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Banks, cements keep index moving up; coming week may be volatile

Treading on gains posted in the earlier weeks, the benchmark index of Pakistan Stock Exchange (PSX) inched up 1.21%WoW to close at 42,531 pointed for the week ended on 11th September 2020. The rally supported by prominent performance of heavy-weights Banks and Cements. Banks came on the investor’s radar, being trading cheaply as valuations stretched elsewhere. Cement witnessed run up as Prime Minister announced Karachi uplift package of Rs1.1 trillion. E&P sector witnessed erosion in value on declining international prices of crude oil and cabinet ratifying CCoP’s decision to offload 7% and 10% shares of OGDC and PPL respectively. However, large gas discovery in Kalat of over 1trillion cubic feet (TCF) by Pakistan Petroleum (PPL) provided some impetus. This was also reflected by average daily trading volume exceeding 750 million shares. Top performers of the outgoing week were: BYCO, JLICL, KOHC, SYS and NATF, whereas laggards included: IDYM, PIOC, MEBL, COLG, and MLCF.

Some of the news driving the market during the week included: 1) progress on FATF with National Assembly and Senate taking up more bills, 2) various developments relating to power sector structural issues, and 3) IMF asking Pakistan to increase gas, electricity tariffs. Foreigners emerged as net sellers with outflow of US$4.3 million. Corporates also indulged profit amounting to net outflow of US$16.7 million, which was absorbed by individuals (US$22.8 million) and mutual funds (US$8.5 million).

Dominated by liquidity flush, market is expected to remain volatile in the upcoming weeks with valuations stretched in most sectors. In this backdrop, stock-picking with a keen eye on news flow holds the key in our view for generating alpha while we advise caution in building long term positions at current levels barring banks amongst major sectors that are still trading at discounted valuations. Result season continues with Millat Tractors Limited (MTL), Interloop Limited (ILP), Kot Addu Power Company Limited (KAPCO), D.G. Khan Cement Company Limited (DGKC), and Mughal Iron and Steel Industries Limited (MUGHAL) due to announce their financial results in the upcoming week.

Sui Northern Gas Pipeline recently held a briefing for analyst Briefing and the takeaways are worth reading. The Company currently has Rs70 billion worth of projects in hands. These include pipeline projects: 300km Turkmenistan-Afghanistan-Pakistan-India (TAPI), 270km Iran-Pakistan (IP) and 1,100km North South Gas Pipelines. In North South Gas Pipeline, there is no defined role of SNGP as of now.

Cash flow position of SNGP has improved slightly after the recent decline in oil and RLNG prices. However, management did not quantify the percentage increase in recovery from customers. Monthly buildup of amount from the customers who have gone into litigation is Rs10 billion. Currently SNGP has borrowings of Rs80 billion, out of which Rs20 billion are for Natural Gas and rest, can be attributed to RLNG. Overall sales mix of the Company is 55% RLNG and 45% Natural Gas. Transmission network related UFG in FY19 jumped to 7.7bcf from 2.8bcf. Management expects no increase in Transmission network related UFG from these levels. Strategy to curtail these losses is ongoing.


The company got Rs32 billion in Energy Sukuk II. Out of this, Company made payments to OGDC, PPL and PSO. Last date for consumers to pay the first installment of GIDC is 17th September 2020. The company has already issued bills to the consumers. On question pertaining to possible reduction in WACC as IPPs returns are also being revised down, the management said, currently there are no plans to change Return Earned on Fixed Assets.

Car sales, as reported by PAMA, increased to 11,678 units in August 2020, up 16%YoY. Overall car sales increased by 1%MoM, major increase was reported by PSMC with 20%MoM increase. However INDU and HCAR reported declines of 18%MoM and 8%MoM, respectively. Indus Motor (INDU) and Honda Car (HCAR) registered sales increase of 52%YoY and 72%YoY, respectively. However, Pak Suzuki Motor Company (PSMC) sales declined by 9%YoY. Kia Lucky Motors (non-member of PAMA) continued to perform well and is also planning to shift its production to double shift from January 2021 to meet high customer demand. It is estimated that KIA sold around 1500 units during the month under review.

Another new entrant Hyundai Nishat launched Tucson in SUV category during the outgoing month and successfully sold 22 units along with 88 units of Porter H-100 (a commercial pickup). Analysts expect car demand to grow in coming months due to lower interest rates for auto financing as well as pickup in economic activities on declining cases of COVID-19.

After an outstanding last two months on the back of demand backlog being cleared and initiation of housing schemes, government projects, monsoon rains have taken their seasonal toll on local dispatches, reported at 2.79 million tons for August 2020, down 29.3%MoM but up 4.7YoY. As against this, exports remained healthy with a major contribution from South-based players (exports from South constituted 71% of the total exports). Overall, for 8MCY20, cement dispatches declined by 10.4%YoY, with local dispatches declining by 11.6%YoY and exports declining by 3.2%YoY. Demand softness is being reflected in prices as well where some manufactured reduced their prices in order to protect their market share in Northern region. However, prices in South remain firm as player continued to utilize exports to keep capacity utilization high.

Following the Supreme Court’s recent decision on GIDC, analysts foresee FFBL’s liquidity situation to continue to worsen, where even a potential right issue of Rs8 billion (400mn shares at an attractive Rs20/share issue price) as opposed to GIDC payables outflow of Rs2.75 billion per quarter may only be a short term respite. The Company already has Rs21 billion of short term borrowing on its books. Continued losses on core operations as well as loss making associates may push equity into negative zone, hindering further leveraging. FFBL’s 1HCY20 results underscore bearish sentiment, where the company posted a loss of Rs4.2 billion for 1HCY20, despite GIDC elimination. Higher YoY losses were driven by impairment charge and higher finance cost.

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