Pakistan Stock Exchange Witnesses Quantum Jump in Average Daily Trading Volume

During the week ended 20^th April, 2017, Panama case verdict cleared political uncertainty along with upcoming MSCI inclusion, positive sentiments are likely to prevail going forward. Ongoing results season is likely to accelerate momentum, while budgetary proposals can direct market performance accordingly. The key news flow during the week included: 1) Net foreign direct investment (FDI) soared 12.4%YoY to US$1.6 billion during first nine months of current financial year, 2) FY18 federal budget would be presented on May 16’17 as announced by Finance Minister, 3) Current account deficit increased by 161%YoY to US$6.13 billion during nine months of current financial year, 4) ASTL announced expansion in steel melting/rolling mill capacity by 200,000/270,000 tons per annum and 5) GoP rejected all bids in the latest PIB auction held on 19^th April. Average daily trading volume increased by 62.44%WoW to 277.66 million shares where volume leaders of the week were: EPCL, TRG, KEL, ASL (63.4mn shares), and 5) BOP (48.5mn shares).Top performers during the week were: SNGP, ASTL, CHCC, HASCOL, and HCAR, while from the main board only MCB ended up in the red zone.

The current account deficit (CAD) reduced to US$562 million in March’17 from US$822 million in February’17 (down 32%MoM). Despite slight increase in trade deficit (+0.85%MoM), the monthly improvement came on the back of higher remittances in March’17 amounting to US$1.69 billion, recording sequential rise of 20%MoM. However, current account dynamics remain considerably weaker on YoY basis, with US$122 million surplus recorded in March'16, due to continued escalation in imports (+34%YoY to US$4.3 billion) particularly on higher auto/machinery imports and higher crude oil prices. The cumulative CAD for 9MFY17 surged to US$6.1 billion, posting an increase of 161%YoY bringing the deficit close to 1.9% of the GDP. This reflects weak trade dynamics. Going ahead, current account is expected to continue its downward slide on account of falling exports, rising imports and remittances remaining flat.

FFBL is scheduled to announce earnings for 1QCY17 on Monday, 24^th April where AKD Securities expects the company to post net loss of Rs97 million (LPS: Rs0.10) as compared to a net loss of Rs514 million (LPS: Rs0.55) for 1QCY16. This reduction in loss is expected on the back of: 1) a 19% YoY increase in topline to Rs5.24 billion reflecting 54%YoY likely increase in DAP off‐take to 109,000 tons and 2) improvement in gross margin (GM) to 12.7% for 1QCY17 due to significant decline in phosphoric acid prices diluting the effect of significant reduction in DAP prices due to depressed international prices.

EFERT is also scheduled to announce its quarterly financial results on the same day. The brokerage house expects EFERT's earnings to nosedive to Rs1.19 billion (EPS: Rs0.90), down 44%YoY. The decline in earnings is expected on the back of: 1) GM declining to 33.2% on account of reduction in urea prices (down 9%YoY) due to depressed farm economics and low international prices, down  by 10%YoY to an average of US$210/ton in 1QCY17.

Supreme Court verdict stays short of disqualifying Pakistan Prime Minister Nawaz Shari

Supreme Court verdict stayed short of disqualifying Pakistan Prime Minister Nawaz SharifIn a split 3-2 decision, the Supreme Court (SC) while forming a Joint Investigation Team (JIT) stayed short of disqualifying the Prime Minister (PM) in the eagerly awaited Panamagate decision on Thursday, allowing the PM to continue holding office.

The JIT [to be comprised of one senior official each from the FIA, NAB, SECP, SBP, ISI and MI] has been tasked to investigate offshore assets [incl. money transfer to Qatar] of the PM’s family.

In this regard, the SC also ordered PM Nawaz Sharif, and his sons Hasan and Hussein to appear before the JIT.

The JIT will be formed in the next 7 days and has also been ordered to present a report every two weeks before the five-judge SC bench and conclude the investigation in 60 days.

Our take

The efficacy of the agencies represented in the JIT to conduct an independent investigation against a sitting PM is going to be challenging, in our view, as some of these agencies have reportedly expressed an inability to conduct an inquiry citing various reasons such as immunity of public office holders, lack of evidence, legal jurisdiction, etc.

At the same time, the plaintiffs will also have to produce a new set of supporting evidence as the ruling deems the current evidence to be inconclusive. This can be challenging for both the plaintiffs and the JIT to complete the investigation in the stipulated 60 days.

Market Reaction

The market has reacted positively (KSE100 up 3.85% intra-day to close with a gain of 2.57%) as the delay in the Panamagate verdict had clearly been an overhang on market sentiments (momentum which picked up in the closing months of 2016 petered out with the KSE100 marginally down 0.4%CY17TD).

In this backdrop, daily value traded is materially down to average US$113.7mn in Apr’17-to-date compared to US$274.4mn in Jan’17 and to its 6 months average of US$194.87mn.

The market has been in a consolidation mode (down ~3%) since the verdict was reserved on Feb 23’17. In this regard, the benchmark has regressed from  close to +2 standard deviation towards +1 standard deviation (vs. the one year moving average) in the review period.

With political uncertainty now relatively lower, we expect the market sentiments to improve with focus now being upon the upcoming MSCI EM inclusion and Budget FY18. In this backdrop, we recommend a thematic exposure in front line Banks (double digit loan growth from CPEC related activities expected to counter pressure from a relatively lower interest rate environment) with UBL (fwd. PB/PE 1.6x/9.7x) as our preferred pick, OMCs (robust volumetric growth as the industry prepares to increase storage) with HPL (CY17/18F PE of 19.6/15.1x) as our preferred pick in the space, Cements (double digit domestic demand growth with a vibrant private construction environment) with LUCK (FY17E PE 20.01x) as the preferred pick and Autos (healthy order book indicating steady demand, ability to increase prices) with INDU (FY17E/18F PE of 11.4/11.0x) making the cut in the auto space. 

