Pakistan stock market closes week flat

The PSX‐100 index snapped its ten‐day winning streak during middle of the week ended 11^th March 2016 and closed at 32,669 levels, up 0.70%WoW. Overall, activity at the market showed sharp recovery, where average traded volumes for the week ascended to 175 million shares as compared to 135 million shares a week ago.

Key news flows guiding the market included: 1) ECC of the Cabinet approved increase in withholding tax on banking transactions for non‐filers to 0.4% from 0.3% and deferred the approval of Auto Policy for more consultation, 2) NTC rejected petition of PSM for imposition of antidumping duty on import of iron ore and steel products from China, 3) National Assembly Standing Committee on National Food Security and Research recommended 60% excise duty on the import of dry milk to promote local dairy sector compared to the current rate of 30 percent, 4) MoF and the MoPNR gave the go‐ahead the Ministry of National Food Security and Research to frame policy allowing urea import by the private sector, while the NA Standing Committee on Industries and Production also directed NFML to import urea in order to curb domestic prices, 5) ISL inaugurated its capacity expansion of over 500,000MT of which 400,000MT can be galvanized at its state‐of‐the‐art steel complex in Karachi and 6) DPC approved around 12 applications envisaging an increase of up to 8% in the prices of the drugs concerned and deferred the issue of reduction in prices of innovator drugs.

Scrips that led the bourse included PTC, EFOODS, FFBL, PPL and AICL, while laggards were PSMC, HBL, UBL, APL and AKBL. Foreign participation witnessed marked improvement this week, where net foreign inflows for the week amounted to US$4.1 million as compared to net selling of US$1.6 million in the week before.

The market is expected to see consolidation around current levels where volatility can emerge from uncertainty in global oil price movements and regional flow trends. Upcoming key events include monetary policy review later this month, where State Bank of Pakistan is likely to maintain status quo due to expectations of higher inflation. This would bode well for banking sector which can gain traction as a 50bps hike in rate in September ’16 is being talked about. Data pertaining to US oil inventories and the possibility of an OPEC meeting may keep oil prices on upward trajectory, flowing through to the domestic Oil & Gas sector. However, many analysts remain skeptical about any consensus due to Iran’s likely agreement to freeze production at January’16 levels.

Despite a number of challenges faced during CY15, UBL was able to post decent earnings growth of 11%, with profit growth being a function of strong NII growth (+23%YoY) and capital gains utilization (+57%YoY). Going forward, analysts expect earnings growth to slow down to 4%YoY during CY16 where: 1) upcoming PIB maturities and lower banking spreads are making way for tighter NIMs and 2) continued risk of further deterioration in international book in the light of the global commodity slump will be key factors to be kept in mind. That said, UBL's sheer strength in terms of diversification of income streams (non‐core income makes 31% of total income), ability to grow loan book (already mandated for infrastructure projects) and sizable capital gains backlog are likely to provide support to earnings. UBL remains the most attractively priced scrips within the banking sector considering its size and superior ROE profile. Price performance however remains hinged upon the reversal of interest rate cycle that is likely to rejuvenate interest in the sector.

According to the latest dispatches data, cement demand has started to pick up where dispatches grew to record levels during February'16 as compared to a month ago. Pick up in domestic construction activity and respite in exports slump were the key highlights. As a result, cumulative growth rate of dispatches improved to 7.7%YoY during 8MFY16 from 6.4%YoY growth during 7MFY16. Companies outperforming the industry during the month included FECTC, FCCL, KOHC, PIOC, DGKC, and MLCF, while LUCK and ACPL remained underperformers due to continued fall in exports. On cumulative basis, KOHC, PIOC and FCCL continued to outpace the industry while LUCK and ACPL continued to face problems on account of failure to divert lost exports (South Africa/Iraq) to other markets. Domestic demand is expected to continue to grow at a fast pace at least during the remainder of current fiscal year on account of record level growth in PDSP spending and construction related private sector credit. Expected normalization of exports from FY17 and initiation of construction work on CPEC projects may further surprise with double digit growth rate in the medium term. Due to strong fundamentals, analysts continue to maintain an Overweight stance on the sector where their top picks include LUCK and DGKC on account of expansion to catch up with anticipated rising domestic demand.

Automotive sales during February ’16 declined to 15,873 units, whereas production figures mimicked this trend. Cumulative 8MFY16 sales/offtake moved by 121,934/121,735units, while 2MCY16 figures showed signs of exhaustion when compared to last year's exorbitant rise in sales/production for 2MCY15 as compared to 2MCY14). All OEMs witnessed monthly sales growth stalling, which may be due to the fading out of 'new registration' effect, while only INDU showcased growth. The 1000cc segment fared better than others in declining offtake, while all other segments posted declines, following the phasing out of the Punjab Rozgar Scheme (news reports indicate final deliveries were due in February’16). At current levels analysts express preference for INDU, citing resilience of Corolla sales (now in its 18th production month) and ability to pass on costs.

