Bulls Keep Control As Investor Interest Spreads Across The Board
During the week ended 8th June 2018, the benchmark index of Pakistan Stock Exchange (PSX) continued its bull run into the second week post announcement of caretaker setup and closed at 43,948 points, up 2.41%WoW. Investor interest was spread across the sectors, with Banks, Oil & Gas and Cements in limelight. More specifically, both the gas utilities (SNGP & SSGC) gained 12.3/6.9%WoW as OGRA announced revised tariff regime (applicable from FY19). Under the revised formula, return on assets is now linked to a market based WACC calculation (resulting in 17.43% RoA for both the utilities in their bundled form), in turn providing clarity to investors over their future outlook.
After the announcement of caretaker set up there was increase in the average daily trading volumes touching almost 183 million as compared to around 119 million a week ago, up by 54%WoW. The volume leaders included: BOP, PAEL, TRG, PIBTL and SSGC. The key news impacting the market included: 1) Supreme Court suspending a Lahore High Court (LHC) judgment that annulled the new nomination papers, paving the way for timely election. 2) headline inflation for May’18 rising to 4.2%YoY as the impact of petroleum price hike and rupee depreciation became more visible, 3) World Bank revising down Pakistan’s GDP growth to 5% against officially envisaged target of 6.2% for FY19 and 4) Petroleum products sales reaching 2.45 million tons in May’18, up 31%MoM/1%YoY.
The major gainers of the week included: UBL, HBL, BAFL, LUCK and FATIMA, while the laggards were: KEL, INDU, PSMC, NCL and KAPCO. Foreigners continued with their selling spree, offloading securities worth US$29.55million as compared to selling of US$17.45million a week ago.Pakistan will be submitting its action plan next week for a review by the FATF in its plenary meeting, scheduled to take place in France 24-29 June.
Cement dispatches touched a monthly peak of 4.65million tons in March 2018. However, offtake growth came into the red zone for the first time in FY18 owing to seasonal slowdown on arrival of Ramazan in May this year. As per provisional statistics, total dispatches during the month under review declined to 3.65million tons, primarily led by fall in domestic dispatches to 3.25 million tons.
Exports on the other hand, continued to recover, going up to 0.409million tons in May’18. On a cumulative basis, total dispatches grew by 13.5%YoY in 11MFY18, significantly higher than 5.8%YoY growth witnessed in 11MFY17, primarily led by domestic demand growth of 15.2%YoY. With the elections drawing close, analysts anticipate total dispatches to remain on the higher side (despite seasonal slowdown in the month of Ramazan and Eid holidays) for the remainder of the year.
The basis for the optimistic stance comes from: 1) strong PSDP and provincial spending in upcoming month ahead of national polls as 32% of federal PSDP at the end of May’18 remains unutilized and 2) impressive growth in private sector credit related to construction activity, up 22.3%YoY in April 2018. While risk of pricing indiscipline prevails with each expansions (particularly for South players) coupled with higher coal prices, analysts believe recent cement price recovery offers attractive entry points.
Steel sector lost out 10.4% since commerce division on 22nd March this year moved a proposal seeking tariff rationalization on 515 items, including withdrawal of regulatory duty on certain steel products in FY19 budget. Though, no specific announcement was made regarding the said proposal in the budget, market participants remained apprehensive due to lack of clarity in this regard.
In a latest development, the government issued amended statutory order, maintaining existing duty structure.With regulatory protection being the key especially in the backdrop of an ongoing expansionary cycle, analysts see clarity with regards to regulatory regime as a positive that can potentially catalyze price performance in the sector in the near future.
In a report AKD Securities has revised its future earnings of ASTL adjusting for 1) recent budgetary measures (continuation of super tax, additional sales tax levy on electricity consumption) and 2) lower than expected utilization post late commissioning of Dhabeji plant.
Putting industry’s concerns regarding regulatory protection to rest, the government, while rejecting proposal of Ministry of Commerce to withdraw duty has maintained the existing duty structure. With both RD and ADD in place, the price differential between imported and local product now stands at a hefty Rs35,000/ton for long steel and up to Rs10,000/ton for flat steel products. Moreover, customs authorities recently rolled out pilot phase of Pak-China Electronic Data Exchange (EDE) — a system for online trade verification between the two countries. The data exchange program once fully implemented should help in eliminating the issue of under-invoicing, which at present adversely impacts domestic steel industry particularly flat steel players.
As a last resort, to overcome persistently rising electricity shortfall due to the delays in new capacities coming online, the Government of Pakistan is once again forced to rely on furnace oil (FO) based plants. FO, demand rose by 132%MoM/-1%YoY to 860,000 tons, near historical averages. Consequently, total industry sales for May 2018 reached 2.45million tons, up 31%MoM/+1%YoY where ex-FO total industry sales were up 7%YoY.
Retail segments remained strong and cumulative 11MFY18 volumes were reported at 22.5million tons was lower by 4%YoY (+4% ex-FO sales), where growth in HSD at 9%YoY came to 8.38million tons and MOGAS was up 9%YoY to 6.74million tons already exceeding FY17 total. During the month retail fuels continued to drive sales growth with MOGAS sales rising by 4%YoY, while reversion to FO sourced power during peak power demand season increased FO sales by 132%MoM/-1%YoY). On a cumulative basis, 11MFY18 sales growth was sustained by transportation/retail fuels (MOGAS and HSD sales rose 9 and 2%YoY). In this regard, major source of higher demand is higher infrastructure activity, heavy commercial vehicle sales and growth of commercial transport.