Attock Petroleum profit up by 92 percent

One of Pakistan’s leading oil marketing companies, Attock Petroleum Limited (APL) has reported better than expected financial results, mainly because of reversal of WWF expenses amounting to Rs621 million in 2QFY17. APL has posted profit after tax of Rs3.16 billion (EPS: Rs38.06) for the six-month period ended 31st December 2016 (1HFY16), up by 92%YoY, where ex-reversal earnings were Rs2.72 billion (EPS: Rs32.83) up by 66%YoY due to: 1) increase in gross margins to 6.4% as compared to 3.9% for 1HFY16 but lower sequentially as input costs rose, 2) profit from other associates recording a strong uptick (Rs68 million as compared to Rs14 million for the corresponding period last year and 3) finance costs rising 58%YoY as the company embarks on ambitious CAPEX plans.

Pakistan Oilfield earnings up by 3 percent

Pakistan Oilfield Limited (POL) has announced its second quarter, ended 31st December 2016 (2QFY17) financial results It has posted profit after tax of Rs2.34 billion (EPS: Rs9.88), up 3%YoY/1%QoQ. The earnings came slightly higher than expectation primarily due to better topline resulting from improved hydrocarbon flows. This took 1HFY17 earnings to Rs4.66 billion (EPS: Rs19.68), up 27%YoY. POL also announced an interim dividend of Rs15/share. Result highlights include: 1) topline up by 9%YoY to Rs7.08 billion in 2QFY17 owing to 19%YoY increase in average oil price to US$48/bbl and relatively improved hydrocarbon flows, 2) gross profit grew by 18%YoY to Rs3.48 billion during the quarter owing to growth in topline together with 10%YoY decline in operating costs, 3) exploration costs jumped to Rs126 million due to higher exploration activity during the period, and 4) pre-tax earnings grew by 16%YoY to Rs3.15 billion. However, 76%YoY higher tax expense at Rs806 million due to higher effective tax rate of 26% as compared to 17% in 2QFY16 kept earnings growth in check at 3%YoY.

                               

Pakistan Stock Exchange fails to sustain 50,000 levels

During the week ended 27^th January 2017, benchmark index of Pakistan Stock Exchange managed to cross 50,000 levels. It failed to sustain the level due to due to profit taking and closed the week at 49,964 points, up 1.21%WoW. Earnings and corporate announcements remained at the center of investor interest with major highlights including: 1) CHCC announcing capacity expansion of 2.1 million tons per annum, 2) PSMC’s plan to enter in to a JV to manufacture automobile glass and 3) ISL disclosing plans to enhance capacity. Volumes improved considerably during the week with daily average rising to 523.4 million shares, up 34.7%WoW with foreign outflows also tapering to US$13.7 million as compared to US$46.6 million a week ago. Top gainers were: EPCL, KEL, HUBC and BAFL, while laggards were: ASTL, SSGC, NCL and MTL.

Major news flows for the week were: 1) SECP constituted a committee to review matters of in‐house financing, 2) the ECC extended cash subsidy on domestic fertilizer sales and approved 0.3 million tons of urea till 28^th April, 3) CCP imposed fines of Rs62.3 million on EFOODS, Rs2 million on FFL and Rs0.5 million on Shakarganj Foods for deceptive marketing of dairy products as milk with EFOODS denying these allegations later, 4) FBR exempted sales tax on machinery imports by textile units and customs duty on import of 13 items for textiles till 30^th June 2018, 5) SBP raised Rs39.39 billion through PIB auction and 6) GoP signed implementation and power‐purchase agreements with two Chinese companies and HUBCO for setting up 1320MW coal plant at Hub and 330MW coal plant in Thar. With no excitement expected in the monetary policy review over the weekend, the market is likely to retain its focus on results announcements with major names in Sugar, Fertilizer, Foods and Autos reporting earnings. January CPI data due next week can prove a key in setting expectations for future interest rate trajectory. On the global front, the US FOMC is also scheduled to announce its interest rate policy, with broader anticipations of no change in the Fed rate.