Why pressure on Iran to freeze oil production at current level?

Saudi Arabia and Russia initiated the move to freeze output at January 2016 level and other smaller oil producing countries joined them. However, most of the stories published by the western media regarding containing glut seems to be terming Iran as spoiler. One has to review the situation dispassionately to find if Saudi Arabia and Russia are being judicious in asking Iran to agree with their demand?
To begin with, it seems very interesting that the US that attained the status of one of the largest producers of oil lately is keeping mum. It may be because in the US number of active rigs have come down from more than 1,900 to less than 400 but the level of oil production has not come down correspondingly.
In my view the indifferent attitude of the US is because: 1) it managed to install record number of rigs and those suspending production can be brought online as and when desired, 2) the decline in oil price has caused enough damage to its arch rivals i.e. Saudi Arabia, Russia and Iran, 3) massive reduction in oil price has failed in accelerating GDP growth rate, even in the US and 4) on the contrary central banks of developed countries are forced to keep interest low and offer other stimulus for accelerating economic activities.
I also believe that Saudi Arabia is not ready to curtail its output because its economy is heavily dependent on oil. As against this Iran has endured sanctions because of its substantial non-oil exports. The other reason Saudi Arabia appears adamant at keeping Iranian oil exports low is the fear that after the withdrawal of sanctions and release of withheld payments, Iran can attain the status of regional super power.
Another point worth probing is why Russia, fighting a proxy war with Saudi Arabia in Syria, has joined hands with its arch rival? It may be said that Russia is trying to get its hold in the Middle East more firmly. In the region there are two contenders trying to attain the status of regional super power, Iran and Saudi Arabia. Over the years Iran has been fighting its own as well as proxy wars, whereas Saudi Arabia is militarily not strong enough, it has survived mainly with the support of US.
Russia also realizes that after the withdrawal of sanctions imposed on Iran, Saudi-US relationship have become strangulated. One can recollect that in the past Saudi Arabia relied on the US/Nato forces but lately it was forced to form a group of 34 countries to defend its interest. At present joint exercises are being held in Saudi Arabia that is a clear message to the US that Arab Monarchs have found the alternative.
In the prevailing situation Saudi Arabia wants to maximize pressure on Iran by keeping its oil exports at the lowest level. However, the logic being followed by Saudi Arabia seems to carry no weight as all the countries have snatched Iran’s share. If Iran is demanding up to 4 million barrel per day production it is fully justified.

OGDC assigned Triple AAA rating

Pakistan’s largest exploration and production entity, Oil and Gas Development Company Limited (OGDC) has been assigned a long-term entity rating of 'AAA' (Triple AAA) and short-term rating of 'A1+' (A One Plus) by Pakistan Credit Rating Agency (PACRA)

These are the highest ratings on respective entity ratings scale and denote the lowest expectation of credit risk emanating from an exceptionally strong capacity for timely payment of financial commitments.

The ratings reflect OGDC's strategic importance to the government of Pakistan for being the largest upstream oil and gas company having predominant share of recoverable hydrocarbons reserves and exploration acreage.

Moreover, the company is the leading contributor in the country's major hydrocarbon mix production and its oil and gas production continues to help the country in saving huge foreign exchange.

Pakistan Stock Market up by 3.67 percent

During this past week ended 4^th March 2016 benchmark of Pakistan Stock Exchange PSX‐100 Index posted gains of +3.67%WoW and closed at 32,442 level. Despite some volatility the impetus was provided by increase in crude oil prices, higher cement dispatches and renewed interest in banks amid expectations of interest rate bottoming out. However, average daily traded volumes went down to 135 million shares as compared to 138 million shares a week earlier. It may be said that the subdued market activity was due to persistent selling by foreign fund managers, net outflow recorded atUS$1.55 million added to the woes of investors.

Key developments during the week included: 1) a Dutch dairy giant announcing intention to acquire up to 51% stake of Engro Foods, 2) the Ministry of Petroleum & Natural Resources suggesting an increase in profit margins on petroleum products for OMCs and dealers, 3) Treasury Bills cut‐off yields remained relatively flat at the latest auction, 4) CPI inflation during February'16 recorded around 4% YoY higher than 3.32%YoY for January'16 owing to the low base effect despite a sequential decline of 0.25%MoM and 5) SNGPL announced to start supplying gas to the textile industry in Punjab from March'16 on 24/7 basis at a cost of US$6.66/mmbtu instead of US$9.8/mmbtu.

