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Cherry-picking likely for short span as new covid fear, anti govt rallies may Killjoy

With higher than expected inflation and heightened political tension, after announcement by opposition parties’ alliance to hold rallies across the country, trading started the week on a negative note, down 2.5% at the close of first session of the week. After remaining jittery in the second session, recovery was finally witnessed during third trading session and the sentiment remained positive till close of the week, on 9th October, last trading day of the week index close at 40,798 points, up 1.8%WoW. Top performers of the outgoing week were: UNITY, KOHC, ILP, KTML and PAEL, whereas laggards included: NATF, SERT, AGIL, KEL and COLG.

Mid-week change in sentiment was backed by stellar cement sales, up 22%YoY for September 2020, reported at 5.2 million tons – the highest ever amount and consequently cement sector remained in the limelight with a 4.3%WoW increase. Similarly Oil & Gas marketing sector also posted an impressive return of 3.3%WoW backed by expectations of a good result for 1QFY21. Among other major sectors, banking sector’s performance remained muted despite being attractive on valuations after State Bank of Pakistan (SBP) asked banks to close all accounts of ministries and divisions and transfer the balance funds to the federal government’s central account with the SBP. Average daily turnover for week witnessed an increase of 6.6%WoW to 417 million shares.

Major news flow during the week included: 1) Petroleum Division admitting that Economic Coordination Committee (ECC) of the Cabinet has recently increased the gas price for different sectors, 2) Government allowing Ministry of Finance to launch three international bonds to build up foreign currency reserves and 3) Pakistan’s trade deficit widening by 19.49%YoY to US$2.4 billion for September 2020. Foreigners emerged as net sellers with outflow of US$7.5 million, whereas profit taking by individuals (net outflow of US$10.9 million) was absorbed by Banks/DFI (net inflow of US$7.1 million) and insurance (net inflow of US$6.6 million).

With valuations remaining stretched, index is expected to tread sideways in short term where cherry-picking may be followed. After a disappointing FY20, sectors like Cement and OMC are expected to witness change of fortunes in 1QFY21, with activity to be concentrated in these sectors. However, main risk on the horizon remains increasing COVID cases, possibly pointing towards second wave. The worsening rift between government and opposition is increasing noise and it is expected to rise further with commencement of country-wide rallies.

Treasury Single Account (TSA) implementation is front and center yet again, with the latest SBP circular released, directing specific the government functionaries to transfer deposits from Commercial banks to SBP. Resultant dampeners to investor sentiments are possible, where analysts advise investors to avoid banks with large government deposits as modalities of this long term transition play out. The banks tend to pass on the impression that the said measure would be neutral to negative for the industry since the initial accounts transfer do not represent large chunk of government deposits. At the same time, Cash Reserve Requirement (CRR) for banks meeting targets related to housing and construction financing is to be reduced effective December 2020 whereas penalty in the form of higher CRR would be imposed on banks missing those targets. Result season for the banking sector is about to commence soon with HBL due to hold its Board of Directors meeting on 16th of this month. Analysts estimate 9MCY20 earnings for the Big-3 private banks at Rs58.9 billion, up 49.8%YoY with normalization in core income reflecting in 3QCY20 earnings, likely to slip to Rs19.5 billion, down 17.8%QoQ, but up 24.7%YoY. Previewing results, analysts expect HBL to continue gaining from conclusion of US related costs, whereas UBL’s floating rate bonds portfolio and recovery in fee income could help it post attractive results. MCB is likely to gain from normalization in provisioning costs and higher remittance flows translating into improved fee income performance.

Local cement dispatches extended their outstanding run with an increase of 17.6%YoY and 46.5%MoM to 4.1 million tons for September 2020. South fared better amongst the two regions, witnessing an increase of 26.8%YoY and 88.4%MoM, while North posted an increase of 16.3%YoY and 41.5%MoM. Exports also remained buoyant with growth of 40.9%YoY and 54.0%MoM with major contribution from South-based players (exports from South contributed 74.5% to the total exports).Overall, for 1QFY21, cement dispatches have increased by 19.5%YoY where local dispatches increased by 18.7%YoY and exports increased by 23.2%YoY. Prices in North are also reacting to strong demand and have increased by Rs10/bag in last two weeks in a sign of improved demand environment, with further price hikes difficult to rule out. South’s export tilt is keeping prices stable in the region. Investors like MLCF and LUCK with the former being one of the lowest cost producers implying lower sensitivity to retail price variations, while latter’s cost efficiencies coupled with diversified investments make it a safe play.

The book-building process of Agha Steel’s Initial Public Offer (IPO) concluded with an oversubscription of 1.63 times, as per the Company announcement. The IPO received an overwhelming response from institutional investors and high-net worth individuals as the strike price was reported at Rs32/share, higher than the floor price of Rs30. Agha Steel is going to raise Rs3.8 billion in total, making it the largest IPO in the steel sector and the second-largest IPO in the private sector. Brokers and investment advisory firms had issued almost unanimous calls to ‘subscribe,’ which resulted in investor demand amounting to Rs4.4 billion against the IPO’s book-building size of Rs2.7 billion. The general public will subscribe to the remaining 30 million shares (25 percent of the total offer size) on 14 and 15 October at the strike price of Rs32/share. The company would use the IPO proceeds to finance the expansion of its re-rolling capacity from 250,000 to 650,000 metric tons, the steelmaker said adding that this would increase reinforcing bar production capacity by 160 percent. Brokerage houses anticipate steady growth in the company’s bottom line owing to a substantial rise in construction activities across the country. The main product of Agha Steel is reinforcing bars used in the construction of mega-structures, roads, bridges, skyscrapers and homes.

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