Fauji Fertilizer Bin Qasim (FFBL) is scheduled to announce its full year financial results for CY16 on Monday 30^th January. The companies is forecast to post profit after tax of Rs678 million (EPS: Rs0.73) in CY16F as compared to net profit of Rs4.06 billion (EPS: Rs4.35) in CY15, down 83%YoY). This decline in earnings is expected on the back of: 1) gross margin (GM) coming off by 15.7% (including subsidy) on account of significant reduction in DAP prices (down 14%YoY) due to depressed international price trends, 2) a 39%YoY lower other income (excluding subsidy) on account of lower dividend payout from associated companies and reduction in term deposit placements, and 3) 19%YoY higher finance cost owing to increased borrowing to manage working capital requirements. Sequentially, analysts expect earnings to post a turnaround recording profit of Rs1.73 billion (EPS: R1.15) in 4QCY16 against net loss of Rs159 million (LPS: Rs0.17) in 3QCY16 on the back of 1.3xQoQ growth in topline to PkR23.7bn on account of increase in DAP offtake to 483,000 tons, courtesy the Rabi season. Along with the result we also expect a cash dividend of Rs0.60/ share. While earnings turnaround in 4QCY16 is expected to be led by strong volumetric growth, we feel an improvement in international pricing dynamics would be necessary for sustainability of the earnings trend, going forward.

Lucky Cement (LUCK) announced its 2QFY17 result posting consolidated/unconsolidated earnings of R4.34 billion/ Rss3.80 billion (EPS: Rs13.43/Rs11.75) in 2QFY17, up 16%YoY/12%YoY. The consolidated earnings came in line with the expectation of Rs4.27 billion (EPS: Rs13.21) where unconsolidated earnings of AKD Securities higher than our expectation owing to better than expected GM during the period. This was in spite of 68%YoY/30%QoQ surge in average coal price to US$85/ton suggesting LUCK utilized cheaper coal inventory during the period. On a cumulative basis, consolidated/unconsolidated earnings grew by 13%YoY/13%YoY to in 1HFY17. Growth in earnings was led by 1) Topline grew by 12%YoY/22%QoQ led by 16%YoY/19%QoQ growth in dispatches to 2.03 million tons in 2QFY17 as compared to 1.753 million tons/1.703 million tons in 2QFY16/1QFY17, (2) Gross Profit increased by 16%YoY/18%QoQ led by improved topline and 1.61ppt YoY GM expansion to 49.05% in 2QFY17, and (3) Other income growth  by 64%YoY/10%QoQ to Rs498 million in 2QFY17 owing to relatively higher cash and STI of Rs32.1 billion (Rs99.28/share).

                                                                 

                

United States: Boon or busted after Trump

As a student of Geopolitics in South Asia and MENA, I have repeatedly held the United States responsible for the turmoil in the region. I had even gone to the extent of saying that United States is the biggest warmonger. The super power loves to initiate a conflict that goes to the extent of anarchy and civil war.

This also invites other contenders to take part in proxy wars. While the sole purpose of United States is to sell its arms, it wants to keep others countries busy in fighting wars, rather than focusing on the welfare of their people. This also gives it a chance to keep the countries dependent on the World Bank and the IMF.

After having gone through what has been happening in the United States, after Donald Trump taking oath as new President, I am obliged to say that till recently the United States has been fanning hatred in the world, but now it is facing the same. Demonstration on the inaugural day and subsequent events clearly shows ‘Emergence of anarchy in the United States’. There are growing fears within the United States these demonstrations may turn violent.

Over the years the United States has been breading militants and using them in various countries to promote its agenda of keeping the countries in constant state of war. The worst examples are Syria, Iraq and Afghanistan. The blood thirsty mercenaries from around the world have landed in these countries. It may also be said that these militants have been moved from one country to another only to promote sale of arms.

One often wonders how the rebel groups get money. Even a cursory look at Afghanistan and MENA shows that poppy and petrodollars are used for purchasing arms. Various oil fields have been taken over by rebels, who are selling oil to the developed nations. The center of drug has shifted from golden triangle to Afghanistan.

Spy agencies of the United States have been alleging Russia for rigging election. This on one hand proves the failure of these agencies and on the other hand breakout of anarchy in the country that has been creating turmoil around the world.

Over the years, United States has been ringing alarm of nuclear assets going into the control of militants in various countries. One may ask the same question, will nuclear assets of United States be in safe hands, if the present demonstrations turn violent?

