Pakistan Stock Exchange witnesses 28 percent decline in trading volume

Pakistan Stock Exchange (PSX) continued its bearish momentum during the week ended 28th October 2016. The sentiments were driven by rising political uncertainty over 2nd November PTI protest and lower international oil prices. The benchmark Index slipped below 40,000 mark and close at 39,873, down by 3.44%WoW. The average daily trading volumes for the week declined to 341.2 million shares, down by 27.7%WoW.

The key news flow during the week included: 1) China's Baosteel Group expressed its interest in acquiring PSM, 2) GoP expressed intentions to disallow dedicated gas supply from new discoveries to 4 fertilizer plants, including EFERT during the upcoming winter season, 3) Sindh High Court allowed benefit of SRO 1125/2011 to spinning mills at the rate of zero percent on the import of raw cotton, 4) GoP raised Rs90.2 billion though Treasury Bills auction, where cut off yield for the 3-months were raised while yields on 6 and 12 month Bills remained stable and 5) IMF Chief Christine Lagarde during her visit praised Pakistan for emerging from an economic crisis to a stabilizing economy.

Volume leaders for the week were BOP, KEL, TRG, PACE and PIAA. While gainers were: MLCF, FCCL, PIOC and ICI, laggards included: SHEL, ASTL, LOTCHEM and PSMC. Foreigners emerged net buyers with net inflow amounting to US$14.1 million as compared to net outflow of US$8.46 million a week ago. With result season nearing its end, analysts expect market sentiments to be driven by political developments ahead of PTI protest. Furthermore, escalation in cross border tension and domestic security concerns can add further pressure. However, textile sector may come into limelight upon expected announcement of the export package worth Rs75 billion by the GoP. On the global front, OPEC countries are scheduled to meet in November to discuss details over output freeze/cut. The outcome can impact oil prices and performance of companies listed at PSX accordingly.

Recent developments with regards to upgraded fuel quality, volumetric sales dynamics and long term competitive dynamics were discussed at PSO's 1QFY17 analyst briefing session. To recall, the OMC posted earnings of Rs4.38 billion (EPS: Rs16.11) for the quarter, where growth of 35%YoY was led by inventory gains of Rs1.0 billion (R3.68/share) as compared to a small loss in the comparable period last year. Overall, PSO: 1) lost market share (56.5% currently) due to losing out on white oil segment growth, 2) benefitied from higher margins (HSD and Mogas), lower Mogas cost of supply, 3) provisioning for receivables from PIA of Rs300 million (on gross receivable of Rs15 billion) and, 4) absence of late payment income from IPPs where power sector receivables of Rs162 billion remain unresolved. Having the footprint PSO does, it cannot take part in inventory curtailment or limit supply, but has to follow a strict system of procurement.

FATIMA has posted unconsolidated profit after tax of Rs3.9 billion (EPS: Rs1.62) for 3QCY16 as compared to net profit of Rs612 million (EPS: Rs0.29) for 3QCY15. Key highlight of the result includes: 1) strong growth in topline to Rs10.13 billion caused by increase in Urea, CAN and NP offtake, post subsidy in budget FY17, 2) decline in gross margin due to weak domestic Urea/CAN/NP prices and 3) dealer discounts to clear out high inventory levels. On a cumulative basis, 9MCY16 earnings declined to Rs6.37 billion (EPS: Rs3.03) compared to Rs7.45 billion (EPS: Rs3.55) for 9MCY15, down 15%YoY on account of unprecedented adverse market conditions caused by weak farm economics and delayed implementation of subsidy on urea by the GoP.

LUCK announced its 1QFY16 results posting profit after tax of Rs3.24 billion (EPS: Rs10.01) as compared to Rs2.97 billion (EPS: Rs9.18) for 1QFY16. The reported earnings were higher than expected of owing to: 1) higher than expected topline resulting from 0.145 million tons clinker sales during the period and 2) improvement in gross margin due to cheaper coal inventories. Result Highlights included: 1) topline growth due to higher dispatched, 2) improvement in gross margin, 3) addition of 5MW WHR, 4) substitution of exports by domestic sales, 5) reduction in distribution cost owing to decline in export dispatches, 6) other income rising jumped due to interest income on higher cash balances, and 7) effective tax rate of 30%.

