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Stock Review

Stock review December 2022
Index posts 6.65%wow gain and likely to keep momentum

The week ended on July 07, 2023 started on a positive note, with the market going up 2,000 points from the opening bell and closing the day at 43,899 points. Overall, market ended gaining 2,754 points or 6.65%WoW, breaking the 44,000 barrier, up 660 points in intraday trade on July 6 trading session.

The rally was mainly driven by the positive sentiment coming out from the Eid holidays as the country’s authorities reached Staff Level Agreement (SLA) with the International Monetary Fund (MF) on June 30, 2023.

The market capitalisation rose to PKR6,685 billion, up from PKR6,361 billion. In terms of volume, WTL topped the list with 162.97 million, followed by CNERGY with 103.65 million shares.

Foreign exchange reserves held by State Bank of Pakistan (SBP) rose to US$4.5 billion on June 30, from US$4.07 billion on June 23, reflecting an increase of 10%WoW. Total liquid reserves on June 30, 2023 were reported at US$9.7 billion, representing an increase of 4%WoW. Moreover, CPI for June 2023 clocked at 29.40%YoY.

Other notable news for the week include: 1) price of petrol was left unchanged at PKR262 per litre, whereas the price of High Speed Diesel was raised to PKR260.5 (effective beginning July); 2) Pakistan’s trade deficit for June 2023 was reported at US$1.81 billion as compared to US$2.13 billion a month ago; 3) the GoP increased advance income tax rate for commercial importers to 6%, from 5.5%; 4) IMF put Pakistan’s external funds requirement at US$91.5 billion over the next three years; 5) the GoP’s total debt skyrocketed to PKR58.96 trillion in May 2023 due to the increased domestic and external borrowing; 6) SBP reserves further increased by US$ 393 million to US$4.463 billion; 7) Saudi Arabia invested US$0.59 billion under SIFC; 8) Pak Eurobond yields witnessed a significant increase on a MoM basis.

Sector wise, Modarabas/Leasing Companies/Synthetic & Rayon have been worst performers, whilst Refinery remained an anomaly.

Top performing scrips of the week were: NRL, AIRLINK, AVN, UNITY, and INIL, while top laggards were: PGLC, IBFL, GADT, EFUG, and PAKT.

Flow-wise, major net selling was recorded by Banks/DFIs with a net sell of US$5.48 million. Insurance Companies absorbed most of the selling with a net buy of US$5.72 million.

After the bullish end to the previous week, market participants await further clarity regarding the IMF bailout package. The market may observe momentum once the lender concludes its board meeting on July 12, 2024. It is believed that the country’s impending risk of default diminish before the market can establish its direction.

Analysts reiterate stance to follow a cautious approach while picking up scrips and continue to advocate dollar-denominated revenue stream scrips (Tech and E&P sector) to hedge against currency risk or high dividend-yielding scrips.

Corporate briefing by PSO

Pakistan State Oil (PSO) conducted a corporate briefing on 9MFY23 performance and to discuss current and future operational dynamics.

Regarding the rising gas circular debt, the management mentioned that the buildup was solely due to the wellhead segment of gas and will be curtailed due to the recent increase in gas prices in February 2023. However, the LNG segment will continue to pose a problem for the company in the future.

The management commented on plans for PRL and mentioned that US$1.5 billion to US$1.7 billion expansion is under consideration, which would double the refining capacity.

As regards FX losses adjustment mechanism, management explained that PSO is used as a proxy since it has an import share of 70%. The company provides calculations to OGRA (Oil and Gas Regulatory Authority) regarding its FX losses, and these losses are adjusted in the final product prices.

PSO is in constant discussions with the GoP regarding the turnover tax regime and is negotiating a reduction to maintain the viability of the OMC business. To note, current turnover tax for OMCs is 0.5%.

The management explained that negative Inland Freight (IFEM) is a penalty imposed on refineries for supplying lower quality fuel products. In normal circumstances, when IFEM is positive, calculations are based on OMCs’ transportation costs, and the benefit is passed on to consumers in the form of uniform prices.

Petroleum Development Levy (PDL) is collected at import stage by the GoP or collected directly from refineries.

Furnace oil sales of PSO for 9MFY23 were reported at a monthly average of 94,600 tons, as compared to a monthly average of 172,200 tons during the same period last year. The reduction in volumes is primarily due to the company’s heavy reliance on power generation and the current decrease in demand from that sector.

Commenting on recent storage expansions, company mentioned that the cost per metric ton of storage capacity expansion ranges from PKR25,000 to PKR30,00. This cost depends on the size of the storage, with larger storage sizes offering economies of scale.

Jet fuel is a profitable business for the company, and margins are deregulated. Therefore, contracts are negotiated separately with airlines, and margins can vary from client to client.

To note, in 9MFY23 PSO posted profit after tax of PKR10.29 billion (EPS: PKR21.91) as compared to net profit of PKR64.77 billion (EPS: PKR137.96) for 9MFY22. Main reasons for decline was inventory losses due to declining international oil prices, higher borrowing costs and higher effective tax rate.

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