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Stock Review

Stock review December 2022
Index edges up, likely to shine under election glare

The week unfolded amidst political uncertainties and speculations of election delays, tempering market optimism; however, positive macroeconomic developments provided a counter balance. IMF’s approval of the second tranche of US$700 million on January 11, 2024, injected momentum, drove the KSE100 index to close the week at 64,638 points (up 0.19%WoW) after an initial dip to 64,237 on the first day.

While the approval of the IMF’s second tranche was anticipated, the surprise was the absence of any comments on politics or elections.

Additionally, a restrained trade deficit of US$1.7 billion in December 2023 and a 13% annual increase in remittances to US$2.38 billion provide hope for another month of current account surplus, potentially reducing the 1HFY24 CAD to below US$1.0 billion (5MFY24 CAD: US$1.16 billion).

Furthermore, KIBOR rates dropped to below 21% (from a peak of 24.5%) after falling yields in the last T-bill auction. IMF tranche approval along with a build-up in foreign exchange reserves (up by US$1.2 billion last month) has led to a 0.37%WoW appreciation of the PKR against the greenback.

On the sectoral front, E&P remained in the limelight during the week due to the sale of the Reko Diq stake to KSA, and amendments in petroleum policy have kept interest alive in the sector.

Market jitter led to a decline in investors’ interests, resulting in average daily traded volumes to decline by 18.5%WoW to 560 million shares.

Other major news flows during the week included 1) Pakistan asks UAE for US$2 billion deposit rollover, 2) Banks’ deposits increase by 23%YoY to PKR27.7 trillion at end December, 3) Caretaker speed up process PIA sell-off and outsourcing of airports:, 4) Car sales rise 5%MoM, but fall 65%YoY in November, 5) Equities get record US$65 million inflows in December.

Transport, Automobile parts, and Synthetic & Rayon companies were amongst the top performers, while close-end Mutual Funds, Leather & tanneries, and Textile weaving were amongst the worst performers.

Flow-wise, major net selling was recorded by Banks with a net sell of US$4.9 million. Companies absorbed most of the selling with a net buy of US$6.4 million.

Top performing scrips during the week were: PSMC, IBFL, PIBTL, INDU, and MARI, while top laggards included: SML, LOTCHEM, HGFA, FFBL, CNYERGY.

Looking ahead, the upcoming election will continue to be in the limelight, and clarity on political uncertainties is expected to drive the market upward.

Conversely, any election delay may cause short-term market jitters, it is anticipated to eventually sustain its bullish momentum.

Brokers advise clients to view any market fluctuations as opportunities to accumulate stocks of fundamentally strong companies, particularly those with high dividend yields.

Overall, the energy and cement sectors are expected to remain in focus, given the anticipated amendments in the E&P policy and the decline in international coal prices to a 5-month low to US$96/ton.

In a recent development, two power producers, namely HUBC and KAPCO have announced expansion plans. HUBC is interested in increasing its stake in the Sindh Engro Coal Mining Company (SECMC). while KAPCO has submitted a bid to acquire a 49.5MW wind power plant.

HUBC’s board has approved plans to increase the company’s shareholding in Sindh Engro Coal Mining Company (SECMC). The company currently holds an 8% stake and is interested in acquiring another 11.9% stake. If the acquisition is successful, HUBC share in SECMC will increase to cumulative 20%, making it the 2nd largest shareholder after the Government of Sindh (54.7%).

The mine is currently operating at a capacity of 7.6MTPA, meeting coal requirements of Engro Powergen Thar, Thar Energy Limited and ThalNova Thar Power Limited. The 3rd phase of the mine is expected to be completed by 2024 which will enhance the total capacity to 11.8 MTPA. According to estimates, acquisition of ENGRO’s stake will require an investment of PKR6.4 billion based on a brokerage house estimate, current SECMEC equity value is PKR54 billionn, and will increase HUBC’s earnings by PKR0.74/share. HUBC has actively pursued expansion opportunities as part of its strategy to diversify its business. This commitment is evident in its ventures to expand into the Oil and Gas sector, and ongoing discussions with the Chinese giant BYD to venture into the Electric Vehicle sector.

KAPCO has submitted a bid to acquire an equity stake in Tenaga Generasi Limited, a subsidiary of Dawood Lawrancepur Limited. Tenaga Generasi Limited owns a 49.5 MW wind power plant in Mirpur Sakro, Sindh, which commenced commercial operations in October 2016 under a 20-year Power Purchase Agreement (PPA) valid until October 2036. Dawood Lawrancepur owns 75% stake in Tenaga Generasi.

To note, KAPCO’s own PPA expired in October 2022, due to which the company is not generating revenue. The company has applied for renewal of its PPA. However, the request is still pending at NEPRA’s end for more than a year.

If successful, this acquisition could extend KAPCO’s operational life until 2036, despite the expiration of its existing PPA. Analysts’ estimates suggest that the current equity value of Tenaga Generasi Limited, based on its upfront tariff, is approximately PKR 10.1 billion (US$35.91 million). This strategic move is anticipated to boost KAPCO’s profit after tax by PKR 1,962 million and PKR 1,982 million in fiscal years 2025 and 2026, respectively.

Pakistan recorded its highest-ever monthly IT exports of US$303 million, up 17%MoM and 23%YoY in December 2023. IT exports in Dec 2023 are also higher than last 12-month average of US$222 million.

Jump in the IT exports is due to 1) relaxation in the permissible retention limit by the State Bank of Pakistan (SBP), increasing it from 35% to 50% in the Exporters’ Specialised Foreign Currency Accounts, and 2) stable PKR currency which encouraged IT companies to repatriate their foreign income and deposit it in local accounts.

The reported IT export number indicates the amount remitted back to Pakistan by technology companies. As per the IT Minister, IT companies have parked an estimated US$1-2 billion outside of Pakistan.

During first half of current financial year IT exports were reported at US$1.5 billion, up 9%YoY compared to US$1.3 billion recorded in 1HFY23.

Net IT exports also recorded an increase of 16%MoM and 13%YoY to US$263mn in December 2023.

Although there has been a growth in gross IT exports during 1HFY24, the government’s ambitious target of reaching US$5 billion seems challenging. It is anticipate that gross IT exports for FY24 will likely fall within the range of US$3-4bn compared to US$2.6 billion recorded last year.

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