Negative sentiments prevail; value stocks may shine
During the week ended on February 25, 2022, negative sentiments engulfed the market following the escalation in Russia -Ukraine conflict where President Putin gave green signal to invade Ukraine. Following this news, the benchmark KSE-100 index slipped 3% alone on Thursday, plunging the index down to 43,984 points by the end of week. During the week, Brent Oil flirted with US$100/bbl level, while other global commodities such as Natural Gas/Wheat/Coal rallied 24/16/4% on supply concerns. The average daily trading volume increased 20%WoW to 228.5 million shares as investors made their way to dispose off their holdings.
Other major news flows during the week were: 1) Prime Minister Imran Khan meeting with President Putin, 2) CAD rising to US$2.56 billion, out of which US$1.56 billion were financed, 3) T-Bill yields rising to 23bps, 4) IFTC approving US$1.2 billion financing facility for Pakistan, 5) Pakistan meeting all FATF requirements, 6) GoP establishing Tech startup fund in Pakistan, and 7) January 2022 fertilizer offtakes remaining flat MoM basis.
The top performing sectors included: Leasing Companies, Close-end Mutual Funds, REIT, Tobacco and Jute, while the least favorite sectors during the week were: Refinery, Textile Weaving, Technology & Communication, Engineering, and Woollen.
Stock wise, top performers were: NCL, HMB, MTL, PAKT and UBL, while laggards were: TRG, ANL, YOUW, ATRL and JSCL. Volume leaders for the week were: WTL, TELE, HUMNL, BOP and KEL.
Flow-wise, Mutual funds emerged the net sellers, offloading US$15.2 million followed by foreigners (US$3.2 million) and other organizations (US$1.2 million), while Companies (US$9.5 million), Individuals (US$4.3 million) and Banks (US$4.0 million) remained on the buying side.
The rally in global commodities brings its adverse impact to Pakistan, putting further pressures on local currency amidst rising import bill. For every US$5 change in Oil prices, Pakistan’s CAD rises by US$1.2 billion. Sectors such as Cement may remain under pressure in near term due to escalation in energy prices, while supply chain disruptions for metals and semi-conductors may hinder the ability of Automobile sector to supply their products on time. On the flipside, analysts expect MUGHAL in steel sector to actually benefit from the exports of Copper at a higher prevailing price. In terms of valuations, market remains extremely attractive, providing a huge opportunity to take exposure in value stocks.
The gas tariffs (both feed and fuel) have remained at the current levels since CY19 – courtesy the Covid-19 pandemic. Now with much of the stimulus rolled back, analysts expect a much more frequent revision in the tariffs for fertilizer industry as a whole. They expect EFERT to actually benefit from this development as pricing for 70% of its gas in old plant depends on international oil prices under petroleum policy 2012. For every 10% hike in feed gas tariff, EFERT is required to increase the price of urea by PKR27/bag while FFC and FFBL would be required to increase the price by PKR36/bag and PKR58/bag, respectively. Similarly, a hike of 10% on fuel gas tariff has an impact of PkR26/25/45/bag on EFERT (PKR26/bag), FFC (PKR25/bag) and FFBL (PKR45/bag). The fertilizer players believe that WACOG bill might be the first step in unlocking the export potential of the local fertilizer industry as well. Pakistan currently has a urea production capacity of 7 million tons after debottlenecking out of which the sustainable demand is around 6.3 million tons. This leaves the industry with 700,000 tons excess capacity which can be used to export and achieve additional export proceeds of US$567 million.
Analysts believe that an immediate shift in gas tariff for fertilizer plants towards WACOG remains unlikely in near and medium term as they expect the hikes to be in a phased manner. To depict the overall scenario in terms of earnings, they have conducted sensitivity analysis at different incremental hikes in tariffs along with corresponding increases in the price of urea. EFERT by far remains the major beneficiary of this event, providing a dividend yield of 17%, as opposed to 11% on 10-year PIB.
GoP has finally been able to pass amendments to Oil and Gas Regulatory Authority (OGRA) Ordinance, 2002, including the cost of RLNG in the pricing mix and providing OGRA the authority to notify prices in case government fails to advise in the stipulated timeframe. The revision in gas pricing mechanism was a long standing demand of the IMF and will have significant implications for inflation and sectors like Fertilizers, Oil & Gas explorations and Oil Marketing. From macroeconomic vantage, a revision of 15% in gas prices will increase inflation by 9bps. However, a phased revision in prices can decrease the flow of gas related circular debt buildup which has doubled to PKR650 billion in last three years. Among the various sectors, major impact will be witnessed by Fertilizer where a price increase will be required by EFERT/FFC to pass on the increase in feed gas prices of 10%, while players in Glass, Chemical and Cement sectors will also be at the receiving end of price increase.
National Bank of Pakistan (NBP) in a notice sent to PSX disclosed that it reached an agreement with the US regulators of NBP’s New York branch with fines of US$55 million arising due to historical compliance weakness and delays in making compliance related enhancements. However, there were no findings of improper transactions or willful conduct as per the notice.
Latest press release by the US Department of Financial Services stated, “The National Bank of Pakistan allowed serious compliance deficiencies in its New York branch to persist for years despite repeated regulatory warnings. Foreign banks that enjoy the privilege of operating in New York have an obligation to maintain effective controls, and the Department will continue to promote financial transparency and take action to protect the global financial system when those obligations are not met”.
Following examinations conducted by the Department and the Federal Reserve Bank of New York in 2014 and 2015, NBP’s New York branch was found to have inadequate Bank Secrecy/Anti-money compliance programs. As a result, enforcement action against NBP was taken in 2016 where NBP agreed to improve compliance deficiencies which later on it failed to do so. As a result, the Bank will now be subject to US$35 million penalty in addition to certain deliverables for the improvement in its compliance program.
In addition to the fine by the US Department of Financial Services, Federal Reserve Board also imposed US$20.4 million penalty against NBP on anti-money laundering violations totaling penalty to US$55 million which translates into Rs9.7 billion (Rs4.6/share). In 9M2021, the bank has so far reported earnings of Rs25 billion.
To recall, HBL also faced a similar fine in 2017 where the US regulators initially imposed a penalty of US$630 million on HBL on non-compliance of Anti-money laundering laws, which was later revised down to US$225 million.
NBP is also faced with a pending pension liability case with potential liabilities of over Rs70 billion under which the Company had filed a review petition in Supreme Court of Pakistan where further judgment is still awaited. The Bank due to the aforementioned reason has skipped dividends since 2017, analysts believe.