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 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 Key developments during the week included: Prime Minister restored subsidy on fertilizer which was earlier withdrawn by the Ministry of Food, 2) SECP proposed setting requirement all equity funds and funds of funds would have to maintain at least 5% of net assets in cash and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.

Selling by foreigners keeps Pakistan stock market under pressure

The benchmark of Pakistan Stock Exchange breached 40,000 mark during the week ended August 19, 2016. This prompted the investors to indulge in profit taking in the later part of the week to pull the index below 40,000 level. Foreign selling added to the pressure with outflows for the week at US$18.38 million considerably higher than US$1.03 million earlier. Daily average volume for the week also declined 12.9%WoW to average 230.69 million shares.

Key news flows during the week included: 1) MTB yields remain unchanged across all tenors in the week’s auction despite heavy participation with bids amounting to above Rs659 billion where the GoP raised Rs373 billion, 2) FDI declined 14.6%YoY with net flows of US$64.3 million in July’16 with total foreign investment for the month at US$113.9 million on rising portfolio investments, 3) the NA Standing Committee on Finance approved the Benami Transaction (Prohibition) Bill, 4) ECC approved sale of imported urea available with NFML at a discounted price of Rs1310/bag compared to the subsidized local price of Rs1,400/bag, 5) GoP got ready to float fresh tenders for the import of 200 mmcfd of LNG to cope with the expected surge in demand during winter this year and 6) Privatization Commission sought comfort letter on PPA and generation license of KAPCO from the Ministry of Water & Power to offer GoP’s residual shares to investors during domestic road shows.

Interest in the coming week is likely to be centered on remainder corporate results for the quarter. Major companies scheduled to announce results include HUBC, KAPCO, OGDC, CHCC, BAFL, NBP and INDU. However lacking major triggers, the broader market is expected to remain listless. Global crude prices are likely to be tracked keenly ahead of OPEC’s meeting next month.

Renewing concerns on potential slowdown in remittance flows on worsening global financial dynamics, inflows during July'16 marked a sharp decline of 20%YoY/36%MoM to US$1.33 billion ‐ the lowest monthly flow since April'14. This reflected unfavorable developments that included: 1) slowdown in GCC economies on oil price slump and 2) US regulatory tightening on money transfer. While room remains for volatility in the Rupee on sluggish remittances, analysts maintain their FY17 forecast of 3% PkR/US$ depreciation on Pakistan’s foreign exchange reserve strength. In terms of its implication on the banking sector, some revenue dilution can be expected in UBL, HBL and NBP with remittances contributing more than 10% to total fee income approximately. However, expansion in branchless banking segment is likely to provide a buffer to any downside arising from slower remittances growth having no material impact on banks' earnings.

Exhibiting the brunt of monsoon season, latest APCMA's dispatches data depicts domestic demand growth of 3.9%YoY in July'16, far lower than 9.2%YoY growth in June'16. While flatter exports during July’16 as compared to the previous month indicated that freefall has likely ceased, settling at new normal levels post anti‐dumping duties imposed by major cement export markets (South Africa/Iraq). However, exports increased 20.2%MoM in July'16 as against a 15.7%MoM in July'15. While the slowdown in demand has much to do with the seasonal factors, analysts believe demand to start picking up from August'16 as construction activity is likely to pick pace post‐monsoon.

Pakistan market witnesses 23 percent increase in daily traded volume

The week ended August 05, 2016 was a volatile week as the benchmark PSX‐100 Index declined marginally to 39,390 levels. The decline was initially led by the banking sector in the backdrop of status quo in the monetary policy followed by selling pressures particularly in Cements on anticipated weaker dispatches attributable to Ramadan/Monsoon season slowdown effect. The point worth mentioning is that average daily traded volume increased by 23%WoW to 225 million shares. Leaders during the outgoing week were: PSMC, BAFL, KEL, SHEL and ICI, while laggards included: LUCK, PIOC, MLCF, KAPCO and MEBL.

