Positive news flow guides bulls keep rule for 8th consecutive weeks
Continuing on its stellar bull run into eight consecutive weeks, Pakistan Stock Exchange (PSX) closed the week ended on 13th August 2020 at 40,291 points, up 0.65%WoW. Average daily traded volume was reported at 581 million shares. The top volume leaders included: HASCOL, UNITY, TRG and WTL. Top gainers were: HASCOL, KAPCO, SNGP and ATRL, while laggards included: HCAR, PSMC, AGP and IGIHL. Foreign portfolio investments recorded inflow of US$8.7 million. While individuals continued to buy (US$11.4 million), Banks (US$10.7 million) and Insurance (US$5.4 million) were net sellers during the week.
News flow guiding sentiment during the week included: 1) The Supreme Court case decision on Gas Infrastructure Development Cess (GIDC) was an affirmation of the Government’s stance. The verdict directed complete recovery of GIDC payables from the industries, amounting to Rs417 billion as of December 2018, as per GoP draft proposal submitted to senate, 2) Saudi Arabia promised revisiting the committed amount of deferred oil facility of US$3.2 billion annually keeping in mind the Pakistan’s capacity of utilization of the facility, 3) Pakistan’s fiscal deficit was reported at 8.1% of GDP in 2019-20, almost 1% lower than anticipated, mainly because of underutilization of Prime Minister’s Economic Relief and Support Package, 4) Moody’s Investors Service has confirmed the Government of Pakistan’s B3 local and foreign currency issuer and senior unsecured debt ratings with a stable outlook, 5) Prime Minister, Imran Khan said that the PTI government had spent its first two years under most trying times as it had to save the country from default, affirming that the Rs5 trillion Ravi City project would create millions of jobs as there were 40 industries connected to the construction sector and 6) Independent Power Producers (IPPs) and GoP’s team are said to have completed four rounds of talks but “crucial things” are yet to be tabled and agreed between the parties.
As regulatory risks mount and headline risks induce volatility in specific sectors (GIDC decision negative for fertilizers, chemicals) policy steps guiding sentiment may need to be backed up by actions (headway on housing and development projects key). Overall, macro improvements are likely as COVID-19 driven externalities fade out and consumer activity picks up.
Supreme Court in its decision on Gas Infrastructure Development Cess (GIDC) has upheld of the Government’s stance. It has reportedly directed complete recovery of GIDC payables from the industries until 2018, amounting to Rs417 billion till December 2018. While analysts await further clarity, key repercussions for industry profitability hinge on the timeline of GIDC payments (runway for payment would cushion cash flows). Analysts understand that on an face value, significant cash outflow of Rs20-60 billion for Fertilizer sector may take place, hampering liquidity in the medium term. In terms of earnings impact, leveraging remains a key mode for financing payments, with potential bridge financing as a method to pay accrued GIDC payables, where absence of other income may result in negative earnings impact (most significant for FFC and FFBL).
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For Construction, analysts expect a muted impact with only LUCK, MLCF and DGKC to be affected. The ECC had removed GIDC application on Fertilizer sector effective 20th January 2020 (PkR300/150 per bag on feed/fuel). Analysts await clarity on the same for other industrials (Cements, Steel and Chemicals).
United Bank (UBL) has announced its 2Q2020 result, where it recorded provisions worth Rs6.2 billion for the quarter, taking 1HCY20 total provision charge to Rs9.9 billion. Out of these provisions, Rs4.6 billion pertains to the international book in the quarter taking 1HCY20 figure to Rs8.3 billion. The international Non performing loans were reported at US$353 million with a coverage ratio of 78%. The management is targeting to get close 100% coverage. The main hindrance has been that additional parties are going under, given the adverse operating conditions due to COVID-19.
The central banks of respective international books have also given relief measures for 6-12 months, after which there will be a substantial amount of accumulated debt to be repaid. As a result the provisioning is expected to go up in the latter half of the year. The Bank is not optimistic on the loan front, with a conservative target to reach an ADR of 41% by year end from 38% as of June 2020.
The Bank is on the steering committee of the housing finance mandate by the government. The work is being conducted at fast pace. However, one of the key concerns is yet to be fully addressed foreclosure laws.
On the investment front, the Bank currently has a fixed PIB book of Rs299 billion offering a yield of 9.3% with duration of 2-years. Floating rate PIBs are reported at Rs197 billion yielding 13.4% with first round of re-pricing in August 2020. The strategy of the Bank is tilted towards shorter term papers with a view that the yield curve is gradually shifting towards normality.
The Bank expects NIMs to contract by 20-30bps in the latter half of the year on re-pricing of the Assets. Fee income decreased by 34%YoY and 25%QoQ, due to reduced branch operations and branch closures because of COVID-19.
The Bank is currently in the process of developing a new strategy given the arrival of new President, Shazad G. Dada, whose initial focus will be on 1) Customers, UBL has an end to end product suit and aim is to further enhance the experience; 2) Expansion on the digital front, upgrade the technology platform; 3) Increase operational efficiency and 4) optimize costs. The bank aims to maintain 70-80% payout ratio.