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Stock Review

Stock review December 2022
Pakistan Stock Exchange posts lackluster movement

The week ended on March 08, 2024 started on a positive note, with the index gaining 1% on the opening day. However, as the week progressed, profit taking activities ensued, losing some of the initial gains. Nonetheless, by the week’s end, the benchmark index managed to maintain an upward momentum, closing at 65,326 points with a gain of 468 points or 0.7%WoW.

With new Prime Minister taking office and issuing immediate directives focusing on engaging with the IMF and addressing privatization matters set an initial positive impetus. With new setup in place the IMF started rolling out new recommendations and is poised to unveil more with the appointment of the finance minister.

Government’s next major task will be to smoothly navigate the second review of the SBA. IMF’ team is scheduled to visit following the formation of the new cabinet, as SBA program is set to expire in April 2024.

The recent decline in cut-off yields for 3-month papers in last T-bill auction hints volatility, suggesting that some players anticipate a rate cut in the upcoming Monetary Policy Committee meeting on March 18.

Remittances for February totaled US$2.25 billion, up 13%YoY and with trade deficit of US$1.7 billion for the month.

Market participation remained subdued, with the daily traded volume averaging 412 million shares as compared to 418 million shares in the earlier week, down 1.6%WoW.

On the currency front, rupee held its ground against the greenback, closing at PkR279.04/US$.

Other major news flows during the week included; 1) Jul-Jan debt during first seven months of the current financial year rose by 6 percent, 2) SBP injected PKR8 trillion to ease liquidity crunch, 3) Bank deposits surged nearly 21%YoY in February on record-high interest rates and remittances, 4) cement dispatches in February fall 19% to 3.26 million tons, and 5) Textile exports hit US$1.41 billion in February, up 20%YoY.

Sector-wise, Transport, Refinery, and Inv. Banks/ Securities cos. were amongst the top performers, while Tobacco, Modarabas, and Textile weaving were amongst the worst performers.

Major net selling was recorded by Companies with a net sell of US$6.8 million. Foreigners absorbed most of the selling with a net buy of US$6.3 million.

Top performing scrips of the week were: NRL, DAWH, CNERGY, PAEL and PSX, while the laggards included: SML, FCEPL, PAKT, MEBL and SHFA.

The upcoming MPC meeting will remain in the limelight. With prevailing consensus of the status quo, the market is likely to remain largely unaffected as this expectation is already priced in. However, if there is any surprise cut, it could unlock funds towards debt-heavy cyclical sectors.

The imminent announcement of the federal cabinet in the coming week holds significance, with progress on the IMF’s SBA third tranche as a near-term focal point and a potential positive in sight.

During February 2024, Cement offtake was reported at 3.26 million tons, a decline of 5%MoM and 19%YoY. This decline is attributed to February being a shorter month because daily domestic dispatches rose by 3%MoM.

The annualized decline in dispatches was mainly due to a slowdown in construction activity amid election activities. Export from North increased by 95%MoM mainly due to the closure of Pak-Afghan border for 11 days during January. Export from South declined 24%MoM due to higher freight premiums due to the Red Sea crisis. Overall, 8MFY24 total sales increased by 3%YoY to 30.55 million tons, primarily driven by heightened annual sales in the initial two months of FY24.

Despite 2QFY24 total dispatches being down by 1.2%YoY, gross margin expansions amid higher retention prices pushed profitability higher, with AKD universe profitability increasing by 8%QoQ and 26%YoY (excluding DGKC 10%QoQ and 28%YoY).

With interest rates at their record highs and post-expansion profitability, companies have focused on paying back their debt, where AKD cement universe (excluding FCCL) total debt has reduced by 24%YoY as of December 2023 accounts (FCCL debt was up 26%YoY amid dual expansions).

The recent decline in international coal prices, dropping to US$100/ton following reduced winter demand from Europe, presents a favorable development for the cement industry. At the current international price, the post-axel load landed cost calculates to PKR38,500 and PKR44,700 per ton in the South and North regions, respectively.

Consequently, South plants have predominantly transitioned to fully utilizing international coal. However, in the North, companies continue to rely heavily on local coal.

The utilization of Afghan coal is diminishing due to escalating prices, with the discount observed in FY23 (averaging PKR12,000/ton or 23% below international prices), transitioning to a premium of up to PKR8,000/ton presently, with Afghan coal priced between PKR53,000/ton. Subsequently, only companies with previously procured inventory are utilizing Afghan coal. Additionally, the gap between local and international coal prices has narrowed, with local coal prices rising to PKR40,000/ton. If international coal prices decline to below US$90/ton, the usage of international coal in the North is expected to rise. However, for the full year, international prices are anticipated to average at US$105/ton, while local coal prices are expected to hover between PKR38,000 to PKR42,000/ton.

Cement prices are still hovering around PKR1,234/bag, up 11%YoY. However, the recent axel load implementation has had a negative impact on the industry, with total distribution expenses of the AKD cement universe increasing by 28%QoQ in 2QFY24.

With the increase in profitability levels and declining burden of borrowing, companies have started paying out after taking a gap of 3 to 5 years amid the ongoing expansionary cycle and higher debt levels.

Going forward, offtakes in 3QFY24 are expected to remain subdued owing to election activity, Ramadan, Eid festivities, and unfeasible weather conditions. For the full fiscal year, analysts expect local sales to remain flat YoY at 40 million tons. However, improved exports can bring total cement offtakes for FY24 to 45 million tons. With increased retention prices, profitability is expected to remain higher for the AKD Universe, with profitability expected to grow by 79%YoY in FY24. Overall, we maintain a bullish stance on the cement sector owing to the aforementioned positive earnings outlook

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