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Bulls control persist; outcome of FATF meeting may sway the market

The benchmark Index of Pakistan Stock Exchange (PSX) closed the week ended on 11th October 2019 at 34,476 points, up 4.37% marking the second consecutive week closing in green. Top performers during the week included FFBL, MEBL, HASCOL, PAEL and EFOODS, while FCCL and PSMC were among the major losers. The inverting yield curve, stable currency over the last three months and upcoming Eurobond and Sukuk issues, expected to shore up foreign exchange reserves, boosted bullish sentiment. The week began with the release of FATF report on Pakistan, indicating that the country was compliant on one criterion, partially compliant on 26 criteria and largely compliant on 9 criteria, where Government of Pakistan (GoP) has taken material steps since then to address issues in the 4 areas of non-compliance.

The PIB and T-Bill auctions indicated an inverting yield curve – rates on 10-year PIBs declined by 50bps since the last auction to 11.74%. The yields on 3/6/12 month Bills declined by 4/28/38 bps to 13.69/13.55/13.46 percent since last auction; pushing market into buying frenzy. Also, PSX introduced minimum brokerage commission at 3 paisa per share or 0.15% of the transaction value, whichever is higher for the ready market, which will be effective from 14th October 2019. Sector wise, major developments included cement players in North increasing prices up to Rs530/bag, this being the second consecutive weekly hike in cement prices, keeping cement stocks in limelight.

Other major news during the week included: 1) next meeting of the federal cabinet to be held on 15th October to potentially announce another reshuffle in the cabinet, 2) remittances increasing to US$1.7 billion during September this year and 3) FBR’s directing big retailers to install point-of-sale invoicing app into their systems by 1st December this year to report turnover with the tax authority on real time basis.

The next key check point for the market would be the outcome of the FATF meeting scheduled for 16th to 18th October, 2019 where a status quo would be taken as a positive by the market. Furthermore, upcoming week also includes Board meetings of HBL, ABL, MCB, APL, ACPL, ISL, EPCL, LOTCHEM and EFERT for financial result announcements, which could sway the market.

Bullish trend witnessed in local currency bond market is one of the strongest rallies in the recent history. The 10-year bond has rallied 12-15% in last 7 weeks. Consequently, yields have fallen to 11.63%, from 13.50% on 20th August, 2019. Reportedly, a few trades have been executed at 11.5%. After witnessing a low price on 29th May this year, the 10-year bond has rallied 15-18% out pacing all asset classes in Pakistan, causing yields to fall sharply from its recent high of 13.92% as of 29th May this year to 11.63% lately. This bull-run was despite of over Rs1.2 trillion (fixed and floater) long term bonds (PIBs) issued by government after signing IMF program on 3rd July 2019. This is in line with IMF guidelines to shift borrowing from central bank to banking sector and to increase the tenor of government borrowings. Although, a similar bond rally was witnessed in 2014 post IMF program but that was also led by sharp fall in global oil prices which caused local inflation to come down to 2.1% in April 2015, from 9.2% in April 2014.

The Board of Directors of Engro Fertilizers (EFERT) is scheduled to meet on 18th October 2019 to announce 3QCY19 results. Analysts expected the Company to post 3QCY19 profit after tax of Rs4.5 billion (EPS: Rs3.36), up 41%QoQ, but down 12%YoY. The YoY decline in earnings is attributable to 1) lower Urea/DAP offtakes, 2) a 54%YoY hike in finance cost amid policy rate hikes over the last year and, 3) higher effective tax rate of 39%, as compared 25% for the same period last year due to expected reversal of deferred tax booked in 3QCY18. On a QoQ basis, the 41% increase in earnings will result from 907bps QoQ higher GMs led by higher urea retention price, while build-up in urea inventory is expected to provide further cushion. However, EFERT booked a gain on sale of land to EPCL in 2Q, the absence of which is expected to result in 64%QoQ lower ‘other income’, constraining bottomline growth. EFERT is also expected to announce a second interim cash dividend of Rs3.0/share that will take 9MCY19 payout to Rs8.0/share.

Fauji Fertilizer Company (FFC) is expected to witness a sequential decline in earnings due to higher feed and fuel gas prices effective 1st July 2019. FFC immediately increased urea retention price by Rs210/bag, which led to a disruption in urea offtake during the month. Overall, FFC urea offtake is likely to post declined in 3QCY19. Disruption in volumes and pricing post the most recent gas price hike is expected to result in 11%QoQ lower 3QCY19 earnings of Rs4.65 billion (EPS: Rs3.66). Gross margins (GMs) are expected to witness a decline 600bps QoQ, outweighing the 9% increase in topline. In addition to sequential decline on gross profits level, absence of dividend income from FFBL and AKBL is expected to drag ‘other income’ lower by 10%QoQ. On YoY basis as well, the earnings are expected to witness 25% decline led by: 1) lower GMs of 28% amid flattish topline, and 2) higher finance cost. ‘Other income’ based on GIDC accrual and lower effective tax rate are expected to contain the dip in 3QCY19 earnings, resulting in 22% YoY higher profit tax after. FFC is also expected to announce its third interim cash dividend of Rs3.2/share, taking 9MCY19 payout to Rs8.55/share.

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