Key developments during the week included: 1) Market Treasury Billions cut‐off yield posted a modest gain despite SBP maintaining interest rate unchanged, 2) Finance Minister and SBP governor alluded that there is no further IMF program under consideration, 3) PSMC announced increase in prices of its vehicle variants by 3% per unit in an attempt to maintain its profit margin, 4) Headline inflation rose by 4.12%YoY during the first month on the current financial and 5) SBP kept policy rate unchanged in its latest monetary policy statement.

Although, PSX‐100 Index is hovering near its highest levels, it is expected to remain volatile due to: 1) increase in political heat as opposition parties plan countrywide protests against the government, 2) weaker anticipated earnings in current result season owing to super tax and 3) volatile oil prices in spite of oversupply/surplus inventories. Financial result announcements of index heavyweights i.e. MCB, ABL and EFERT in upcoming week will likely to plunge Index downward on account of expected decline in earnings as a result of the imposition of super tax and impact of negative sector‐specific factors.

Recovering from initial Brexit shocks with major global economies vowing to unveil stimulus measures to boost economic growth, international equities rebounded sharply during the previous month with MSCI EM Index returning 4.9%MoM. In tandem, PSX‐100 Index closed the month 4.6%MoM higher at 39,529 points, just falling short of the 40,000 level. Volumes also depicted a healthy trend growing 9.8%MoM to average at 189.3 million shares during the month. MSCI led foreign interest was evident in July with foreigners buying equities worth US$26.8 million against a net selling of US$2.02 million a month ago (excluding foreign participation in EFERT divestment), building positions in Banks, Cements and OMCs. Amongst the main board, Automobiles and Parts, Cements and Commercial Banks garnered traction while Healthcare Services along with Multi‐utilities in the sideboard were key performers. Going forward, market's performance in Aug'16 is likely to be guided by the ongoing result season where we see strong earnings performance by Cements & Textiles. Banks are also expected to remain in the limelight with UBL's above expected 1QCY16 earnings setting the tone for the rest of the sector. That said, political pressures can come to the fore with opposition parties (PTI and PAT) likely to stage anti‐ government protests during the month.

In continuation of what has been a persistent trend now, Pakistan exports remained lackluster in June'16, declining to US$1.65bn. Similarly, FY16 exports were recorded at US$20.85 billion, marking a decline of 13%YoY from US$23.94 billion posted in the FY15. The fall came primarily on the back of a slowdown in textile and other commodity related sectors with textile and food group slipping by 8%YoY and 13%YoY respectively during the year. Going forward, despite anticipated weakness in Pak Rupee, analysts expect textile exports to remain under pressure primarily on: 1) slow Chinese demand, 2) adverse exchange rate limiting GSP plus benefits, 3) concerns of an economic slowdown in EU following Brexit and 4) low cotton production, down by 34%YoY.

Pakistan stock market closes week almost flat

For the week ended July 22, 2016 the benchmark of Pakistan Stock Exchange PSX-100 closed almost flat as compared to a week ago. The market managed to close above 39,000. However, the overall performance was not disappointing. CYTD returns were reported at above 19 percent. Additionally, the month to date foreign inflow of US$31.7 million is a strong indicator for foreign investments picking pace, following Pakistan’s re‐entry into the EM club.

News flow impacting market during the week included: 1) in the T‐Bill auction conducted on Wednesday, cut‐off yields for 3, 6 and 12 months posted decline, where banks aggressively participated in the auction with bids amounting to Rs740.9 billion against the target of Rs200 billion, 2) net inflow of almost $600 million from China, foreign direct investment (FDI) in Pakistan surged 38.8% as Pakistan received FDI of US$1.28 billion during 2015-16, which was US$358.2 million higher than receipts a year ago.The unusual jump in FDI in the last month of 2015‐16 was on the back of an inflow of US$138.5 million in the telecommunications sector, 3) SECP has formally sent the final draft of the Companies Bill, 2016 to the Ministry of Finance for initiating necessary legislative process and its approval by the Parliament and 4) Textile exports went down by one billion dollars during last financial year due to massive decline in cotton crop production and slowdown in the economy of China pushing Pakistan's textiles and clothing exports to US$12.45 billion during FY16.