Upcoming Checkpoints

·         Formation of JIT in next 7 days with investigation to be concluded in 60 days

·         Inclusion in the MSCI EM space in May’17 where Pakistan is slated to have a weight of around 19bps

·         Federal Budget FY18 expected to be announced on May 26’17. This would be the last budget of PML-N before general elections in May’18

·         Major political parties are expected to kick-start their election campaigns shortly

Panamagate Recap

·         Prior to the closing of hearing (reserved since Feb 23’17), the Supreme Court heard petitions in the Panama Papers leaks case filed against PM Nawaz Sharif, his family members and others.

·         To recall, the Panama Papers leaks in Apr'16, showed the Sharif family's connection to offshore entities registered in tax havens with assets vastly exceeding legal income sources.

·         No offshore company in the Panama Papers is in the name of Nawaz Sharif or his brother Shahbaz Sharif, Chief Minister of Punjab.

·         However, several entities are listed in the names of the PM’s three children, Mariam, Hasan and Hussain, who were owners or had the right to authorize transactions.

·         That being said, the PM and his children are accused [in the Panamagate case] of money laundering and owning offshore assets without disclosing the source and trail of funding.

·         The opposition led by the PTI (ruling party in the province of KPK, second largest party in opposition) began a spate of protests, threatening a street movement to force PM Sharif to face a proper inquiry over the claims in the leaks (ended on Nov 1’16 as the Supreme Court announced to hear multiple petitions in the case).

·         The delay in announcing a verdict had been due to the unavailability of SC judges hearing the case as they were in different registries of the SC.

A report by Pakistan’s leading brokerage house, AKD Securities

US peacekeeper or conflict creator

One can deduce a few conclusions even by having a cursory look at the prevailing conflicts:

1)     conflicts are generated to create hegemony

2)     hegemony is established to get control over natural treasures

3)     natural resources are controlled to make the rich richer and the poor poorer

4)     worst crimes are committed in the name of conflict resolution

This raises a question is US a peacekeeper of conflict creator?

Keeping in view the prevailing conflicts, I am compelled to arrive at the conclusion that the US is conflict creator. To support my hypothesis, I will talk about:

Middle East and North Africa (MENA) inferno

Beginning from Iraq’s attack on Iran in seventies and on Kuwait in nineties the prime motive has been to control energy reserves. Iraq could have not done this without the patronage of the US. A look at the present day conflicts in Yemen, Bahrain, Somalia and Libya are the effort by the US to get control of oil and gas reserves of the region. Flaring animosity between Saudi Arabia and Iran and involving them in proxy wars is also part of the US policy to retain its hegemony in the region.    

Ongoing war in Afghanistan

The US managed to disintegrate USSR by prompting it to get access to warm waters. However, even after disintegration of USSR the war continues in Afghanistan. Be it tribal bouts or proliferation of extremism the local population continues to suffer from acute shortage of food and devastated infrastructure. The presence of NATO troops in Afghanistan raises the suspicion that they are not there to maintain peace but supervise cultivation of poppy.

Pakistan-India conflict

There can’t be two opinions that if Pakistan and India join hands, South Asia will become the most prosperous region. The area is rich in food, natural resources and makes the biggest market of the world. At the time of departure British Raj left a thorn, Kashmir. Since independence both the countries have been billions of dollars for the procurement of arms but bulk of the population continues to live below the poverty line.  

Iran-Saudi Arabia hatred

Both the countries are oil rich and have huge per capita income. While Saudi Arabia is often accused of towing the US foreign policy, Iran has been declared part of axis of evil. Both the countries have been involved in proxy wars, only to make them weaker. Saudi’s have been brain washed and made to say “Iran is a bigger enemy as compared to Israel”.

Growing US naval presence in Indian Ocean

The US has the largest and most equipped navy. It also has presence in all the occasions. It has major concentration in Indian Ocean, through which bulk of the trade and energy passes. Indian Ocean also connects two of the most important straits of Hormuz and Malacca.  

Efforts to choke straits of Hormuz and Malacca

The US has been making desperate efforts to get control over these two most important straits. However, in Hormuz it faces resistance from Iran and in Malacca from China. Since Iran and China are actively involved in oil trade, both have been supporting each other. Prior to Islamic revolution Iran had been towing the US foreign policy agenda but now it is considered the worst foe. China is one of the biggest trading partners of the US; the memories of cold war era are still fresh.

I am sure my critics may term my narrative ‘diabolic thinking of a citizen of third world country’. I will still say that all the conflicts around the world are created by the US to initiate proxy wars, sell arms and getting control over bounties of the nature.  

Pakistan Stock Market witnesses over 37 percent decline in daily traded volume

Trading at Pakistan Stock Exchange (PSX) remained lackluster for the large part of the week. During the week ended 7^th Aptil’17, the benchmark index closed at 48,156 points with average daily turnover during the week falling 37.36% WoW to 155.75 million shares. Volume leaders during the week were:  ASL ANL, BOP, BYCO and TRG. Key news flows during the week were: 1) headline inflation for March’17 rising to 4.94%YoY, 2) GoP raising petroleum prices, 3) INDU unveiled investment plan of Rs3 billion for debottlenecking of its paint shop, 4) IMF concluded its consultation with GoP, opining cautious stance on fiscal and external account while maintaining 5% GDP growth target, 5) Commerce Minister hinting disbursal of the first installment under the Rs180 billion textile package shortly and 6) SSGC approved  Rs64.9 billion additional gas pipeline development project to transfer 1.2bcfd RLNG from Bin Qasim to Sawan  with expected COD October’18. Stocks leading the bourse were: SSGC, INDU, MEBL, LUCK, and HCAR, while laggards were: NBP, NCL, AICL, ENGRO and SNGP. Foreign interest was positive during the week with net inflow of US$9.25 million compared to US$19.04 million net outflow a week ago. With high political uncertainty and delayed in implementation of in‐house financing product, market is expected to remain under pressure. However, commencement of results season may lend some support to the market. On the global front, recent U.S missile attack at Syria escalated tensions in the Middle East can that is likely to push crude oil prices higher, which can lend support to market.

