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).

                                                                 

                

Pakistan Stock Market Receives Higher Foreign Investment

During the week ended 29^th July 2016, the benchmark of Pakistan Stock Exchange PSX-100 closed at 39,529 levels – marking another record high level as results season commenced this week. Average daily trading volumes tapered slightly during the week to 182 million shares as compared to slightly more than 207 million a week ago. Foreign participation improved with an inflow of US$10.94 million as compared to an outflow of US$11.5 million a week ago. Leaders at the bourse were SHEL, NCL, LUCK, NML and ABL; while laggards included POL, PSMC, PPL, OGDC and EPCL. Volume leaders were DCL, AGL, SNGPL, DFML and TRG.
Key news flows for the week included: 1) SBP scheduled to announce its first monetary policy review on 30^th July, 2) the GoP and IMF commenced staff level discussions for the twelfth and last review under the EFF program, 3) Pakistan and Russia to start negotiations for laying 1,100km LNG pipeline with an estimated cost of US$2 billion next week where the first phase of the project is scheduled to complete by December next year, 4) ECC allowed BAFL to remit US$27.2 million to set up branch in UAE, 5) DRAP approved price increments for scheduled drugs, non‐scheduled drugs and lower priced drugs under the Drug Pricing Policy and 6) Mari Petroleum’s Managing Director stated that the company plans to establish a 400MW power plant at Dharki/Sadiqabad with an estimated cost of US$400 million.

The key event to track for next week will be the monetary policy announcement on the weekend. The expectations remain split between status quo and 25bps reduction in the policy rate. CPI inflation for July’16 to be released next week will also help to set expectations for further monetary policy action. Earnings season is likely to be the guiding factor over the near term with key results likely to be announced in the coming month. On the global front the further decline in international crude oil prices can keep the pressure on the Oil & Gas sector.

Reflecting a slowdown in revenues and tighter gross margin (GM), EFOODS is likely to post profit after tax of Rs793 million (EPS: Rs1.04) for 2QCY16 earnings, down 13%YoY/28%QoQ. This will effectively take 1HCY16F earnings to Rs1.90 billion (EPS: Rs2.48) as against Rs1.97 billion (EPS: Rs2.58) for 1HCY15. In this regard, intensifying competition in the dairy sector is likely to lower revenues by 6%YoY and remain flat sequentially. GM is also anticipated to take a hit (expected to go down by 140 bps YoY in 1HCY16F) on account of higher raw milk prices in lean season. Going forward,the pace of earnings growth is likely to come off for EFOODS (3-year earnings CAGR of 11%) where volume saturation in the industry along with recovery in dairy prices poses downside risks to earnings. Analysts believe price performance will more be a function of EFOODS' performance ipost acquisition by Royal Friesland Company.

The listed banking sector has shed 14.9% CYTD struggling on account of lower interest rate with reversal expectations now pushed forward beyond 1HCY17. Banking spreads continue to remain at their multi‐year lows, while advances growth has also failed to pick up any significant pace. In addition, the continuation of super tax is another impediment in earnings growth in an already challenging operating environment. These factors are likely to manifest in the upcoming 1HCY16F results where analysts expect earnings surprise can come from higher utilization of capital gains (as seen in 1QCY16) and lower than expected credit costs (particularly in case of National Bank of Pakistan). In the backdrop of lower earnings expectations, analysts continue to look favorably towards fundamentally resilient HBL and UBL, based on: 1) a superior ROE profile, 2) keen focus on growing low cost current accounts, 3) diversified income streams and 4) ability to capture CPEC related investments.

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 stock market driven by foreign investors

The bull run continued during the week ended 6th May 2016. The PSX‐100 Index crossed 36,000 mark, yet failed in sustaining this level and closed the week at 35,974 level, up 3.6%WoW, as investors calibrated portfolios in anticipation of Pakistan's inclusion in the Emerging markets club.

Additionally, the index heavy Oil & Gas sector was propelled by strength in global oil benchmarks. While setting aside the political uncertainty arising from revelations included in the Panama Papers, measures to be adopted in the upcoming FY17 budget remain a key consideration in setting investors’ expectations.

News moving the market included: 1) inflation increased to 4.17%YoY during April'16 from 3.94%YoY in March'16, mainly on the back of hike in food, fuel and rental indices, 2) PTA is set to hold auction for Next Generation Mobile Services (NGMS) spectrum (3G) on 11^th June’16 aimed at generating Rs42 billion revenues and 3) the Ministry of Finance has fiercely opposed allocation of gas from Mari field to EFERT, arguing that the fertilizer manufacturer has defaulted on payment of GIDC, whereas the Ministry of Petroleum & Natural Resources is seeking approval for allocating 60 mmcfd to Guddu power plant and 31mmcfd to EFERT.

