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Index jumping for joy after support fund launched

After a jubilant week, the benchmark index of Pakistan Stock Exchange (PSX) started the week ended on 30th May 2019 in the red on emerging concerns. While details of the upcoming budget weren’t very supportive, the government seemed desperate regarding meeting the revenue target of Rs5.5 trillion for next financial year. Towards middle of the week, euphoria on the back of Stock Market Support Fund was witnessed again after confirmation from Finance Adviser, helping the Index to close the week at 35,975 points, up 0.8%WoW. News of price increase by local cement manufacturers ignited a rally in the cement sector while talk about government withdrawing zero-rated status for textile players kept pressure on the textile sector. Increased activity was witnessed during the week with average daily traded volume rising to 165 million shares as compared to 157 million a week ago.

Foreigners remained net sellers for the week with an outflow of US$2.95 million. The leader on the main board included: PSMC, HASCOL, PSO and APL, whereas laggards were: FFBL, CHCC, NCL and FCCL. Volume leaders included: BOP, UNITY, FCCL and MLCF. Key news flow impacting investors’ sentiment included: 1) Government increasing next fiscal year revenue collection target to Rs5.5 trillion, almost 35.4% or Rs1.45 trillion higher as compared to current year’s revised estimate of Rs4.1 trillion, 2) Government planning to withdraw certain exemptions given to farm sector including reduced rates of general sales tax on seeds, fertilizers and pesticides, 3) State Bank of Pakistan raising Rs125 billion against total bids worth Rs464.8 billion, while rejecting bids asking for higher return in the first auction of the long-term Pakistan Investment Bonds (PIBs), after the rate hike by 150bps on May 20. Activity is expected to remain low in the only trading session before Eid next week. However, announcement of Federal Budget FY20 is going to set the direction, where likely heavy taxation measures are expected to keep the stock market under pressure. Having said that, introduction of Stock Market Support Fund could offer active support and bring some stability.

Bank of Punjab (BoP) reported earnings per share of Rs0.74 for 1Q2019, up 1.4%YoY and in line with market expectations. NII of BoP for 1Q2019 depicted outstanding growth of 64%YoY, up 12%QoQ amid hike in policy rate and better asset reprising strategy. Non‐markup income during the quarter under review declined by 11%YoY mainly due to loss recorded on account of foreign exchange loss amounting to Rs2.7 million as compared to a gain of Rs67.8 million for same period a year ago. This was contrary to the trend seen in other banks.Non‐markup expense was up 28%YoY mainly on the back of higher operating expenses. During the outgoing year the BoP had recorded net provision of Rs246 million as against a reversal of Rs157 million during same period a year ago. Pretax earnings of BoP increased by 19%YoY during 1Q2019, while net earnings growth was restricted to 1.4% mainly on account of higher effective tax rate to 45%.

 

The government in its last economic reforms package had 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 BoP include: 1) lower than anticipated hike in policy rate 2) significant impact of IFRS-9, 3) slowdown in advances growth and 4) deterioration of Pakistan macro indicators.

During April 2019, urea offtake declined to 292,000 tons, down 35%MoM and 22%YoY. The decline during the month under review was mainly led by a large base effect, pre-emptive buying during April 2018 on anticipated price hikes (urea price was increased by Rs100/bag in May 2018). EFERT remained relatively better performer, with offtake exhibiting an increase of 23%YoY, though declining 4%MoM. As against this, other urea producers witnessed decline in offtakes FFC (51%YoY), FATIMA (48%YoY) and FFBL (45%YoY). Slow offtakes, combined with 14%YoY higher Urea production resulted in increase in urea inventory to 335,000 tons. The government has approved 100,000 tons urea import, and is considering to keep Fatimafert and Agritech fertilizer plants operational till October 2019, which will likely keep urea inventory at more than manageable levels during the remaining months of CY19. DAP offtake improved by 32%MoM to 86,000 tons, but declined 28%YoY. The sequential increase was led by price discounts by various players in view of high inventories. While FFBL’s DAP offtake improved by 67%MoM, a YoY decline of over 60% for April 2019 and 4MCY19 remained concerning. The DAP closing inventory of 620000 tons, will continue to keep a cap on DAP player’s pricing power, deteriorating the gross margins for FFBL post recent gas price hike.

April 2019 exports of textiles and clothing were reported at US$1.1 billion, up 5%MoM but down one percent YoY), despite GoP’s zero-rated tax incentives and recent energy subsidies. It is apparent that exporters passed-on the steep impact of rupee weakness to buyers, where the trade-off implies higher volumetric sales, a phenomenon seen playing out in the value added segment, but countered by significant depletion in non-value added segment.

Spillovers from rising trade tensions, weak demand from developed markets and reorienting of global supply chains seem to keep international cotton prices under pressure, while production outlook will be dependent on inventory build-ups. In light of news flow raising concerns over the continuation of energy incentives and zero rated regime for textiles, analysts believe medium term risks to export growth are likely to be internal in nature, with the execution of planned FTA’s (specifically with China) a possible catalyst. In the meantime, the risk-return balance tilts to favor diversified composite stocks.

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