The IMF recently concluded its Article IV staff‐level discussions with Pakistan, adopting a cautious tone on the country's ability to sustain recent macroeconomic gains. While similar to earlier reviews lagging fiscal and reform implementation efforts were counted as potential disruptive factors, looming external account threats also became a highlight. In this regard, the Fund has sharply increased its FY17 current account deficit projection to 2.9% of GDP (1.2% of GDP in FY16) on weak trade dynamics. On the fiscal front, GoP is expected to miss its deficit target of 3.8% of GDP with IMF forecasting the same at 4.1% owing to slow revenue collection (Rs2.2 trillion in 9MFY17 against Rs3.6 trillion target for FY17). Urging fiscal consolidation and greater tax collection, the Fund has also highlighted lack of progress on structural reforms in the energy sector. On a positive side, GDP growth for FY17 is expected to rise to 5.0% as compared to 4.7% for FY16 on CPEC led investment. IMF has appreciated controlled inflation levels, though advising a prudent monetary stance keeping in view fiscal and external risks.

Due to high political uncertainty, Pakistan market witnessed 0.8% MoM erosion during March'17, trimming down its CYTD return to a mere 0.7%. While foreign selling continued unabated during the month (FIPI outflow of US$22.8 million in March'17), participation of local players also remained lean, with volumes coming down by 31%MoM. Buying activity of Mutual Funds came down to around US$19.1 million as compared to US$47.9 million and US$44.1 million in February'17 and January'17). Banks and Individuals sold US$16.1 million and US$35.1 million worth of equities respectively. Barring Textiles, all main-board sectors posted negative returns with the highest decline seen in Cements and the index heavyweights Oil and Gas and Commercial Banks. Going into April'17 is likely to hold key importance in determining the market's direction. In addition, other points of significance include: 1) foreign flow trend a month prior to inclusion in MSCI EM index next month, 2) commencement of results season, 3) preliminary budgetary news flow and 4) inflation number this month to set the tone for interest rate hike during the year. 

Upsides in HASCOL are due to superior volumetric growth (CY17‐21 CAGR of 9.7%)  outpacing the industry, with requisite CAPEX dovetailing an aggressive retail push (adding 16 pumps per quarter for CY16) and storage infrastructure (planned addition of 350,000MT operational by 1QCY18). In this backdrop, AKD Securities has raise its CY17‐19 earnings by 11%, on the back of revised volumetric growth and increasing long term CPI assumption to 4%. However, with ambitious growth targets, the risks from a volatile oil price environment and associated inventory losses are hard to rule out. Ramping up of supply is also expected to strain liquidity while a commensurate increase in below the line expenses may drag profitability. Compared to listed peers, HASCOL’s books have better liquidity with room available to handle planned CAPEX. At current levels, the market seems to be under pricing growth.

Pakistan Stock Market Remains Lackluster

Trading at Pakistan Stock Exchange remained lackluster evident from benchmark index sliding by 1.7%WoW and closing the week at 48,156 points. The average daily trading volume also declined by 3.5%WoW to 248.7 million shares.The lack of investors’ interest can be attributed to political volatility and absence of market triggers. News flows for the week included: 1) SECP in its press release dated 29th March apprised that its constituted committee (for reviewing in‐house financing) had submitted a report which focused on introducing reforms in Margin Financing (MFS) to improve banks' funding to investors through brokers, 2) GoP released total Rs505 billion (63% of total Rs800 billion allocated) inclusive of Rs122 billion from foreign aid, 3) GoP allowed PTA to auction a next generation mobile services (NGMS) license with a base price of US$295 million from the frequency spectrums left unsold in the previous two auctions, 4) NML announced selling of 40% stake of its auto assembling business to the Japanese giant Sojitz Corporation and 5) OGRA proposed an increase of POL products for April. Stocks leading the bourse include: SHEL, MTL, ASTL and MEBL, whereas laggards were: HASCOL, AKBL, KEL, NML. Volume leaders were: BOP, ANL, KEL and ASL. Headline inflation is expected to guide expectations for monetary policy and may trigger a rally in banks. Additionally, the much awaited outcome of Panama case hearings could alleviate political pressures.

Circular debt and overdue receivables remain a usual element in cash strapped liquidity dynamics for the power sector. Taking a comprehensive approach, AKD Securities map the timeline of developments and quantum of circular debt build up since the one‐time clearance of Rs480 billion in June 2013. Its analysis show that in a large number of cases the GoP has been asked by independent arbitrators (foreign and domestic) and high courts to clear the pile‐up. This perception gains further strength based on increasing reliance on IPPs in power generation mix particularly in the backdrop of 10,663MW of gross capacity additions coming online by CY20. Also, with its political agenda hinging on resolving the prevailing power deficit of over 5,000MW, it is believed that a limited clearance of overdue payables to them is more likely. The Rs48 billion being claimed by 13 IPPs currently is a minor hiccup whereas IPPs with planned CAPEX outlays have increased pressure to free up liquidity tied in GoP receivables (case in point being HUBC where the room for leverage falls from Rs71.7 billion in FY16 to Rs27.8 billion in 1QFY17 and Rs1.8bn in 2QFY17).

Inconsistent with previous month's improved performance, Pakistan’s exports remained lackluster in February 2017, declining by 8.0%MoM/8.6%YoY to US$1.64 billion. Total exports registered a decline across all segments, with highest impact coming from the heavyweight Food and Textile sectors amounting to US$318.9 million and US$995.3 million, sliding 12.7% MoM/24.6%YoY and 6.5%MoM/2.7%YoY respectively. On a cumulative basis, 8MFY17 textile exports were 1.6%YoY lower at US$8.23 billion, largely contributed by 9.2%YoY decline in the low value segment diluting the impact of 1.6%YoY growth in the value added segment. Contrary to expectations, inclusion in zero rated regime and recently announced export incentive package worth Rs180 billion (textile sector's share estimated at close to 90%) has so far failed in generating positive momentum in export trend, giving way to fresh concerns regarding the export‐oriented industry's competitiveness over regional players. Going forward, analysts expect textile exports to remain under pressure due to: 1) weak Chinese demand outlook and concerns of economic slowdown in the European Union following Brexit and 2) lack of currency competitiveness. Moreover, continuous rise in international and local cotton prices has also aggravated concerns about textile industry.