Pakistan stock market remains under pressure

The benchmark index of Pakistan Stock Exchange remained volatile during the week owing to political developments related to Panama case. With changing tone of the Supreme Court bench in favor of Prime Minister, the market reversed its earlier losses and closed at 49,365 levels, up 0.31%WoW. Textiles, Autos and Steels were the major driving sectors owing to announcement of textile package, early models launch/robust sales, and imposition of anti‐dumping duty on CRC imports, respectively. As against this, E&Ps and Banks provided major drag on Index due to foreign selling as Privatization Commission approved divestment of OGDC, and expectations of delay in interest rate liftoff, respectively. Average daily traded volumes fell by 20%WoW to 489 million shares where volume rankings continued to be occupied by second tier scrips such as: TELE, FABL, KEL, SSGC and BOP. Volume leaders during the outgoing week included: MTL, SNGP, HCAR, PSMC and ICI, while laggards included: OGDC, ASTL, HBL, UBL and PSO. Key developments during the week included: Prime Minister restored subsidy on fertilizer which was earlier withdrawn by the Ministry of Food, 2) SECP proposed setting requirement all equity funds and funds of funds would have to maintain at least 5% of net assets in cash and cash equivalents, 3) NTC imposed anti‐dumping duty of 13.17%‐19.04% on imports of cold rolled coils/sheets from China and Ukraine for a period of 5 years, 4) Privatization Commission approved initiation of capital market transaction of OGDC’s with divestment of up to 5% stake, and 5) The cut‐off yield declined slightly at the latest Treasury Bills auction with heavy participation of Rs1.071 trillion, while bids valued Rs538 billion were accepted. The market is expected to remain volatile in near term due to political risk associated with ongoing Panama case hearings. Possible selling spree of mutual funds to meet proposed SECP requirement can create additional pressures. Expectations of delay in interest rate liftoff may continue to keep banking sector under pressure. While analysts expect status quo in upcoming Monetary Policy announcement later this month, it can shed further light on interest rate outlook. However, analysts also believe that Textiles, Autos and Steels to remain in limelight due to aforementioned developments. Telecom/IT sector may also garner investors’ interest as the government plans to announce tax relief package for Telecom/IT sector.

With a sharp rise in December'16 (US$1.08 billion), current account deficit in 1HFY17 has accumulated to US$3.58 billion, higher than the deficit recorded for the last fiscal year. The deterioration in 1HFY17 reflects weak trade dynamics (trade deficit up 15.6%YoY) on declining exports and tepid remittances. Going forward, analysts expect the trend to continue with FY17 current account deficit at 1.85% of GDP on account of anticipated increase in imports as crude oil prices stabilize at higher levels and remittances failing to provide support. Concerns also remain on foreign investments as FDI from China has remained lower this year (down 54%YoY in 1HFY17) with the 10%YoY increase in 1HFY17 reflecting US$462 million flows under EFOODS's acquisition. Within this backdrop, analysts highlight mounting risks on foreign exchange reserve with upcoming external repayments (cumulative US$1.5 billion‐ US$1.75 billion under Eurobond, Paris Club and China SAFE debt retirement) largely funded through debt flows.

Lucky Cement (LUCK) is scheduled to announce its 2QFY17 result on 26^th of this month and expected to post consolidated/unconsolidated earnings of Rs4.27 billion/Rs3.48 billion (EPS: Rs13.21/Rs10.78), up 10%YoY/6%YoY from Rs3.87 billion/Rs3.29 billion (EPS: Rs11.97/Rs10.16) for 2QFY16. The growth in earnings is expected to be led by growth in topline owing to 11.3%YoY growth in dispatches as domestic dispatches are expected to go up 23.3%YoY backed by stronger domestic demand and additional sales of clinker to FCCL. However, increase in average coal price by 68%YoY is expected to shrink gross margin (GM) to 43% limiting gross profit growth to +1%YoY. Inter alia, 17%YoY decline in distribution cost due to fall in export dispatches by 28.5%YoY, and 76%YoY higher other income due to higher cash base is expected to result in further earnings growth. Consolidated earnings are expected to get a further boost from operations of 50MW wind farm and 1.18 million tpa cement plant in Congo.

