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Market ends up; IMF plan progress, oil price movements and covid fear likey sway sentiments

Pakistan Stock Exchange (PSX) began the week ended on 27th November 2020 on negative sentiment with government mulling over measures to contain rising cases of COVID-19, hinting a complete lockdown. To add, IMF hinting at government’s need to undertake unpopular measures (electricity and gas rate hikes, targeting higher tax collection, etc.) to resume the IMF program further dampened the sentiments. Decision of State Bank of Pakistan (SBP) to leave interest rate unchanged at 7% resulted in some exuberance among investors. A rise in international oil prices on the back of mass availability of vaccines in 2021 brought interest in index heavy weight E&Ps in the remaining trading sessions, where profit-taking in the last trading session pared some of the gains.

The benchmark closed the week at 40,807 points, up 1.54% during the outgoing week. Average daily turnover during the week increased to 279.8 million shares, up 63.4%WoW. Major news flow during the outgoing week included: 1) Pakistan securing US$800 million in debt relief from 14 members of the richest club of G-20 countries, as it still awaits ratification by remaining six countries, 2) IMF talks focusing on renewed tax thrust, 3) COVID-19 compelling the government to close educational institutions, 4) SBP keeping policy rate unchanged at 7 percent, 5) IPPs refusing to accept Rs400 billion proposed payment in three installments, 6) government hinting at increasing power, gas tariff in phases and 7) SBP’s foreign exchange reserves crossing US$13 billion mark.

Top performers in the outgoing week included: TRG, SYS, POL, PSX and LOTCHEM, whereas laggards were: FCEPL, IGIHL, FFBL, GATM and SNGP. Developments on the IMF program resumption front, the COVID-19 situation and global crude oil price movements are likely to sway the market sentiments, going forward. Resurgence in energy prices remain double edged sword, with interest in energy chain and banking sector likely to continue.

Pakistan Petroleum (PPL) has a take or pay agreement with GENCOs on 72.5% of the 200mmcfd (or 145mmcfd) gas flows from Kandhkot field. Currently there is no offtake from Kandhkot field since the last 20 days and the company can’t sell gas from this field to any other party. The take or pay agreement is also not being implemented. The management is trying to revise the terms of the contract so that the unsold gas can be sold to other parties.

At present, the overdue receivables of the Company have increased to Rs305 billion as compared to Rs297 billion in September2020. As per the management, recovery ratio has doubled since last year to 70%. Total receivables of the Company in FY20 increased to Rs312 billion from Rs227 billion in FY19. Receivables from SNGP are Rs153 billion followed by SSGC at Rs97 billion and GENCOs at Rs52 billion. The Company got Rs7 billion indirectly from the Energy Sukuk II.

The Company plans to drill 5 development and 5 exploratory wells in FY21 as against 6 development wells and 2 exploration wells in FY20. The government has opened bid rounds for 20 new exploration blocks, where the deadline to submit bids is mid of January 2021. Results of the Abu Dhabi bid round are awaited.

During FY21, Company plans to complete two projects, GPF 4 Phase II and Benari Pipeline. The commissioning of GPF 4 Phase II will augment Company’s gas production up to 35mmcfd. Dhok Sultan field has a potential to reach 10,000 bopd by drilling more development wells. The existing one well delivers maximum flows of 3,800 bopd, while average flows were 500 bopd. This well is not under production right now due to some issues.

Maple Leaf Cement Factory (MLCF) recently held a corporate briefing. As per the management, the new expansion may begin from March 2021 as cement demand in FY21 is likely to grow by 16%YoY. Management estimates 10-15% growth per annum. Utilization in the North region (only local) will be at 82-89% in FY22 and each year growth will generate an absolute demand up to 5 million tons, suggesting that the country will need two plants to come online every year.

Earlier company was selling 2,000 TPD (out of 18,000 TPD) of cement in South market, which is now reduced to just 200 TPD due to rising demand in North region and higher contribution margin (net of freight). Company is getting Rs1,500/ton contribution on cement exports to Afghanistan.

White cement contributes 2-3% to the total volumetric sales. However, in terms of value its contribution is around 10-15%. In good times, white cement contributes roughly 20% in overall profits. MLCF commands 95% of the white cement sales in Pakistan.

The company projects net sales of Rs30.1 billion in FY21 and a debt balance of Rs13.6 billion as of Jun 30, 2021 as compared to Rs19.5 billion at end FY20.

Company believes, WHR project has a payback of 12-18 months. MLCF is adding 9.3MW (taking total to 25MW) of WHR, which is expected to come online by September 2021 at project cost of US$11.2 million with 83% debt and 17% equity.

Cost of raw materials over the last few quarters have increased and have shown some variation due to increase in royalty by the government departments. Currently this cost is at Rs600/ton. Maple Leaf Power can start paying dividend to MLCF from next year.

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