ASTL has recently raised its re‐bars prices per ton by Rs2,000 (up 2.5%) to Rs79,000 likely due to: 1) increase in scrap steel prices and 2) rise in Chinese re‐bar prices due to higher domestic demand as a result of improvement in Chinese property sector and continuous decline in steel production. The recent price increase is likely to improve the bottom line. That said, current re‐bar prices still remain below FY16 average of Rs83,000/ton resulting in reduced gross margin/earnings for FY17F. While the upcoming expansion is to aid earnings growth, analysts believe the current price level is already reflects that.

West getting ready again to create rift between Saudi Arab and Iran

Major oil producers are scheduled to meet in Kuwait to deliberate on the outcome of their collective cut in production. It is expected that they won’t make any decisions until May, but are likely discuss the slow pace of market adjustment.

A survey of 13 oil market analysts by Bloomberg concludes that OPEC has little choice but to continue their production cuts. “They’ll probably think they need to grin and bear it longer. The glue that bound them together to begin with, which was higher prices, is the glue that will continue to bind them together.”

A point to be dealt with by all is ‘Saudi Arabia might demand Iran cutback if OPEC is to extend deal’. Speculation about whether or not OPEC will extend its production cut deal for another six months will be one of the most significant variables affecting oil prices in the short run. Western media has once again started spreading disinformation, “Saudi Arabia might only agree to an extension if Iran agrees to cut its production, something that it did not have to do as part of the initial deal”.

 The western media is prompting, “Iran agreed to a cap on production slightly higher than its October baseline for the January to June period, but Saudi Arabia is growing tired of taking on the bulk of the sacrifice for the market adjustment and might stipulate that other countries make a larger sacrifice if the deal is to be extended through the end of the year”.  

The western pinch can be understood by a Reuters report quoting a Saudi energy ministry official that crude exports to the United States in March would fall by around 300,000 barrels per day (bpd) from February and hold at those levels for the next few months.

The official said the expected drop, in line with OPEC's agreement, could help draw down inventories in the United States that stood at a record 533 million barrels last week. It is also believed that Saudi exports to other regions, notably Asia, will not face any cut, rather these may increase. Therefore, the western media is once again making hue and cry that unless OPEC extends the curbs beyond June or makes bigger cuts, oil prices are not likely to improve.

The question remains whether OPEC, whose committee monitoring the cuts will meet over the weekend in Kuwait, will extend the deal? In Russia, private oil producers are ditching their skepticism and lining up behind an extension of output cuts after previous oil price increases compensated for lost income.

In the United States, shale drilling has pushed up oil production by more than 8 percent since mid-2016 to just above 9.1 million bpd, though producers have left a record number of wells unfinished in Permian, the largest oilfield in the country, a sign that output may not rise as swiftly as drilling activity would indicate.

While, I am not an expert to suggest any thing to OPEC, I have no option to tell them that if no cap is put on oil output in the United States, they (OPEC) have no obligation to cut output.  On the contrary they should start dumping their oil in the United States, rather than giving it a chance to increase indigenous production. OPEC must once again let the price go down below US$25 per barrel.  This will render the producers from the United States uneconomical. OPEC should also stop considering Iran its enemy as it (Iran) can’t increase output in near term.

Pakistan Stock Market Witnesses Return of Foreign Investors

The benchmark index of Pakistan Stock Exchange closed the week ended 24^th March 2017 at 48,971, up paltry 1.16%WoW. Investors remained cautious and activity remained lackluster with average daily traded volume at 257.8 million shares. KEL led volume charts with 140.9 million shares) as NEPRA determined the company’s multi‐year tariff  (MYT) reducing its base tariff from PkR15.57/kWh to PkR12.07/kWh which was followed by news reports of PM Sharif forming a committee to review the tariff after a meeting with Chairman of SPIC (Shanghai Electric’s parent company). Other key developments for the week included: 1) current account deficit for February 2017 was reported at US$744 million, taking cumulative 8MFY17 deficit to US$5.47 billion, up 120%YoY, 2) PIB yields remained flat at the latest auction with GoP raising PkR28.5 billion, 3) February 2017 fertilizer off‐take declined by 19%MoM/2%YoY to 491,000 tons, 4) HBL announced plan to sell its Kenyan branches in exchange for 4.18% holding (13.28 million shares) in Diamond Trust Bank Kenya and 5) PSMC considering shelving its planned US$450 million investment in spare parts plant and capacity expansion. Stocks leading the bourse were: SNGP, AGTL, MEBL and EFERT and laggards were: KEL, ICI, UBL and APL. Foreign interest was positive during the week with inflows of US$3.47 million compared to US$11.07 million net outflow a week earlier. Little surprise is expected at the Monetary Policy announcement scheduled on 25^th March as marker expects rates to remain unchanged. On the global front, representatives of the five monitoring OPEC/Non‐OPEC countries will meet to review compliance with the members’ deal to curb supply by 1.8 million bpd. Market is likely to remain volatile till clarity about the upcoming FY18 federal budget.

Current account continues to steadily deteriorate with 8MFY17 cumulative deficit to 1.7% of GDP or US$5.47 billion. This reflects rising imports (+11.2%YoY) this fiscal year on the back of higher oil prices (8MFY17 oil imports up 15.4%YoY) along with greater machinery (12%YoY) and auto (36%YoY) imports. This has been exacerbated with weak exports (down 2%YoY in 8MFY17) and tepid remittance flows (down 2.5%YoY). In February 2017 deficit was registered at US$744 million, lower than US$1.2 billion recorded in January 2017 helped by lower imports for the month ( down 6.2%MoM) and US$350 million CSF inflows under service exports received earlier. Going forward, unfavorable trade dynamics will prompt further weakness in the deficit, with additional CSF inflows of US$200 million received in March 2017 and expected recovery on the remittance in 4QFY17 based on seasonal trends.

