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Index rallies; FATF and companies outcome likely to keep volumes buoyant

Battling significant headline risk from the FATF plenary meeting vote for Pakistan’s status on the grey list, the benchmark index of Pakistan Stock Exchange (PSX) rallied 2.7%WoW. Major earnings beats across Banks, Cements and Fertilizers provided fuel to the rally. For the week ended 23rd October 2020, the index closed 41,266 points. Volume leaders during the week were: HASCOL, UNITY, KEL and TRG. Stocks leading the index higher included, UNITY, ATRL, CHCC, while laggards included: GATU, ABOT and EPCL.

Volumes spiked 57.3%WoW where major forces driving investor sentiment were long consumer cyclicals (Cements, Autos, Edible Oils) as an improving external situation and Rupee stability eases cost pressures for import reliant sectors, and earnings outperformance for 1QFY21 and 3QCY20) period for Banks and Fertilizers, with resumption of payouts by Banks a notable catalyst.

Other developments during the week included: 1) Pakistan posted US$73 million current account surplus in September 2020 compared to US$211 million in August 20, where on a cumulative 1QFY21 basis current account surplus of U$792 million was achieved against a deficit of US$1.5 billion recorded in first quarter of last financial year, 2) ECC approved supply of RLNG till the end of November 2020, ensuring the supply of RLNG to fulfill the requirements of two fertilizer plants namely Agritech and Fatima Fertilizer, 3) Drug Regulatory Authority of Pakistan (DRAP) fixed the maximum retail prices (MPR) of 253 drugs on the basis of its packing sizes with certain other conditions, and 4) Government agreed to give tax concessions to Pakistan’s big retailers in return for their commitment to documenting their businesses.

FATF outcome was noticeably favorable with authorities accepting Pakistan’s policy actions to mitigate AML/CFT risks by reducing the number of Action Items to be addressed to 6 by February 2021. The companies scheduled to announce financial results over the coming week include NBP, PSO, FFBL, MCB and PAEL, likely to keep volumes buoyant.

Engro Corporation (ENGRO) announced its 3Q2020 financial result, posting a consolidated profit of Rs9,286 million (EPS: Rs16.12) as compared to Rs6,113 million (EPS: Rs10.61) for 3Q2019, up 52%YoY. It takes 9MCY20 earnings to Rs18,345 million (EPS: Rs31.84), up by 42%YoY. Along with the result, the Company announced a cash dividend of Rs10.0/share, taking cumulative dividend during 9MCY20 to Rs24.0/share. The dividend announcement came was higher than expected. Among the subsidiaries, Engro Fertilizers (EFERT) earnings were up by 111%YoY to Rs7,034 million during 3QCY20 due to higher Urea offtake up 35%YoY to 616,000 tons and DAP up 90%YoY to 183,000 tons and lower effective tax rate at 2% against 44% for 3QCY19 amidst tax reversal. Engro Polymer (EPCL) earnings were up 48%YoY higher to Rs1,881 million as compared to Rs1,270 million for 3Q2019 due to increase in PVC sales by 9%YoY to 48,000 tons and increase in gross margins to 32%. Income from Joint Venture and Associates significantly increased by 70%YoY to Rs804 million from Rs472 million amid contribution from Sindh Engro Coal Mining Company (CECMC) and Engro Vopak Terminal.

Bank Alfalah (BAFL) posted consolidated earnings of Rs1.62/share for 3QCY20, down 9%YoY and largely unchanged QoQ. The bank also announced an interim cash dividend of Rs2.0/share along with the result. The results were higher than expectations on the back of higher than expected Net Interest Income (NII). During 3QCY20, the Bank’s NII declined by 4%QoQ. The drop in Interest Income by 9%QoQ was covered to an extent by a 14%QoQ decline in Interest Expense. Fee Income grew by 42%QoQ to Rs1.9 billion, which was also higher than pre-COVID level of Rs1.6 billion recorded for the corresponding period last year. Gain on sale of securities also supported the Non Funded Income, albeit contribution was much lower compared to last quarter. Out of Rs453 million, major contribution came from Fixed Income portfolio, while Equities contributed 7% only. Operating expenses for the quarter rose to Rs7.8 billion depicting increase of 5%QoQ. Cost to Income ratio also rose to 56%, from 48% in the previous quarter. The cautious stance continues as the Bank recorded further provisioning of Rs1.5 billion primarily in the General category as a precaution.

DG Khan Cement Limited (DGKC) has reported an unconsolidated loss of Rs0.8/share for 1QFY21 as compared to a loss of Rs3.3/share for 1QFY20. The earnings came in lower than expected due to lower than expected Gross Margins, reported at 10% during the quarter. Net Sales increased by 16%YoY to Rs10.5 billion on the back of increase in cement dispatches by 10%YoY to 1.9 million tons. Finance Costs declined by 39%YoY to Rs771 million as interest rate re-pricing has started to kick in. Selling and distribution expenses increased by 26%YoY due to growth in exports to 670,000 tons. Other Income declined by 87%YoY due to absence of dividend from MCB due to restriction imposed by the central bank after COVID-19 outbreak. The Company recorded a net tax reversal of Rs107 million for 1QFY21 as compared to Rs451 million for 1QFY20.

Pakistan Petroleum (PPL) reported profit after tax of Rs14.4 billion (EPS: Rs5.27), significantly higher than expected. Deviation from expectations stems from higher Net Sales, which recorded a decline of 6%YoY as against expectation of 11% decline. Hydrocarbon production of the Company during 1QFY21 fell by 1.7%QoQ. Along with this, Arab Light crude oil prices also declined by 32%YoY to US$43/barrel in 1QFY21. Operating expenses were reported at US$4.5/barrel, down 17%QoQ. Exploration cost increased by 134%QoQ. Other Income declined by 68%QoQ due to absence of heavy exchange gains. Similarly, Other Expenses increased by 118%QoQ due to incurrence of exchange losses as currency appreciated during the outgoing quarter. Effective tax rate clocked came down to 25% for 1QFY21 from 31% for 4QFY20.

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