With a modest recovery in the first couple of days, the
benchmark index of Pakistan Stock Exchange (PSX), lost most of the gains posted
recently. The week ended 7th September closed at 40,855 points, down 2.1%WoW.
Showcasing all the tell-tale signs of a highly volatile, illiquid (average daily trading volume shrinking by 22%WoW) and dampened near term outlook,
investors remained cautious. The news impacting the market included: 1) a
number of crucial and time sensitive decisions for the new government where
clarity is awaited and 2) growing risk of a cyclical downturn in consumption
led demand where monetary tightening and high fuel prices suggest reduced
spending. Other news affecting investors’ sentiments were: 1) US Secretary of
State Michael Pompeo stating that his visit to Islamabad led to an agreement
that it’s time for the United States and Pakistan to deliver on their
commitments, 2) the central bank announcing auction of Rs5.15 trillion worth Market
Treasury Bills and Pakistan Investment Bonds during the four remaining months
of the current calendar year, 3) Prime Minister Imran Khan approving 46% increase
in gas prices as proposed by OGRA, along with ordering steps to control annual
gas theft of Rs50 billion and 4) President on the advice of the Prime Minister
reconstituting the Council of Common Interests (CCI), and constituting the
Cabinet Committee on China-Pakistan Economic Corridor (CCoCPEC). Volume leaders
for the week were: BOP, KEL, AGL and EPCL. While the gainers were led by: ABL,
KAPCO, UBL, KEL, the laggards included: PIOC, DGKC, CHCC and NCL. Volatility is
expected to mar investors’ sentiments over the coming weeks because of some
difficult to comprehend decision, also lacking prudent thinking. Accumulating
positions on dips and tactical sector switching could yield returns. Overall,
market participants will be closely monitoring policy decisions, particularly
regarding gas and electricity tariff hikes (proposed by OGRA and NEPRA with
ECC's formal decisions pending) and near term measures to curtail the external
account deficit.
Ballooning current account deficit (CAD) due to the hefty
debt repayments have led to a mammoth external financing gap (US$20.42 billion
for FY18) as insufficient external inflows (US$14.35 billion loans in FY18)
plunged the foreign exchange reserves held by State Bank of Pakistan to US$9.79
billion, down US$6.34 billion during FY18. Going forward, an estimated CAD of
US$17.8 billion for FY19 with additional drags from upcoming redemption of
Eurobond and commercial borrowing repayments are likely to push gross external
financing to US$22.44 billion for FY19. In this regard, inadequate external
inflows estimated at US$13.45 billion (excluding bailout financing should translate
into a net shortfall of US$8.84 billion by the end of FY19, plunging the
reserves to unsustainable levels. Moreover, for recent policy makers, the path
to possible remedies for the prevailing BoP shortfall include: 1) approaching
international debt market, 2) investments from non-residential Pakistanis, 3)
Chinese bailout, 4) 'gifts' from friendly countries, and 5) eventual IMF
financing facility. With each mode of financing carrying inherent benefits and
associated risks, GoP conceding to another IMF financing facility along with
accompanying caveats (with the sole purpose of improving on external
vulnerabilities). Under an IMF facility, GoP could likely tap in other external
avenues as well as fetch better yields in international debt market to create a
blend of financing to bridge the external gap.
Pakistan’s largest exploration and production company OGDC has
announced its FY18 earnings at Rs78.74 billion (EPS: Rs18.31) as compared to R63.80
billion (EPS: Rs14.84) for FY17, up 23%YoY. The Board of Directors has also
approved payment of a final dividend of Rs2.5/share, taking the cumulative full
year payout to Rs10/share for the year. The results are above market
expectations on account of higher gross profit, translating into higher profitability.
Net sales were up 19%YoY mainly due to the hike in international oil prices by
25%YoY and depreciation of Pak rupee by more than5%, despite falling
hydrocarbon volumes. Exploration expense were reported at Rs16.19 billion, may
be due to recording of a previously suspended well at Ranipur. The quantum of
other income was almost at the level of previous year. During 4QFY18 fourth earnings
rose to Rs21.92 billion (EPS: Rs5.10) from R16.21 billion (EPS: Rs3.77), on the
back of favorable macro/oil price shifts, overcoming the drop in volumetric
output (gas volumes were stagnant but oil volumes declined by more than 7%YoY).
At present the scrip is being traded at a heavy discount to its 3 year
historical price. While the likely positive is further hike in international
oil price, the dry wells in Baluchistan or a decline in global oil prices could
pose risks to the profitability of the Company.
The decline in petroleum, oil and lubricants (POL) sales
plunged by 18% MoM/46%YoY during August 2018 as volumetric offtake declined to
1.35 million tons, proving to be the lowest monthly for sales since February 2007.
The lofty decline was observed in FO sales falling by 46%MoM/79%YoY. Along with
this retail fuel segment also tapered (HSD and MOGAS sales also posted decline
of 20%MoM/38%YoY and 1%MoM/11%YoY) respectively, the 8MCY18 cumulative volumes also
declined by 18% YoY. Among all the products, only MOGAS recorded a 3%YoY
increase, while HSD/FO offtake declined 7%MoM/45%YoY, sapping growth from
overall sales. Sizeable shifts in market share PSO, APL, and HASCOL during
8MCY18 was observed as smaller unlisted players were seem to be claiming bigger
chunk in the pie.
Some of the worth mentioning corporate announcements were:
1) National Foods (NATF) announced its 4QFY18 result posting consolidated EPS
of Rs4.37 up 100% YoY as compared to EPS of Rs2.19 for the corresponding
quarter last year. Sales improved by 13% YoY, while distribution cost declined
by 18% YoY. Earnings were considerably up despite 1) increase in administrative
expenses by 75% YoY, 2) hike in financial charges by 37% YoY, 3) decline in
gross margins and 4) fall in other income by 65% YoY. NATF also announced cash
dividend of Rs3.75 per share along with issue of 20% bonus shares. 2) Engro Polymer
and Chemicals (EPCL) informed PSX that the Company has decided to enter
Hydrogen per Oxide business through a Greenfield manufacturing facility with a
CAPEX of US$23 million, funded through internal cash generation. 3) Pak Suzuki Motor
announced that it would stop production of its much sought-after and low-priced
Mehran from next year.
