Index posts smidgen gain likely to remain shaky
During the week ended on 19th February 2021, Pakistan Stock Exchange (PSX) remained volatile and closed the week at 46,228 points, posting 0.92%WoW gain. This was in continuation of the momentum witnessed a week ago and as a result of staff-level agreement with International Monetary Fund (IMF) for the release of US $500 million. Nevertheless, profit-taking by investors kept the Index under pressure during the week.
Major news flows for the week included 1) commencement of COVID vaccine registration for citizens aged 65 and above, after successful vaccination of around 50,000 frontline workers, 2) home remittances rising to US$2.3 billion in January 2021, up 19%YoY, 3) FATF acknowledging efforts of Pakistan in making substantial progress towards achievement of remaining 6 partially addressed action points, 4) forex inflows via Roshan Digital Account (RDA) reaching US$500 million in just 5 months, 5) tax exemption on profit on RDA deposits, 6) Large-scale manufacturing (LSM) growing at 11.4%MoM in December 2020, highest monthly growth over last decade and 8.6% in 1HFY21 on the back of higher automobile and cement production, 7) OGRA maintained petroleum rates despite rise in international crude oil prices, 8) across the board increment in power tariff by Rs1.95/unit and 9) NAB retracting its reservations on excess profits of IPPs.
Average daily traded volume for the week exceeded 595 million shares, from 734.42 million shares a week ago. Amongst major sectors, technology led the pack followed by Refinery, Engineering and Automobile Parts & Accessories. Foreigners remained net sellers during the week (net sell US$0.57 million) together with Insurance Companies (net sell US$9.06 million) and banks (net sell US$1.05 million), which was mainly absorbed by Companies and Individuals. Top performers for the week were: STJT, TRG, GATI, MTL and BYCO whereas laggards included: HBL, ATLH, FABL, AGIL and MEBL.
The market sentiments during the next week will be driven by major offtake in economic activities and developments revolving Covid-19 vaccination. Major corporate result announcements in the upcoming week include HMB, UBL, OGDC, NBP, MLCF, INDU, NML, PPL, and HUBC. With FATF’s meeting scheduled on 22-24 of this month, the market is likely to witness some volatility.
Engro Fertilizers (EFERT) announced 4Q2CY20 consolidated earnings of Rs4.97/share, up 4%YoY – higher than consensus estimates of analysts due to re-measurement gain on Gas Infrastructure Development Cess (GIDC) liability and lower effective tax rate. This took full year 2020 (CY20) earnings to Rs13.6/share, up 7%YoY. Along with the result, the Company also declared final cash dividend of Rs4/share, taking full year payout to Rs13/share. The one-off factors during the year were 1) re-measurement gain on GIDC of Rs2,121 million as per the IFRS-9 and (2) expected credit loss on subsidy of Rs1,239 million. For 4QCY20, effective tax rate came to 8% as compared to 35% for the same period last year due to tax reversal taken after the assessment of prior tax years. The management refrained from commenting on the specifics.
A regards concessionary gas supply, discussion are ongoing with relevant authorities, if the matter is not resolved by June 2021, the Company intends to take the matter to the court. After several engagements with FBR, fertilizer industry was able to successfully obtain specific exemption on sales tax disallowance subject to certain conditions. However, talks are ongoing with FBR on income tax disallowance which has become applicable from 1st October 2020. To highlight, EFERT has neither reversed provision on sales tax nor income tax disallowance in CY20. As regards payment of GIDC on base plant, stay order has been obtained primarily on the basis that it was not recovered from the end consumers. Similarly, on Enven plant, interim stay order was obtained and is not provided for.
International DAP prices are on rising trend due to higher demand which hampered the ability to procure required quantity. Management expects prices to be volatile in the near feature. Currently, Dealer Transfer Prices (DTP) of DAP is Rs4,300/bag (Excluding Karachi).
The management shared that the farm economics for wheat, sugarcane and rice crops have improved during 2019-20. Wheat net income/acre increased to Rs20,748 for 2019-20 from Rs19,227, Sugarcane net income/acre improved to Rs60,200 from Rs41,200 and Rice net income/acre improved to Rs30,020 from Rs22,900 during this period. EFERT has recorded highest ever Urea production of 2.26 million tons in CY20 as compared to 2.02 million tons in 2019, up 12%YoY. In spite of a 3%YoY decline in industry’s Urea sales during CY20, EFERT’s Urea sales have increased by 3%YoY. It takes EFERT’s market share to 33% from 32%.
Fauji Fertilizer Bin Qasim (FFBL) DAP plant has resumed operations from 15th February 2021 after the approval by ECC and the Cabinet on extension of gas contract for next five years. Total DAP sales rose to 2.2 million ton in 2020, from 2.0 million tons in 2019, up 10%YoY. The management expects industry sales may not maintain same momentum in 2021 due to higher DAP prices.
Currently (ex-Karachi) FFBL’s DAP price is around Rs4,750/bag. To highlight, FFBL charges a premium of Rs100/bag over imported DAP. As of today no progress has been made on DAP subsidy. In May 2020 the GoP had announced a subsidy of Rs37 billion to farmers on fertilizers in the form of Rs925/bag on DAP. Management believes international DAP margins are likely to continue to remain on the higher side for next six months due to shortage of DAP amid closure of plants. Regarding FFC‘s DAP plant, the management briefed that it is in initial stages and talks are ongoing with the GoP on gas flows. It will take 4-5 years for the plant to start production.
As per IFRS-9, the Company has booked a gain on Gas Infrastructure Development Cess (GIDC) of Rs2,741 million in 4QCY20. To note, FFBL will reverse Rs1.0 billion net of taxes in 2021. As regarding payment of GIDC, the Company has obtained a stay order from court. When the issue is resolved, the Company is likely ask the GoP to set off its outstanding dues, which includes sales tax, subsidy receivable and income tax adjustment with GIDC. During 2020, FFBL booked a provision of Rs780 million on account of sales tax disallowance to unregistered dealers.
FFBL booked impairment loss of Rs4.0 billion on FML and FFL. Future impairment will depend on the performance of FML and FFL. As per management, during 2HCY20, both the companies have showed significant improvement in their profitability. As regarding sale of Wind Power plants, the management expects transaction to close by June 2021.