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Index rises as cement shares shine; october remains an exciting month for participants

For the week ended 4th October 2019 the benchmark index of Pakistan Stock Exchange (PSX) closed at 33,033 points, up 3%WoW. After a choppy start of the market, cement companies remained in limelight after the hike in cement prices by up to Rs15/bag. It was further supported by the expectation of double digit growth in cement sales during September 2019, signaling a revival in construction activities. The momentum gained strength as key stakeholders from government assured their support to business community.

Investors’ participation increased significantly with average daily traded volume rising to 223 million shares, up 106%WoW. Top performers during the week included: DGKC, CHCC, MLCF, GWLC and PIOC, while POL and FATIMA were the major losers. Based on NCCPL data, foreigners remained net sellers amounting to US$4.70 million. On the local side, Individuals were net buyer of US$4.36 million, while banks and insurance were net sellers of US$4.13 million and US$4.75 million, respectively.

Major news impacting the market included: 1) provisional revenue collection of Federal Board of Revenue (FBR) fetching Rs960 billion against quarterly envisaged target of Rs1,071 billion, 2) inflation for September 2019, rising to 11.37%, as compared to 10.49% in the previous month, 3) Army Chief, General Qamar Javed Bajwa meeting top business leaders to find ways to bolster the economy, 4) Pakistan’s total public debt expected to climb to Rs45.6 trillion over the next five years and 5) foreign exchange reserves held by the central bank falling to a three-month low of US$7.7 billion during the week ended 27th September, 2019.

After a jubilant week, analysts expect the market to cool down and investors to set their eyes on upcoming result announcement where cyclical sectors might disappoint. On top of all, the upcoming FATF meeting scheduled for mid October holds key to market performance where a favorable outcome for Pakistan will set the tone for significant performance in medium term. However, as time approaches closer the divergent news flows might start to appear, which may keep the market volatile.

Reversing persistent pressures on equity benchmarks, September 2019 ended on an upswing. Foreign portfolio investors remained net sellers, offloading US$3.5 million in positions during the month, with net buys centered on Fertilizers (US$2.7 million) and Oil & Gas exploration (US$0.5 million), moderated by domestic participants, with individual investor (US$6.1 million) and other organizations (provident/pension funds, societies and trusts, US$13.3 million) furthering buying interest. October remains an exciting month for market participants, with external factor and investors beginning to align portfolios before the end-of-year signified by the benchmark index being in the black, 8 times out of 10, while extraneous developments tend to make the month a water-shed moment for sentiments.

 

Headline inflation for September 2019 jumped to a multi-year high of 11.38%YoY from 10.50%YoY in the preceding month and 5.40%YoY in September 2018. The acceleration was primarily driven by the food group, reflecting the rising prices both in perishable and non-perishable items. The monthly inflation rate dropped to 0.76%MoM as compared to average monthly rate of 1.8%MoM in 2MFY20, as the country moves past the economic adjustment phase. The decision to cut fuel prices for September 2019 also played its part, partially offsetting the impact of rising food prices. Market-wise, urban inflation accelerated to 11.56%YoY, driven by rising food, clothing and appliances prices, while rural Inflation jumped to 11.09%YoY with the heavyweight food group being the single largest contributor. Higher than expected inflation may dent the expectations of an early rate cut, where elevated inflationary pressures and challenges on the fiscal front will likely lead to keeping policy rate unchanged.

The volumetric offtake of POL products was reported at 1.5 million tons, up 16%MoM, but down 15%YoY with HSD sales continuing to crater on the back of persistent grey-product penetration. The changing power mix weighed on furnace oil (FO) sales, down 23%YoY. For 1QFY20, volumes were reported at 4.3 million tons, receding 9%YoY exhausted by weak power demand (cumulative FO sales dipped 16%YoY), where monthly average sales dropped to 238,000 tons as compared to 283,000 tons during 1QFY19. In terms of market shares, PSO/APL/HASOL accounted for 47/11/5% market share during the month under review as compared to cumulative shares of 45/10/8%. PSO successfully clawing back share during the outgoing month while HASCOL continued to lose out. Cumulative POL product sales posted 9%YoY decline in for 1QFY20 underpinning a fall in demand for POL products from the industrial segment mainly as influx of grey product and economic slowdown weighs heavily. With major shifts underway. Analysts advocate for building positions in APL, with the company having a strong balance sheet and steady pace of growth (devoid of any event-based developments, neutral to policy reforms or clearances) providing an attractive mix of defensive and growth credentials.

Potential sell-off from Islamic mutual funds (6% of free float), largely due to rising debt financed equity investments has kept a cap on HUBC’s price performance. However, the release of detailed financial accounts indicates HUBC’s conventional debt to asset (33%) comfortably below the levels allowed by Shariah compliance criteria of 37%.

Meanwhile, ‘penal income’ at 11% of total revenues may potentially hinder Shariah board in giving a clean chit to the IPP, where HUBC’s management argues the aforementioned ‘non-compliant’ penal income is being derived from rising receivables, which are not within the Company’s control. The upcoming November 2019 Shariah review could be a key check point for HUBC, where revenue growth from US$ indexed income and possible pick-up in fuel costs could bring down penal income’s contribution from current levels.

Analysts’ bullish stance on HUBC stems from US$ hedged ROEs on HUBC’s 1,650MW coal power projects translating into 3-year earnings CAGR of 42% (ThalNova Thal Power project not incorporated yet, financial close expected in December 2019). Piecemeal payouts are expected to resume in 2HFY20.

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