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Bullish sentiments likely to attract investors

With the joy of a new year following through the trading floor for the first week of the year 2021 and the January effect in full steam (where investors re-allocate portfolios, driving volumes higher), the benchmark index of Pakistan Stock Exchange (PSX) gained 2.7%WoW to close at 45,654 points continuing the uptrend witnessed during the tail end of CY20.

Additional catalysts were in the form of significant headway on circular debt resolution efforts initiated by the Government of Pakistan (GoP) in August 2020. The surprise crude supply cut by Saudi Arabia lifted crude benchmarks and in turn bolstered the index heavy weights under E&Ps. Further support was witnessed in the form of strong investor participation in Commercial Banks, as supportive end of year result expectations drove bullish sentiments.

Other news flows driving sentiment included: 1) Pakistan’s economic growth rate for the current fiscal year is forecast to remain subdued at 0.5%, despite the global economy may expanding at a much faster pace, 2) during a meeting of the CCOE power sector circular debt figure was stated to have surpassed Rs2.3 trillion as of 30th November 2020, up Rs156 billion over 5MFY21, at a rate of Rs31.2 billion per month, 3) the GoP is reportedly in the process of unveiling a Textile and Apparel Policy 2020-25 laden with cash subsidies and lower rates on utilities worth Rs960 billion to boost production and exports of value-added textile products with the restoration of the zero-rated regime for the five export-oriented sectors also on the cards and 4) Special Assistant to the Prime Minister on Power Tabish Gohar resigned from the post within a quarter, as chronic power sector challenges continue to haunt the government.

Stock driving the market higher included: FML, KAPCO, BYCO and MEBL, whereas laggards acting as a drag were: SHEL, GATI, and ANL. Average daily traded volumes climbed 18.3%WoW to 625.1 million shares, where as volume leaders included: BYCO, PRL, HUMNL and PAEL.

Broad based participation coupled with depth driving market upsides (multi sector) affirms the bullish momentum at play in markets, which is likely to continue through to results season. That said, dampeners in the form of rising commodity prices exposing external vulnerabilities or adverse tax and cost inflation from higher energy tariffs as preconditions for IMF EFF lending could prompt profit taking.

Local cement dispatches extended their outstanding run with an increase (18%YoY and 12%MoM) to 4.2 million tons for December 2020. South fared better amongst the two regions, witnessing an increase of 20%YoY while North posted an increase of 18%YoY. Exports slowed down with a sequential decline of 17% largely due to logistical issues, while seasonality has also played a part. For 1HFY21, local dispatches were reported at 20.2 million tons, up 16% YoY. Local players have reacted to the increasing cost pressure and prices in North have been increased by Rs10/bag. However, to fully pass on the impact of increase in coal prices, manufacturers will need to increase prices by at least Rs30/bag. Analysts 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.

Sales volume of OMC witnessed an increase of 16%YoY for December 2020 led by FO as the fuel witnessed a massive growth, while retail fuels posted a growth of 10%YoY where MS5% and HSD posted 13%YoY growth, but posted declined on MoM basis by 3% and 22% respectively. Overall, local OMC sales continued on a strong footing, up 12%YoY for 1HFY21 (up 8% excluding FO) where seasonal uptick in FO demand for power generation over the period drove growth of 38%YoY while MS/HSD followed with growth of 8% and 13% YoY respectively. Market shares remain fluid with PSO (45%), APL (8%), HASCOL (5%) and SHEL (8%) accounting for market shares during December 2020. PSO is the top pick of AKD Securities. The medium term developments include clearance of circular debt and shift in cash profile of cash flows due to increased share of retail fuels while focus on improving storage infrastructure will result in company sustaining the recently gained market share, moving forward. APL has inherent ’anti-bodies’ against sector headwinds with a strong balance sheet, high cash flow generation and progress on storage capability to improve market share.

The GoP and IPPs have reportedly reached an amicable solution with regards to settlement of overdue receivables of Rs450 billion in three installments by December 2021. This is in contrast to settlement timeline of 3 years, which was proposed by GoP earlier. The catch however is, each installment is expected to be paid one third in cash and the remaining two thirds in the form of T-bills. The Nishat IPPs have resumed piecemeal payouts ever since the issuance of Energy Sukuk-I in FY19, while managing their liabilities. Going forward, NPL seems to best placed in terms of payout potential, with liabilities amounting to 33% of receivables. Assuming 50/100% of short term debt retirement and payables, NPL boasts of payout potential of PkR6.0/share. HUBC and KAPCO’s liabilities stand at 109% and 49% of outstanding receivables, indicating better liquidity situation for the latter. However, both need to be seen in the context of potential asset sell-off (HUBC) and impending PPA expiry (KAPCO). AKD Securities maintains its liking for HUBC, being the only listed IPP with exposure to US$ hedged, CPEC power projects.

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