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Volatility witnessed; sbp forward guidance, result season may comfort investors

Pakistan Stock Exchange witnessed volatility throughout the week ended on 22nd January 2021. The week closed at 45,868 level after gaining 1,433 points or 3% month-to-date. Lackluster news on macro levels led to profit taking during the outgoing week, offsetting the result season driven exuberance.

Major news driving the market included:1) hike in unified base tariff of DISCOS by Rs1.95/KWh as against a proposal of Rs3.34/KWh; likely to yield impact of Rs200 billion impact, adding to inflationary pressure in the upcoming months, 2) decision to disconnect gas supply to captive power plants from 1st February till 1st March for industries and export-oriented industries, respectively, encouraging industries to shift towards grid electricity, 3) SBP kept policy rate unchanged at 7%, where MPC giving forward guidance commented monetary policy settings to remain unchanged in the near term as economy heads towards recovery phase, with inflation in FY21 expected to remain between 7% to 9% and 4) a decline in foreign direct investment (FDI) by 29% during 1HFY21.

On sectoral basis, major highlights included: 1) six more IPPs including Lalpir, Pakgen, Engro, and Saif installed under 1994 and 2002 power policy initialed the Master Agreement; 2) Pakistan approves Sinopharm and AstraZeneca corona vaccine for emergency use and 3) prices of POL products hiked.

Average daily trading volume declined 25%WoW to a little less than 510 million shares. Amongst major sectors, textiles led the pack with a gain of 6.8%WoW followed by Vanaspati & Allied Industries (up 4.6% WoW) and technology (up 3.2%WoW) whereas E&Ps (down 2.4%WoW) and refineries (down 3.6%). Top performers during the week included: SHFA, FCEPL, TRG, ICI, and KTML, whereas laggards were: FML, GATM, SHEL and BNWM.

The market may carry forward the optimism of delay in interest rate hike, where SBP’s forward guidance should provide comfort to the investors. Result season is expected to commence from the next week in full swing with major earnings announcement including FFBL, Attock Group (ACPL, APL, ATRL), HCAR, FFC and LUCK. Meanwhile, US$2 billion cash facility from UAE and Saudi Arabia is expected to expire in January 2021, where a rollover (or lack of it) may also influence market sentiment.

FFBL is expected to outshine the other players in 4QCY20 amidst 59%YoY uptick in DAP volumes, along with uptrend in local DAP prices, GIDC elimination and a sharp decline in finance cost resulting in unconsolidated profit after tax of Rs2.7 billion (EPS: Rs2.90) as opposed to net loss of Rs3.50 billion (LPS: Rs3.75) for the same period last year. EFERT is expected to post a sequential decline in 4QCY20 earnings (EPS: Rs3.42) based on a decline in urea and DAP offtakes, combined with higher effective tax rate of 31% in 4QCY20 as opposed to 3QCY20. For FFC, the 4QCY20 earnings are expected to witness growth to EPS: Rs3.96. Earnings increase on a sequential basis is expected on the back of 17%QoQ improvement in urea offtake. On YoY basis, a steep 40% decline in finance cost is expected to outweigh flattish operating profits. EFERT and FFBL have recorded Rs1,300 million and Rs600 million provisioning in lieu of the sales tax adjustment disallowed. Relaxation on the same may result in the companies recording a reversal, no disclosure by FFC.

Pakistan Oilfield (POL) will announce its 2QFY21 results on 26th January 2021. Analysts estimate the company to post unconsolidated earnings of Rs3.3 billion (EPS: Rs11.67), lower by 27%YoY and 9%QoQ. Depleted profitability is expected from decline in oil prices keeping revenues soft, where a lagging production profile (oil/gas production for 2QFY20 depleting keeps expected topline on a weak footing. A pullback in the PKR vs. US$ during 2QFY21 diminishing the role of macro factors in covering for production declines and significantly depleting other income, and lack of major exploration and production activity (PPIS data shows no exploratory wells).

In short, relative dampness on both the macro front, and production should keep earnings in check for the period before the recent run-up in prices and PKR stability stabilize earnings over 2HFY21. On a cumulative basis, 1HFY21 profit after tax should amount to Rs6.9 billion (EPS: Rs24.45), marking 19%YoY decline, with NM receding to 38% mark as against 39.7% for 1HFY20 on the back of weak production and pricing dynamics. In line with its payout trends analysts expect the company to announce an interim payout of Rs20.0/share.

Attock Petroleum (APL) is expected to announce results on 26th January 2021 for 1HFY21 where analysts expect the Company to post profit after tax of Rs2.4 billion (EPS: Rs23.8), up 50%YoY, mainly on the back of significant inventory gains in 1QFY21. For 2QFY21, net profit is expected to be reported at Rs887 million (EPS: PR8.9), mainly due to low base as significant inventory losses depressed profitability in 2QFY20. However, on QoQ basis, profitability is expected to decline by 40%. APL’s market share has witnessed a significant slump, reported at 8.8% for 2QFY21 as against 10.3% for 2QFY20 as HSD consumption by power plants decreased. The smaller players are also eating up Company’s share in retail fuels. The same is also being reflected in profitability where for 2QFY21, estimated normalized gross profit is expected to decline by 1.5%YoY while excluding FO (which witnessed an abnormal increase during 2QFY21 due to ongoing gas crisis), estimated normalized gross profit is expected to decline by 6.6%YoY. Along with the result, analysts anticipate APL to announce an interim dividend of Rs12/share. Even though market share has declined recently, analysts maintain a Buy stance on the stock premised upon enhancement of storage infrastructure which will aid in expanding footprint.

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