Pakistan equities post mixed results year-over-year

HABIB BANK LIMITED (HBL) has posted earnings of Rs1.7/share, down by 63%YoY. Despite Rs3.2 billion reversal in Workers Welfare Fund (WWF) expense, earnings were below market expectations as the Bank booked hefty loss from dealing in foreign currencies as well as higher total provision charge. Despite increase in interest rate, net interest income of the Bank dropped by 3%YoY. This can be attributed to maturing high yielding PIBs as well as lag in re-pricing of assets compared to liabilities. HBL booked total provision reversal of Rs3.3 billion attributable to both worsening of equity market as well as decline in asset quality. HBL also recorded Rs1.8 billion loss from dealing in foreign currency mainly due to its outstanding foreign currency loan. HBL had taken a foreign currency loan in order to pay-off penalty imposed by New York State Department of Financial Services (NYDFS) in 2017.

Administration expenses remained elevated with 14%YoY growth primarily due to expenses related to its international operations. During 2018, the Bank reported a 54% increase in profits mainly due to low base in 2017 as a result of Rs23.7 billion penalty charge during 2017. Normalizing for this penalty, earnings are down 61%YoY due to 25%YoY higher admin expenses, 40% lower non-interest income and 2% decline in net interest income. Key risks for the stock include: 1) delay in expected hike in interest rates, 2) lower than expected growth in advances, 3) deterioration of Pakistan macros and 4) further penalties on international operations.

UNITED BANK has reported earnings of Rs4.7/share for 4Q2018, down 16%YoY primarily due to a hefty provisioning charge during the quarter. However, the earnings are much higher than market expectations due to reversal in pension charge as well as reversal in Workers Welfare Fund (WWF) expense. UBL announced a dividend of Rs3/share for 4Q2018. Net Interest Income (NII) remained flat in both this quarter and in 2018 despite 425bps hike in policy rate during 2018. This could likely be due to both high proportion of fixed rate PIBs in UBLs book. The bank booked a provision charge of Rs5.6 billion in the quarter, primarily due to provisioning for NPLs in its international operations in order to increase its coverage ratio. The total provision charge for 2018 was reported at Rs13.1 billion. The Bank’s earnings were supported by reversal of Rs2.1 billion in pension charge. UBL had booked pension charge of Rs8.7 billion in 9M2018 and also booked a reversal of Rs2.6 billion in WWF expense during 4Q2018. Bank’s non-markup income fell by 8%YoY mainly due to Rs309 million due to the loss on sale of securities compared to Rs503 million gains in the same period last year. Admin expenses of the bank rose by 18%YoY. The higher growth in admin expenses could be due to expenses related to closure of bank’s US branch. For 2018 cumulatively, EPS slipped to Rs12.6, down by 41%YoY primarily due to Rs6.7 billion total pension charge and higher total provision expense booked by the Bank. Key risks for UBL include: 1) further NPL creation on international book 2) lower than expected advances growth, 3) delay in hike in interest rates and 4) deterioration of Pakistan macros.

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KOT ADDU POWER COMPANY (KAPCO) posted 2QFY19 profit after tax of Rs5.9 billion (EPS: Rs6.68), up 89% QoQ. This takes the 1HFY19 earnings to Rs9.0 billion (EPS: Rs10.22). The earnings were above expectations due to higher than anticipated other income, leading to 89% QoQ growth in earnings. For 1HFY19, the increase in earnings was drive by: 1) gross profits up by 8%YoY and 2) higher other income, which more than offset the drag resulting from 43%YoY higher finance cost. The lack of dividend comes as a surprise to the market, especially amidst the news flow of circular debt settlement, and KAPCO being among the few IPPs which had maintained dividends payouts despite cuts by other IPPs (HUBC, NPL and NCPL).

HUB POWER COMPANY (HUBCO) posted 2QFY19 earnings of Rs2.4 billion (EPS: Rs2.11), down 16% YoY. This takes the 1HFY19 earnings to Rs5.4 billion (EPS: Rs4.67), up 2%YoY. The result announcement was not accompanies by cash dividend, likely due to liquidity crunch and ongoing expansion plans. The decline in earnings was driven by: 1) a 52%YoY lower topline, (2) a 42%YoY higher finance cost, and 3) higher share of loss from associates. To note, HUBCO has withdrawn 30% of its financing agreement of Rs26 billion as of September 2018, which along with higher interest rates dragged earnings for the quarter. For 1HFY19, the earnings remained flattish, where 7%YoY higher gross profits due to weaker rupee and higher other income offset the impact of 36%YoY increase in finance cost. Circular debt resolution may ease liquidity situation for IPPs, where Rs200 billion Sukuk issue is in pipeline.

MAPLE LEAF CEMENT FACTORY (MLCF) reported 2QFY19 consolidated EPS of Rs1.3, broadly in-line with estimates. While pretax earnings were down 26%YoY, net earnings fell by 36% on the back of higher effective tax rate in 2QFY19 compared to same period last year. Lower effective tax rate in 2QFY18 was on the back of tax relief which MLCF booked on account of setting up a Coal Fired Power Plant (CFPP) under wholly-owned subsidiary, Maple Leaf Power Limited (MLPL) that started its commercial operations in Oct 2017. This year, tax rates were normalized. Cement sales were up 4%YoY during the outgoing quarter, mainly led by higher average net retention prices as volumes were down by 11%YoY on the back of 14% decline in local sales.

Average net retention prices grew by Rs54/bag to Rs387 in 2QFY19 owing to increase in local cement prices and ability to pass on input costs, also supported by higher export prices due to the depreciation of Pak rupee.

Cement gross margins fell to 23.6% in 2QFY19 due to the rising input costs like higher coal prices (mainly owing to devaluation; Pak rupee depreciated by 24% since January 2018). Financial charges grew during 2QFY19 on account of increase in borrowing to fund the cement expansion project and higher policy rate, up 450bps since January 2018 to 10.25% per annum. The key risks facing the company are: 1) price competition, 2) unanticipated increase in gas and coal prices and 3) lower than estimated local demand.