NEPRA has released KEL's MYT for the years FY17‐23 with numerous details still to be sorted. Salient features of the tariff include: 1) seven year period covered under the determination as opposed to the request for ten years, 2) raising of T&D benchmark, 3) allowance for passing through of increased O&M expense with inclusion for WPPF and WWF, 4) allowance of write-offs up to 1.78% of Electricity sales revenue in any given year, and 5) planned CAPEX of PKR237.6 billion allowed for in the tariff and adjusted in the base tariff. Contrary to increased allowances and benchmarks, the base tariff for the utility has been decreased to PkR12.00/ KwH (after adjusting for T&D and fuel), a reduction of PkR0.94/KwH over FY16's tariff, raising concerns of a tapered bottom‐line. Analyst from ADK Securities believes that  KEL may approach NEPRA for a Review, with specific aspects being highlighted.

Another Pakistan Resolution Needed

Every year on 23rd March Pakistanis celebrates the day Muslims of South Asia passed a resolution in 1940 for the formation of an independent country. They worked hard under the charismatic leadership of Quaid-e-Azam Mohammad Ali Jinnah. The first ever state based on ‘ideology’ rather than geographical proximity or common language appeared on the map of the world in 1947. Since independence opponents of Pakistan connived and tried to prove that ‘two nations’ theory was wrong and finally succeeded by carving Bangladesh out of East Pakistan. One still hears slogans like ‘we don’t want Pakistan’ (Pakistan Na Khappay), Sindhudesh, Greater Pashtunistan and Greater Balochistan. All these ideologies are being sponsored by those adamant at fragmenting Pakistan. All these pursuits are fully sponsored and funded by the regional and global super powers in the name of ‘new world order’. The politicians in power or in oppositions have been saying for decades ‘Pakistan is standing on crossroads’, ‘it is the most critical time for Pakistan’, ‘challenges are enormous’ and ‘third hand is busy in destabilizing Pakistan’. However, even a Pakistani of average wit strongly believes that since independence conspiracies have been going on to erase Pakistan’s name from the world map. Many of the external forces have embedded their agents in Pakistan. These agents not only have access to power corridors but often succeed in occupying key positions. They have attained the capacity to influence decision making. Ironically, politicians seeking key positions often become ‘most obedient servants’ of super powers. They make many decisions which are not in the interest of Pakistan but help them build personal wealth. Believers of conspiracy theories say that soon after independence reins went into the control of external forces. The first ever notable incident is said to be the assassination of Liaquat Ali Khan. However, some insist that Quaid-e-Azam was also assassinated because no one pulled him out from the ambulance which remained stranded for hours. Then came hanging of deposed Prime Minister Zulfikar Ali Bhutto and assassination of first ever lady prime minister of Muslim Ummah, Benazir Bhutto. If it could not be found out who sent an ambulance without spare wheal to carry seriously ill Quaid-e-Azam and killers of Liaquat Ali Khan and Benazir Bhutto have also remained at large. The same elements have also refused to make public details of Hamood-ur-Rehman Commission on the fall of Dacca. From the cold war era the United States has its bases in Pakistan. If in the past these bases were used for spying USSR the most recent endeavor has been attacks by CIA-operated drones, flying from a Pakistan Air Force base at Jacobabad. Some outfits are also involved in cross border terrorism in Iran, the most notorious being Jundullah. Its chief was caught while flying over Iranian airspace in a chartered flight. The latest hearing at a Congress Committee demanding Pakistan to give right of self determination to Balochs is also part of the grand agenda. It may not be wrong to say that not only ruling junta of Pakistan remains subservient to super powers but the situation is even worst in other Muslim countries. Saddam Hussain of Iraq was kept in power to kill his fellow citizens, encouraged to invade Iran and fight a war for almost a decades. He was also encouraged to attack Kuwait but once he became redundant, he was hanged. Many other rulers have also faced similar fate be it Anwar Sadat or Hosni Mubarak of Egypt. Assassinations of Quaid-e-Azam, Liaquat Ali Khan, Benazir Bhutto, Pakistan fighting US proxy war in Aghanistan US bases in Pakistan,

The Editorial Published in The Financial daily on 23rd March 2012.

Pakistan Stock Market remains laclkuster

Due to political uncertainty and regulatory pressures the benchmark of Pakistan Stock Exchange index remained unexciting. The week ending 17^th March 2017 closed at 48,409 points, down 1.6% WoW. Soft global oil prices, SECP’s action to curtail in-house badla financing and political uncertainty kept the market under pressure. Key news flows during the week were: 1) SBP raised Rs284 billion through short‐ term government papers, 2) in line with expectations, the US Fed raised interest rates, 3) in addition to independent power producers’ claims of over Rs414 billion, non‐payments to oil companies were reported at more than Rs300 billion, 4) Ministry of Finance approved payment of Rs6 billion on Thursday for the state owned PSO to avoid an international default, and 5) HUBC and FFC announced in separate notices the offer and receipt of an equity divestment plan relating to Thar Energy Limited. (TEL), a 330MW mine mouth coal fired project in Thar Block II. Stocks leading the bourse were: MEBL, ASTL, FATIMA, and ICI. On the other hand, laggards were: HMB, PPL, and FFBL. Volume leaders were: KEL, BOP, TRG and ASL. Subdued global oil prices, strengthening US$ and global trade related developments over the upcoming G‐ 20 summit may impact the domestic markets. At home, any clarity on the political front could trigger bullish sentiment, while policies and budgetary developments for the Finance Bill FY18 can be expected to sway markets.

