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PSE index ends on strong note and likely to be build up

Pakistan Stock Exchange (PSX) started the week ended on 19th March 2021 on a strong note, after the announcement of Senate election results on the last trading session of the earlier week, rallying 2.23% on the first trading session. During the following trading sessions benchmark index remained volatile, where bullish sentiment from political victory of incumbent government was given a tough face-off by corporate income tax exemption withdrawals and potential inflationary pressures from electricity rate hikes — both necessary to unlock third tranche of IMF’s EFF facility (payment is likely to be approved in the coming week).

Amid the aforementioned factors, double digit inflation expected in March 2021 brought interest rate up cycle fears to the surface. Sector wise, new refinery policy in the offing entailing import parity based pricing and 10% duty protection on MS and HSD led to a rally in refinery sector (up 16.8%WoW). Overall, the KSE-100 Index closed at 44,901 points, up 2.54%WoW. Top performers for the week included, BYCO, ANL, TRG, ATRL and UNITY; whereas laggards were: AKBL, HMM, STJT, HMB and ABL.

Major news flow during the week included: 1) Amid differences over resignations PDM’s long march put off, 2) GoP expecting US$1 billion rollover by UAE, 3) Power tariff may go up by Rs3.0/unit by December 2021 and by Rs5.36/unit till 2023 to comply with IMF plan, 4) Saudi tycoon in Pakistan to end impasse over KE sale, 5) LSM growth up by 9.13% in January this year, 6) textile exports witnessing a decline of 3.1%YoY in February this year, 7) Privately-imported COVID shots arrive with GoP backtracks on its decision of not keeping any price caps, and 8) GoP withdrawing summary seeking non-payment of dues to IPPs.

After State Bank of Pakistan (SBP) leaving policy rate unchanged, the market is likely to extend rally to some extent in the upcoming session. Key market movers in the upcoming week include: 1) IMF Board approving release of US$500 million tranche, 2) payment of first installment to the IPPs as per agreements inked in February this year and 3) the GoP taking new measures with regards to rising COVID cases.

AKD Securities has updated investment case for Attock Petroleum (APL) by incorporating 1) muted profitability for second quarter of current financial year, 2) taking into account disappointing volume growth for FY21 as retail fuel market share declined to 7.4% for 8MFY21 from 9.7% in corresponding period of last financial year and 3) lower than expected revision in OMC margins. Incorporating the volumes for 8MFY21, the brokerage house has revised down retail fuel market share assumption of APL to 7.6% for FY21 against 8.1% earlier. For FY22, the brokerage house expects the Company to register retail fuel market share of 8.5%, resulting in an earnings impact of Rs1.4/share for FY22. The revision in OMC margin of Rs0.16/ltr is lower than expected increase of Rs0.3/ltr and incorporating the same in its estimates, assuming implementation from April 2021, the earnings have been revised down by Rs1.2/2.8/share for FY21/FY22. APL has remained under pressure recently. However, moving forward stock price performance will be dependent on how effectively the Company can recover its market share.

Topline Securities has revised earnings forecasts of its Exploration & Production (E&P) universe for FY21-FY23 after the increase in per barrel price assumption of Arab Light oil from US$45/50 to US$52/58 following upward revision in the said estimates by Energy Information Administration (EIA) in its March 2021 report and incorporating production flows from recent discoveries/development wells.

Oil prices per barrel (Arab Light) have recently crossed US$60, recovering from its bottom of US$13.3 on 21st April 2020 on the back of production cuts by OPEC+ countries along with expectations of global economic recovery.

Oil and Gas Development Company (OGDC) earnings forecast has been increased by 8-10% over FY21-23 after incorporating revised oil price assumption and 2) upward adjustment in operating expenses. The brokerage house expects production of the Company to 59/59/56 million barrels of oil equivalent (boe) in FY21/22/23, respectively. It expects the Company to pay dividend of Rs7/11/11 during FY21/22/23.

Pakistan Petroleum (PPL) earnings have been revised up our by 11-18% for the period. The brokerage house has assumed additional flows of 30 mmcfd before start of FY22 from the backlog of discoveries (160-170mmcfd), while remaining we have assumed between FY22-FY23. Exploration expense forecast to Rs6 billion for FY21 from Rs11 billion earlier, due to lower number of wells drilled by the Company (till 9MFY21) and lower seismic acquisition. The brokerage house expects the Company to pay cash dividend of Rs6/8/8 during FY21/22/23, respectively.

Mari Petroleum (MARI) earnings forecast has been raised between 5-8% on the back of 1) upward revision in oil price assumption and 2) addition of new production fields (like Togh and Togh Bala). MARI also has a backlog of over 70 mmcfd from already announced discoveries like Tipu, Shaheen, Shahbaz among others. These flows are expected to come online after installation of gas processing units to supply pipeline quality gas to Sui companies (likely in next couple of months). Gas reserves of Mari field have increased by 0.7 tcf in December 2020. This addition of reserves increases Target Price estimate of the Company by Rs140.

Pakistan Oilfields (POL) earnings have been revised up by 14-26% from FY21-23 after upward revision in oil price assumption and incorporation of additional flows from Pindori 10 (540 bopd). This field alone will add Rs1.6/share to annual earnings. The brokerage house has also revised down reserves of MamiKhel South (field yet to commence operations).

Key risks to E&P estimates includes: 1) delay in commissioning/installation of gas processing facilities, 2) lower than expected oil prices, 3) worsening of circular debt and 4) unfavorable decision in Tal Block wind fall levy case.

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