Commercial banks in Pakistan post good results

National Bank of Pakistan has posted consolidated profit after tax of Rs13.6 billion (EPS: Rs6.40) for Jan-Sep 2016 period (9MCY16) as compared to net profit of Rs12.3 billion (EPS: Rs5.78) for 9MCY15, up 11%YoY. Sequentially, there was 41%QoQ decline in earnings on the back of 28%QoQ/20%QoQ drop in Net Interest Income/Non-funded income despite lower taxation expense (down 52%QoQ) and higher gains utilization (+53%QoQ). Key 9MCY16 result highlights included: 1) a 3%YoY increase in NII that was down by a substantial 28%QoQ as lower interest rates squeezed margins, 2) provisions were down 78%YoY/16%QoQ reflecting continued asset quality improvement, 3) a 17%YoY/20%QoQ drop in non-interest income on the back of lower capital gains (down 37%YoY) and 4) a manageable 6%YoY increase in expenses. While asset quality continues to improve, the decline in income streams, both interest and non-interest, is surprising.

United Bank has released its Jan-Sep 2016 financial results. Bank's 9MCY16/3QCY16 earnings were up 9%YoY/4%YoY. While capital gains were judiciously utilized to smoothen earnings, the flashpoint, was the improvement in credit quality with provisions going down by 52%YoY and coverage crossing 90% in 9MCY16. Recoveries, both internationally and domestically have remained strong with the bank marking reversals in the last two quarters consecutively. That said, risks in the form of growth deceleration in non-funded income (31% of total income in 9MCY16), particularly in the bank's fee income franchise have emerged, prolonging of which can impact revenues. Of particular importance is the slowdown in commission from worker's remittances (down 40%YoY) on account of weakening Middle Eastern economies. However with oil prices stabilizing now, analysts expect the impact is likely to have played out. Having gained 30% in the last 6months.

Bank of Alfalah has posted profit after tax of Rs6.3 billion (EPS: Rs3.93) for 9MCY16 as compared to net profit of Rs6.0 billion (EPS: Rs3.79) for 9MCY15, up 4%YoY. Sequentially, analysis witnessed 1%QoQ jump in earnings where a 27% QoQ decline in non-funded income restricted earnings to Rs1.9 billion (EPS: R1.2), despite reversals worth Rs78 million and lower taxation expense. Key 9MCY16 result highlights included: 1) a 2%YoY increase in NII however was down 7%QoQ as lower interest rates squeezed margins, 2) provisions were down 75%YoY with reversals worth Rs78 million booked in 3QCY16, 3) non-interest income went down by 27% QoQ on the back of 29%QoQ decline in fee income and capital gains and 4) a manageable 7%YoY increase in expenses.

Faysal Bank has posted a net profit of Rs3.7 billion for Jan-Sep 2016 period, which is 11.4% higher. Markup income for the period under review decreased 20% in the wake of low interest rates. As a result, post-provision net interest income slipped to Rs8.6 billion, down 8.4% from a year ago. Non-interest income of the bank increased 23.8% YoY to Rs5.6 billion. The notable increase in non-interest income was on the back of rising gains on the sale of securities.

Engro Fertilizers outperforms peers

Quarterly results of fertilizer manufacturers were keenly awaited by the investors. My previous post hinted towards the possible decline in earnings of the companies due to: 1) reduction in international prices of urea and 2) slower offtake. Today, review of the accounts of three companies are presented. Only one company, Engro Fertilizer has posted above expectations results, while Fauji twins have posted below expected results. Results of Fatima and Dawood are still awaited.  

Engro Fertilizers (EFERT) has posted unconsolidated profit after tax of Rs2.86 billion (EPS: Rs2.15) for July-September 2016 period as compared to net profit of Rs2.79 billion (EPS: Rs2.10) for the corresponding period of last year, an increase of 3%YoY. The recovery in earning has come from, 1) strong growth in topline to Rs20.76 billion (including subsidy) caused by likely 39%YoY increase in Urea offtake to 502,000 tons post subsidy in budget FY17 and 2) 31%YoY decrease in finance cost on account of swift deleveraging and low interest rate environment. The result also accompanies an unexpected cash dividend of Rs2.50/share, taking 9MCY16 cumulative dividend payout to Rs4.50/share. On a cumulative basis, 9MCY16 earnings slipped to Rs5.66 billion (EPS: Rs4.25) compared to Rs9.91 billion (EPS: Rs7.44) for 9MCY15, down 43%YoY on account of unprecedented adverse market conditions caused by weak farm economics (urea offtake down 16%YoY in 8MCY16) and delayed implementation of subsidy on urea by the GoP.

