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Stock Review

Index keeps falling; investors poise some political and economic news snag

Despite positive news flows at the start of the week, a barrage of weak volumes, mediocre results, skipped payouts by IPPs and lack of concrete development on the passage of the Supplementary Finance Bill by the parliament equity market performance subdued. The benchmark Index of Pakistan Stock Exchange (PSX) declined by 1.16%WoW during the week ended 22nd February 2018 to close at 40,016 level. Key news flows during the week were: 1) Saudi Crown Prince Mohammed bin Salman signed investment agreements worth US$20 billion during his high-profile visit to Pakistan, 2) the delay in the passing of a supplementary bill in the National Assembly dampened its likely impact of tax relief to businesses and individuals, 3) the country’s current account deficit during January 2019 narrowed to US$809 million, falling by 47%YoY from US$1.544 billion recorded during December 2018 and 4) India pressing for Pakistan to be kept on a terrorism financing watch list following an attack in occupied Kashmir.

Gainers of the week were led by: PSO, MCB, OGDC, POL, whereas laggards included: KAPCO, PSMC, UBL and MLCF. Daily trading volumes climbed 18.8%WoW to 125.13 million shares, but remained well below levels seen during earnings season. The volume leaders were: KEL, PIBTL, PAEL and LOTCHEM. Earnings announcements during the coming week include INDU, NML, NCL, PIOC, DGKC, ASTL and PPL. Any pickup in activity would bode well for market participants, where illiquidity has caused erratic moves in main board sectors, relegating investors to the sidelines. Geopolitical developments, circular debt clearance and passage of the mini-budget through parliament remain major flashpoints for investors in the near term.

During the week ended 15th February, 2019, total liquid foreign exchange reserves of Pakistan were reported at US$14,794.6 million. A point of concern was that the reserves held by State Bank of Pakistan (SBP) further decreased by US$163 million to US$8,043 million due to external debt servicing and other official payments. Net reserves held by commercial banks were reported at US$6,751.6 million.

Pakistan’s first and the largest Islamic bank, Meezan Bank (MEBL) announced profit after tax of Rs2.7 billion for 4Q2018 (EPS: Rs2.3), up 70%YoY. The result was above market expectation. The prime reason for growth in income was the rise in net spread earned, up by 57%YoY. The Bank also announced final dividend of Rs2.0/share. Topline Securities has attributed this significant rise in net spread earned to the non-applicability of minimum deposit rate on Islamic banks which has resulted in higher sensitivity of income to the tightening monetary policy (policy rate up by 425bps in 2018), where profit earned has grown by 57%YoY. Other income decreased by 7%YoY due to a 76% decline in dividend income to Rs143 million. However, fee income exhibited a robust growth of 45%YoY to Rs1.5 billion. Admin expenses rose to Rs5.4 billion, up by 25%YoY. Cost to income ratio dropped to 49.3% as compared to 55.1% for the same period last year. During 2018, earnings rose to Rs7.7/share, up 42%YoY due to 35% higher net spread earned.

The primary reason for this increase in earnings was the rising interest environment where policy rate has gone up by 425bps in 2018. The key risks facing Meezan Bank include: 1) deterioration in Pakistan macros, 2) uptick in provisioning charge, 3) lack of investment avenues and 4) lower than expected hike in policy rate.

HUBC’s consolidated earnings for 2QFY19, declined by 16%YoY to Rs2.1/share, primarily due to the rise in finance cost. Moreover, the company did not announce any dividends for the outgoing quarter due to liquidity crunch brought about by circular debt as well as funds requirements for upcoming projects. Revenue declined by 52%YoY due to lower generation at Hub and Narowal plant as the government focused on producing power from fuels other than furnace oil. HUBC’s gross margins increased to 35% as compared to 17% for the same period last year which is attributable to PKR depreciation. Finance cost rose to Rs1.6 billion, up 42%YoY as the Company continues to rely on short term borrowing in a rising interest rate environment. Furthermore, share in loss from associate companies increased to Rs133 million from Rs62 million, which further dragged down the bottom-line. 1HFY19 earnings grew by 2%YoY which were primarily driven by PKR depreciation and lower admin and other expenses. Keys risks facing Pakistan’s largest IPP are 1) lower than expected rupee devaluation; 2) delay in commissioning of upcoming projects and 3) pile up of circular debt.

Pakistan State Oil (PSO) recorded a sharp decline of 98%YoY in its profit to Rs0.17/share for 2QFY19, much lower than market expectations due to 1) exchange losses amounting to Rs1.5 billion and 2) inventory loss of Rs3 billion. Other than aforementioned reasons, Company witnessed a decline of 47%YoY in its volumetric sales; mainly due to furnace oil (FO) sales declining by 75%YoY coupled with Hi Speed Diesel (HSD) and Motor Gasoline (Mogas) declining by 35%YoY and 17%YoY respectively. Other income was up by 122%YoY amidst higher penal income of Rs1 billion, while finance cost doubled to nearly Rs2 billion for the 2QFY19 due to higher bank borrowing and rise in interest rates. PSO’s associate company contributed losses of Rs185 million for 2QFY19 as against profit of Rs52 million for the corresponding period of last year. The key risks facing the Company include: 1) volatility in oil prices and inventory losses, 2) rupee depreciation and 3) sharp pile up in circular debt.

Fauji Cement Company (FCCL) posted a profit after tax of Rs1.8 billion for 1HFY19, up 44%YoY, due to partial closure of line-2 in 1HFY18 leading to a low base. Gross margins for 1HFY19 rose to 29% as compared to 22% for 1HFY8. For 2QFY19, EPS was reported at Rs0.74, up 24%YoY on the back of margins improving to 32% as compared to 26% for 2QFY18 due to line-2 being fully operational leading to in-house production of clinker. QoQ increase of 28% was mainly on the back of higher prices of Rs608/bag for the quarter as compared to Rs517/bag in 1QFY19 leading to higher gross margins. Other income for the quarter jumped by 229%YoY to Rs76 million for the period which we believe is on the back of one-off gains. Overall, the result was better than market expectation mainly on account of 32% gross margins for 2QFY19. Along with the result, company also announced a interim dividend of Rs0.75/share.

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