Elixir Securities Limited – Pakistan Equity Market: Weekly Review
Web Desk
Karachi, January 12, 2018 (PPI-OT): Unabated Foreign Flows Take Locals by Surprise
KSE100 Index rose by 410pts WoW (1.0%) to 42,934pts during the outgoing week buoyed by strong foreign buying. Average volumes also remained high at 276mn shares as compared to 213mn shares during last week which translates into an increase of 30%.
Foreigners remained net buyers during the all ten trading sessions of the ongoing year as PKR depreciation and attractive valuations opened buying opportunities in the market. However political uncertainty dampened market exuberance which resulted in profit taking by domestic investors over the last two trading sessions of the week. The unfortunate incidents in Qasur added fuel to the ongoing struggle by Pakistan Awami Tehreek’s (PAT) against the sitting government.
The week also marked the release of trade data by PBS where the country’s exports during 1HFY18 increased 11.2% YoY to USD11bn while imports grew to USD29bn (up 19.1% YoY). Consequently Pakistan’s trade deficit widened to USD18bn. Meanwhile remittances increased only 2.5% YoY to USD9.7bn raising concerns on foreign reserves and PKR/USD parity.
During the outgoing week, market volumes continued to be driven by retail friendly stocks led by WorldCall Telecom (WTL: 101mn shares) which held an Analyst Briefing on Monday to guide about its recent restructuring and future plans. Other volume leaders included The Resource Group (TRG: 91mn shares) and Azgard Nine (ANL: 63mn shares).
Sui North Gas (SNGP) led the market return during the outgoing week rising 18.7% WoW to add 110pts to the benchmark index. This followed as a reaction of last week’s ECC approval of PKR175bn for the LNG-III pipeline project to be undertaken jointly by SNGP and Sui Southern Gas (SSGC).
Foreign investors remained the biggest buyers in the market purchasing shares worth USD26.4mn. Meanwhile Banks/DFIs and other organizations remained the biggest sellers during the week liquidating positions worth USD18.5mn and USD7.8mn respectively.
Equity Market Outlook and Perspective
Pakistan Equities have so far witnessed net inflows of USD 49mn in January, in-line with our theme of return of Foreign Investment as Pak Rupee depreciates. The resultant turnaround in sentiments and advent of much needed liquidity should keep the momentum going into the next week. However the announced street protests by PAT, along with support from Pakistan Tehreek-e-Insaaf (and potentially Pakistan Peoples Party), from 17th January would be a sentiment dampener. If the Opposition parties manage to stir strong street power, it may open the doors for profit-taking as KSE-100 has already posted a sharp rally of 13% from its Dec-17 lows.
Key news this week
Govt preparing roadmap to borrow $10b in next six months (Economy): The government is preparing a roadmap to borrow $10 billion from external sources in next six months to repay previous loans and finance the current account deficit.
“Out of this amount ($10 billion), the government will make payment of around $3.5 billion to International Monetary Fund (IMF) and others while $6 to 7 billion will be used to finance the trade deficit of the country,” said a top official of the ministry of finance wishing not to be named. He informed that roadmap in this regard would be finalized in next few days.
Govt considers slashing gas, power tariffs to ease cost of doing business (Economy): Government is likely to reduce industrial tariffs of electricity and gas within the next couple of days, the finance ministry’s chief said on Saturday in a response to businessmen’s demand to lower cost of doing business.
“Gas and power rates would be lowered possibly in the next 10 days,” Adviser to the Prime Minister on Finance, Revenue and Economic Affairs Miftah Ismail said in a meeting with the office bearers of All Pakistan Textile Mills Association.
Fertilizer policy on the cards (Fertilizer): The government is set to announce within one week a new fertilizer policy, which will reduce the cost of production for farmers and attract investments.
According to Mr Bosan, the Ministry of Finance and Federal Board of Revenue have agreed to the new policy. The government wants to reduce taxes to control the cost of production and discourage subsidies, he said. The new policy will benefit farmers as well as the industry, he added.
World Bank projects 5.5 percent growth (Economy): Pakistan’s growth is projected at 5.5 percent in the current fiscal year with strong activity in construction and services, a recovery in agricultural production, and robust domestic demand supported by strong credit growth and investment projects.
The Bank projected even higher growth for Pakistan in the next fiscal year: “Pakistan is expected to accelerate to 5.8 percent in fiscal year 2018-19, which begins July 1. The current deficit widened to 4.1 percent of GDP, amid weak exports and buoyant imports.”
Installation of cement plants banned in Punjab (Cement): The Punjab chief minister has approved a summary for the imposition of ban on installation of new cement plants in the entire province, The Nation has learnt. As per details, a summary for the standing committee of the cabinet on legislative business was moved for imposition of ban on establishment of new cement plants.
This week’s top stories
Automobile Assemblers – Soft December Sales Fail to Mask Strong 1HFY18 Performance
Passenger car sales for the month of Dec-17 fell 6% sequentially as customers delayed buying until the New Year. However the overall sales growth remained robust as can be gauged from 15/20% YoY increase in Dec-17/1HFY18.
Amongst assemblers, PSMC outperformed the segment with sales growth of 1/29% MoM/YoY in the outgoing month owing to robust demand in the 1000cc segment which is dominated by the company.
Tractor and pickup sales also remained strong during 1HFY18 growing 54% and 22% respectively against SPLY.
We maintain a Market weight stance on the sector identifying i) expected reversal in economic cycle and ii) entry of new competition as key risks to the current players. However we hold that the current delivery period of 2-6 months will likely provide a lag in the translation of these factors onto the existing players.
Hub Power Company Limited – Addressing Concerns on Utilization and Shariah Compliance
Based on our discussions with the management we believe all planned overhauls at Narowal for FY18 have been carried out in the first quarter. Earnings are expected to normalize going forward. A PKR5-5.5bn additional debt facility has also been arranged for expansion projects.
Capacity additions to the grid may lead to HUBC’s utilization levels on furnace oil dropping to 30.1% by FY20. This would reduce HUB plant’s bonus, reduce O and M savings and fuel losses. We expect the net impact to be immaterial.
However if operating costs remain sticky, EPS may decline by ~PKR1.0/share in FY18/19.
HUBC is expected to remain shariah compliant despite pick up in borrowing. However circular debt pay off could cause non-compliance as 54% of total assets are receivables from WAPDA and NTDC.
We maintain our BUY call on HUBC with a Dec-18 PT of PKR145/share resulting in 66.1% total potential upside (including 8.2% forward dividend yield).
