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Market likely to snap out of rollover week as selling pressure eases

Happenings over the political front together with rollover and rising COVID-19 cases kept the week ending on 25th September 20202 under pressure. The benchmark Index of Pakistan Stock Exchange recorded a loss of 803 points to close at 41,701 points, down 1.89%WoW. The market activity also witnessed contraction, with average daily trading volumes falling by 13.4%WoW to 465 million shares. Top gainers of the week were: ILP, SHEL, DAWH, ATLH and NCL, while laggards included TRG, ANL, OGDC, COLG and PPL.

The activity was concentrated in speculative stocks, where UNITY, SILK, HASCOL, KEL and ASL emerged as volume leaders. Amongst the major sectors, E&Ps witnessed erosion in value due to declining international oil prices, followed by power sector, due to lack of clarity on payment of outstanding dues. Commercial banks came under pressure following the decision of State Bank of Pakistan to hold rates unchanged. Cement sector came under pressure due to an investigation by Competition Commission after the recent hike in cement prices. A against this textile composite units were major outperformer, on continuation of subsidized tariffs and sector scaling back to pre-COVID-19 capacity utilization.

Other major macro news flows during the week included: 1) country’s external balance recording surplus of US$297 million as against a deficit of US$601 million in August 2019 on account of 18%YoY reduction in trade deficit and 24%YoY higher inflow of remittance, 2) the GoP raising Rs520 billion through auction of MTBs and 3) SBP further easing restrictions on imports, withdrawing 100% cash margin requirement on the import of certain raw materials to support industrial sectors.

The market may take some respite in the upcoming week, as the selling pressure eases following rollover week. With earnings season in full swing, the stock specific movement cannot be ruled out. The companies scheduled to announce their results next week include GATM, SHFA, SPL, OGDC, SEARL and UNITY.

D G Khan Cement (DGKC) has posted a loss of Rs2.2 billion (LPS: Rs4.9) for the year FY20, as against a profit of Rs1.6 billion (EPS: 3.7) a year ago due to the increase in finance cost by 41%YoY, despite declining interest rate. The Company has reported loss per share (LPS) of Rs0.7 for 4QFY20 as compared to LPS of Rs2.3 for 4QFY19. Loss for the quarter under review was lower than analysts’ expectation of Rs1.2/share, mainly on account of deviation in finance cost.

Net sales during 4QFY20 were reported at Rs7.5 billion, down 26%YoY due to decline in volumetric sales by 27%YoY. Local dispatched and exports fell by 23%YoY and 37%YoY, respectively. Gross margins were reported at 7% during 4QFY20, broadly in line with expectations. Margins improved marginally due to decline in fuel/energy costs amidst usage of furnace oil. Finance costs declined by 17%QoQ due to early re-pricing of loans after the recent decline in Policy Rate. Admin expenses declined to at Rs141 million, down by 12%QoQ.

Topline Securities has revised earning of Pakistan State Oil Company Limited (PSO), up by 13% for FY21. The earnings revision primarily stems from 1) decrease in short term borrowings and 2) increase in earning as economy comes out from shocks of COVID-19. Payment proceeds from the issue of Pakistan Energy Sukuk-II have enabled the Company to significantly reduce its liabilities/improve liquidity. Its short-term borrowings over the past fiscal year have declined by Rs41 billion, which was also aided by lower Furnace Oil (FO) sales. Going forward, the brokerage house expects lower borrowings that will reduce finance cost significantly. Finance cost is expected to reduce by 64%YoY, which will be a result of both decline in borrowings and lower interest rates, of which the impact will be more visible in the coming year as re-pricing kicks in.

 

Reduction in other receivables has also helped improve the footing as the head showed a decline of Rs34 billion primarily driven by decline in FE-25. To recall, FE-25 borrowing (foreign currency borrowing) were allowed by GoP as payments for imports.

The mechanism addressed the issue of exchange losses (to be borne by GoP) and exchange gains (to be paid to GoP). There was a breakthrough on exchange loss on the FE-25 borrowing with the GoP retiring Rs28.6 billion of the total amount with a balance of Rs1.7 billion remaining.

The government and IPPs are in discussions to revise future returns of the IPPs. The key demand for the IPPs has been resolution of the accumulated stock of circular debt. PSO’s highest proportion of June-2020 trade debts (past due) of Rs196 billion emanates from GENCO Holding Company (Rs75 billion in FY20 vs Rs82.3 billion in FY19), SNGP (Rs68.2 billion in FY20 vs Rs53.4 billion in FY19) and HUBC (Rs23.3 billion in FY20 vs Rs25.6 billion in FY19). The release of outstanding circular debt by the government will help IPPs/Gencos to retire their payables against PSO, which will further improve the liquidity position of the company.

FY21 has started on a promising note with industry volumes depicting an increase of 11%YoY in the first two months. The volumes have been primarily driven by a 19%YoY increase in HSD volumes and a 14%YoY increase in Furnace Oil sales, followed by a 9%YoY increase in MS volumes.

PSO volumes show a similar trend on a YoY basis during 2MFY21 with HSD, FO and MS improving by 29%YoY, 13%YoY and 14%YoY, respectively. Projected growth of car sales in the coming year is expected to be around 35%YoY, which is expected to bode well for MS demand, which in turn is projected to grow by 10%YoY for FY21.

For FY20 the margin revision came in at around Nov-Dec 2019 period. OMC margins are fixed in PKR terms and linked to the Consumer Price Index (CPI). The last revision was of Rs0.17/ltr to Rs2.81/ltr from Rs2.64/ltr for MS and Rs0.40/ltr to Rs2.81/ltr for HSD which was in line with CPI. The brokerage house expects the revision to come at a similar timeline this year and have incorporated this in its model on a pro-rated basis.

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