins rising to 64.7% as compared to 58.6% for the corresponding period last year and 3) other income recorded at Rs17.8 billion, up 59%YoY.

Hascol Petroleum (HASCOL) has announced financial results for 1QCY19. The Company has posted profit after tax of Rs675 million (EPS: Rs3.39), down 8%YoY. This was a significant improvement keeping in view that the Company had posted loss for 4QCY18. Profit has been termed higher than expected likely on account of inventory gains estimated around one billion rupees, which was on the back of gains made on furnace oil sales. However, analysts await clarity from management in this regard. Finance cost for the quarter was up 35% and 277% on QoQ/YoY after Company’s debt increased with debt-to-equity rising to at 195% at end December 2018. The Company had posted colossal exchange loss of Rs1.4 billion for 4QCY18, which declined to a moderate level of Rs180 million as rupee depreciated by one percent during 1QCY19 as against 12 percent for 4QCY18.


Pakistan Petroleum (PPL) has reported lower than expected earnings for third quarter ended 31st March 2019. The deviation from analysts’ estimates was mainly on account of higher than expected exploration expenses. For the quarter under review, PPL’s revenues grew by a decent 31%YoY, led mainly by around 20% depreciation of Pak rupee. Arab light crude prices declined by 3% to US$63.8/barrel, while oil and gas production were up meagerly by 3% and 2% respectively. For the quarter, exploration charges were up 68%YoY, mainly due to higher dry well costs. For 9MFY19, sales of the company were up 30%YoY, while earnings grew by 32%. Other income surged by 16%, which was mainly on the back of exchange gain on foreign currency due to depreciation of Pak rupee. The likely threats facing the Company include: 1) persistent volatility in global oil prices, 2) delay in key projects and 3) significant increase in exploration and development costs.

The Hub Power Company (HUBC) posted 3QFY19 consolidated profit after tax of Rs3.2 billion (EPS: Rs2.73), up 5%YoY, taking the 9MFY19 earnings to Rs8.6 billion (EPS: Rs7.40). The earnings were above expectation for the quarter, due to diversion on gross profit basis. It is believed the Company has booked lower penal expense, as overdue payables declined by Rs15 billion QoQ. Other headline items were broadly in-line. Key highlights of the 3QFY19 result included: 1) a 31%YoY decline in topline due to lower dispatch factors, 2) a 25%YoY higher admin cost as 1,320MW nears CoD and 3) a 83%YoY higher finance cost due to debt draw downs for CAPEX amid rising interest rate environment. For 9MFY19, the consolidated net profit increased 3%YoY, weaker Pak rupee led to increase on gross profits level, which cushioned the decline in bottom line due to 52%YoY higher finance cost. As expected, HUBC did not announce any interim dividend along with 3QFY19 result. To recall, HUBC has not paid dividends during 9MFY19, as against 65% payout in 9MFY18.

Analysts even see low probability of any payouts in 4QFY19 as well. Analysts maintain Buy stance on HUBC, where its 1,320MW coal powered plant is expected to commence operations in 1QFY20. The coal power projects are expected to lead to 30% CAGR in HUBC’s bottom line over FY19-21.

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