Fauji Fertilizer Company (FFC) has posted unconsolidated profit after tax of Rs2.61 billion (EPS: Rs2.05) for July-September 2016 quarter as compared to a net profit of PkR3.69 billion (EPS: PkR2.90) for the corresponding period last year, a decrease of 29%YoY. The decline in earnings was expected on the back of: 1) gross margins declining to 32% (includes subsidy) on account of reduction in Urea prices (down 9%YoY) due to depressed farm economics and low international prices, down 36%YoY to an average US$184/ton during 3QCY16 and 2) a 83%YoY decline in other income (excluding subsidy) in the absence of dividend from associated companies (AKBL, FFBL and FCCL) and reduction in return on term deposits. However, the result was also accompanied by a cash dividend of R1.75/share, taking 9MCY16 cumulative dividend payout to Rs5.15/share. On a cumulative basis, 9MCY16 earnings declined to Rs7.51 billion (EPS: Rs5.90) as compared to Rs11.96 billion (EPS: Rs9.40) for 9MCY15, down 37%YoY on account of unprecedented adverse market conditions caused by weak farm economics, urea offtake down 16%YoY during 8MCY16 due to delayed implementation of subsidy on urea by the GoP.

Fauji Fertilizer Bin Qasim (FFBL) has posted unconsolidated net loss of Rs1.05 billion (LPS: Rs1.13) for 9MCY16 as against net profit of Rs939 million (EPS: Rs1.01) for 9MCY15. This significant downturn in earning resulted from, 1)gross margin declining to 14% (including subsidy) on account of significant reduction in DAP prices, down 15%YoY due to depressed international price trends. Price came down 24%YoY to an average US$325/ton during 9MCY16 and increased feed and fuel gas prices in 1QCY16  and 2) a 38%YoY lower other income (excluding subsidy of Rs3.18 billion on DAP and Urea in the absence of dividend from associated companies and reduction in term deposit placements. Following the trend 3QCY16 the Company posted net loss of Rs159 million (LPS: Rs0.17) for 3QCY16 as against net profit of Rs181 million (EPS: Rs0.19) for 3QCY15. However, on sequential basis, 3QCY16 earnings improved slightly against net loss of Rs381 million (LPS: Rs0.41) 2QCY16 on the back of likely increase in DAP/Urea offtake to post subsidy announcement in Federal Budget FY17.

Warehouse Receipt Financing Becoming Reality in Pakistan

State Bank of Pakistan (SBP) announced Draft Rules of Ware House Financing and solicited comments from different stakeholders about two years ago. Many experts, even at that time, had pointed out that this plan could not be achieved in the absence of: 1) modern warehouses and 2) collateral management companies.

Initial probe disclosed that SBP released the draft Rules and also solicited comments from different stakeholders about two years ago. Now Securities & Exchange Commission (SECP) has been assigned this mandate and very shortly the Commission would announce the duly approved rules.

In the meantime SECP assigned the mandate to Pakistan Mercantile Exchange Limited (PMEX) to bring trading of red chilli to its technology driven platform in 2015. The Exchange with the support of other value chain partners undertook a pilot project and succeeded in trading of around 600 tons of red chilli at its platform.

The value chain partners are: 1) Pakistan Agriculture Coalitions, 2) Agility Pakistan and 3) SGS Pakistan. Pakistan Agriculture Coalitions assumed the responsible for providing on-farm technical advice to farmers, Agility took the responsibility to offer warehousing and logistic facilities and SGS agreed to provide quality certification.

The collective efforts yielded encouraging results. Sind Enterprise Development Fund (SEDF), a fund created by Sindh Government, also joined the endeavor and announced to pay the subsidy to free the growers of red chilli from payment of trading fee. The Fund has agreed to pay subsidy up to 6,000 tons of red chilli to be traded at PMEX this season.

