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Stock Review

Stock review December 2022
Progress with IMF likely to push sentiments

The market remained jittery during the week ended on August 26, 2022. Political uncertainty was further enhanced after a case was registered against ex-prime minister Imran Khan in the Anti-Terrorism Court. This shadowed positive news regarding foreign exchange inflows and SBP keeping interests rates unchanged. Erosion in Pak rupee value against the dollar continued, with the currency depreciating 2.72% against the greenback over the week, to close at PKR220.66/US$.

The benchmark index lost 679 points, down 1.57%WoW. Participation in the market was also lackluster, with average daily traded volume dropping by 52%WoW to 250 million shares. SBP also conducted T-Bill auction this week mobilizing PKR780 billion as against a target of PKR750 billion.

Other major news flows during the week were: 1) SBP indicated that Pakistan was over-financed by US$4 billion, 2) Qatar’s Sovereign Wealth Fund hinted to invest US$3 billion in Pakistan with Saudi Arabia also indicating to invest US$1 billion, 3) FFC reduced DAP prices by PKR850/bag, 4) SPI rose by 44.58%YoY and 1.83%WoW, and 5) CAD dropped 45%MoM to US$1.2 billion at end July 2022.

The top performing sectors were, Woolen, Glass and Ceramics, while the least favorite sectors were: Miscellaneous and Vanaspati & Allied Industries.

Top performing stocks were: TGL, BNWM, FATIMA, LUCK and SCBPL, while laggards were: PSEL, POML, KTML, PSO and AICL.

Banks and DFI remained the major buyers with net buy of US$4.1 million, followed by Individuals (US$3.8 million). As against this, Insurance Companies emerged as the top seller with net sell of US$5.1 million followed by Mutual Funds (US$3.8 million).

With the IMF tranche (US$1.2 billion) expected to be released by end August, would also unlock inflows from friendly countries, the development may lead to positive sentiment in the market. Pakistan’s currency is also expected to gain footing as the fall in foreign exchange reserves is arrested, courtesy foreign exchange inflows, expected to materialize soon.

Furthermore, the ongoing result season will keep all eyes on the scrips yet to announce results, including heavyweights in the E&P sector. However, with the economy slowing down—an intended outcome of the SBP’s contractionary policies—and the effects of floods across the country, could adversely affect the sentiment.

As super profits of refiners begin to cool off, the recent reemergence of the long-awaited refinery policy has spurred life into the sector’s prospects once again. Keeping in view the aforementioned objectives, various incentives such as attractive pricing along with a pathway for future deregulation is in the works. More than any increases in gross margins either through cracking spreads/duty protections, it is the decontrol of fuel prices that is expected to be the positive trigger going forward. In terms of pricing, ATRL turns out to be the major beneficiary of increase in effective duty protection on MS/HSD due to the company’s retail fuel yields outperforming other refiners in the listed space, with average yields during the outgoing quarter standing at 38%/38% for MS/ HSD, respectively. For the incentives regarding up gradation, CNERGY turns out to be the major beneficiary with the company meeting minimum capacity requirement set for up gradation (100,000/bpd requirement as against 150,000/bpd company capacity and 10-year tax holiday incentive.

CPPA-G released its Energy Purchase Data for the month of July. Power generation has increased in July, with 14,151GWh generated, up 2%MoM as compared to 13,876GWh generated in June, decreasing 10%YoY from 15,679GWh. By source, power generation from Hydel power plants was up 48%MoM and 6%YoY, while nuclear plants picked up the pace after maintenance, generating 59% more than the previous month, while also up 21%YoY. Due to elevated fuel costs for RLNG and coal, the country has reduced generation from these fuels, while generation from RFO was also seen taking a dip (down 39.7%MoM, 45.6%YoY). Average cost of generation for the month dropped by 27% to PKR10.7/kWh owing to the surge in generation from low cost sources (Hydel & Nuclear), while the costlier sources (RLNG, RFO) have experienced lower dependency. HUBC has seen a dip in utilization, with 34% less power purchased compared to June and down 31%YoY. KAPCO’s generation also decreased by 50%MoM and 62%YoY. NCPL’s power generation dipped 39%MoM and 32%YoY, NPL surprisingly registered increased utilization in the month given that it operates on RFO, up 6%MoM and 27%YoY. Going forward, analysts expect the IPPs dependent on fossil fuels to maintain their decreased levels of generation, as dependence on other low-cost fuel sources will remain elevated for August.

Fatima Fertilizer (FATIMA) has posted a 2QCY22 profit after tax of PKR0.2 billion (EPS: PKR0.08), down a sharp 97% both sequentially and as compared to the same period last year SPLY, missing projected EPS of PKR2.03. The variance primarily stems from higher-than-expected taxation and other expenses. This drags down 1HCY22 EPS by 37% YoY to PKR2.79.

Net revenues increased by 30%YoY owing to both higher fertilizer prices and volumes (ex-CAN, which declined by 23%). Topline came in lower than the estimate, likely due to lower retention prices and DAP volumes.

Gross margins increased by 3pptYoY to 48%, higher than anticipated margin of 42%. The increase in gross margin is potentially due to receipt of government subsidy for Fatima Fert (which is presently operational on RLNG).

Distribution expenses surged to PKR1.9 billion, owing to higher product offtake, whereas Admin expenses rose by 28%YoY. Quarterly accounts are awaited for more clarity.

Among other line items: 1) taxation touched PKR10.4 billion (ETR: 98%) significantly higher than the estimated rate of 61% and 2) other expenses surged to PKR2.0 billion, potentially due to exchange losses.

Going forward, recent floods are likely to keep offtake depressed for 3QCY22, before rebounding in 4QCY22. However, gross margins are likely to remain healthy amid recent prices hike across the board and subsidy disbursements.

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