Elixir Securities Limited – Weekly Review

Karachi, January 11, 2019 (PPI-OT): Pakistan Equity Market – Riding the Tide of Foreign Investment

KSE100 Index rallied 1,502pts (4.0%) during the week, kick starting on a high note with 1,014pts rally on Monday as Information Minister confirmed that talks with UAE were finalized for building oil refinery which is expected to bring Foreign Direct Investment (FDI) of around USD4-5bn. Market activity too improved during the week with average daily traded value/volumes going up by 12.3%/17.8%WoW to USD46mn/139mn shares.

Regarding Khalifa Coastal Refinery (KCR), Bilal Pasha, Commercial Counsellor at the Pakistan Embassy in Abu Dhabi said that International Petroleum Investment Company (IPIC, UAE) will hold a 76% stake while Pak-Arab Refinery Company will have 24%. Construction of the mammoth project is expected to start in January next year. Production is slated to start in December 2021. “The refinery will have the capacity to produce around 100,000 barrels of diesel per day and around 35 to 45 million barrels a year,” said Pasha.

The index was mainly driven by Oil and Gas Exploration Production sector contributing 606pts (40%) as it returned 10.5%WoW on the back of 6.4%/8.1%WoW rally in Brent/WTI to USD61/USD52 per bbl. Saudi Energy Minister Khalid Al-Falih commented to restore equilibrium in oil markets through reduction in production to 10.2mnbpd this month, and exports by 0.8mnbpd to 7.2mnbpd in Jan-19 and further down to 7.1mnbpd in Feb-19. Mari Petroleum (MARI) lagged behind (relative to its peers) returning just 4.7%WoW as media news indicated a go-ahead from Government to divest its 18.39% shareholding through secondary public offering.

Refineries returned 2.2% (underperforming KSE100) on government’s announcement of utilizing funds generated through Deemed Duties to enhance storage capacity and modernize production facility to reduce the production slate of Furnace Oil (FO). Moreover, the government completely banned imports of FO with waiver given to K-Electric (KEL) and directed the refineries to enter commercial agreements with Independent Power Producers (IPPs) to utilize latter’s capacity for storage, maintain FO production at minimum levels, and export FO. The short term measures would likely remain tough to implement as there are limited avenues for exports besides high production slate of FO (~30%) is expected to continue to choke supply chain due to storage constraints.

Pharma sector returned 4.8% during the week as the government released notification today, allowing prices of hardship drugs / general category to increase by 9/15% over the maximum retail prices determined under Drug Pricing Policy 2018.

Fertilizer sector returned 4.5%WoW on speculation over reduction in GIDC and partial settlement.

The State Bank of Pakistan’s (SBP) reserves fell by USD239mn (3%) to USD7.0bn owing to external debt servicing and other payments.

Pakistan Bureau of Statistics reported 15%MoM/19%YoY reduction in trade deficit to USD2.4bn in Dec-18. This was led by 5%MoM/13%YoY growth in exports and 4%MoM/9%YoY decline in imports where the latter was likely driven by lower oil imports attributable to rout in international oil prices (Arab light averaging USD58/bbl in Dec-18 vs. USD68/bbl in Nov-18). Overall trade deficit was down 5%YoY to USD16.8bn in 1HFY19 led by reduction in both oil and non-oil imports, where the latter is attributable to impact of PKR/USD depreciation.

Remittances showed a mix picture falling by 2%YoY but up 5%MoM to USD1.7bn in Dec-19. On cumulative basis, remittances were up 10%YoY at USD10.7bn in 1HFY19. The growth breakdown by region showed pressures from GCC region due to lower oil prices standing at 2%YoY in 1HFY19 compared with 23%YoY growth from Non-GCC region.

Foreign investors clocked in net buying of USD0.6mn during the week. Among the domestic investors, mutual funds and brokers were the major net buyers with net buying of USD6.7mn and USD6.4mn, respectively. Individuals and companies remained the major sellers, offloading shares worth USD6.6mn and USD6.3mn, respectively.

Key news this week

EOI invited to divest shares in MPCL (Economy) – Neutral

External pressures to worsen despite oil price declines: Fitch (Economy) – Positive

Pakistan’s growth projected to slow to 3.7% in FY18-19: World Bank (Economy) – Neutral

Moody’s doubts Pakistan’s debt repayment outlook

Govt tells refineries to upgrade capacity

This week’s top stories

Pakistan Economy – REER Estimated to Have Reached 100.6 by Dec-18

Pakistan OMC Sector – After Shocks of Economic Policies

Equity Market Outlook and Perspective

The focus over the weekend would remain on visit of Saudi Arabia’s Minister of Energy Khalid Al-Falih tomorrow for signing of MoU for setting up oil refinery and possibly for mineral resource development too. According to Board of Investments officials, its investment could range between USD5-10bn where oil refinery alone would account for USD4-8bn with a capacity of up to 0.4mnbpd. Market is likely to show excitement if the visit concludes in concrete announcements on timeline.

More important for next week (and going forward) would be the announcement of second Supplementary Budget by the Government for the ongoing fiscal year (expected to be unveiled on Monday, January 14, 2019). News reports suggest imposition of additional taxation measures of PKR150bn – this would be negative for market if the additional taxes are directly imposed on sectors already under heavy tax net (e.g. formal corporate sector, salaried class etc.).