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Stock Review

Stock review December 2022
Index remains range bound amid uneasiness ahead

The benchmark index of Pakistan Stock Exchange (PSX) remained range bound during the week ended on 25th June 2021. The investors remained jittery regarding the FATF Plenary meeting which took place from 21st to 25th of this month. Added to this, was uneasiness regarding the ongoing talks with the IMF. The week closed at 47,603 points, down 1.3%WoW.

Automobile Assemblers turned out to be among the outperformers, increasing by 0.28%WoW, led by PSMC as the stock rallied in anticipation of tax incentives offered to cars under 850cc being extended to cars under 1000cc as well. Cable and Electrical Goods sector was also among the outperformers, increasing by 1.19%WoW as ongoing summer season is expected to uplift sales of the sector.

Food and Personal Care products sector increased by 3.07%WoW as government took back the proposal to increase GST on dairy products. Cement sector declined by 3.56%WoW as coal prices remained on upward trajectory, eroding margins.

Major news flow during the week included: 1) Prime Minister Imran Khan categorically stating that Pakistan would ‘absolutely not’ allow any bases and use of its territory for any sort of action inside Afghanistan, 2) Saudi Arabia agreeing to restart oil aid to Pakistan worth at least US$1.5 billion annually in July this year, 3) Pakistan’s trade deficit during the first 11 months (July-May) of the current fiscal year 2020-21 reaching US$27.463 billion as compared to US$21.065 billion for the corresponding period last year, 4) Sui Southern Gas Company (SSGC) announcing that gas supply to non-export industries has been stopped, followed by 50% cut in supply to captive power plants, and 5) Finance Minister saying that IMF has shown flexibility on demands.

To volume leaders included: SILK, WTL, BYCO, HUMNL and TPL. Individuals remained the major buyers with a net buy of US$13.7 million followed by Banks/DFI (net buy US$12.9 million), while Insurance companies emerged net seller with US$12.8 million followed by Mutual Funds (net sell of US$7.35 million).

Ongoing discussions with the IMF regarding continuation of program and approval of Budget FY22 will continue to create noise for the market while FATF maintaining Pakistan on grey list will not have any significant bearing on the performance. Budget FY22 still remains to be passed from parliament and news items regarding Budget will continue to affect sector specific performance. Investors’ focus will also shift towards upcoming result season where analysts expect margin suppression for cyclical plays on the back of increased raw material costs. However, surprises could arise from players maintaining large low cost shares.

In a recent development, MSCI has initiated consultation process to migrate Pakistan from Emerging Markets (EM) to Frontier Markets (FM), targeting November 2021 for potential reclassification with the result likely to be announced on 7th September 2021. To highlight, Pakistan has been hanging by a thread in the MSCI EM index since November 2018 due to index continuity rules (being classified as EM in May 2017) while engrossing a weight of 0.02% as per last review as against 0.1% when it was initially upgraded to EM. Proposed reclassification of Pakistan to FM from EM would seemingly fetch an indicative weight of 2.3% in FM (5.8% in MSCI FM-100) as per MSCI, which is significantly lower than 9% when the country exited FM back in 2017. Moreover, after being downgraded from MSCI EM to standalone index, Argentina is also a potential contender for inclusion in MSCI FM which could further reduce Pakistan’s weight in the index. Assets under management of frontier funds have tumbled to US$4 billion as compared to US$15 billion in 2014 as FM markets failed to compensate for added risks present in these markets. Even though Pakistan’s classification in FM is unlikely to bring material foreign flows in the market expect potential fresh allocation to FM funds unlocking increased inflows going forward.

According to the data released by PBS, textile exports for the month of May’21 registered a growth of 41.1%YoY to US$1.06 billion, gaining from low base effect, while compared to May’20 exports declined 10.7%. On a month on month basis, exports diminished for the second consecutive month, down 20.5% in May’21 where value and non-value added exports recorded a decline of 20.0% and 22.3% respectively, as seen in other regional countries. International cotton prices have remained flat in May’21 though CYTD/FYTD increase stands at 12.12/38.5%. Going forward, analysts expect cotton prices to surge on stronger demand expectation outpacing supply growth. Textile sector has turned out of favor in recent months, underperforming KSE-100 index.

Analysts expect earnings to remain robust in the near term as older cotton inventories benefits local manufacturers in sailing through the recent bull cycle in commodities, along with stronger offtakes as global economies reach pre-COVID levels.

AKD Securities revisited its investment case on Engro Fertilizers (EFERT), incorporating: 1) Urea price of Rs1,675 per bag for CY21 onwards, 2) non-concessionary gas rates from 3QCY21 onwards and, 3) unwinding of discount on GIDC provision over CY21-24.To recall, EFERT recorded GIDC re-measurement impact of Rs2.12 billion in 4QCY20, as per IFRS 9, which is expected to be unwound over CY21-24. On pricing front, EFERT announced urea prices hike of Rs50/bag from 11th January 2021, taking the cumulative hike to Rs75/bag since August 2021. Relaxation on disallowing 10% expense on sales to unregistered dealers and, price hike sustaining despite build up in inventory, has led us to incorporate urea price hike. Despite higher gas price incorporated, healthy EBITDA generation over investment horizon ensures EFERT’s ability to maintain dividend yield.

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