Friday, 29 April 2016

Pakistan Stock Market closes the week at 8-month high

The benchmark of Pakistan Stock Exchange, PSX-100 Index finally came out of its consolidation phase and closed at an 8-months high (also CY16’s high) of 34,719 level. During the week ended 29th April, the Index rallied on the back of oil prices and stronger corporate profitability reported in the ongoing result season.
After an extended period of risk-off sentiment, investor’s confidence recovered in spite of heavy foreign selling (US$12.40 million during the week) resulting in higher volumes touching 242 million shares compared to 239 million shares during a week ago. Leaders during the outgoing week included: NML, OGDC, HBL, FFBL and SNGP while laggards included: PSMC, PTC, KAPCO, AKBL and PSO.

Key developments during the week included: 1) fertilizer companies turned down the GoP’s proposal to bring down prices of urea by Rs200/bag, however they agreed to reduce the price by Rs60/bag, 2) ECC is likely to direct an additional 60mmcfd to Engro Fertilizers (EFERT) from Mari gas field, 3) he federal cabinet approved Budget Strategy Paper for FY17 with a target to spend Rs1.497 trillion on development, reduce fiscal deficit to 4% of GDP, increase economic growth rate to 6.5% and limit inflation to 6%, 4) according to Finance Minister the circular debt is to be cleared by July this year and 5) Super Tax to be imposed on rich individuals, association of persons and companies having over Rs500 million for another year.

The continuation of market’s bull‐run, up 13.6% from CY16 low is hinged upon a number of events including 1) movement in crude oil prices which is widely expected to run out of steam due to oversupply, 2) heightened political risks associated with burgeoning pressure from the opposition with regards to Panama Leaks investigation (though that seems highly unlikely due to lack of proper legislation pertaining to this investigation), 3) upcoming budget proposals and 4) possible inclusion of Pakistan in MSCI Emerging Markets. However, analysts believe that current rally may extend in the upcoming week as bulls continue to outweigh bears in spite of the persisting risks.

AKD Securities in its project has forecast the CPI to rise 1.4%MoM, implying inflation at 4.03%YoY in April’16 as compared to 3.94%YoY recorded in the previous month. This is expected to be an outcome of recent uptick in both Food and Fuel prices coupled with periodical rise in the Housing, Education and Clothing Indices. This implies 10MFY16/4MCY16 CPI average of 2.78%YoY/3.83%YoY. NFNE Core inflation is also projected to rise to 4.8%YoY during April'16 taking 10MFY16/4MCY16 average to 4.13%YoY/4.56%YoY. Going forward, CPI is likely to tread up as Ramadan effect propels food prices and rising crude oil prices translate into higher domestic energy costs. Consequently, FY16/CY16 CPI inflation is expected to average at 3.05%YoY/4.5%YoY. Expectations for any further easing have faded with secondary market yields ascending sharply post April'16 monetary policy announcement where bond yields have risen 34bps on average since. Within this backdrop analysts reiterate a nominal hike in 4QCY16 on higher inflation expectations and potential currency weakness if crude oil prices continue to escalate.

National Bank of Pakistan (NBP) has posted below expectations consolidated profit after tax of Rs4.02 billion (EPS: Rs1.89) for 1QCY16 as compared to net profit of Rs3.89 billion (EPS: Rs1.83) for 1QCY15, up by a nominal 3%YoY. The deviation from the projections came from higher than expected expenses of Rs11.7 billion against an estimate of Rs10.1 billion. Sequentially, there a sizable 48%QoQ decline in earnings  primarily on the 50%QoQ/30%QoQ drop in capital gains/fee income alongwith 24%QoQ decline in net interest income. The 1QCY16 result highlights included: 1) a 7%YoY increase in NII, 2) provisions going down to Rs917 million during the quarter from Rs3.1 billion for the corresponding period last year, 3) a 23%YoY/29%QoQ drop in non-interest income amid lower capital gains, utilizing Rs1.46 billion in the quarter under review against Rs3.49 billion in same period last year, 4) a 4%YoY increase in expenses. While NII came down by 24%QoQ, a key positive feature of NBP’s 1QCY16 earnings performance is the improvement in asset quality. However, a sustainable improvement, in this regard, is necessary to ascertain quality earnings.

Maple Leaf Cement Factory (MLCF) announced its 3QFY16 results posting profit after tax of Rs1.16 billion (EPS: Rs2.20), up 28%YoY from net profit of Rs911 million (EPS: Rs1.73) for 3QFY15. Pre-tax earnings grew significantly by 54%YoY due to a strong domestic demand and lower energy costs. However, significant increase in effective tax rate kept the earnings on a lower side.  As a result, the earnings were lower than the forecast of Rs2.35/share in spite of higher than expected topline and gross margins (GMs). This took 9MFY16 earnings to Rs3.51 billion (EPS: Rs6.64), 49%YoY higher than Rs2.35 billion (EPS: Rs4.44) for 9MFY15. Result Highlights included: 1) topline grew by 13%YoY due to stronger domestic demand, 2) GMs improved by 709bps YoY to 42.81% led by lower coal price, 3) finance cost declined by 57%YoY due to early debt repayments and lower interest rates and 4) increase in tax liability due to greater profits and relatively higher effective tax rate of 38% as compared to 25% in 3QFY15.

