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.

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.