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Stock Review

Stocks on the mending as upcoming imf meetings and monetary policy may sustain bulls

The week ended on 13th September 2019 was reduced to three trading days due to Ashura holidays. Coming-off from holidays, the benchmark index of Pakistan Stock Exchange (PSX) continued with the trend of earlier week and gained 3.3%WoW to close at 31,481 points. T-Bill Auction (where 12M yield declined by 31bps) seeded market expectations of a cut in discount rate, providing critical catalyst for market performance. Other news providing the impetus included: 1) positive news flows from ongoing meeting of APG, an associate of FATF, and 2) the Government of Pakistan reassuring meeting IMF targets on performance and structural benchmarks for 1QFY20, boosting investors’ sentiments.

Average daily volume rose to 129.5 million as compared to 93.0 million a week ago. Based on NCCPL data, foreigners remained net seller to US$1.01 million. On the local’s side, Mutual Funds emerged net buyer US$5.53 million, but individuals remained net sellers with US$4.8 million. Sectoral developments included: 1) Supreme Court (SC) moved for ‘out of turn’ hearing of GIDC case, 2) Fertilizer companies increasing retail price following delay in implementation of GIDC Ordinance and 3) Rs200 billion Energy Sukuk stuck with SBP owing to delay in issuance of sovereign guarantees.

Top performers of the week included: KAPCO, POL, PPL, LUCK and BAFL, while laggards included: HASCOL, MLCF, GWLC and PIOC. With CPI numbers and the latest T-Bill auction pointing towards the end of the tightening cycle, monetary policy announcement scheduled for 16th September is likely to set market direction for next week. News flows relating to APG meeting would also influence the market sentiments.

The total liquid foreign exchange reserves held by Pakistan were reported at US$15,751.7 million on 6th September 2019. The break-up was: reserves held by the State Bank of Pakistan (SBP) were US$8,462.3 million and net reserves held by commercial banks were US$7,289.4 million. During the week under review reserves held by SBP increased by US$182 million to US$8,462.3 million, due to official inflows.

During August, the benchmark index of Pakistan Stock Exchange (PSX) posted decline despite a rise in trading activity, with incessant selling from institutional investors and terse outcomes from the meeting of the APG of FATF depreciative for investor sentiments. Amongst local investors, individual participation levels surpassed other participants with net buying of US$27.9 million was followed by Banks (US$8.2 million), while cumulative FIPI for the month amounted to a net outflow of US$3.5 million, contrary to July’19 net inflow of US$31.4 million.

Equities performance could remain under stress in the short term given weak demand penetrating earnings profile of the listed companies. That said, in medium-to-long run conditions are ripe for a bull-run, given cheap valuations and acknowledgment that the economic down cycle is near bottom. However, the brokerage house remains apprehensive over recent measures to improve market liquidity, which are believed to prove inadequate compared to substantial macro reforms and clearances from international bodies (IMF review, FATF plenary and working group meetings) for driving any sustainable bull run.

August 2019 volumetric offtake of oil marketing companies declined to 1.3 million tons, with high speed diesel (HSD) sales continuing to crater on the back of persistent grey-product penetration. Decline in furnace oil (FO) seems to have decelerated, contributing to the prevailing slowdown in POL volumes. For 8MCY19, volumes also declined to 12 million tons, receding 16%YoY exhausted by weak power demand (cumulative FO sales dip 40%YoY), where monthly average sales dropped to 255,000 tons as compared to 427,000 tons during 8MCY18, indicative of subdued monthly demand, but significant annual deviation.

 

In terms of market shares, there was an improvement with PSO being at the top with 46% share followed by APL and HASOL. A 16%YoY decline in cumulative POL product sales for 8MCY19 underpins a fall in demand for POL products from the industrial segment mainly as influx of grey product and economic slowdown weighs heavily, exacerbated by consumers buckling under the pressure of rising pump prices.

Amreli Steels (ASTL) posted a loss of Rs0.64/share for 4QFY19 as against earnings per share of Rs1.98 for 4QFY18. For the full year (FY19) the Company posted an EPS of Rs0.11, down by 98YoY. Gross margin declined to 6% mainly due to 1) Rupee depreciation over the last few quarters, 2) higher depreciation cost amidst recent expansion and 3) inflationary pressure. During 4QFY19, the company doubled its revenue to Rs9.87 billion, from Rs4.6 billion. Higher revenue is attributable to increased volumes, post expansion and increased prices. Finance cost of company has increased on back of debt financed expansion, and higher interest rate. Selling and Distribution expense increasing by 75%YoY were broadly in-line with the increase in sale in volumetric terms. The risks facing the Company include: 1) slowdown in economy, 2) likely cut down in PSDP and 3) further depreciation of Rupee.

Hub Power Company (HUBC) closed the financial year on a weaker note with consolidated net profit of Rs2.67 billion (EPS: Rs2.22) for the fourth quarter. This took FY19 earnings to Rs11.24 billion (EPS: Rs9.37). The decline in 4QFY19 earnings was mainly attributable to 108%YoY increase in finance cost due to CAPEX financing and higher interest rates. HUBC opted for additional short term borrowing during 4QFY19 to increase its stake in 1,320MW CPHGCL project as funds raised through the recent right issue were expected to materialize mid-July. For full year FY19, 67%YoY higher finance cost was partially offset by Rupee depreciation impact, keeping the bottomline flattish. As per expectations, HUBC did not announce any cash dividend along with its result due to liquidity constraints. To note, the proceeds from the first Energy Sukuk were entirely used to retire payables to PSO.

Automotives sales in Pakistan continued downward trend, posting decline of 41%YoY during August that was mainly attributed to: 1) higher auto prices on persistent Rupee depreciation, 2) less number of working days amid Eid holidays and 3) overall economic slowdown. The major contributor to industry decline was HCAR, down by 67%YoY, followed by INDU down 57%YoY and PSMC down 19%YoY. Honda Cars (HCAR) sales fell 67%YoY, highest decline among its peers. Indus Motors (INDU) reported a decline of 57%YoY for August, with a 59%YoY decline in its Corolla variant, which historically has shown exceptional performance and supported INDU’s overall volumes. Pak Suzuki (PSMC) recorded a 19%YoY decline mainly due to shift of customers’ interest to Alto and upcoming Kia’s Variant Picanto.

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