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Stock Review

Mixed sentiment witnessed; political noise may push back investors

Tensions on the eastern border and tough call from the FATF demanding swift action dampened investors’ sentiment. The benchmark index of Pakistan Stock Exchange closed the week ended on 25th October 2019 at 33,657 points, 0.63%WoW lower. The index lost 785 points in the first trading session of the week, but was quick to recover and pared 86% of the earlier losses in the next three trading sessions, as the investors shifted their focus on positive macro: narrowing CAD, improving EODB ranking and declining yields on short tenor government papers. Market activity remained weak following the application of a minimum standard commission, with average daily volume declining almost 11%WoW to 124.61 million. Top performers during the week included: DGKC, HASCOL, ASTL, POL and KAPCO, while PIOC, FFBL, PSMC, and NCL were the major losers.

The key news flow impacting the market during the week included 1) Current Account Deficit (CAD) narrowing mainly on account of contraction in imports, 2) cut-off yields on short tenor government paper declining, with inversion in yield curve signifying rate cut over next 12-month period, 3) Pakistan climbing 28 places in World Bank’s ease of doing banking (EODB) ranking, 4) latest data on large scale manufacturing (LSM) showcasing continuous slowdown in manufacturing sector and 5) foreign exchange reserves held by SBP increasing by US$79 million to US$7.89 billion during the week ended 18th October 2019.

The earnings season is in full blossom, where major corporate (FFC, GLAXO, KAPCO, SEARL, INDU, NBP, NCL, NML, CHCC, GATM, FATIMA, PSO, PPL, ASTL, HUBC, & LUCK) are scheduled to announce their result next week. While the expectations are tilted towards the down side, any surprises both on up/down side could sway the sentiment accordingly. However, market sentiments will largely be driven by the upcoming JUI-F led opposition march. The domestic political noise could gain momentum, as the protest date draws closer.

Engro Corporation (ENGRO) posted profit of Rs6.15 billion (EPS: Rs10.67), up 59%YoY as compared to Rs3.857 billion (EPS Rs6.69) for the same period last year. The earnings are higher than expectation owing to increase in other income. Along with the result Company also announced cash dividend of Rs8.0/share, taking cumulative dividend during 9M2019 to Rs23/share.

Among the subsidiaries, Engro Fertilizer Limited (EFERT) earnings declined by 35%YoY to Rs3,326 million during 3Q2019 amid decrease in volumetric sales, higher gas cost and one-off deferred tax charge. Furthermore, finance cost increased by 127% to Rs1.2 billion due to hike in policy rate and impact of rupee devaluation on foreign borrowing. However, profit from chemical business increased by 17%YoY to Rs1.29 billion during 3Q2019 due to increase in PVC margin and other income. Unconsolidated admin expenses continued its rising trend during 3Q2019, the Company witnessed 40%YoY growth on back of expenditures being incurred on creation of ‘Engro Leadership Academy’ (for training of its employees) and other feasibilities related expenses.

Key risks to ENGRO include: 1) poor crop season, 2) scarcity of water for sowing season 3) volatility in polymer margins and 4) change in regulatory structure in energy division as key risks for the holding company.

 

FCEPL (Formerly EFOODS) posted a loss of Rs570 million (LPS: Rs0.74) for 3QCY19, taking 9MCY19 loss to Rs809 million (LPS: Rs1.05) due to lower than expected gross margins. Net sales of the Company witnessed an increase of 17%YoY to Rs10.0 billion. Analysts attribute higher volumetric sales and increase in prices owing to partial pass-on of rupee depreciation. The Company posted gross margins of 8%; significantly down during 3QCY19. This was mainly due to higher imported raw material cost amidst rupee depreciation. FCEPL’s distribution expenses were down by 4%YoY to Rs901 million owing to lower marketing expense. This was due to higher base effect, where the company was aggressive in media campaigns to re-position Olpers and Tarang brands. Finance cost was up by 94%YoY to Rs316 million owing to increase in the policy rates.

The Company faces following risks: 1) rising competition, 2) declining demand for processed milk, 3) any unanticipated regulatory changes, and 4) volatility in international raw milk prices as key risks for FCEPL.

MARI Petroleum (MARI) posted earnings growth of 45%YoY to Rs55.9 per share due to increase in net sales by 2%YoY and finance income by 572%YoY. Net sales of the company increased primarily on the back of increase in Mari field gas prices by 44%YoY to Rs273 per mmbtu owing to currency devaluation. However, overall production witnessed a decline of around 2%. Operating expenses increased by 18%YoY to Rs3.25 billion. On Basis of Estimate (BOE), opex (operational expenditure) clocked in at around US$1.72 as compared to US$1.82 in 1QFY19. Exploration cost increased by 31%YoY due to higher seismic acquisition by the company in Block 28, Bannu west, Sukkur and Ghauri Blocks. Finance income increased by 572% YoY to Rs1.2 billion due to cash rich balance sheet of the company which is invested in high yielding Government Papers. Effective tax rate of the Company was up 30% in the outgoing quarter as compared to 33% in 1QFY19 and 27% in 4QFY19.

Analysts identify various risks facing the Company that include: 1) inability to meet set benchmark of incremental production to avail higher pricing, 2) slowdown in demand from customers, and 3) lower than anticipated international oil prices as a key risk to company’s earnings and valuation.

Pak Suzuki Motor Company (PSMC) reported financial result for 3Q2019, reporting LPS of Rs 14.11 as against EPS of Rs 1.15 for same period last year. Company has incurred significant loss due to gross loss amounting to Rs232 million incurred during the quarter under review.

Unilever Pakistan Foods (UPFL) reported financial result for 3Q2019, posting an EPS of Rs93.41 as compared to EPS of Rs58.02 for the same period last year. Earnings were up by 61%YoY due to growth in Revenue by 12%YoY.

Fauji Fertilizer Bin Qasim (FFBL) reported financial result for 3Q2019, recording LPS of Rs0.50 as against EPS of Rs0.85 for same period last year. Earnings were down due to significant hit on margins, down by 8%YoY.

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