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Markets jump back; FATF, monetary policy outcome likely to guide

After four consecutive sessions of retreat, the benchmark index of Pakistan Stock Exchange (PSX) staged a rebound on the last trading day of the week ended on 24th January 2020, closing at 42,633 points, but still down by 1.24%WoW. The market remained under pressure on fears of: 1) inflation likely crossing 13% mark in January 2020 putting on hold expectations of interest rate cut in forthcoming Monetary Policy announcement and 2) potential gas price hikes where the decision to reduce GIDC to Rs5/bag from Rs405/bag added to the uncertainty particularly in the Fertilizer sector. Average daily trading volumes declined to 186.7 million shares, down 20.2%WoW due to lack of triggers as well as awaiting the outcome of FATF joint group meeting in Beijing. Other news flows impacting the market included: 1) current account deficit narrowed 75%YoY to US$2.15 billion during first half of the current financial year, 2) foreign investment in treasury bills touched record US$2.2 billion and 3) Half-yearly uplift spending rose to 55% of allocation.

Foreigner emerged net buyers with US$2.8 million, which together with banks with net buy of US$2.3 million absorbed profit-taking by Individuals of US$2.2 million and Insurance net sell US$2.8 million. Sector wise, Cable and Electrical Goods and OMCs witnessed major declines where the latter came under pressure due to below expected result of APL on inventory losses. This was followed by Fertilizers, Engineering and Autos. Top performers of the week were: NML, CHCC, FFC, PIOC and FFBL, while laggards were: HASCOL, APL, HMB, EFERT and ENGRO.

The market performance in the upcoming week is likely to be governed by positive outcome of Pakistan and FATF joint group meeting where Pakistan’s efforts have been widely acknowledged and Monetary Policy announcement scheduled on 28th January 2020. Pressure would also be exacerbated by portfolio realignment as a result of roll-over week.

Bank AL Habib (BAHL) is scheduled to announce its full CY19 results on 29th January 2020. Analysts expect the Bank to announce profit after tax of Rs11.1 billion, up 31.1%YoY from Rs8.4 billion for CY18. The result is also likely to be accompanied by a dividend of Rs3.5/share. Confluence of likely robust growth in deposits of more than 15% as against an industry average of 9.6%; addition of branches and interest rate hikes could push NII growth to 38.7% for CY19. This coupled with stable contribution from NFI (15.2% of total income) is likely to aid earnings growth. On a quarterly basis, earnings are likely to grow by 60.2/62.6% QoQ/YoY to Rs4.1 billion (EPS: Rs3.68) with impetus coming from: 1) NIMs improvement, pulling up NII growth to 22.2%QoQ and 2) possible reversal of impairment expense, offsetting higher potential credit costs due to downgrading of NPLs. CY19 earnings announcement is likely to provide fuel to stock performance.

Attock Petroleum (APL) has announced its half yearly financial results, which has been termed significantly lower than market expectations. The Company has posted profit after tax of R1.6 billion (EPS: Rs15.9), down 24.8%YoY. The below expectation result will keep the stock under pressure in the near term. Major deviation occurred in gross profit as company recorded gross profit of Rs3.0 billion due to the lower inventory gains. For 2QFY20, net profit was reported at Rs355 million (EPS: Rs3.6), down 71/36% QoQ/YoY, but inventory losses (estimated at Rs771 million) in the second quarter can be termed the major culprit. Analysts believe that bulk of inventory losses were incurred on furnace oil (FO) after company’s furnace oil sales increased by 23.4%YoY, as against a decline of 22.5%YoY for the industry, with prices nosediving.Net sales of the company declined by 1.2%YoY for 2QFY20 as volumes declined by 2.4%YoY. However, rising retail prices contained the losses. APL booked impartment of Rs51.4million on its financial assets during the second quarter, while short term investments plunged to Rs936.4 million as of December 2019, as against Rs2.1 billion as of September 2019.


As per data released by NFDC, Urea offtake increased by 89/253% YoY/MoM to 1.35 million tons in December 2019, due to buying in anticipation of increase in urea price in upcoming months. This takes CY19 urea offtake to 6.2 million tons, up 7%YoY, solely led by LNG based fertilizer players. On cumulative basis, FFC, FFBL and FATIMA witnessed a decline of 3/10/25% in CY19, while EFERT’s urea offtake remained flattish. The year ending urea inventory normalized to 203,000 tons in December 2019. However, diversion of excess LNG availability to Fertilizer sector in CY20 may keep urea inventory levels around half a million tons. DAP inventory also rose to 492,000 tons at end December 2019 due to weak offtake, down 12%YoY in CY19 amid stable production levels. Only FFBL’s offtake increased by 10% YoY in CY19, with others EFERT/FFC/FATIMA posting a decline of 21/48/12% YoY. The Fertilizer players have reportedly expressed their inability to pass on the GIDC benefit to farmers due to potential gas price hike in the offing. Given increase in ‘fuel’ prices only to LNG price level (Rs150/bag impact), analysts highlight that the GoP will be forsaking Rs35 billion in revenues as compared to the OGRA approved gas price hike. Meanwhile, the urea demand supply dynamics will continue to determine prices. Until further clarity emerges, analysts advise investors to remain cautious. ENGRO should be accumulated on dips due to: 1) exposure to diversified businesses and 2) unutilized cash, where investments in lucratively profitable ventures could be the key upside trigger.

According to an AKD report, profitability of Cement companies in its investment universe are expected to remain in negative territory for 2QFY20 as price competition among local players could led to prices going down up to Rs90/bag during the period. Finance cost is going to be a drag on earnings of these companies for 2QFY20 as increasing debt to finance capacity additions and working capital will take interest cover down to 1.2x for 2QFY20 as against 5.8x for 2QFY19. The high leveraged players are worst placed in the prevailing environment and are slated to post losses in 2QFY20, while companies with low leverage (LUCK and FCCL) are expected to remain in green. However, companies such as CHCC, MLCF can utilize available tax benefits to support bottomline. The brokerage house expects the cement sector to remain under pressure in near term on the back of disappointing results for 2QFY20. The outlook for 3QFY20 also remains bleak with declining retail prices (particularly in North), along with coal prices creeping high. As against this, demand isn’t expected to provide much support either as government’s fiscal constraints increase.

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