Bulls remain in the ring; political noise unlikely to sour sentiment
Climbing for a third consecutive week on the back of stable participation (avg. daily turnover up 2.5%YoY), the benchmark index of Pakistan Stock Exchange (PSX) was up 0.6%WoW to close at 42,470 points on 11th December 2020. Key news flows affecting market included: 1) pronounced rise in political noise, 2) HUBC reportedly accepted the proposal of the Power Division, a major reduction in claimed CPP payments from the base plant in return for approval for PPA with KE for purchase of 600MW of Coal power by 2024 and commitment to supply 300 million gallons per day of potable water (desalination) to the Karachi based on concessionary pricing of Thar coal, base plant to be converted from FO to Coal, 3) FBR registered a 4%YoY rise in number of income tax filings, to 1.8 million (with significant requests for delay approved) and the amount collected rising 63%YoY, coming on the back of the decision taken not to extend the last return filing date seen as a measure to promote tax discipline, 4) Pakistan to get US$873 million worth of debt servicing suspension from the Paris Club of creditor nations and 5) total cement dispatches during November 2020 recorded at 4.51 million tons, an increase of 4.19%YoY. Stocks driving the index higher included: ATRL, ANL, LOTCHM and AGP, while on the flipside SFL, HUBC, KAPCO and GATI underperformed. Volume leaders during the week were: PRL, TRG, UNITY and PIBTL.
With all signs pointing to a lack of consensus on concrete political steps to formalize opposition to the ruling PTI government, political noise is unlikely to sour sentiment at the bourse. Broad sectoral participation suggests significant rotations are underway, where supporting macros appear likely to provide tailwinds to market momentum through to 2021. Headway on energy sector reforms could kick-off significant upsides to the relegated energy chain.
Car sales increased by 48%YoY in November 2020 to 14,454 units, including Lucky Motor Corporation (non-member of PAMA), was up 63%YoY. Indus Motor (INDU) sales were up 87% YoY, Honda Car (HCAR) up 72% YoY and Pak Suzuki Motor Company (PSMC) up 16%YoY. PSMC registered first YoY increase in FY21 as some of the production issues were resolved. Car sales increased by 3%MoM during November 2020, the increase was driven by PSMC’s increase of 12%MoM as Cultus sales grew by 86%MoM followed by Ravi sales improving by 255%MoM. HCAR’s sales were same as last month. INDU’s volumes declined 10%MoM. New entrants, Hyundai Nishat sold 472 units (+63% MoM), while Lucky Motor sold around 1,500 units. Analysts expect demand for cars to grow stronger owing to low interest rates environment and pickup in economic activity.
Local cement dispatches continue to increase with a 6%YoY growth in November 2020 where South continues to lead, up 15%YoY during the month amidst a multitude of factors at play including increasing demand in urban centers on the back of resumption in housing projects and North-based players decreasing their supply to the region. However, significant sequential decline was witnessed in dispatches of both the regions (South/North down by 12/25%MoM) as commencement of winter leads to a slowdown in construction activities. Winter season has arrived with a number of cost pressures for local cement manufacturers as coal prices increased by 42% since October 2020, while LNG prices are also increasing. Recent increase in cement prices of Rs20-25/bag can offset some part of the impact but sustenance of margins remains in question.
Topline Securities has revised earnings forecasts up for its E&P universe after revising up Arab Light oil price assumption by 9-19% from US$38/46 per barrel in FY21/22 to US$45.3/50.1 per barrel following upward revision in the said estimates by Energy Information Administration (EIA) in its December 2020 report and incorporating recently announced discoveries and financial results of E&P companies.
Oil prices have recently recovered to over US$40 per barrel after hitting a bottom of US$13 per barrel (Arab Light) in April 2020 on the back of continuation of production cuts by OPEC plus countries along with gradual reopening of economies after COVID-19 related shutdown.
The brokerage house raise its Oil and Gas Development Company (OGDC) earnings forecast for FY21-23 after incorporating revised oil price assumption and addition of three new discoveries namely Mamikhel South, Togh Bala and Siab. Mamikhel South is expected to come online by April 2021 with estimated flows of 3,240 bopd and 16.1 mmcfd, while for Togh Bala and Siab have assumed production from 1QFY22. However, it has slightly increased exploration cost estimate of the Company for FY21/22.
Earnings forecast for Pakistan Petroleum (PPL) has been revised up by 1-14% over FY21-FY23. Commercial operations of already announced discoveries remain a grave concern for the company. The Company has announced hydrocarbon backlog of 170Mmcfd of gas, of which 160Mmcfd was announced before December 2018. Among these flows, the brokerage house has assumed start of 30 mmcfd before start of FY22, while remaining we have assumed between FY22-FY23.
Mari Petroleum (MARI) earnings have been revised up for FY21-23 between 12-42% on the back of 1) upward revision in oil price assumption, 2) increase in flows from Mari field to 682Mmcfd and (3) addition of new discoveries (like Togh Bala, Hilal and Iqbal), which together will contribute 15 mmcfd in total that is 2% of existing sales volume. MARI also has a backlog of over 70 mmcfd from already announced discoveries like Tipu, Shaheen, Shahbaz among others. These flows are expected to come online after installation of gas processing units to supply pipeline quality gas to Sui companies (likely in next couple of months).
Pakistan Oilfields (POL) earnings have been revised up by 11-25% from FY21-23 after upward revision in oil price assumption and addition of Mamikhel South from April 2021. This field alone will add Rs4.0-4.5/share (10%) to annual earnings.
Key risks to E&P estimates include: 1) delay in commissioning and installation of gas processing facilities, 2) lower than expected oil prices, 3) worsening of circular debt and 4) unfavorable decision in Tal Block wind fall levy case.