After rejecting the terms of reference (TORs) put forward by opposition parties, Prime Minister Nawaz Sharif and his legal and political aides agreed to rope in opposition parties in negotiations to draw mutually acceptable terms for the proposed judicial commission to probe the Panama leaks.

Gainers at the bourse were: LUCK, MCB, NML, ICI and PTC, while scrips losing value were: AKBL, LOTCHEM, APL and HMB. Volumes dropped by one percent on week on week basis to 242.3 million shares, where volume leaders were: BOP, SNGP, PTC and TRG. Foreign participation took a healthy turn, with foreigners buying US$21.2 million worth equities during the week against net sell of US$12.4 million last week.

As result season comes to an unexciting close, investors look ahead to flashpoints, particularly upcoming MSCI's Annual Market Classification review (announcement scheduled on 14^th June’16) where Pakistan is hopeful for re‐entry into EM status. Anticipating this, investors are likely to shift interest to blue chip plays, likely to enter the EM index, namely LUCK, ENGRO, HBL and MCB. Furthermore, a rising CPI (April’16 at 4.2%YoY) has set the stage for reversal in the interest rate cycle, with expectations for a tightening to initiate from 4QCY16.

Due to the continuation of bullish momentum at the local bourse, benchmark PSX‐100 index offered return of 3.8%MoM in April'16 rising to 34,719 points, taking CYTD gains to a modest 5.8%. Rallying oil prices along with a strong corporate earnings season where selected sectors (Cements, Autos and Electricity) were seen on top. Average volume for the month hiking by a whopping 61.6% to 235 million shares against last 7-monthth average of 154 million shares. Despite a change for the good in volumes, foreign selling continued to be the itchy point with foreigners selling US$18.1 million worth equities taking CYTD net outflow to US$122 million. As regards sector specific performances, mimicking global oil price trends the Oil & Gas sector was seen taking charge, in what looked like ages, followed by Commercial Banks and Automobiles, while Cements and Fixed Line Telecommunication lagged behind.

Oil & Gas Regulatory Authority (OGRA) on Friday notified 38.3% or Rs76.5/mmbtu decrease in feedstock gas prices for fertilizer sector from Rs200/mmbtu to Rs123.41/mmbtu, in lieu of Rs70/bag agreed reduction in urea prices by fertilizer manufacturers. Following this recent development and significantly lower fertilizer offtake (demand growth revised down to 4.7 million tons from 5.2 million tons earlier) leading to poor 1QCY16 financial results.

Pakistan Stock Market April 2016 Review and Outlook

Pakistan Stock Exchange continued its bullish trend in April’16 and closed the month with benchmark PSX-100 Index touching 34,719 level, posting a decent gain of 5.8 percent.

Rising crude oil prices along with a strong corporate earnings season kept investors interest live in selected sectors (Cements, Autos and Electricity).

Daily trading volumes improved with average for the month rising by a whopping 61.6% to 235 million shares against last 7-month average of 154 million shares.

Despite an increase in average trading volume, foreign selling continued to be the itchy point with foreigners selling equities worth US$18.1 million during April taking CYTD net outflow to US$122 million.

Coming down to sector performances, mimicking global oil price trends the Oil & Gas sector was seen taking charge (up 12.4% MoM) in what looks like ages,  followed by Commercial Banks (up 4.3%MoM) and Automobiles (up 2.6%MoM) while Cements ( down 0.7%MoM) and Fixed Line Telecommunication (down 6.4% MoM) lagged behind. 

For May'16, analysts believe important points to be kept in mind will be: 1) MSCI EM up gradation review drawing closer, 2) upcoming budget proposals and 3) political stand-off between ruling PML-N and opposition parties over Panama investigation gaining strength, all of which can impact market performance.

Remaining dismal for most part of FY16, average volumes improved substantially by 61.6%MoM during April'16. Similarly, average traded value also increased by 34.8%MoM to US$97.6 million during the month review as compared to US$72.4 million during March'16. While local participation remained healthy with NBFCs, Banks and Mutual funds buying US$44.15 million, foreigners remained net sellers with US$18.1 million.               

The index heavyweight Oil & Gas sector turned out to be the best performer, gaining 12.4%MoM during April'16 as oil prices rallied on account of a weak dollar and eroding stockpile.

With market participants remaining hopeful for an inclusion into the MSCI EM Index, analysts expect market to continue depicting strong performance in May'16. That said, particular consideration should be given to upcoming budget proposals and the political stand-off over Panama investigation, where any adverse development can affect market's performance negatively.