AKD Securities has revisited its investment case for ASTL owing to recent increase in re‐bar prices by Rs3,000/ton. The increase in re‐bar prices is attributable to the rise in imported scrap prices and Chinese re‐bars prices. In this backdrop, ASTL has rallied 44% during January’16 so far, while further increase in domestic re‐bars prices is anticipated. In this regard, analysts estimate Rs1,000/ton increase in re‐bars prices to potentially raise earnings. However, they highlight that the local re‐bars prices are being raised to pass on cost of scrap where US$10/ton increase in scrap price is expected to dampen earnings by Rs0.88/share while it will require Rs1,300/ton increase in re‐bars price to completely pass on this cost. They also believe that ASTL's price rally has been overdone.

Pakistan Petroleum FY16 profit declines by 55 percent

Pakistan Petroleum Limited (PPL) has posted below expectation profit for financial year 2015-16 (FY16) but has not disappointed the shareholders. The Board of Directors has approved payment of final dividend of Rs3.50/share in addition to an interim dividend of Rs2.25/share. This takes the full year dividend to Rs5.75/share.

PPL’s FY16 earnings declined by 55%YoY to Rs17.24 billion (EPS: Rs8.74/share) for FY16 as compared to Rs38.40 billion (EPS: Rs19.47) for FY15. This decline can be attributed to: 1) topline declined by 24%YoY to Rs80.15 billion for FY16 from Rs104.84 billion due to 44%YoY plunge in average oil price to US$41/bbl in FY16 as against US$73/bbl in FY15,  (2) field expenditures grew to Rs44.95 billion in FY16, up by 6%YoY due to aggressive exploration activity, and (3) Other Income declined to Rs5.42 billion in FY16 YoY from to Rs7.61 billion in FY15, a decline of 29%YoY.

The company did not book further impairment loss associated with MND Exploration & Production Limited in FY16 which was expected to amount up to Rs4.00 billion. Nonetheless, lower than expected earnings have been attributable to higher than anticipated field expenditures and effective tax rate of 35%.

Pakistan stock market closes flat

With bouts of profit‐taking dampening an otherwise strong rally, the benchmark index of Pakistan Stock Exchange (PSX) closed almost flat at 49,211 for the week ended 13^th January 2017. Price increases from steel manufacturers, rally in dividend paying stocks before results season, announcement of an export promotion textile package and reversal in fertilizer subsidies revived investor participation, raising average daily turnover for the week by 19.7%WoW. Key news flows included: 1) ECC approving the summary regarding the Prime Minister's Package of Incentives for Exporters with an estimated outlay of Rs180 billion, 2) data showing that during November’16 large scale manufacturing sector grew 8 percent, 3) car sales during December’16 declining to 16,042/14,024 units, lower by 10.2%YoY/12.4%MoM, 4) GoP withdrew the cash subsidy on fertilizers, which was offered to the industry in the budget for FY17, and 5) HUBC has increased stake to 47.5% from 26% in the joint venture of setting up a 1,320MW power project on imported coal at an estimated cost of over US$2 billion . Leaders at the bourse were: ASTL, EPCL, SNGP, and KAPCO, whereas laggards were: PPL, EFERT, NML, and AICL. Volume leaders for the week were KEL, TRG, EFERT and ANL. As results season approach, stocks undergoing price performance stand to lose if earnings growth fails to match investor expectations. Additionally, any reversal in the GoP's annulment of the fertilizer subsidy may allow for pairing back losses.

During December’16 total industry/car sales were recorded at 16,042/14,024 units, lower by 10.2%/12.4%MoM, while the high base from the Rozgar scheme kept industry sales lower by 11.6%YoY. The full year (CY16) industry/car sales at 203,633/177,363 units tapered 9.2%/2.7%YoY, whereas ex‐Rozgar, car sales jumped 26%YoY.  Impressive offtake of Civic drove HCAR sales higher by 24.1%YoY, while PSMC sales ex‐Rozgar tracked up 19% YoY, whereas INDU marked a fall of 3.9%YoY.  Segment‐wise, growth was seen continuing in 1000CC segment up 26%YoY, 1300CC and above increasing by 4%YoY), while the Rozgar‐led high of (68%YoY growth in CY15) cooled in the 1000CC and below segment.  