This initiative is aimed at encouraging the growers to sell their produce in a transparent manner.  The added advantages are that growers will come to know about the quality of produce even before it is offered for sale at PMEX platform and also get prompt payment. Buyers will be able to procure certified quality of red chilli.

The Fund has also agreed to bear part of financing cost to be paid by farmers to the financial institutions. Under this plan farmers will have to deposit their produce at PMEX designated warehouse after getting quality certificate. The financial institutions agreeing to extend credit disburse funds against the warehouse receipts.

Though, this may look a small beginning but one should not forget that Pakistan produces over 150,000 tons of red chilli and bringing its trading at PMEX will be the game changer. The other agricultural produce that are mostly likely to be traded at PMEX are: wheat, rice and maize.

The collective annual output of these commodities is over 35 million tons. The successful implementation of the proposed plan can drastically change the agriculture landscape of Pakistan and realize its ultimate objective of achieving food security.

Dismal Performance of Pakistani Fertilizer Companies

Pakistan Stock Exchange enjoys substantial foreign investment. With the commencement of results season investors await earnings forecast/results anxiously. Listed fertilizer manufacturing companies have always remained in focus. Previews financial results of the two leading fertilizer manufacturing companies namely Fauji Fertilizer Bin Qasim (FFBL) and Engro Fertilizer (EFERT) for July-September 2016 quarter (3QCY16) exhibits a dismal picture.

FFBL is scheduled to announce its results on 24th October. According to a report by AKD Securities, the Company is forecast to post profit after tax of Rs127 million for 3QCY16 as compared to net profit of Rs181 million for 3QCY15, down 30%YoY. This decline in earnings is expected on the back of: 1) gross margin of company declining to 18% (including subsidy) on account of significant reduction in DAP prices. There has been a decline of 14%YoY due to depressed international price trends. There has also been a decline of 81%YoY in other income (excluding subsidy) in the absence of dividend from associated companies (AKBL & FCCL) and reduction in term deposit placements. The brokerage house expect the Company to post net profit of Rs127 million (EPS: Rs0.14) for 3QCY16 as against a net loss of R381 million (LPS: Rs0.41) on the back of 60%QoQ growth in topline to Rs11.91 billion caused by likely 50%QoQ/36%QoQ increase in DAP/Urea offtake to 143,000/164,000 tons post-subsidy announcement in budget FY17. On a cumulative basis, the brokerage house expects FFBL to post net loss of Rs768 million (LPS: Rs0.82) for 9MCY16 as against a net profit of Rs939 million (EPS: Rs1.01) for 9MCY15. While core business outlook remains bleak, FFBL's impressive diversification strategy and investment in dividend yielding group companies (AKBL & FCCL) is likely to drive earnings of the Company. 

EFERT is scheduled to announce its quarterly financial results on 25th October. The Company is expected to post profit after tax of Rs2.98 billion (EPS: Rs2.24) for 3QCY16 as against net profit of Rs2.79 billion (EPS: Rs2.10) for 3QCY15. The recovery in earnings is expected on the back of: 1) strong 51%YoY growth in topline to Rs21.01 billion caused by likely 39%YoY increase in Urea offtake to 502,000 tons post-subsidy in budget FY17 and 2) a 28%YoY decrease in finance cost on account of swift deleveraging and low interest rate environment. On a cumulative basis, projected earnings for 9MCY16F are to be around Rs5.77 billion (EPS: Rs4.34) as compared to Rs9.91 billion (EPS: Rs7.44) for 9MCY15, down 41%YoY on account of unprecedented adverse market conditions caused by weak farm economics (urea offtake: down 16%YoY in 8MCY16) and delayed implementation of subsidy on urea by the GoP. Moreover, on the arrival of Rabi season, manufacturers are offering hefty dealer discount to clear out high inventory levels.

Pakistan Stock Market Marred by Foreign Selling

he After recording gains for three successive weeks, the benchmark of Pakistan Stock exchange took a breather with the index closing almost flat at 41,282 points during the week ended 21^st October 2016. The correction was led by the continued rise in political tensions and foreign outflows (US$8.46 million as against an inflow of US$2.2 million during the earlier week).

