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Stock review December 2022
Unchanged rates, weak corporate results mar sentiment; imf review keenly awaited

Weak corporate results and State Bank of Pakistan (SBP) decision to leave interest rate unchanged marred investors’ sentiment. As a result the benchmark index of Pakistan Stock Exchange (PSX) closed the week ended 31st January 2020 at 41,631 points, down 2.35%WoW. Market participation also remained weak, with an average daily volume remaining flattish on WoW at 188.14 million shares. The top volume leaders included: MLCF, HASCOL, UNITY, AVN and BOP. While top gainers were: HASCOL, PSMC, NCL and INDU, laggards were: MCB, NML, UBL, POL, PPL and OGDC.

Sector wise, E&P stocks were down 4.7%WoW on declining oil prices and announcement of partial sale of shares of OGDC and PPL owned by the Government of Pakistan (GoP). Cement scrips also remained under pressure on pricing concerns following addition of new capacities and failure of the manufacturers to reach a consensus on pricing.

Other major news flows impacting the market during the week included: 1) the GoP notifying reduction in GIDC to Rs5.00/bag, from Rs405/bag, 2) the ECC deferring proposal of gas price hike (up to 15%), while proposing changes to minimize the burden on domestic consumers, 3) SBP raising Rs590 billion through treasury bills auction, while maintaining cut-off yields for 3M/6M/12M bills at 13.43%/13.29%/13.13%, and 4) FX reserves held by the SBP increasing by US$184 million to US$11.91 billion during the week ended 24th January 2020.

With result season in full swing, near term market performance will largely be driven by earning surprises. MCB, EPCL, ABL and MFL are some of the major players scheduled to announce their earnings next week. From a macro perspective, the market will be keenly watching developments pertaining to the second IMF review under EFF, inflation reading for January 2020, and tax collection by FBR. It is feared that tax collection for the month of January 2020 may fall short by Rs100 billion.

In line with market expectations, the Monetary Policy Committee of SBP left the policy rate unchanged at 13.25% in a third consecutive monetary policy announcement. The decision underscored the Committee’s focus on inflation. While inflation considerations have led SBP to hold the policy rate, the policy statement carried ‘accommodative bias’, with statement downplaying the inflationary risks and the SBP governor announcing facilitative measures for domestic and export industries. Near term inflation outlook remains uncertain, with a multitude of factors at play including price normalization in certain food items, timing and scale of utility rate adjustments and fiscal considerations.

According to an AKD Research report, Engro Fertilizers (EFERT) is expected to post profit after tax of Rs16.7 billion (EPS: Rs12.48) for CY19, down 4%YoY. The decline in earnings is expected on the back of: 1) fall in gross margins neutralizing rise in topline, 2) higher operating expenses, 3) higher financial expenses and 4) higher effective tax rate of 36% due to reversal of deferred tax booked previously. For 4QCY19, EFERT is expected to post higher earnings of Rs6.2 billion (EPS: Rs4.61). The uptick in net profit is expected to come from: 1) higher offtake leading to 63% increase in topline, 2) higher gross margins and 3) lower effective tax rate. EFERT has already paid Rs11.0/share interim dividend in 9MCY19 as compared to Rs8.0/share in 9MCY18, limiting chances of announcement of a final cash dividend.

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Fauji Fertilizer Company (FFC) posted consolidated profits of Rs3.23/share for 4Q2019, down 36% YoY and 11% QoQ. The earnings announcement was lower than market expectations on account of higher than expected Other Expenses and Financial Charges. The full year consolidated 2019 earnings came to Rs13.62/share. Alongside result, the Company also announced final cash dividend of Rs3.25/share, taking full-year 2019 dividend pay out to Rs10.8/share. Revenue of the fertilizer business came down by 7%YoY during 4Q2019 due to lower DAP off-take by 56%YoY. The financial cost increased substantially by 78%YoY to Rs1,049 million for 4Q2019 amid higher interest rates. Other expenses were down by 3%YoY. Effective tax rate rose to 30% for 4Q2019 as against 24% for 4Q2018. Key risks facing FFC include: 1) decline in international urea prices, 2) slower than expected urea sales and 3) adverse decision on GIDC.

Fauji Fertilizer Bin Qasim (FFBL) posted consolidated loss of Rs2.46/share for 4Q2019, taking full year loss to Rs6.82/share. Earnings for 4Q2019 were lower than expected due to higher than expected taxation and losses by subsidiaries. The Company booked tax expense of Rs2.9 billion for 4Q2019 as compared to tax credit of Rs86 million for 4Q2018. The food business of the Company posted gross loss of Rs115 million for 4Q2019, under pressure due to decline in sales revenue and increase in cost of production due to rupee depreciation. In its fertilizer business, gross margins were reported at 10% for 4Q2019 as compared to 14% for 4Q2018 due to decline in DAP margins. Financial cost also increased substantially by 86% to Rs3.0 billion due to higher interest rates and higher borrowing requirement due to lower cash profitability. Key risks facing the Company include: 1) higher than expected gas prices, 2) adverse decision on GIDC, and 3) decline in international DAP margins.

Lucky Cement (LUCK) reported profit after tax of Rs3.2 billion (EPS: Rs9.93); down by 45%YoY on a consolidated basis, but still above market expectations, primarily due to higher Other Income. Other income for the 1HFY20 was reported at Rs2.7 billion, up 45%YoY driven by higher profitability from international operations. Core cement segment sales declined by 10.9%YoY for 1HFY20, mainly on the back of lower volumetric sales by 8.4%YoY and intense pricing competition, emerging from lower demand and higher transport and logistics cost. Sales break down shows local sales declined by 13.3% to 2.6 million tons, while exports increase by 6% to 1.08 million tons. Consolidated gross profit margins for 1HFY20 declined to 16%, from 22% for the same period last year. Cement margins declined by 15ppts YoY primarily due to intense competition in the northern region along with rising costs pressures. Effective tax rate of the company rose to 23% as compared to 19% for the corresponding period. Key risks facing Lucky include: 1) price weakening, 2) lower than anticipated local demand, 3) unanticipated increase in gas and coal prices, and 4) delay in its upcoming ventures as a key risk for the company.

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