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Listless market after growing unrest in held Kashmir and mounting macro risks

During the week ended 9th August 2019, the benchmark Index of Pakistan Stock Exchange (PSX) fell more than 7.1% WoW to close at 29,429 points. It breached the psychological barrier of 30,000 after five years. This un-ceremonial fall was caused by mounting macro risks and growing unrest in Indian occupied Kashmir. Key news flows during the week included: 1) the Government of Pakistan (GoP) minimized furnace oil and coal based power generation to facilitate maximum intake of RLNG to avoid US$30 million penalty under Take-or-Pay mechanism and reduce the volume of demurrages, 2) FBR announced not to take any adverse action against traders on the condition of provision of CNIC numbers till 30th September this year, 3) the ECC of the Cabinet on Thursday approved mechanism for payment of subsidy on account of lower gas price of US$6.5/mmbtu to the export industry and ordered to have a proper definition of export-oriented sector to avoid misuse of public funds, 4) the National Security Committee on Wednesday decided to contain diplomatic ties with India and suspend bilateral trade in response to New Delhi’s move to annex occupied Kashmir and 5) National Accountability Bureau (NAB) on Wednesday arrested former finance minister, Miftah Ismail and former managing director of Pakistan State Oil Company (PSO), Sheikh Imranul-Haq, in LNG corruption reference.

Average daily traded volume during the week declined to 57.85 million shares. Volume leaders included: MLCF, KEL, TRG, UNITY and ISL. Stocks leading the performance board during the week included: DGKC, MLCF, EFOODS and NCL, on the flipside, stocks heading lower included: UBL, APL, HASCOL, HMB and INDU. A rally would hinge on likely emergence from: 1) conclusion of the current cycle of monetary tightening seen in September 2019 Monetary Policy, expectations can be seen crystallizing on 21st August 2019 PIB auction participation, 2) successful completion of IMF’s second quarterly review, expected during November and FATF consultations, scheduled in October this year and 3) external space emerging from global monetary tightening, softening US$ and weak prices of energy commodities.

Engro Fertilizer (EFERT) announced 2QCY19 financial result, posting profit after tax of Rs3.2 billion (EPS: Rs2.38), down 2.5%YoY mainly on the back of higher other operating expenses and finance cost. On cumulative basis during 1HCY19 earning remained flat at Rs7.18 billion (EPS: Rs5.38). The result is below market expectations due to higher effective tax rate of 48% during the quarter. This takes 1HCY19 net profit to Rs7.2 billion (EPS: Rs5.38). Other result key highlights included: 1) topline was up 16%YoY on higher urea retention price and a 13%YoY increase in urea sales, and 2) YoY higher gross margins of 32%, resulting from 17%YoY higher operating profits during 2QCY19. Above expected effective tax rate (potential reversal of tax credits booked in CY18) dragged the YoY profitability growth. The Company also announced its first interim cash dividend of Rs5.0/share.

 

Despite reduction in volumetric sales, the Company achieved 18%YoY growth in revenues on the back of price hike in urea. Other Income recorded at Rs1.4 billion as compared to Rs509 million for 2QCY18 on account of sale of certain assets. Effective tax rate of the company clocked in at 48% as compared to 33% in consolidated business and 34% in core urea business during 2Q2019 owing to partial reversal of tax credit which the Company utilized in previous quarters amid decline in tax rates by the government. Financial charges increased by 237%YoY to Rs1.2 billion on the pretext of increase in the policy rate and borrowings. Analysts flag, 1) Rupee depreciation, 2) regulatory control on fertilizer industry, 3) poor crop season and 4) unfavorable decision related to GIDC as key threats to the Company.

MCB Bank (MCB) posted an earnings of Rs4.6/share, up by 15%YoY for 2Q2019 primarily due to 1) NIMs expansion and 2) higher other income due to exchange rate fluctuations. Cumulative earnings of the Bank during 1H2019 were reported at Rs10.4 billion (EPS: Rs8.8), up by 11%YoY. Along with the results, the Bank announced an interim dividend of Rs4.0/share taking aggregate dividend payout to Rs8.0/share for 1H2019. The Bank’s non-markup income grew by mere 7%YoY to Rs4.6 billion in 2Q2019 primarily on the back of higher foreign exchange income; to Rs1.3 billion due to exchange rate volatility. However, loss on securities of Rs192 million as against a gain of Rs382 million tapered off the gains. Non-markup expenses of the bank recorded a growth of 10% YoY due to higher operating expenses. Other than that, the Bank booked provisional expenses of Rs1.3 billion as against reversal of Rs731 million in the corresponding period. Key risks facing MCB include: 1) higher than expected provisions, 2) lower than expected advances growth and 3) deterioration of Pakistan macros.

United Bank (UBL) announced 1HCY19 profit after tax of Rs9.2 billion (EPS: Rs7.49) as compared Rs6.1 billion (EPS: Rs5.06) for the corresponding period last year. The bank also announced interim dividend of Rs2.5 at the end of 2QCY19, taking 1HCY19 cumulative dividend payout to Rs5.0 For 2QCY19 alone, net profit rose to Rs5.1 billion as compared to Rs4.0 billion for the previous quarter. Domestic CASA rose to 86.9% as compared to 86.1% for 1HCY18. CAR strengthened further to 18.1% for June 2019 as compared to 17.7% for December 2018 mainly on the benefit of rating on corporate loans – a measure likely to continue going forward. The Bank recorded additional provisioning charge in UAE and Qatar operations. Management has accounted for all possible risks on UAE portfolio. However, Abu Dhabi portfolio is currently exhibiting risks which can keep overseas provisions elevated. Overseas coverage on NPLs stood at 90% and management reiterated its commitment to pull coverage to 100%, inclusive of FSV benefits. Domestic book seems stable currently, with no material risks visible despite toughening economic conditions. The bank is expected to record Rs65 billion and Rs75 billion PIB maturities in 2HCY19 and 1QCY20. As regard to TSA, the management stated that no policy has yet been finalized as to its implementation. IFRS-9 is expected to be implemented from January 2020 and much of its implication is already reflected in the current financial position. The management is likely to continue to impair Tanzania operations which will result in ‘loss from discontinued operations’ going forward.

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