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Lockdown fear, declining bond yields may weaken sentiments

Bond yields in the secondary market of Pakistan came down by 5-12 bps, while compared to 11th March 2021 have come down by 12-65 bps. Analysts believe the decline in yields is largely due to rising COVID-19 cases in the country, which may potentially delay any rate increase by State Bank of Pakistan (SBP). The appointment of Shaukat Tarin as new Finance Minister has also added to this belief, as he has been vocal of low interest rates prior to his appointment. Asad Umar, Minister for Planning, Development and Special Initiatives said that more restrictions could be announced on Friday, hinting at closing down of major cities if the current trend of COVID-19 continues. To recall, SBP had delivered emergency rate cuts between March-June 2020 by 625 bps to counter loss of economic activity amidst COVID-19 outbreak. The CPI inflation for April 2021 is expected to rise up to 11.0%YoY as against Policy Rate of 7.0%. According to a survey conducted by Topline Securities in March this year, 92% of the participants were expecting increase in interest rates during 2021.

Meezan Bank (MEBL) has posted unconsolidated 1QCY21 earnings of Rs6,101 million (EPS: Rs4.3), up 11%YoY and 49%QoQ. Alongside result, the Bank announced a cash dividend of Rs1.5/share. The result came in higher than expectations due to Rs284 million provision charge recorded in 1QCY21, which essentially was 93%QoQ lower. Profit earned on assets depicted an increase of 4%QoQ. Profit expensed on deposits increased by 12%QoQ, which was the result of increasing deposit base. Overall, Net Spread earned remained stable at Rs15 billion mark. The Other Income segment has grown by 23%QoQ on the back of Forex Income which grew by 49%QoQ. As branch operations normalize post COVID-19 lockdowns, alongside pick-up in economic activities, the bank was also able to increase Fee Income by 2%QoQ. On the back of branch expansion strategy, other expenses increased by 14%QoQ. Cost to Income for the quarter stood was reported at 43%, up from 39% recorded in 4QCY20.

Engro Fertilizers (EFERT) announced 1Q2021 consolidated earnings of Rs4.30/share, up 906%YoY, but down 14% QoQ, which was higher than industry expectations due to higher than expected gross margins in DAP business. Along with the result, Company also declared interim cash dividend of Rs4/share, which was above industry expectations. As per IFRS-9, the Company has recorded unwinding of Gas Infrastructure Development Cess (GIDC) to the tune of Rs297 million for 1Q2021. As regards concessionary gas, discussions are ongoing with relevant authorities. If the matter is not resolved by June 2021, the Company will record normal gas pricing that will have an incremental annual impact of Rs3,500 million (Rs2.6/share). Urea production went down by 9%YoY to 523,000 tons in 1Q2021, from 572,000 tons in 1Q2020 due to plant turnaround. As regards sales tax disallowance, EFERT has submitted dealers’ data within compliance date to FBR and will continue to submit data for new dealers. As of now, 59% of EFERT’s dealers are registered. To highlight, EFERT has not marked any provision on sales tax disallowance in 1Q2021. International DAP prices have increased by 12%YoY to US$570/tons in 1Q2021 as against 9%YoY increase in local DAP prices to Rs5,362/bag. As per management, in near-term the prices are likely to remain on higher side. As regards payment of GIDC on base plant, stay order has been taken 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. The management shared that the farm economics for wheat, sugarcane, and cotton are expected to improve in 2020-21 with Wheat net income per acre improving to Rs30,952 in 2020-21 from Rs20,748 in 2019-20; Sugarcane net income per acre improving to Rs88,000 in 2020-21 from Rs60,200 last year; and cotton net income per acre improving to Rs19,625 in 2020-21 from Rs13,189 last year. For 1Q2021, effective tax rate declined to 34%, from 49% for the same period last year.

Engro Corporation (ENGRO) has announced its result for 1Q2021, posting EPS of Rs14.47, up 151%YoY and 23%QoQ. Along with the result, the Company announced an interim cash dividend of Rs12.0/share. This was higher than industry expectations. Among the subsidiaries, Engro Fertilizers (EFERT) earnings were up by 906%YoY to Rs5,741 million for 1Q2021 due to higher Urea and DAP offtake, up 246%YoY and 84%YoY, respectively. Similarly, Engro Polymer (EPCL) earnings rose to Rs4,143 million due to: 1) increase in PVC sales by 60%YoY amid low base due to closure of plant last year, 2) caustic sales by 27%YoY due to higher demand from the textile sector and 3) core delta by 86%YoY to US$1,000/ton amid supply side disruption. Income from joint venture and associates increased significantly by 277% to Rs1,019 million amid higher contribution from Sindh Engro Coal Mining Company (SECMC), Engro Vopak Terminal and FreislandCampina Engro Pakistan (FCEPL). To highlight, FCEPL recorded a profit of Rs647 million during 1Q2021 as against a loss of Rs131 million during 1Q2020 primarily due to higher volumetric sales and increase in gross margins to 19.9%. On unconsolidated basis, ENGRO posted EPS of Rs6.22 for 1Q2021, up 360%YoY due to lower dividend income recorded last year amid postponement of Annual General Meetings of the subsidiary companies due to COVID19 lockdown.

Maple Leaf Cement (MLCF) posted a profit of Rs1.2bn (EPS: Rs1.11) in 3QFY21 compared to a loss of Rs959mn (LPS: Rs0.87). This came in slightly higher than our expectations of Rs1.01/share due to better GP margins. Analysts estimated GP margins at 23% for 3QFY21. However, actual margins were estimated at 26.8% with majority of the deviation coming from lower than expected cost of sales. Net sales of the Company increased by 37%YoY to Rs9.5 billion despite likely decline in cement dispatches by 3%YoY as retention prices increased by a whopping 42% YoY. Finance cost declined by 56%YoY due to retirement of debt, supported by higher EBITDA generation and lower interest rates. Selling and distribution cost increased by 80%YoY due to exports increasing by 150%YoY. Other operating expenses also increased due to improved profitability as it contains WPPF and WWF (linked to profitability). For 9MFY21, The Company posted EPS of Rs2.59 as against LPS of Rs2.48 for the corresponding period last year. On unconsolidated basis, MLCF has posted EPS of Rs4.02 for 3QFY21 as against loss of Rs1.17 for the same period last year due to dividend income received from Maple Leaf Power.

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