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PSE registers 39%wow increase in average daily trading volume

Supported by significant retail participation, indications of stability in the resumption of commercial activity post COVID-19, and better than expected consumer spending outlook, the KSE-100 index closed 3.3%WoW higher, continuing its upward trajectory into a third consecutive week. Strong 39.1%WoW uptick in average trading volumes was a sign of enhanced liquidity. To read details click  http://shkazmipk.com/weekly-report-on-pakistan-stock-exchange/

Successful biding for the HNWI and institutional investor portion of Pakistan first IPO in CY20 (after a fifteen month pause since ILP on March 2019), which was oversubscribed by 1.7 times landing at a strike price at the upper limit of Rs20/share, drove sentiments at the bourse. Stocks posting major gains during the week included: NBP, CHCC, INDU and PAEL, while laggards were: ANL, FCEPL and DAWH. Volume leaders during the week included: TRG, PAEL, MLCF and HASCOL.

Other news driving the market included: 1) SBP extending deadline for consumers, small and medium businesses to apply for a one-year moratorium on loan repayment till 30th September 2020 after recording freeze on nearly Rs600 billion of principal amounts, 2) central bank also slashing applicable rates for two refinance schemes to 5% from 7% for boosting long-term investment both in domestic and export oriented sectors, 3) the OICCI’s releasing the results of its latest Annual Security Survey 2020, covering feedback on the security environment from July 2019 to June 2020, foreign investors showing high level of satisfaction on the fast improving security environment in the main business centers of Pakistan, Karachi and Lahore and 4) IMF sponsored program of US$6 billion for Pakistan remaining contingent upon Islamabad’s willingness to comply with tariff adjustments on electricity and gas as well as to undertaking reform path to evolve staff level agreement on completion of second review.

Barring significant improvement in guidance from major sectors amidst an environment of wider uncertainty (particularly covering the runway for normalization of consumer spending), going by quantitative measures, market momentum is likely to remain choppy. With results season just around the corner, investors could be nudged to re-asses portfolios to accommodate expected profitability over the previous quarter and by extension, payouts.

News reports highlighting the commencement of production by ODGC from wells in Dhok Hussain and Togh (both in Kohat district) brought the largest domestic E&P firm (50% of domestic oil and 28% of gas production) back into the limelight. Our forward earnings estimates are underpinned by FY21/22 Arab Light Price estimate of US$40bbl and US$ appreciation of 4.5% against the PkR, where the fall in market capitalization (down 18%YoY) extended deviations to crude oil fundamentals with the stock currently trading at an implied oil price of US$15/bbl — a discount of 65% from the prevailing crude price bench-mark (Arab Light currently at US$43.1/bbl) as against LT avg. of 30%. OGDC’s stable success ratios, inroads to meeting planned drilling targets and upcoming LT projects expected to counter depletions and highlight the firm’s relatively frugal exploration efforts, mitigating negative impact from dry wells. A dollar denominated top-line provides effective hedging in case of currency devaluation, coupled with substantial room to curtail CAPEX, keeps us comfortable on payout assumption.

 

Local cement dispatches for June 2020 increased by 20%YoY as restrictions related to COVID-19 eased where backlog of construction being cleared must have played a part. Moreover, buying before price increase cannot be ruled as prices were increased by Rs15-20/ bag in the last week of the month. Exports from south were higher as compared to local dispatches as the backlog gets cleared while economic activity gradually resumed in Bangladesh and Sri Lanka, propelling clinker demand. Overall, though low economic activity was a drag on local cement sales offtake was up 3.9%YoY for 9MFY20). The emergence of COVID-19 had dealt a severe blow, sending overall growth into negative territory as local dispatches ended the year at 40 million tons, down 0.9%YoY.

Local cement dispatches, after a dismal May’20 where COVID-19 related lockdown, harvesting season and Ramzan took a toll, have re-bounded in Jun’20 with a YoY/MoM growth of 20/69% as restrictions related to COVID-19 eased while backlog of construction being cleared must have played a part. Moreover, pre-buying before price increase cannot be ruled out as well, as prices were increased by PkR15-20/bag in the last week of Jun’20. Region wise, contrasting trends were witnessed where local dispatches in North witnessed an increase of 69/23% MoM/YoY while local dispatches in South declined by 1%YoY though increasing 68%MoM on the back of low base. Though players from North supplying to South has a significant role to play, we believe with major portion of demand originating from urban centers in South, more stringent restrictions in urban centers further depresses the demand for the region. On the other hand, exports from south stood at 1.6x of local dispatches, increasing by 2.6/1.1x YoY/MoM as the backlog gets cleared while economic activity gradually resumes in Bangladesh and Sri Lanka, propelling demand; exports from north remain depressed as border restrictions with Afghanistan remain in place.

Overall, though low economic activity was a drag on local cement sales (up by a meager 3.9%YoY for 9MFY20), emergence of COVID-19 dealt a severe blow, sending overall growth into negative territory as local dispatches ended the year at 39.9mn tons, down 0.9%YoY. Influx of product from North to South resulted in both regions witnessing contrasting trends during FY20 as well where difference between the prices of regions stood at PkR18/bag at the start of year but touched a high of PkR181/bag in Sep’20 and currently stands at PkR133/bag. However, exports remained upbeat, increasing by 20%YoY mainly on the back of clinker exports from South to Sri Lanka and Bangladesh. Total cement dispatches for FY20 stood at 47.8mn tons, up by 2%YoY. Moving forward, we expect local dispatches to grow at 10% YoY for FY21 where COVID-19 grappling economic activity will dampen the growth while low base is expected to have an uplifting affect.

LUCK, DGKC and MLCF emerge top picks from the sector, LUCK remains the safest bet, while diversified portfolio adds more flavor to the mix. DGKC and MLCF are the players which have opted for cost reduction measures along with capacity additions in the latest expansion cycle. After a recent price increase and higher than proposed decrease in FED, margins of local cement players are slated to improve where reversal in commodity cycle will make the case of further price increase stronger.

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