The PRK has remained stable over the last year, weathering the worsening external account position. While current account deficit is up 90%YoY during 7MFY17 and reserve position (down US$1.75 billion from its peak) has deteriorated, PkR/US$ has remained stable at PKR104.8/US$, which is reflective of GoP's resolve to keep exchange rate stable. Going forward, analysts see little pressure on the PRK over the short term, primarily supported by an expected recovery in forex reserve position. In this regard, analysts see support from expected inflows including: 1) up to US$1.0 billion from planned Eurobond/Sukuk issue, 2) US$550 million under CSF disbursement and 3) likely US$4.0 billion from project lending and commercial loans budgeted for the year along with room for greater accretion from CPEC related inflows. Incorporating this,

AKD Securities has recently revisited its investment case for PIOC, incorporating recent cement price increase and expected continuation of clinker sales. While rally in coal price is expected to shrink gross margins (GM) and dampen earnings, recently installed 12MW WHR is expected to partially make up for the above. In this regard, the brokerage house expects an after‐tax operational savings of PKR1.11/PKR1.82 in 2HFY17/FY18. Besides, the company revealed its plans of: 1) revising up its cement expansion capacity from 2.21 million tpa to 2.52 million tpa, 2) installing separate line of 12MW WHR for the expansion and (3) setting up 24MW coal CPP. The total capex associated with the projects is expected to be around PKR25 billion. Though, the brokerage house has not incorporated the aforementioned projects due to awaited details, it expects the expansion to result in increase in FY20‐23 average earnings. Moreover, the new line of WHR and coal CPP are together expected to result in incremental earnings.

OGDC discovers hydrocarbon in District Hyderababd

Pakistan’s largest exploration and production (E&P) enterprise, Oil and Gas Development Company (OGDC) has discovered a new oil and gas reserve in Hyderabad District. The OGDC is the operator of joint venture of Nim Block having 95% share along with 5% shareholding of the Federal Government through Government Holdings.

The discovery at exploratory well Chhutto-1 is the first hydrocarbon reserve in Bulri Shah Karim, Tando Muhammad Khan in District Hyderabad. Initial results encouraged the company to drill two more wells in this licensed areas, of which one well has already been marked for immediate drilling.

The structure of Chhutto-1 was delineated, drilled and tested using OGDCL’s in-house expertise. The well was drilled down to the depth of 3,820 meters. The well has tested 8.66 million standard cubic feet per day (mmscfd) of gas and 285 barrels per day (bpd) of condensate through 32/64-inch choke at wellhead flowing pressure of 2,100 per square inch.

As declared by the Company, the discovery is the result of aggressive exploration strategy adopted by the OGDC. It has opened a new avenue and would add to the hydrocarbon reserves base of the country in general and OGDC in particular.

The OGDC has the largest acreage, production and hydrocarbon reserves in the country. It is listed at Pakistan and London Stock Exchanges with a debt-free robust balance sheet and cash reserves, although its huge financials are stuck up in the country’s chronic energy sector circular debt.

Pakistan meets around 12% of its oil requirement from indigenous resources. Historically, the OGDCL’s production has hovered between 35,000 and 45,000 bpd. The company has embarked upon an aggressive exploration and development program in the last few years to take advantage of a slowdown in drilling activities in the Middle East and around the world.

Only recently, the company launched four fresh seismic crews started operations in Kharan, Pasni, Gwadar, Zhob and Musakhel in Balochistan which remained inaccessible due to security situation for a long time. It was for the first time that its nine seismic crews were simultaneously working in various parts of the country. The number of such crews never went beyond five in the past, he claimed.

US the biggest beneficiary of output cut by Saudi-led OPEC

I posted a blog ‘US producers gulping Saudi share’ on 4th February 2017. In this blog I had expressed my apprehension that Saudi Arabia was most likely lose its market share by cutting down output. I also warned that with the improvement in oil prices, US producers would be prompt in increasing their production to gulp Saudi share.

In the recent past various reports have been released that supports my point. The reports indicate that the US production has risen to around 9 million barrels/day. These reports also confirm that the compliance by OPEC members is as high as 95 percent; Russia has not made the corresponding cut in its output.

According to EIA data, US crude inventories hit record highs last week, after eight straight weeks of build ups. This was because of increase in number of active rigs as production topped 9 million barrels per day for a second week in a row, the most since April 2016. Increase in US crude stockpiles undermine efforts by Saudi-led OPEC to contain global oil glut.

I am obliged to share a report published by Reuters ‘U.S. drillers add oil rigs for seventh week in a row: Baker Hughes’ indicating that with the improvement in crude oil price the US drillers have added a total of 293 oil rigs in 36 of the past 40 weeks. This is the biggest addition since a global oil glut crushed the market in mid 2014. The US drillers added seven oil rigs during the week ended 3rd March 2017, taking the total count up to 609, the most since October 2015. During the same week a year ago, there were 392 active oil rigs only.

According to Baker Hughes, oil rig count plunged from a record 1,609 in October 2014 to a six-year low of 316 in May 2016. This fall has been attributed to the collapse of US crude oil prices to near US$26 in February 2016, from over US$107 a barrel in June 2014.

Yet another sign of warning is a report by the US financial services firm, Cowen & Co that said its capital expenditure tracking showed 52 exploration and production (E&P) companies planned to increase spending by an average of 50 percent in 2017 over 2016.

One of the likely OPEC decisions could be to declare that the agreement reached last year is no longer binding for its members. Increasing output may not pose any problem for OPEC members but could certainly put US producers in trouble. Only price could determine who can withstand the completion.   

