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Stock Review

Stock Review
Index regains momentum, covid 4th wave may worry sentiment

Pakistan Stock Exchange (PSX) remained range bound during the week ended 13th August 2021 and closed at 47,170 points, down 0.67%WoW. The geopolitical uncertainty kept the investors at bay, evident from 37.8%WoW decline in average daily turnover to 306 million shares.

Key data points released during the week included: 1) trade deficit for July 2021 rising to US$3.1 billion, up 85.5%YoY on increase in global crude oil price and 2) remittances remaining stable at US$2.71 billion. The auto numbers released showed PSMC/INDU recording highest ever monthly sales with 15,181/6,715 units, on the back of budgetary measures.

Other major headlines during the week included: 1) the World Bank irked by government’s ‘failure’ to honour commitment to increase electricity tariff, 2) GoP seeks Nepra nod to phase out power subsidy plan, 3) Lucky gets permission to set up assembly plant for Samsung mobile devices, 4) Chinese sponsor’s rejection to Pakistan’s request for review of Rate of Return (RoR) on power sector projects and, 5) decline in SBP reserves by US$220 million on debt servicing. On economic front, ECC approved remittances loyalty program in the outgoing week. Meanwhile, US$2.77 billion are expected to flow in SBP’s accounts on 23rd August 2021. However, persistent fears on geopolitical developments amid a lack of triggers, where the market has already priced in economic revival kept the investors at bay, where result announcements resulted in sporadic price performances.

Top performers of the week were: FCEPL, PSEL, INDU, TRG and MEBL. Meanwhile laggards included: STJT, HASCOL, GATI, SFL and AKBL.

Flow wise, Foreigners continued to be net buyers with an inflow of US$3.9 million, absorbing the sell-off by Insurance companies (US$6.6 million), and Individuals (US$3.0 million).

The market performance is likely to remain range-bound given deteriorating situation in Afghanistan, and uncertainty surrounding IMF review, likely to commence from September 2021. A keen eye should be kept on upcoming results for any surprise-driven move in individual stocks. To this end, major results include, KAPCO, FCEPL and LOTCHEM. We continue to advocate building positions in thematic plays such as in Cements, Steel, and Construction-Allied, and Textiles (on currency devaluation).

Pakistan State Oil (PSO) is expected to post profit after tax of Rs24.0 billion (EPS: Rs51.1) for FY21as against LAT of Rs6.5 billion for FY20 on the back of heavy inventory losses for FY20. For 4QFY21, net profit is expected to rise to Rs5.7 billion (EPS: Rs12.2) as against LAT of Rs9.5 billion for 4QFY20 while on QoQ basis, profitability is expected to decline by 34% as high inventory gains during last quarter kept the base high. PSO’s overall market share for 4QFY21 increased to 46.3%, from 44.5% for 4QFY20 where major increase was witnessed in furnace oil with PSO’s market share standing at 50% against 15.4% for 4QFY20 while an increase in retail fuel volume of 15.4%YoY against 19%YoY of the industry resulted in retail fuel market share declining to 45% for 4QFY21 against 47% for 4QFY20. Despite decline in interest rates, analysts expect PSO’s finance cost to increase on QoQ basis as furnace oil demand from power sector increased during the quarter, resulting in increased need for short term borrowings. PSO remains top pick of the analysts where near term developments include clearance of circular debt and shift in profile of cash flows due to increased share of retail fuels while focus on improving storage infrastructure will result in company sustaining the recently gained market share, moving forward.

COVID fourth wave with positivity ratio crossing 9% mark could dampen investor sentiments in the near term (Sindh authorities is likely to sit over the weekend to consider COVID situation in the province and associated measures. The Federal Government has also imposed restrictions on certain activities). Result season is likely to pick pace in the upcoming few weeks where surprises cannot be ruled out driving individual stock performance (Major results next week are, LUCK, EPCL, MCB, Attock Group companies, MEBL, and MLCF). Analysts continue to advocate building positions in thematic plays such as in Cements, Steel, and Construction-Allied, and Textiles on currency devaluation.

Cement sales posted a muted performance in July 2021, with local sales witnessing a decline of 13%YoY and 26%MoM respectively as seasonality took a toll. The slowdown induced by Eid was further exacerbated by widespread rain across North particularly while exports went down by 28%YoY. Region wise, South fared slightly better with an increase of 7%YoY partially due to low base, while North witnessed a decline of 15%YoY and 25%QoQ. Coal prices continued to cause trouble, increasing by 49% CYTD. Local manufacturers have increased prices up to Rs55/bag during last two months while further price increases cannot be ruled out in order to fully pass on the increase in cost. Even though sector has remained under pressure recently due to increasing coal prices, analysts expect the sector to come back into limelight post result season and particularly if coal prices recede.

AKD Cement universe is expected to post profit after tax of Rs6.8 billion for 4QFY21 against loss after tax of Rs1.5 billion reported in 4QFY20. Sequentially, profitability is expected to decline by 49%QoQ as soaring coal prices denting the margins. For FY21, PAT is expected to rise to Rs30.3 billion as against loss after tax of Rs4.5 billion as fortunes of the industry completely changed after prices improved post conclusion of price competition while demand was also stimulated by various incentives provided to construction sector. Usage of pet coke for its third line is expected to partially shield MLCF from the impact of soaring coal prices as company’s gross margins are only expected to decline by 2ppts against 6ppts of the industry. LUCK and DGKC are expected to witness biggest drop in profitability sequentially due to high base. Analysts continue to like MLCF and LUCK with the former being one of the lowest cost producers implying lower sensitivity to retail price variations, while latter’s cost efficiencies coupled with diversified investments make it a safe play.

Board of Directors meeting of Engro Polymer & Chemicals (EPCL) is scheduled for 10th of this month and also to announce its financial result. Analysts expect EPCL to post 2QCY21 profit after tax of Rs5.17 billion (EPS: Rs5.70), as compared to Rs13 million (EPS: Rs0.01) for the same period last year. This will take 1HCY21 net profit to Rs9.32 billion (EPS: Rs10.25), from Rs206 million (EPS: Rs0.23) for 1HCY20. To recall, EPCL’s PVC production and sales took a hit in 1HCY20 due to plant disruption and COVID-19 lockdown. For 2QCY21 only, the earnings are also expected to be up sequentially 25% courtesy 10%QoQ increase in revenues amid 7ppt QoQ increase in gross margins expected (19% QoQ increase in PVC ethylene margins with 2QCY21 average price of US$1,004/ton). With PVC line III operational since March 2021 taking quarterly capacity to 74,000 tons, analysts have assumed PVC sales at 60,000 ton for 2QCY21, where VCM debottlenecking in next quarter would enable EPCL to further unlock its PVC production capacity.

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