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Stock Review

Stock review December 2022
Forex, rupee-dollar parity progress likely to help index

Pakistan Stock Exchange witnessed bullish sentiments during the first three trading sessions. However, profit-taking by investors resulted in market closing in red during the last two sessions. Still the benchmark index managed to gain 861 points during the week ended on July 15, 2023 and close at 45,068 points, up 1.9%WoW.

Market participation remained healthy with daily traded volume averaging at 352 million shares as compared to an average of 265 million shares during the earlier week up 33%WoW.

The market performance was characterized by the IMF’s executive board’s approval of the SBA (Stand-By Arrangement) and the inflow of US$1.2 billion. Additional support was provided by influx of US$2.0 billion from Saudi Arabia and US$1.0 billion from United Arab Emirates. The inflows would reflect in the next week’s reserve numbers held by State Bank of Pakistan (SBP) which are anticipated to cross US$8 billion mark after 9 months. As of July 07, SBP held reserves were reported at US$4.5 billion. As a result PKR gained 0.11%WoW to close at PKR277.6/ US$ parity.

Other major news flows during the week included: 1) steps taken to broaden tax base, 2) July-May LSMI output declined 9.87%YoY, 3) FY23 remittances fall 13.6%YoY to US$27 billion, 4) car sales plunged 82% in June and 59% in the last financial year, 5) GoP announced to mobilize additional PKR3.2 trillion from power consumers and 6) during Jan-May period 4.88 million mobile phones manufactured in country.

Chemical, Automobile Parts & Accessories, and Leather & Tanneries emerged the top performers. Close-End Mutual Fund, Technology & Communication, and Textile Spinning were amongst the worst performers.

Flow-wise, major net selling was recorded by Mutual Funds with a net sell of US$5.97 million. Individual absorbed most of the selling with a net buy of US$3.93mn.

Top performing scrips were: during the week were: UNITY, HCAR, COLG, PSMC, and AIRLINK, while laggards included: GADT, UPFL, SHEL, PGLC, and TRG.

Stock market is expected to remain positive, owing to growing foreign exchange reserves and consequent improvements in the PKR/ US$ parity.

At present market offers attractive valuation. However, upcoming results may exert pressure on bullish sentiment due to the retrospective imposition of the super tax.

Investors are advised to follow a cautious approach in the selection of scrips and focus on stocks with dollar-denominated revenue streams (Tech and E&Ps) and companies with healthy dividend-yields.

Fauji Foods (FFL) revenue grew to PKR 9.8 billion with 10%YoY growth in volumes. Furthermore, gross margins improved to 12.5%. Other income was up 55%YoY and finance cost was down 41%YoY which led to a drop in loss before taxation by 98%YoY. Taxation resulted in loss after tax and loss per share to decline by 88%YoY to PKR147 million and PKR 0.07, respectively. The Company did not announce any dividend for the period.

FFL is following strategy has been to enhance market penetration of value added products (having share of 85%) whose volumes remain unaffected by price increases. Thus, distribution towns were reduced to 91 from 269. However, outlets grew 83%YoY to 33,000. Nurpur milk has been the fastest growing brand at 51%YoY in UHT milk segment in the country. Despite in tea creamer segment, Dostea has managed to post decline at a slower pace than its competitors.

FFL has a state-of-the-art “slice on slice cheese” plant and has partnerships with major fast food chains, also is the sole supplier of cheese in Pakistan to McDonalds and KFC.

Due to efficient cash recovery strategy cash operating cycle has dropped to 45 days (2QCY23) from 119 days in 4QCY21, despite some built up in inventories through advance procurement as milk prices were expected to rise in 2HCY23. P

FFL Paid off PKR8 billion debt in March 2023, after which the company has become debt free. Running finance facility is not being used currently as the working capital has been sufficient for the operations of the Company.

Cost optimization has been driven by continued focus on cost efficiencies backed by twin sustainability projects of 1 MW solar and bio mass which went into production in Q1 and are expected to positively impact energy cost in CY23. These initiatives along with price increases and other planned cost optimizations will continue to yield growth in gross margins.

Key challenges facing the company include rise in inflation, PKR depreciation and supply chain disruptions. Nevertheless, the investment in value accretive brands and distribution infrastructure shall continue to fuel future growth. Unhindered by debt, margins and EBIDTA growth from expanding portfolio will enable the business to overcome the expected inflation.

Fauji Fertilizer Bin Qasim witnessed slippage in 2QCY23 EPS recorded at PKR 0.37, due to profit after tax declining to PKR 0.5 billion, down 73% over the same period last year.

During 2QCY23, sales revenue increased by 12% mainly due to higher Urea prices and recovery in DAP off-take. Whereas, gross margin improved by 5pptsQoQ.  However, the margins remained under pressure due to currency depreciation and carryover of inventory. In addition, distribution expense increased significantly along with hike in finance cost to PKR2.8 billion, up 14% on a sequential basis.

Furthermore, the Company received 6,489 MMSCF gas during 1HCY23 that was down 33% over the same period last year, resulting in lower supplies.

Last nail in the coffin, the effective tax rate during 2QCY23 spiked to 76% due to super tax.

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