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Market remains under coronavirus fear, posts 5.7pc decline

During the week ended 13th March 2020 Pakistan Stock Exchange (PSX) remained under pressure mainly due to coronavirus pandemic and plunging crude oil prices. Pak rupee also witnessed erosion in value. The benchmark index closed at 36,061 points, registering a decline of 5.7%WoW. Average daily traded volumes during the week grew by 9.0%WoW to 234.3 million shares. Volume leaders included: MLCF, FCCL, BOP and KEL. While gainers included: PIOC, CHCC, INDU and NCL, laggards were: POL, PPL, BOP and 4) MEBL. With the market in a clear under pressure depression (down 17% from 13th January 2020 peak), value seekers with distant investment horizons may be lured to build ‘buy- and-hold’ positions in select sectors and scrips.

Total liquid foreign exchange reserves held by Pakistan were reported at US$18,904.6 million on 6th March 2020. The break-up of the foreign reserves position was: reserves held by the State Bank of Pakistan (SBP) amounted to US$12,789.9 million, whereas reserves held by commercial banks were reported at US$6,114.7 million. During the week under review the reserves held by central bank increased by US$32 million to US$12,789.9 million.

Major news flow driving market sentiment included: 1) Chief of Army Staff on Thursday urged all concerned parties to gear up preparations to counter the coronavirus, a statement issued by Inter-Services Public Relations (ISPR) said that the situation with regard to COVID-19 and the preventive measures taken by the Pakistan Army were discussed, 2) data released by the central bank indicated that foreign investors have liquidated US$972 million investments in the government securities including Market Treasury Bills (T-Bills) during FY20. The cumulative sale during the first eleven days of March 2020 was reported at US$625 million, 3) World Health Organization on Wednesday declared the coronavirus has found a foothold on every continent except Antarctica, and 4) Lahore High Court ruled that the financial institutions are not required to obtain a decree from banking court to sell mortgaged properties for recovering defaulted loans.

Total automobile industry sales for the month of February 2020 were reported at 12,510 units, comprising of 10,345 units of passenger car, LCV sales of 1,774 units, Truck offtake of 327 units and 64 Buses, marking ten consecutive months of YoY total industry sales declines. Cumulative 8MFY20 industry sales were reported at 94,402 units (down 44%YoY) with cumulative passenger car sales at 79,537 units (down 43%YoY), LCVs at 11,973 (down 47%YoY) and Truck sales of 2,404 units (down 47%YoY), retracing to levels last witnessed during 2014-15.

Segment-wise PC sales during the month under review were at 5,769/2,234/2,342 units for 1300cc+/1000cc/, below 800CC, moving +6%/-1%/-1%MoM and -30/-48/-49%YoY, while amongst PSMC/INDU/ HCAR recorded monthly offtake of 5,377/4,510/2,141 units moving -3/+12/-3%MoM and -50/- 18/-35%YoY. Cumulative 8MFY19 sales for PSMC/INDU/HCAR to 55,630/22,707/12,497 vehicles a move of -35/-49/-61%YoY, implying capacity utilization levels of 56%/62/38%, with competition from Kia Lucky Motors likely eating into PSMC’s share (KLM is not a member of PAMA, hence no numbers reported). Analysts Flag launch of the Yaris to upgrade its 1.3-1.5 PC segment offerings as a catalyst.

Following the failure of OPEC+ talks to yield any consensus on output cuts and resulting measures adopted by the Saudi Aramco (cutting crude delivery rates to Asia and US), crude benchmarks tumbled drastically (Brent down 31%) the most since the 1991 Gulf War. Already in the midst of pricing downsides from the spread of COVID-19 beyond China, OPEC+ nations were working towards extending the existing 1.7 million bpd production cut through to CY20, with additional cuts of 1.5 million bpd from June 2020 onwards. With no OPEC+ deal on the horizon, previous cuts of 1.7 million bpd agreed upon by the 23-country cartel will likely expiring unleashing significant supply upswing, while the spread of COVID-19 effectively lowers the floor on crude benchmarks further. Volatile crude benchmarks have played a drastic role in E&P sector price performance, where -US$5/bbl shift in oil price can cut EPS estimates for OGDC, PPL and POL.

Analysts are closely assessing the impact of COVID-19 and implication for crude oil to downgrade earnings and fair value estimates for E&P companies, where positive spillovers on macro metrics at home could buoy sentiment going forward.

ADK Securities has reviewed its investment case on Fauji Fertilizer Company (FFC) after release of detailed CY19 financial accounts, updating; 1) urea price was brought down by Rs375/bag to current levels, 2) urea production and offtake levels and, 3) GIDC elimination on feed/fuel gas in our model. While the current urea price has neutralized the earnings impact of GIDC elimination for FFC, price differential of Rs215/bag between FFC and EFERT could lead to higher urea offtake for FFC. Note that FFC’s urea offtake declined 3%YoY to 2.46 million tons in CY19 as against an average one percent per annum growth over the previous 5 years.

Meanwhile, Supreme Court’s verdict on GIDC’s legality is awaited. An unfavorable decision could lead to the highest cash outflow (Rs61 billion GIDC payables) amongst the listed fertilizer companies. On the flipside, a liquidation of ST investment for GIDC payables may bring the scrip on the Shariah compliant investor’s radar, neutralizing negative repercussions for FFC. The brokerage house has not incorporated any ‘other income’ being derived from GIDC accumulation in its CY20 estimates. Therefore, any unfavorable decision and consequent liquidation of short term investment will have negative EPS impact of only Rs0.85.

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