Average daily trading volume rose by 16.8%WoW to 471.9 million shares, led by retail favorites: BOP, TRG, PACE and JPGL. Scrips leading the market were: EPCL, APL, SNGP, HASCOL and NML. The laggards included: ASTL, CHCC, LUCK, MLCF and DAWH.

News flows for the week included: 1) Current account deficit for September 2016 recorded at US$161 million as compared to US$612 million in July 2016 taking 1QFY17 cumulative deficit to US$1.36 billion, up 136%YoY, 2) all PIB bids were rejected in the latest auction amid weak participation as banks bid at higher yields, 3) expected approval of relief package worth Rs200 billion for exporters, particularly belonging to textile sector, 4) Atlas Honda Limited (AHL) announced expansion with a second production line at its Sheikhupura plant to double assembly capacity to 1.2 million units per annum and 5) MLCF planning to set up a 40MW coal‐fired power plant to fuel its cement manufacturing operations. The company will generate funds worth Rs5.5 billion for the project from its own resources.

Market performance is likely to be dominated by earnings announcement from major sectors next week, including Banks (MCB, NBP, BAFL), Cement (MLCF, PIOC, LUCK, DGKC, FCCL), Fertilizer (FFBL, EFERT, FFC, ENGRO) and Autos (PSMC, INDU). Additionally, the announcement of the anticipated textile package is likely to prop up performance in the sector. However, planned protests by PTI may escalate political noise and keep the market volatile. On the macro front, key events of interest include planned visit by Managing Director of International Monetary Fund and President of Asian Development Bank to the country next week.

IMF recently released its staff level review report on Pakistan at the conclusion of the last review under the 3-year EFF program. Commending GoP on sustained progress on targets, the report highlights significant improvements achieved on the economic front over program's duration. The Fund has shown optimism on the country sustaining recent gains supported by external factors, improving credit outlook and growth initiatives under CPEC. However, this remains underpinned on continued efforts to enhance fiscal management, control debt accumulation and develop business competitiveness. Going forward, analysts expect GoP to revert to populist measures as general elections draw near with further delays in privatization program and fiscal expansion likely outcomes. Moreover, deterioration in external metrics remains a key risk going forward amid a widening current count deficit and debt‐dependent foreign exchange reserve accumulation.

Earnings Forecast for Pakistani Commercial Banks

Commercial banks listed at Pakistan Stock Exchange (PSX) are scheduled to announce their quarterly financial results shortly, beginning with UBL (Oct 19), followed by HBL (Oct 20) and ABL (Oct 21). According to a report by Pakistan’s leading brokerage house, AKD Securities, the Big-6 banks are expected to post a combined profit after tax of Rs98.2 billion for 9MCY16F as compared to Rs96.9 billion for 9MCY15.

The top-line growth is likely to be constrained on account of lower yield on earning assets amid ongoing PIB substitution and lower banking spreads. Capital gains backlog is estimated at a whopping Rs94.8 billion for the B-6, where higher utilization of the same can cause earnings expectations to deviate particularly in case of banks like NBP and ABL that have sizeable equity portfolios in addition to the bonds portfolio.

This growth seems illusive, being a function of lower tax expenses (super tax expensed out in 2QCY16) as on a pre-tax basis profits are expected to go down by 14%QoQ. With expectations regarding interest rates bottoming out, the banking sector has gained 13% since July 2016. While 9MCY16F results are expected to depict weakness, price performance will remain hinged upon the following: 1) earlier than expected monetary tightening and 2) pick-up in economic activity amid CPEC related development.

Core income is expected to remain weak (flat YoY) as lower interest rates continue to squeeze margins. Non-core income is also expected to decline by 4%YoY as capital gains utilization is anticipated to remain lower in 9MCY16. However, in 3QCY16 alone, the brokerage house expect the B-6 banks to post combined profit of Rs33.7 billion, higher by 10%QoQ where growth is likely to be a function of lower tax expenses in the absence of super tax charge levied in 2QCY16.

Investment Perspective: With economic indicators and global commodity trends now directing towards a possible end to the monetary easing cycle, the banking sector is likely to remain in limelight. While fundamental pressures remain intact, analysts believe triggers in the form of faster than expected uptick in advances, both corporate and consumer, along with speedy pickup in CPEC related infrastructure projects can push price performance.