Leaders exhibiting performance over the week were: ASTL, NCL, and PSMC (+7.1%WoW), while laggards were FFBL, DAWH and HASCOL. Average daily traded volume grew by 7%WoW to 207 million shares, where SNGP, DFML and PAEL were the volume leaders.

Considering the stellar run‐up in the last quarter of the outgoing FY16 gaining 10.7% during the period), analysts expect the market to enter a consolidation phase. Directionless trading in the absence of major triggers may prevail. Market participants are advised to closely follow: 1) political developments as the opposition plans to protest against inaction on Panama leaks investigations, 2) fertilizer offtake numbers for the month of June'16, gauging the sensitivity of recent subsidies on demand and, 3) details of GoP policy measures in response to the final meeting with the IMF over the release of EFF's last tranche (negotiations start July 27th). Additionally, earnings announcement may fuel strong sentiment for consensus beating stocks.

Firming up in June'16, the global commodity index rose by 3.5%MoM. While losing some ground on account of Brexit and a strengthening US$ as a consequence, oil prices consolidated around US$48/bbl whereas prices of coal were up 6.4%MoM on supply disruptions in major markets and cotton witnessed easing supply concerns depicted strength during the month under review. Steel and Urea prices declined on account of excess supplies amid a weak demand outlook. While recovery has been steady during June’16, most commodity prices still remain at their multi‐year lows. Analysts expect prices to consolidate going forward; however a sustainable reversal of the downtrend remains contingent on an improving demand scenario.

Current Account deficit for June'16 was recorded at US$61 million lower than US$252 million in June'15 (US$792 million in May'16) where higher trade deficit was countered by healthy remittance flow for the month was US$2.07 billion, up 13.8%YoY. This implies, FY16 current account marking a deficit of US$2.52 billion, lower 6.8%YoY reflecting: 1) expanding trade deficit, up +8%YoY as weak exports restricted savings from oil imports, 2) steady remittance inflows (up 6.4%YoY) and 3) US$713 million CSF payments. Going forward, analysts expect slight pressures to mount and project current account to post deficit of US$5.1 billion in FY17 with trade deficit increase of 11%YoY: on 1) US$45/bbl assumption for crude oil and 2) limited recovery in exports on low cost competitiveness. However, positive surprises can emerge if CSF payments materialize (US$900 million approved for next year) and on higher than expected growth in remittances.

Pakistan Market: Daily trading volume up 35 percent

The benchmark of Pakistan Stock Exchange PSX-100 resumed its pre-Brexit bullish momentum after Eid holidays, touching an all-time high to close at 39,188 level, up 3.7%WoW. As concerns eased slightly, the market was further supported by additional stimulus announced by Japan and stronger data from the U.S. coupled with recovery in crude oil prices, all favorable for the local bourse. Overall activity at the market improved drastically, average daily traded volume for the week increased by 35.5%WoW to 193.8 million shares.

 Key news flows during the week included: 1) Privatization Commission approved offloading of the government remaining 40.25% stake in KAPCO and Expressions of Interest from prospective bidders was invited, 2) three foreign investors including Shanghai Stock Exchange (SSE) have expressed interest in acquiring a stake of up to 40% in the Pakistan Stock Exchange, 3) total deposits of the banking industry crossed Rs10 trillion as of Jun'16 , up 10%YoY as compared to Rs9.14 trillion at the end of last financial year, 4) GoP announced a plan to lay an oil pipeline from Gwadar to China for the export of crude and task given to state construction firm Frontier Works Organization, and 5) GoP raised over Rs236 billion through auction of PIBs with cut-off yields for 3, 5 and 10-year papers declining noticeably.

Performance leaders during the week were: HASCOL, INDU, PIOC and SNGP; while laggards included: EFOODS, ABL, KAPCO and FATIMA. Volume leaders during the week: KEL, SNGP, DCL, EFERT and TRG. Foreign participation improved significantly where net inflow during the week amounted to US$21.4 million as against net outflow of US$1.2 million in last five sessions.