Luck cement (LUCK) announced its 3QFY16 results posting profit after tax of Rs3.36 billion (EPS: Rs10.39), down 9%YoY from net profit of Rs3.70 billion (EPS: Rs11.45) for 3QFY15. Apart from higher tax expense denting the bottomline, profitability improved during the period where PBT grew by 13%YoY for 3QFY16. Nonetheless, the earnings were in line with analysts’ forecast of Rs10.61/share. As a result, 9MFY16 earnings rose by a meager 3%YoY to Rs9.61 billion (EPS: Rs29.73) from Rs9.30 billion (EPS: Rs28.77) for 9MFY15. Result highlights included: 1) topline dropping by one percent YoY due to flatter dispatches and 1%YoY/7%YoY lower local/export retention prices, 2) GMs expanding by 282bps YoY to 48.81% led by lower coal and  furnace oil price, recent addition of 5MW WHR and shift of lost exports to premium priced domestic market, 3) distribution cost reducing by 39%YoY due to 47%YoY decline in exports and 4) tax expense jumping due to higher effective tax rate of 31% compared to 14% in 3QFY15. The other factor attracting attention of investors included: 1) land acquisition for Greenfield cement plant in Punjab and contract with equipment supplier expected to be finalized by the end of June this year, 2) financial close of 660MW LEPCL is expected to be achieved by August this year and 3) a 50MW Wind Farm likely to commence commercial operations by the end of June 2016.

Wednesday, 27 April 2016

Engro Fertilizer posts above expectation profit

Engro fertilizer Limited (EFERT) has posted disappointing quarterly financial results; there is no surprise because these are close to analysts’ forecast. The blame for this disappointing performance should go to the Government of Pakistan (GoP) for following bad policies rather than the management of EFERT for any inefficiency.
The Company has posted profit after tax of Rs2,121 million (EPS: Rs1.59) for January-March 2016 quarter (1QFY14) as compared to net profit of Rs3,058 million (EPS: Rs2.30), posting a decline of 31 percent.
If one compares the performance with 4QCY15 the disappointment is even bigger, because the Company had posted Rs5,123 million (EPS: Rs3.89) a hefty decline of 59 percent.
In its report AKD securities has 1QCY16 result above its projected net profit of Rs1.65 billion (EPS: RS1.24) with the deviation in gross margin (more than expected inventory level). It has also attributed 59%QoQ decline in earnings mainly to depressed fertilizer industry dynamics and seasonality.
Key highlights of the result include: 1) Topline coming off by 29%YoY/65%QoQ owing to significantly lower volumetric sales (down 37%YoY/48%QoQ), 2) a 87bpsYoY increase in GP margin from 38.3% in 1QCY15 to 39.2% in 1QCY16 mainly on account of concessionary gas pricing for Enven Plant, 3) a 65%YoY lower other income as a result of 54%YoY reduction in T-Bills and other fixed income placements to Rs10 billion and 4) a 41%YoY decrease in finance cost on account of swift deleveraging.

Friday, 22 April 2016

KAPCO profit declines by 13 percent

Pakistan’s biggest independent power producer, Kot Addu Power Company (KAPCO) has released its third quarter financial results for the current financial year (FY16). The company has posted profit after tax of Rs6.204 billion (EPS: Rs7.05) for 9Mfy16 as compared to net profit of Rs7.122 billion (EPS: Rs8.09) for 9MFY15, down by 13%YoY.
They keyways are: 1) sales declined by 36 percent, 2) cost of sales declined by 39 percent and 3) gross profit declined by 17 percent. In declining cost scenario 34 percent increase in administrative cost a bit odd but in the absence of detailed accounts it may not be possible to give any rationale for this hike.
There are two other interesting observations: 1) a 43 percent decline in other income and 2) a 54 percent reduction in financial cost. In the declining interest rate scenario this can be termed an indication that other income was drawn from higher remunerative assets.
Reduction in cost of sales can be attributed to greater use of gas as compared to furnace oil during the period under review. However, a point arises that despite cost being a passed on factor there has not be corresponding reduction in electricity by NEPRA.
Despite many odds the scrip still looks worth considering as KAPCO has already paid Rs4.25 dividend for the first half and a similar payout can be expected for the second half of the FY16.  

Rupees in million


Cost of Sales

Gross Profit

Administrative Expenses

Other Income

Profit From Operations

Finance Cost

Profit Before Tax


Profit For the Period