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Stock Review

Stock review December 2022
Index keeps upward trend and likely to continue

Pakistan Stock Exchange benchmark index continued its upward movement during the week ended on December 01, 2023, finally settling at 61,691 points, up 4.4%WoW, reflecting its historic high.

Although the market participation witnessed a dip of 6.7%WoW, investors remained engaged amid the historic ascent, with avg. traded volume of 612.5 million shares.

The impetus, post IMF review success, sustained with a notable increase in foreign inflows into the market, with net FIPI buying hitting its 6-year high of US$35 million in November 2023.

Furthermore, Kuwait and UAE agreements, US$3 billion deposit extension by Saudi Arabia and an expected US$2 billion inflow from the World Bank in FY24 (albeit with policy-level concerns), above target FBR collections at PKR3.48 billion for 5MFY24, bolstered market sentiments.

Furthermore, trade deficit for November 2023 witnessed a 13%MoM decline, settling at US$1.9 billion compared to US$2.2 billion in the preceding month.

Meanwhile, the week concluded with an elevated CPI reading of 29.2%YoY, exacerbated by the recent gas price hike.

On the currency front, PKR appreciated against the US$, ending at 284.97. Additionally, SBP reserves ended US$77 million higher at US$7.3 billion, taking total reserves to US$12.4 billion, amidst high profit repatriation and easing of imports’ control.

Other news for the week were: 1) IHC suspends SRO about tax on banks’ windfall income; 2) Nepra may allow additional PKR3.53/unit in December 2023 bills; 3) T-bills yields declined but rate cut bets remained cool on inflation; 4) Oil prices gained about 2% on expectations of deeper OPEC Plus cuts; 5) IMF team briefed about tax policy reforms; 6) Outflows jumped almost 21 times in October; 7) NAC lowered and 8) TCP floated tenders to buy 110,000 tons of wheat.

Sector-wise flows suggest buying was witnessed across the board as every sector, except REITs (unchanged) closed in the green.

Emerging as the top performers during the week were Close-end mutual funds, Woollen, Tobacco and Automobile assemblers.

Flow-wise, Banks/DFI remained major buyers, netting US$14.96 million, while major selling by Other Organisation amounted to US$1.49 million.

Top performing scrips during the week were: DGKC, ATLH, MTL, PSEL, and FCEPL, while top laggards included, PGLC, ANL, GHGL, MARI, and BNWM.

Volume leaders were: KOSM, WTL, BOP, MLCF and CNERGY.

Going forward, brokerage houses maintain an optimistic outlook on the market and we believe the present rally to continue, albeit with episodes of profit-taking. Their stance stems from a positive conclusion to the IMF’s review amidst improving macro indicators and fading uncertainty over the upcoming elections, even though the country faces tough economic decisions in the near future, as outlined by the World Bank.

Overall, they advise the clients to focus on fundamentals, with exposure in high dividend yielding stocks to effectively navigate the inflationary environment.

Intermarket Securities has revised its OMC Universe estimates, while maintaining a Buy rating. The government has recently notified an increase in white oil margins by c.30% to PKR7.82/litre. This coupled with an expected rebound in demand, should lift profitability. The expected ease in policy rate should further support PSO’s earnings given its elevated short term borrowings.

The government has implemented a hike in gas prices by up to 193% in order to restrict gas circular debt at its current level. This step should improve PSO’s cash position, consequently increasing payout capability. PSO remains top pick in the sector.

The brokerage house maintains a Buy stance on both PSO and APL. Estimates revision is based on (1) higher-than-expected increase in white oil margins, 2) expected rebound in white oil demand amid economic recovery, and 3) Government’s effort to keep circular debt restricted at current levels. Resultantly, PSO and APL revised EPS/DPS for FY24 are PKR106.14/15.00 and PKR109.52/36.00.

The federal government recently approved upward revision in white oil margins to PKR7.82/liter for FY24, higher than market expectations.

OMC margin revision is linked to inflation, however, the brokerage house believes due to significant increase in OMC margins since last two years, the companies will receive 75% of CPI in FY25f and thereon, full impact of CPI will be received.

The higher than expected increase in OMC margins should lift GMs.

OMC volumes in FY23 remained under pressure due to deteriorating macro-economic situation coupled with a surge in average MS and HSD prices by 65% and 75%, respectively.

The brokerage house expects overall sector demand to remain flat at 16.8 million tons in FY24 due to decline in furnace oil sales, whereas MS and HSD demand is expected to rebound on the back of expected improvement in economic activity coupled with reduction in POL prices in the year.

The government’s efforts to curb HSD smuggling from Iran should also result in improved HSD demand.

MS and HSD demand in FY24/FY25 is expected to rise to at 7.6 million tons and 6.7 million tons, with a YoY change of 3% and 6%, respectively.

The government has recently increased gas prices by up to 193% and a further 10% hike in average gas price is expected in January 2024 on the IMF’s push. Increase in gas prices is expected to stop further circular debt build-up. Analysts have incorporated a 10% build-up in their estimates.

The hike in gas prices should improve PSO’s cash earnings and consequently its payout capacity.

Analysts estimate PSO’s DPS at PKR15/PKR20 for FY24/FY25.

To illustrate, PSO maintained a payout ratio of above 50% (pre-circular debt), and if the same trend repeats, PSO’s payout can hover around PKR50/share for FY24 and FY25.

The stock has gained 57% since the IMF SBA, 13.0ppt above the KSE-100’s performance and currently trades at a June 2024 P/E of 1.6x compared to KSE-100 P/E of 3.9x.

The brokerage houses believes the market is still highly underpricing the scrip due to circular debt concerns where the reduced build-up will be a major driver for PSO.

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