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Stocks came tumbling over selling pressure; inflation news may hit sentiment

Pakistan Stock Exchange (PSX) lost 62% of the gains made a week ago, tumbling down by 5.35% or 1,678 points to close at 29,672 during the week ended 30th August 2018. The placement of Pakistan on ‘enhanced expedited follow up list’ by Asia Pacific Group (APG) on 23rd August 2019 dampened investors’ sentiment. In addition to that, the reported potential divestment of PPL (10% of shares) and OGDC (7% of shares), index heavy weights witnessed further selling pressure. The Government of Pakistan (GoP) also introduced presidential ordinance to waive off 50% of outstanding GIDC overdue from the CNG, power, fertilizer and industrial gas consumers, while allowing them the option to avail non-cash settlement against outstanding sales tax, subsidy and duty drawback receivable from the GoP. The development was positive, especially for fertilizer sector. However, HASCOL’s disappointing results spooked out the positive sentiment of GIDC development.

Major news during the week included: 1) SECP and NCCPL considering steps to enhance market liquidity, 2) the GoP deciding to privatize 10 state owned units, 3) fiscal deficit for FY19 was reported at 8.9% of GDP, 4) GoP considering airspace closure and banning trade routes for India, and 5) Royal Vopak discussing its investment plan worth US$2.8 million in Pakistan aiming at LNG terminal, Polypropylene plant and PARCO coastal refinery.

Top performers during the week included: GWLC and FFC, while HASCOL, PAEL and OGDC remained the worst performers. Average daily turnover declined by 29%WoW to 123 million shares. LOTCHEM, KEL, MLCF, UNITY and OGDC remained major volume churners. No major results are scheduled for the upcoming week. Inflation during upcoming months will remain critical in determining monetary policy outlook and higher than expected inflation could be sentiment dampener.

On Thursday, Meezan Bank (MEBL) held an analysts’ briefing to discuss/elaborate its 1H2019 financial results and provide future outlook. The Bank recorded provisions of Rs1.2 billion for the period under review as against a reversal of Rs100 million for the corresponding period last year. The NPL mainly related to Rs583 million on loan books (edible oil industry etc.) and Rs469 million to investments. Operating expenses were up by 25%YoY to Rs5.8 billion which were attributed to opening up of 76 new branches, inflation and devaluation. The Bank expects similar growth in operating expenses due to aggressive branch expansion in 2020. The Bank expects NIMs to remain more or less close to last quarter. On energy Sukuk-II, the consortium led by Meezan Bank has already completed all the prerequisites. However, some bottlenecks still persist at the ministry’s level. The government is expected to issue a letter of comfort in this regard. It is difficult to ascertain the exact timeline at the Government level for completion of its paperwork. Cost to Income was reported at 46%, which is lowest in the banking sector as compared to 57% in the same period last year. Return on Equity (RoE) of the Bank touched the highest in the history at 33%, the management sees the RoE to remain above 20% in the long run. The management also believes that the RoE is expected to hover in the range of 28-30% in current circumstances. Capital Adequacy ratio (CAR) improved to 16.2%, from 14.5% in the same period last year as against a benchmark of 12.5%. The Board of Directors of the Bank has already approved a Sukuk issue for its Tier-II capital, which is expected to be issued in 4Q2019, the amount of the issue will be up to Rs6 billion. This will also support Bank’s CAR. The Bank’s exposure to government securities is in-line with the sector’s average. Re-pricing of loans generally completes in 3 to 6 months, while few loans are long term loans which witness a lag of about 12 months. The government Sukuk takes up to 6 months to re-price. Deposits of the Bank grew by 7%YoY since December 2018 to Rs842 billion. The growth was driven by current account deposits which were up 14%YoY. Deposit growth rate is tracking the country’s economic slowdown.

 

According to a report by Topline Securities, fertilizer sector of Pakistan has posted cumulative growth of 48%YoY in their earnings during 2Q2019 due to: 1) increase in gross profit margin by 2%YoY, 2) decrease in selling and distribution cost by 13%YoY and 3) increase in other operating income by 31%YoY. While urea sales of four major companies went down by 9%YoY, overall sector volumes went up by 3%YoY to 1.5 million tons due to resumption of operation by Agritech and FatimaFert (181,000 tons). DAP offtake of three companies (EFERT, FFBL and FFC) depicted growth of 23%, while overall sector witnessed increase to 457,000 tons, up by 44%YoY. The four major listed companies are: Fauji Fertilizer Company (FFC), Engro Fertilizer Company (EFERT), Fatima Fertilizer Company (FATIMA), and Fauji Fertilizer Bin Qasim (FFBL).

The brokerage house has taken consolidated income statement of EFERT and FATIMA, while for rest companies it has taken unconsolidated accounts to depict core fertilizer dynamics. Net sales of the sector registered growth of 35%YoY to Rs89.5 billion, despite declining volumetric sales by 11%YoY to 1.5 million tons as urea and DAP prices jacked up by 23%YoY and 11%YoY, respectively. Gross margin of manufacturers surged to 31% during 2Q2019 from 29% last year due to better retention on urea. FFC outperformed its peers with margins accretion of 10pptsYoY owing to better retention price and decline in relatively lower margin DAP sales by 24%YoY during 2Q2019. Administrative expense increased by 26%YoY owing to inflationary pressure, while selling and distribution cost was decreased by 13%YoY during 2Q2019 due to decline in volumetric sales. Other operating expense increased by 155%YoY due to exchange loss incurred by companies on foreign payables and increase in WPPF expense amid higher profitability. Other income increased by 31%YoY, where FFC outperformed its peers (adjusted for subsidy) followed by EFERT due to hefty cash and short term investment and one time gain on sale of land to EPCL. Finance cost depicted a growth of 142%YoY due to the hike in policy rate and increase in borrowings by the sector.

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