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Bulls lead; market closely track US election outcome, but covid cases may trigger risk off sentiment

Pakistan Stock Exchange (PSX) started off on a weak note, with the market participants pricing in rising domestic COVID-19 cases and uncertainty on the US election outcome. The benchmark index shed 1.94% on the first trading session of the week. Softer than expected inflation numbers, encouraging volumetric offtakes in Cement and OMC sectors, electricity package for the SMEs and general industry and rebound in global markets turned the tide. The Index registered 3.5% gain on the second trading session, paring all previous day losses. After a brief respite on Wednesday, the domestic market regained momentum in line with its global peers, pricing in relatively better visibility on the US election outcome, with Democrats likely to take control of the White House and Republicans expected to maintain their majority in Senate.

Overall the KSW-100 Index gained 2.11%WoW to close the week at 40,732 points. Market participation witnessed a decline of 21.6%WoW, with an average daily trading volume of 368.2 million shares. Top gainers of the week were: TRG, HMB, LOTCHEM, FFBL and PO, while laggards included GATI, MUREB, APL, ANL and PAKT. Activity remained concentrated in high beta stocks, with UNITY, HASCOL, POWER, PRL and TRG being the top-5 volume churners.

Other key news flows impacting the market performance during the week included: 1) ECC approving PM’s Rs24 billion package for farmers, with a proposal to reduce DAP prices by Rs1000 per bag, 2) the government marginally reducing the POL product prices, 3) the Supreme Court dismissing review petitions against GIDC, while extending the payment deadline by another 36 months, 4) FBR raising Rs1.33 trillion in tax collection during 4MFY21, surpassing its relatively soft target of Rs1.32 trillion and 5) trade balance improving during October 2020, with exports growing, while imports declining.

In the near term, the domestic market will continue to closely track global markets, with the outcome of the US Presidential Election dictating market sentiment. On the domestic front, rising COVID-19 cases could trigger risk-off sentiment, keeping the market under pressure.

Relatively weaker market participation in the latter part of the week also points towards some risk aversion. From a macro vantage, Current Account numbers and Monetary Policy announcement later this month will be on top of investors’ minds. The encouraging trade numbers point to another positive reading on the external side. As regards monetary policy, analysts expect the central bank to leave the rate unchanged.

OMC volumes witnessed an increase of 6%YoY during October 2020, with FO sales took the lead (up 46%YoY) on the back of increased FO-based power generation (captive and grid), while MS/HSD witnessed a meager increase keeping ex-FO sales flat. Overall, OMC sales have started FY21 on a strong footing, up 9%YoY during 4MFY21 (up 4% excluding FO). FO again leads the pack with growth of 33%YoY while MS/HSD follows with growth of 6/8%YoY. Market shares remain in flux with PSO/APL/HASCOL/SHEL accounting for market shares of 45/10/5/8% during the month under review as compared to October 2019 reveals decreasing share of PSO/ HASCOL/SHEL by 0.6/2.5/0.7 percentage points, while market share of APL increased. APL continues to be the safe stalwart in the sector with high refinery upliftment guarding the Company against fluctuating oil prices. PSO’s investment case remains pinned to “reading the tea leaves” on circular debt clearance following the Government’s agreement with IPPs (yet to be formalized), where a strong policy response can result in significant price performance.

Local cement dispatches extended their outstanding run with an increase of 16/19% YoY/MoM to 4.9 million tons during October 2020. South fared better amongst the two regions, witnessing an increase of 18/23%YoY/MoM, while North posted an increase of 16/18% YoY/MoM. Exports slowed down with a sequential decline of 22% as local players shift their sales mix towards local market to take advantage of higher retention prices at offer with impressive demand growth in the backdrop. For 4MFY21, local dispatches were reported at 10.8 million tons, up 19%YoY. Given high utilization (101% for North) and support being provided by government in terms of expediting regulatory procedures and a concessionary financing facility (TERF), analysts believe capacity expansion announcements may come can earlier than expected. Brokerage houses continue to 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.

Pakistan’s leading brokerage house, AKD Securities has revisited its investment case on Hub Power Company (HUBC) after release of detailed financial accounts. The Company had posted 46/20% YoY/QoQ higher profit after tax of Rs8.4 billion (EPS: Rs6.28) for 1QFY21. More importantly, HUBC also announced first interim cash dividend of Rs4.0/share, after a dry spell since 8 consecutive quarters. Analyzing details of debt repayments (particularly for equity investments), the brokerage house flags a prominent FY23 peak burdening cash flows and shaping payouts to trend in a “U-shape” going forward. Aware of the same, management may remain conservative in the near term to avoid any unsustainable bump in payout policy. Based on lower of the two, FCFE/share and ROEs of existing power projects, the brokerage house forecasts dividend per share of Rs7.0/10.0 per share in FY21/FY22 (dividends from CPHGC, a determining factor). It also tweaks earnings estimates for HUBC by incorporating: 1) HUBC’s 38.3% stake in ThalNova Power Project (financial close achieved in September 2020; expected CoD in June 2022), 2) a 6 month delay in CoD of 60% owned Thar Energy (TEL), and 3)a 25% tax rate on income from 2015 power policy projects. Management is also considering multiple plans for utilization of hitherto closed Base plant, where any cash injection after signature of agreements with GoP should make room for CAPEX.

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