Leaders during the outgoing week included EFOODS, ENGRO, DAWH LUCK and MLCF. Laggards included BAFL, SNGP, HMB, LOTCHEM, and ICI. Analysts expect market to remain volatile taking cues from regional markets developments. In this regard, recovery in international oil prices are expected to reverse amid oil oversupply/inability of OPEC and Non‐OPEC to coordinate production cuts. Moreover, current scenario of lower volumes and foreign selling may continue to put pressure on Index performance. Upcoming monetary policy later this month is widely expected to maintain status quo as inflation inches up. Any surprise on this front, may put further downward pressure on banking scrips. EFOODS has come under the spot light after news of its acquisition went public. Overseas strategic investor has shown interest in acquiring up to 51% stake in the company cumulatively via an agreement with the major shareholders (ENGRO in this case, holding 87.1% shares of EFOODS) and a public offer. While acquisition price is yet to be determined, the direct beneficiary of the said deal will be ENGRO that is most likely to realize a cash benefit of Rs50 billion assuming acquisition price of Rs147/share. That said, implications on EFOODS are going to be long‐term in nature where analyst expect management change to yield positive results in the form of: 1) diversifying product lines and 2) exploring new ventures both locally and globally.

Derived from January'16 generation data, NEPRA approved a Rs4.11/KwH reduction on account of monthly fuel adjustment. Total units generated during the month under review were 6.57GwH, making out a dependable capacity of 8,831MW, lower by 4.5%MoM. Consolidated 7MFY16 generated units of 59.24GwH push dependable capacity to 11,480MW, higher by 5.2%YoY. The factors attributable include: 1) GoP delaying program of privatizing DISCO's where the FESCO transaction is of particular importance, 2) approval of Multi Year Tariff for MEPCO, IESCO, 3) movement towards financial close for planned coal projects and, 4) challenges to clearance of circular debt likely, as legislative deliberations on previous clearance of debt (Rs341.9 billion on May'13) remain accusatory. Analysts see another decline in cost of generation over January'16 figures as Feburary'16 input costs (HSD/FO prices down 12%/3%MoM) were on the decline.

Country’s largest oil marketing company, Pakistan State Oil Company PSO is in the limelight yet again, largely due to its pivotal role in procuring RLNG. While the entity accounted for import of 717,000 tons of imported RLNG during 1HFY16, at a margin of 1.83% the total profitability of the OMC raised by Rs500 million. Consultations remain ongoing with OGRA, GoP and network utilities to re‐negotiate this tariff closer to the 4% margin initially sought by PSO (allowing the entity to book an additional Rs689 million in profits). Using detailed calculations developed by OGRA and PSO management figures for pricing the product, AKD Securities has highlighted the beneficial impact of the recently inked long term supply agreement with Qatar. With the initial volumes remaining higher than previous imports (on spot and DES basis), brokerage house projects PSO to earn Rs940 million (7.8% of FY16F net profit) for the agreed upon 1.5 million tons of LNG to be imported in the first year of the agreement. Furthermore, a sensitivity analysis of margins between the OGRA stipulated rate and PSO's demand leaves room for heightened investor expectations. Despite the nascent stage of regulations governing RLNG imports, brokerage house opine that PSO's tariff should benefit from the lower RLNG import price secured by the GoP and the OMC's vital position in the import chain, leaving PSO with greater bargaining power.

Pakistan stock market declines by 1.6 percent in Feburary

As the global markets remained volatile, Pakistan could not remain immune. During February 2016 the benchmark PSE-100 index slide marginally and closed at 31,370 points, down by 1.60%MoM.
While upward movement in oil prices (Brent up 5.6%MoM) restricted losses to some extent, continued foreign selling (net outflow of US$39.5 million), lackluster results announcements and adverse news flows (regulatory action, legal challenges) propelled bearish pressures.
Most of the sectors were on the downward spree except commercial banks, posting decent earnings announcements, up 2.9%MoM. All other sector posted decline that included Automobiles (down 8.3% on strengthening Yen), Fixed Line Telecommunication (down 5.7% on disappointing CY15 earnings) and Food Producers (down 5% on expected slowdown in earnings growth).
An AKD Research Report hints market sentiments during March 2016 will be driven by: 1) uncertainty on the political front particularly due to the actions being taken by law enforcing agencies against the brokers’ fraternity, 2) foreign selling and 3) Monetary Policy announcement within the month. Expectations are building that with declining PIB yields (down 60bps in the recent auction) and lower than expected inflation number, reduction in discount rate can’t be ruled out.
Taking charge after a very long time, the index heavy-weight, banking sector led the rally during the month under review. The outperformance was a function of above expected earnings announcements and year-end payouts.
Cements, on the other hand, remained on the sidelines, despite positive earnings surprises by players such as MLCF, DGKC and FCCL.
Strengthening of Yen against PkR (down 6.7%during the month) reversed gains for Automobile (down 8.3%MoM) making it one of the worst performing sectors.
With an outflow of US$39.5 million during the month under review foreigners continued to trim their equity positions taking FYTD net outflow to more than US$330 million. This marks the eighth consecutive month in which there has been a net outflow of portfolio capital with selling largely being a function of the global portfolio re-alignment strategy.
While foreign flows will continue to play a major role in determining market direction/participation going forward, analysts believe the Monetary Policy announcement due this month is of importance where a few market participants (particularly some banks) are now eyeing a rate cut.
Any surprise, in this regard should bring renewed interest in cyclical and yield plays. Apart from this, clarity on the regulatory front particularly with regards to implementation of reforms (Amendments to SECP bill, Licensing of operations regulations for NBFCs, Mutual Funds amongst others) would go far in renewing foreign investor participation. Trinkets of news flows surrounding the run-up to the budget FY17 are likely to drive performance accordingly.