Pakistan stock market witnesses 6% decline in daily traded volume

The benchmark index of Pakistan Stock Exchange continued to experience volatility during the week on account of reported action by SECP against in‐house financing and uncertainty with regards to Panama‐gate case. Though market fell initially to one‐month low on first day of the week, it recovered thereafter closing at 49,624 points (+1.26%WoW) on rumors of a new leveraged product and SECP clarification on measures/regulatory oversight over brokerage firms. Average daily traded volumes fell by 6%WoW to 322 million shares where volume rankings were occupied by: LOTCHEM, ASL, KEL, ANL and TRG. Leaders during the outgoing week included: LOTCHEM, EPCL, AGTL, SNGP and ICI while laggards included: NCL, HMB, PIOC, DAWH and PPL. Key developments during the week included: 1) Pak Suzuki Motor Company (PSMC) sent an investment plan of US$660 million to the government, requesting same benefits/incentives for 2 years from the start of mass production of new models instead of 5 years granted to new entrants in the Auto Policy 2016‐21, 2) MUGHAL announced to set up 6 additional lines of 3.1MW gas CPP taking total CPP capacity to 27.9MW and spend Rs1.00 billion on these lines and BMR of existing re‐rolling mill, 3) SBP issued Rs387.4 billion worth of T‐Bills against the participation of Rs473 billion, 4) SNGP’s BoD approved a capital intensive project for development of 1,200mmcfd LNG pipeline from Karachi to Lahore at an estimated cost of Rs111 billion with expected COD of October 2018, and 5) CPI inflation hit a 3‐month high of 4.2%YoY in February  2017. The market is likely to remain volatile in the upcoming week due to lingering regulatory and political risks. Inflationary pressures on account of rising food and fuel prices are expected to strengthen hawkish monetary policy stance. In this backdrop, banks are expected to perform well.

Continuing to climb albeit at a slower pace than the tail end of CY16 bullish sentiment prevailed in global commodities market during February 2017. This sentiments were driven by hike in prices of commodities actively traded that included oil, Cotton, Steel and food commodity prices. Whereas, commodities witnessing decline in prices were Coal and Urea on the back of policies and capacities raising global production. Going forward factors driving commodity prices are: 1) divergence in global monetary policy, where any tightening in US rates could strengthen the greenback, softening commodity prices, 2) global economic activity picking up pace as global manufacturing PMI remain expansionary and 3) continued tightening of supply dynamics for energy prices expected to keep supply constrained. Lastly, political factors including expansionary fiscal policies by the US government and China's meeting of the Politburo Standing Committee are expected to renew commitments to infrastructure development, providing support to metals, energy and hard commodity prices.

After a fitting end to CY16 (promising rabi season), CY17 got off to a sluggish start with not only urea but cumulative fertilizer sales remaining depressed during January 2017 primarily in response to low crop prices (depressed agricultural commodity cycle) and crop shortfalls lowering farmer's income. According to latest figures released by NFDC, cumulative fertilizer offtake during the aforementioned month was recorded at 595,000 tons as compared to 1,278,000 tons in December 2016, declining significantly by 53%MoM, while it rose 21% on yearly basis. Specifically, urea sales during January 2017 were recorded at 406,000 tons as compared to 898,000 tons in December 2016, lower by 55% MoM, while it grew 19%YoY. On the contrary, imported urea sales went up to 15,000 tons in January 2017 on account of the discount offering with imported urea prices at 10% discount to its local counterpart. Following the trend, DAP sales also remained depressed, declining to 61,000 tons in January 2017. Post Rabi season, near‐term expectations are: 1) export of excess urea inventory and 2) change in international pricing dynamics.

CPI based inflation for February 2017 is projected at 4.1%YoY, considerably higher than 3.66%YoY registered in January 2017. While food prices are likely to see a dip on seasonal trend, this should be countered by the recent hike in petroleum prices. Consequently, 8MFY17 CPI average is expected to rise stand to 3.9%YoY compared to 2.5%YoY in the corresponding period. Going forward, analysts expect inflation levels to post a steady increase buoyed by higher price levels for food items and rising global oil prices.

HUBCO More than just an Independent Power Producer

The Hub Power Company Limited (HUBCO) is Pakistan's largest multi-project power producer (1200MW RFO powered base plant, 214MW RFO powered Narowal, 84MW hydel based Laraib) and a stalwart of the IPP space in Pakistan.  Continuing with its pedigree of developing diverse capacity additions, expansion into coal fired power through its 46% stake in China Power Hub Generation Company Limited (CPHGCL) is now likely. Inclusion of the 2x660MW project in the priority list for CPEC projects confirms the market’s bullish expectations and allows us (AKD Securities) a firm basis to include dividend income from the project in our valuation set. We await the financial close of Thar Electric Power, to incorporate upside. Furthermore, the COD of SECMC (expected Dec'18) may also be achieved offering additional upsides. Moreover the company has also approached relevant authorities for developing a mine mouth power project of, 330MW in Thar. Having had a strong bull run (FY14-16 return of 102%), on the back heightened investor expectations of value addition post expansion plans, the stock trades at attractive price.

Going forward, earnings are expected to be driven by: 1) movement past the trough of the U-shaped tariff for the base plant, 2) improved efficiency in the base plant from continuing overhauls (boiler overhaul completed) and 3) termination of O&M contract with O&M services at the base plant (and planned coal expansion) to be managed internally, reducing consolidated O&M costs (halving of annual O&M expense). The separation of O&M services subsidiary Hub Power Services Limited as an in-house O&M provider in a technical agreement with GE and its stake in SECMC are value accretive. The absence of these companies in the consensus valuation method (DDM using income paid through tariffs post indexation), may be undervaluing the company and missing value additions from these segments of HUBC's business.

CPHGCL (2X660MW) coal fired plant with accompanying jetty adjacent to its base plant site, with an expected cost of US$2.4 billion (in an 80/20 debt to equity) through a JV with China Power International  Holdings, and HUBC holding minority stake in the project (recently notified at 46%). To recall, coal based power plants have a lucrative upfront 27.2% ROE (imported coal) during the four year construction period, with a guaranteed 17% US$ indexed IRR. Thus, the planned project, with expected COD by FY19-20 (staggered COD is planned, with each 660MW unit brought online in a span of 2-3 quarters of each other), is expected to be a major contributor to payouts from FY20 (Rs5.73/share in annual dividend income from CPHGCL).

HUBCO’s base plant with 1,200MW net generation capacity forms the foundation of the current valuations as it makes up for 80% of units generated by the company. These factors allow the base plant to add Rs63.2/share to DDM based valuation in the form of dividend income (at 100% ownership). Having a U-Shaped tariff (unique in the Power Sector) the plant's tariff peaks towards the end of its tariff period, expiring in FY27. Additionally, the recent completion of boiler overhauls and incorporation of a wholly owned subsidiary to carry out plant O&M significantly reduces O&M costs for the consolidated entity.