The CY16 turned out to be an eventful year for commodities. All the major commodities including Oil (up 77%YoY on production cut agreement), Steel (up 85%YoY on increased protectionism and demand stabilization), Coal (up 73%YoY on supply tightening from China), Sugar (up 44%YoY on sustained import demand), Dairy (up 28% YoY on EU intervention price) and Cotton (up 13%YoY on weather related crop shortfall). The exception in this regard was Urea with prices for the commodity down 1.5%YoY however recovering well to US$232/ton currently. Going forward, prices for most commodities, including Oil, are expected to rise, carrying on the momentum from CY16 as markets re-balance. That said, high global stock levels particularly with China and currency uncertainty following Trump's presidency can throw a spanner in the works.   

Chinese have submitted the highest bid for buying controlling stake in Pakistan’s largest integrated utility, K-Electric. Developments surrounding the sponsor hand-off at the utility continue to drive sentiment, while minor price slippages signal growing impatience. Concrete developments include: 1) passing of resolution by shareholders of Shanghai Electric Power Co. Ltd (SEP) approving acquisition of 66.2% shares in the Company, 2) submission of documents and supporting financial reports of SEP to NEPRA for approval, and 3) news reports regarding the approval process for sale, ongoing negotiations, sum up the long and arduous process for change in sponsors. Highlighting the operational credentials of SEP, analysts reiterate the benefits from this planned change in ownership, using past actions by the entity as a blueprint for possible actions by SEP post acquisition in the Company.

Pakistan Petroleum profit likely to plunge by 40 percent

One of Pakistan’s pioneer exploration and production (E&P) Pakistan Petroleum Limited (PPL) is scheduled to announce its FY16 financial results on 17^th January 2017. During this period global crude oil price hovered at low levels. Therefore, the investors/shareholders await the result anxiously.

Pakistan’s leading brokerage house, AKD Securities has released its forecast hinting towards a decline in Earnings per Share (EPS) by 40 percent. The brokerage house attributes this potential decline to 44 percent decline in international oil prices. It has also hinted towards some other positives.

According to the brokerage house, PPL profit after tax for the period under revive is estimated to decline to Rs20.40 billion (EPS: Rs10.35) as compared to net profit of Rs34.25 billion (EPS: Rs17.37) for a year ago, a plunge of 40 percent.

Brokerage house has attributed this decline primarily to a 44 percent decline in average international crude oil price of USD41/barrel in FY16 as compared to USD73/barrel during FY15.

The report also suggests that PPL may also announce a final cash dividend of Rs2.75/share that would the full year payout to Rs5.00/share for FY16.

The story would begin with an expected fall in topline by 24 percent, to Rs79.13 billion in FY16 from Rs104.02 billion in FY15.  Other income is expected to decline by 30 percent to Rs5.32 billion owing to decline in short-term investments. Finance cost is expected to go up by 24 percent to Rs688 million owing to greater real discount rate set for the decommissioning obligations.

A decline in royalty expenses is likely to provide some relief. However, slide in crude oil price remains a key risk to declining revenues/earnings and consequently valuations.

Anti Iran stance of western media

In one of my previous blogs I had accused western media of being dishonest. Some of my readers termed it a ‘sweeping statement’. Since then, I have been reading news pertaining to Muslim countries more carefully and dispassionately and also avoiding giving any immediate response. However, today I read news released by Reuters captioned “Exclusive: Iran capitalizes on OPEC oil cut to sell millions of barrels” submitted by Jonathan Saul.

This report talks about Iran has selling more than 13 million barrels of oil that it had long held on tankers at sea, capitalizing on an OPEC output cut deal from which it is exempted to regain market share and court new buyers, according to industry sources and data.

In the past three months, Tehran has sold almost half the oil it had held in floating storage, which had tied up many of its tankers as it struggled to offload stocks in an oversupplied global market.

The amount of Iranian oil held at sea has dropped to 16.4 million barrels, from 29.6 million barrels at the beginning of October, according to Thomson Reuters Oil Flows data. Before that sharp drop, the level had barely changed in 2016; it was 29.7 million barrels at the start of last year, the data showed.

Unsold oil is now tying up about 12 to 14 Iranian tankers, out of its fleet of about 60 vessels, compared with around 30 in the summer, according to two tanker-tracking sources.