The market is still likely to come under pressure due to the global developments but analysts believe it could sustain current levels over the short term. Support should come from results season commencing next week where major sectors are expected to post strong earnings performance. However, risks for a pullback will linger in the form of: 1) political developments gaining prominence, 2) oil price swings likely to impact the local market, 2) another rate cut in the upcoming monetary policy proving negative for banking scrips. On the global front, upcoming US FOMC meeting and development on UK‐EU negotiations need to be tracked with implications for growing participation.

The IMF recently released its staff level report for the second last review under the IMF EFF stressing the country to continue structural reforms beyond the program's conclusion. Commending Pakistan on its strong performance on the program so far, the report also reiterates largely positive macro outlook though risks remain in the form of weak trade dynamics, policy slippages and political noise. With only one review left, IMF has added two structural benchmarks related to energy sector namely: 1) KAPCO's sell‐off and 2) updating plan for the resolution of circular debt. The twelfth review entailing disbursement of US$100 million is scheduled for end‐Sep'16 where successful achievement of targets would mark the conclusion of the facility ‐ the first for Pakistan. In line with our expectations, GoP will not be entering a new IMF agreement owing to stable external metrics however, GoP is expected to remain engaged in a consultative process with the IMF though without imposition of targets.

Brexit keeps Pakistan market under pressure

To begin with, it may be true that the local equity market remained under pressure due to Brexit, which was an overreaction. The decision by the public is yet to be approved by the British parliament. It will be a long drawn process but meantime the business will continue ‘as usual’.

The panic trickling down to Pakistan Stock Exchange plunged the benchmark PSX-100 index to 37,390 levels, down 3.58%WoW, after losing 1,412 points intraday. Regional markets also witnessed similar trend while crude oil tumbled, along with other commodities on a stronger dollar.

Barring Friday, lack of triggers kept market activity dull during the week where average daily volumes declined by more than 15%WoW to 155.7 million shares. Foreign participation remained under pressure, with foreigners selling equities worth US$20.6 million during the week against a net buy of US$19.58 million last week.

Key news flow impacting the market included: 1) National Assembly finalizing amendment in 2016 Finance Bill, 2) Current Account deficit for May’16 rising US$792 million as against a surplus of US$23 million a month ago, 3) the World Bank approving US$1.02 billion in developmental loans for Pakistan under the CGDPF and Sindh Resilience Project, while ADB approved US$100 million loan for the construction of Shorkot‐Khanewal section of the M4 motorway, 4) yields slipping by 3‐ 5bps in the latest Market Treasury Bills auction with the GoP raising Rs138 billion and 5) news source indicating rise in petroleum prices in the range of Rs1.75‐Rs4.5/ltr for July’16. Leaders at the bourse were: MTL, FATIMA, HMB, FCCL and AGTL; while laggards included: BAFL, MCB, AICL, NML and NCL. Volumes leaders were: KEL, DCL, PAEL and DFML.

Bouts of volatility are likely to be witnessed in the week ahead as investors react to uncertainty in the global outlook following ‘Brexit’. Negative implication for the bourse can also emanate from any extended downside in commodities, particularly crude oil. With volatility in major currencies, Autos on (JPY) and Textiles (on EUR and GBP) could see further downside.

After recording surplus for three consecutive months, current account balance returned to the red zone in May'16 recording a deficit of US$792 million expanding, consequently, 11MFY16 current account deficit to US$2.48 billion, up 1.2%YoY higher than the balance in 11MFY15, primarily reflecting a worsening trade deficit. The trade data depicts 22.6%YoY widening in the trade deficit in May'16 as rising imports (up 7.6%YoY) added to the burden of declining exports (down 6%YoY). With similar trends to continue analysts expect current account deficit to further deteriorate. Resulting pressures on current account and hefty debt repayment in FY17 can likely have spillover effects on the Pak rupee exchange parity. However, rising foreign exchange reserves and improving foreign investment outlook should keep erosion in rupee value limited.