A number of catalysts continue to fuel investor expectations including: 1) demerger of Narowal into a separate IPP, with potential listing to raise additional funds for sizeable CPHGCL equity drawdown, 2) Pak Rupee depreciation and increase in US CPI provide upside to indexations built into the tariff and adjusted quarterly, and 3) additional income from the acquisition of 6% stake for US$20 million in Sindh Engro Coal Mining Company (SECMC) tasked with mining for coal in Thar Block II (COD expected Dec'18). Lastly, headway on additional projects, including 330MW Thar Electric (TEL) could be value accretive (26.5% ROE on local coal vs. 24.5% on imported coal).

Under the scheme of arrangement for asset desegregation approved in the EOGM on Feb'15, the newly formed Narowal Company Ltd will have 392.2 million shares. Post demerger, 100% ownership of Narowal Company Ltd will remain with HUBCO; the company may put up a minority stake for listing through Offer for Sale.

Valuation & Investment Perspective: Having had a strong run (FY14-16 return of 102%), on the back heightened investor expectations of value addition post expansion plans, the stock trades at a premium. The financial close of TEL also offers additional upside. Between now and the commencement of operations in the 1320MW coal fired extension project, the COD of SECMC (expected Dec'18) may also be achieved offering additional upsides. That said, both projects will be a drain on liquidity, which the company may balance by offloading Narowal post demerger. Despite this, management has recently stated its aim to implement quarterly payout regime.

Regulatory impediments with pending approvals on 1,320MW coal fired power plants having the potential to delay the project in a material manner. In the backdrop of additional burden of upcoming projects and investments, liquidity crunch may ensue if circular debt resurges. Any surge in debt build up may impede FO supply, particularly at the base plant, where PSO (with whom a Fuel Supply Agreement governs payments) is exposed to a liquidity crunch and may face problems opening LC's/ facilitating shipments.

HUBCO, Pakistan, energy crisis, circular debt

Pakistan Stock Market Comes Under Extensive Pressure

After starting the week on a shaky foot, market remained volatile as investors preferred realizing profits due to uncertainty around Panama hearing, law and order concerns and stories about unethical conduct of some of the brokers. During the week ended on 24th February, the benchmark index of Pakistan Stock Exchange (PSX) closed almost flat at 49,008 levels. Average daily trading volume at the bourse tapered to 322 million shares, down by 11.6%WoW. Foreign flows also declined with net outflows for the week rising to US$4.8 million as compared to inflow of US$4.2 million a week ago. Major news flows during the week included: 1) current account deficit for January’17 rose by 16%YoY to US$1.19 billion taking 7MFY17 cumulative deficit to US$4.71 billion, up 90%YoY, 2) GoP raised Rs59.7 billion through PIB auction with banks’ biding for Rs115.2 billion but cut off yields remained largely flat, 3) National Assembly Standing Committee was informed that the GoP is considering a subsidy package for farmers in the FY18 Budget, 4) Chairman of the PSX’s Divestment Committee stated that the exchange would be listed through an IPO by the end of June this year, 5) PSMC announced expansion plans for producing 100,000 units, with total planned outlay of US$460 million and 6) KPMG Taseer Hadi – Independent Consultants for SNGPL and SSGC – released their report suggesting UFG benchmarks for the utilities at 5%. Top performers at the bourse were: HMB, MTL, PIOC and SSGC, whereas laggards included: HASCOL, DAWH, AGTL, and ASTL. As the result season approaches its end, the market is likely to retain focus on developments around Panama‐gate case. Uncertainty around the time frame for the announcement of the decision can keep investors on edge, inducing greater volatility in the market. Additionally, February’17 CPI inflation to be announced next week is expected to be higher than last month and will help to firm expectations of a higher interest rate trajectory going forward.

External trade trend witnessed improvement during January'17 with exports rising to US$1.78 billion (up 3.0%MoM/0.7%YoY), marking reversal from the consistent monthly downward trend seen this year. Textile sector, which constitutes more than 60% of country's exports picked some pace and rose by 2.7%MoM to US$1.06 billion during the period under review driven by broad‐based recovery in both low value (+7.8%MoM) and value‐added segments (+1.0%MoM). However, on a cumulative basis, 7MFY17 textile exports are still 1.5%YoY lower as compared to that of US$7.23 billion for the corresponding period last year. Going forward, analyst at AKD Securities expects textile exports to largely remain under pressure due to: 1) demand side bottlenecks with weak Chinese demand outlook and concerns of an economic slowdown in the EU following Brexit and 2) lower currency competitiveness amid sharp depreciation in regional currencies against US$. That said, the recently announced export incentive package worth Rs180 billion with the textile sector having the lion's share is expected to enhance export competitiveness over regional countries remains a key near‐term trigger for the sector. Moreover, encouraging cotton arrivals to date (up 10.63%YoY) to 10.634 million bales) is expected to reduce cotton shortfall this year.

Large Scale Manufacturing (LSM) during 1HFY17 grew by 3.90%YoY buoyed by a jump in December'16 by 7.04%YoY on seasonal trends. However, this remained slightly lower as compared to 1HFY16 owing to slower than earlier growth in the Auto sector. However, recovery in the Food sector lent support to the LSM index. While some upwards push is expected in the coming months on periodical trends, analyst expects the trend to normalize over FY17. However, ongoing expansion plans can lift the index higher than previous year. This remains inadequate for achieving FY17 GDP target of 5.7%.

Pressures on rupee seems more imminent due to 7.3%MoM increase in trade deficit emanating from a 6%MoM decline in remittance inflows during January’17. Consequently, analysts expect sharper deterioration with CAD rounding off at 1.85% of GDP in FY17 on rising trade deficit and declining remittance. This adds to already worsening foreign exchange reserve position as foreign debt flows (net of repayments) in 7MFY17 at US1 billion have been lower than US$1.3 billion in the corresponding period. Resultantly, import cover on SBP held reserves now stands at 4.6 month compared to 5.4 month at end FY16.