Meezan Bank profit for 2015 up by 10 percent

Pakistan’s first full service Islamic bank, Meezan Bank, posted earnings of Rs5 billion for the year ended 31^st December 2015, up 9.9% from the profit of Rs4.5 billion recorded in the preceding year. Along with the approval of financial accounts, the Board of Directors gave nodded distribution of 12.5 percent final dividend among the shareholders. This is in addition to an interim dividend of 17.5 percent paid earlier, taking the full year payment to 30 percent.

The increase in the bank's profitability is attributable to improved net spread after provisions. The net mark up income after provisions was stated at Rs17.6 billion, up 36.8% from a year ago. The expansion in its spread was mainly on the back of a significant increase in the profit earned on Islamic financing, investments and placements. It rose almost 15% YoY to Rs33.1 billion at the end of 2015. In contrast, other income of Meezan Bank registered a YoY decline in 2015, hurting its bottom line. It amounted to Rs4.6 billion, down 3.3% from a year ago. The major reason for the decrease in other income was the drop of 70.2% in the net gain on sale of securities in 2015. In addition, the bank's income from dealing in foreign currencies also decreased by 9.5% to Rs1.4 billion.

Oil glut has been created with a purpose

In one of my previous blogs I raised a point that western media often mislead. I have a strong feeling that like any third world country news are produced on the behest of lobbying firms. These lobbying firms often call their work ‘Policy Advocacy’. These entities work for protecting the interest of Fortune-50 and Fortune-500 companies and not the consumers or public at large.

My perception gets further strength when I go through the reports of mainstream media regarding the prevailing oil glut. These media companies paint a scenario that if oil price goes further down, the entire global economy would plunge in serious crisis. There would be many bankruptcies and for saving the oil and gas exploration and production companies crude price must be hiked.

These companies had made tons of money through connivance. This game was started by the US companies and Saudi Arabia and other oil producing countries were trapped. They lived under the false impression that inflow of petro-dollars was on the rise and totally ignored the fact that one the US attains self sufficiency in oil production, it would gradually deprive all other oil countries from oil income.

Interestingly, the US has plunged oil prices to present lows to inflict material injury to all the oil producing countries, Saudi Arabia, Russia and Iran being the prime targets. It is stunning that Russia and Saudi Arabia are fighting a proxy war in Syria but have joined hands to convince OPEC and non-OPEC members that their survival was in cutting down production.

This brings to mind an old saving that enemy of an enemy can be made friend. Saudis very strongly believe that the US has betrayed them with regards to Syria and Iran. Russia has established its nuisance value in the Middle East and its policy makers strongly believe that by joining hands with Saudi Arabia they can achieve twin objectives, weakening the US influence on countries located in Arabia Peninsula and pushing many of the US oil producing companies out of business.

Ironic is the attitude of oil consuming countries, which feel helpless before these exploiters. They are also falling victim of the disinformation being spread by the western media.  These countries have been made to believe that economic downturn in the US would also affect their economies adversely.

Since I live in Pakistan and following this issue to some extent, the incumbent government has failed in passing the benefit of low oil prices to the masses. Following IMF mantra the government has increased percentage of tax on energy products to overcome budget deficit. I am sure Pakistan is not the only countries following IMF recipe blindly but all those countries that live on the crutches of IMF are following the same policy blindly.

Pakistan has failed in benefiting from the GSP plus status granted to the country by the European Union only because of prevailing energy crisis. I would say it very loudly that energy crisis in Pakistan is not due to the shortage of energy products but blatant theft, gross inefficiencies and above all massive corruption.

In the third world rulers are installed and toppled in the name of ‘regime change’. It is simple that once an agent becomes redundant it is eliminated, assassinations are common but portrayed as act of rebels or an act of God.

Explosion of aero plane of Pakistan’s President Ziaul Haq was not an accident but outright killing. Those who died along with Zia included the US Ambassador to Pakistan, a Brigadier General of the US Army and many generals of Pakistan Army, who had played key role in defeating USSR in Afghanistan.