Continuing
its strong run, the benchmark of Pakistan Stock Exchange marked another stellar
week ended on 8th December 2016 and closed at 45,387 levels. The
rally was driven by high oil prices, continued expansions in industrial sectors
and announcements of corporate actions. LUCK announced plans for entry into
automotive business through setting up manufacturing plant in partnership with
Kia motors, furthering operations in Iraq while expressing intention to bid for
DCL's assets, keeping sentiment strong. Other announcements included TREET and
ICI’s plans to invest in the pharmaceutical sector, Shanghai Electric sharing a
US$9 billion investment plan following KEL’s acquisition and BoD approval of
MCB and NIB merger. Additional key news flows included: 1) Continuation of Supreme
Court hearings of Panama case, with PM Sharif facing criticism from the court
for failing to provide a money trail for asset purchases, 2) GoP raising Rs147 billion
through Treasury Bills auctions where cut‐off yields remained stable, 3) cotton arrivals increasing
13.8%YoY for the season, 4) delay in bid opening process for the 40% divestment
of PSX and 5) CCP imposing a penalty of Rs150 million on PSO for deceptive
marketing. Market leaders during the week were: LUCK, ICI, PIOC, FCCL and AICL;
while laggards were: ASTL, EPCL, HASCOL, PSMC and LOTCHEM. However, activity at the Exchange tapered 15.3%WoW with average daily trading volume of about 393
shares. Foreigners remained net sellers for the week, though outflows stood
lower at US$24.8 million as compared to US$33.5 million a week ago. Oil stocks
is likely remain in limelight as the next week kicks off, following the OPEC
and Non‐OPEC meeting to
decide on oil output cuts set for tomorrow. Moreover, the US FOMC is scheduled
to announce monetary policy next week, with broader anticipations of a 25bps
hike in Federal Funds Target Rate (FFTR). However, Fed’s outlook for FFTR
trajectory in CY17 remains a risk event for global markets. Resurgence in
political noise on Panama case developments remains a possibility, to potentially
force some profit taking next week.
The US
FOMC is largely anticipated to increase the fed rate in its upcoming monetary
review next week that coupled with a
surge in inflationary expectations post Trump victory has pushed the greenback
to its 14-year high. Within this context, the upcoming meeting retains particular
importance as Fed's economic projection for future rate trajectory can alter
the dollar outlook. While most regional currencies have witnessed erosion against
US$, the PkR/US$ parity has held its ground. Moreover, GoP's ongoing drive to
normalize kerb‐rates is a strong
signal of its policy to maintain currency stability. However, going forward analysts
fear some decline due to: 1) exports weakness amid lower currency competitiveness
in the region, 2) higher oil prices adding to import bill and 3) potential
delays in foreign debt flows to support foreign exchange reserves.
We
revisit our investment case of LUCK as it has formally announced to further
expand its business portfolio. The new list of projects comprise of: 1) setting
up of manufacturing plant of Kia motor vehicles, 2) expressing interest in
acquiring DCL's 1.134 million tpa Hattar plant, 3) doubling capacity of Iraq JV
to 1.742 million tpa and 4) indirect additional exposure in the pharmaceutical
business through its subsidiary, ICI (expressed interest in acquiring certain
assets of Wyeth Pakistan Ltd). Assuming the DCL acquisition is successful, LUCK's
earnings can increase depending on DCL's post acquisition performance. Whereas,
doubling Iraq JV's capacity can result in incremental earnings.
Up-gradation
of prevailing MOGAS standard (from 87RON to 92RON) and the accompanying launch
of high octane variants by OMC's has rejuvenated the drive for volumetric sales
growth, as seen in the November’16 figures released by OCAC. Running a preliminary
market sizing analysis, some analysts ascertained the impact of these fuels
(reportedly deregulated but an official notification is still awaited) on
SHELL, HASCOL and PSO's earnings. Moreover, deregulation resonates positives
for OMC's, namely: 1) additional cushion against wild swings in cost of supply,
as increased costs can be passed on without a lag and higher margins raise
earnings profile and 2) low receivables in motor fuels segment, increasing
avenues for growth steering clear of liquidity pangs.