I would like to reiterate that this news pertains to 2016 and any details about 2017 are yet to come. During December 2016 both Saudi Arab and Russia have produced oil at record levels and more shale oil rigs have resumed production in the US. Therefore, it may be said that Iran was not alone in capitalizing on its crude inventories. It only followed the footprints of Saudi Arabia, Russia and the US.

Pakistan Stock Exchange inching closer to 50,000 mark

The benchmark index of Pakistan Stock Exchange (PSX) continued its upward journey towards 50,000 mark during the week ended 6^th January 2017. It posted a gain of 2.58%WoW, and closed the week at 49,038. Exercising of pricing power by cements, expectations of turnaround in margins for steels, expectations of the textile policy and the Supreme Court's move to re‐examine beneficial owners of holding companies, helped boost a broad based rally where average volumes for the week were up 42.3%WoW, 408 million shares. Key new flows included: 1) cement dispatches grew by 8.65%YoY to 19.81 million tons in 1HFY17, led by growing demand in the domestic market, while local cement sales increasing by 11.07%YoY during the period, 2) the GoP decided to keep petroleum prices unchanged for two weeks during the ongoing month, 3) domestic petroleum products sales during the 1HFY16 increased by more than 18% to 13 million tons. POL sales during December'16 rose to 2 million tons, reflecting a growth of 23% YoY/1.8%MoM and 4) news reports stated that KEL has shelved plans for converting its BQPS‐1, with 420MW capacity to low‐priced coal after the utility failed to secure cost‐effective tariffs from the regulator. Stocks outperforming over the week were: ASTL, FFC, NCL and PTC, while laggards were: MEBL, AGTL, EPCL and KEL. Volume leaders were: DSL, ASL, KEL and, BOP. News flows and preliminary data on output figures from OPEC nations is expected to greatly sway global oil prices. While the index is at all‐time highs, profit taking cannot be ruled out. In the run‐up to results season, dividend paying stocks are expected to remain in the limelight. 

Recent recovery in international urea price to US$240/ton (up 42% since July'16) presents a lucrative opportunity for local manufacturers to export excess urea inventory (November'16 urea inventory in the system stands reported at 1.45 million tons, down 15%MoM/ up 56%YoY). Weakening demand (poor farm dynamics) along with record level urea production has led to high inventory build‐up in the system which is likely to persist in the near‐term with urea inventory forecasted at 1.2 million to 1.8 million tons by the end of CY16/CY17 respectively. In this backdrop, the GoP is expected to allow export of 0.8 million tons of urea in line with a proposal of Ministry of Industries. In such a scenario, Engro fertilizer remains a key beneficiary on account of its low cost/bag and healthy market share, followed by FFC owing to market leadership in urea sales.  

Robust growth in demand for POL products, underpins December'16 total volumetric offtake of over 2 million tons, climbing 1.4%MoM/21.6%YoY. Furnace oil sales rose by 35.5% MoM/30.4%YoY, followed by HSD sales up 23.7%YoY but dipped 20%MoM, whereas MOGAS demand continued to rise (growing 16.7%YoY), yet remaining tepid sequentially (0.3%YoY increase). 1HFY17 volumes point to 18%YoY growth in total volumes, led by 20%/16%/20%YoY growth in FO/HSD/MOGAS offtake. The picking up of volumes at this pace is likely to slow. That said, 2HFY17 is likely to be slightly better (5-year average 2HFY sales make up 53% of annual offtake), led by strong growth in retail fuels from May’17 onwards. Premium fuels sales continue to soar, where 1HFY17 sales of 29,547 tons marks a 37%YoY increase, making FY16 full year sales of 41,067 tons pale in comparison. Renewed force to regain market share remains prominent in PSO's numbers, where the OMC is slated to benefit from its vast retail network.

According to an AKD Research report, cement prices in the North Region have likely been increased in the range of Rs10‐20/bag whereas the cement prices in the South Region remain unchanged and are not expected to be raised anytime soon. The brokerage house believes that the hike in cement prices (not incorporated in base estimates yet) should allow cement manufacturers to maintain margins whereas gross margin of AKD Cement Universe is likely to improve by 54 bps/100 bps to 38.76%/43.77% in FY17/FY18.