Volatility persists until budget and IMF talks
The trading sessions during the outgoing week remained volatile, primarily due to the aftermath of decision of the State Bank of Pakistan (SBP) to keep interest rates unchanged, coupled with anticipation surrounding inflation readings, which registered at 17.34%YoY for April 2024. The benchmark index closed at 71,902 level on Friday, posting a loss of 840 points or 1.16%WoW decline. The last trading session remained positive with a gain of 1244 points.
Other major events included the receipt of a US$1.1 billion tranche following the final review of the IMF’s Stand-by Arrangement, declining fuel prices and unchanged yields in the mid-week Treasury Bill auction. Trade deficit for April 2024 increased by 3.2%MoM to US$2.4 billion, mainly due to 8% monthly decline in the exports.
Average daily trading volumes remained down by 20.7%WoW, clocking in at 515.75 million shares, compared to 650.00 million shares traded a week ago.
Foreign exchange reserves held by State Bank of Pakistan (SBP) increased by US$24.8 million on a weekly basis to US$8.0 billion as at April 26, 2024. PkR appreciated by 0.06%WoW to close at 278.21/US$ on Friday.
Other major news flow during the week included: 1) Saudi team to arrive for investment talks on Sunday, 2) IMF team likely to arrive in middle of month, 3) Government borrowing soared 103 percent, 4) PIA sell-off EoIs submission deadline extended, 5) Pakistan’s cement dispatches dip nominally in April, and 6) Pakistan OMC’s sales declined to 1.1 million tons; lowest in 6 months.
Top performing sector included: Woolen, Cable & Electrical Goods, Oil & Gas Exploration Companies, Jute and Sugar & Allied Industries, while Automobile Assembler, Technology & Communication, Vanaspati & Allied Industries, Transport and Property were amongst the worst performers.
Major net selling was recorded by Other Organizations (US$5.62 million) and Individuals (US$1.84 million). Foreigners absorbed most of the local selling with a net buy of US$8.04 million.
Top perform scrips of the week were: PPL, NCPL, SNGP, KAPCO and FFBL, while top laggards included: TRG, AKBL, THALL, NBP and SCBPL.
Overall, the market’s future trajectory will be shaped by expectations of revenue measures set to be introduced in the upcoming Federal Budget. Anticipated revisions in electricity and gas tariffs during the summer months may moderate the bottoming out inflation figures as well.
The SBP is likely to adopt a wait-and-see approach with regards to monetary easing, until a more substantial programme is secured. Market volatility is likely to persist until discussions regarding the Budget and IMF are settled. Therefore, investors are advised to focus their investments on fundamentally strong companies.
In a notice to Pakistan Stock Exchange, ENGRO and DAWH informed that their boards, at their May 03, 2024 meeting, approved a reorganization plan involving both companies.
Under the scheme of arrangement of restructuring DAWH will be demerged into two legal entities.
First entity will include assets and liabilities of DAWH, other than ENGRO, and will be listed separately on the stock exchange in due course. For illustration purposes this entity is being referred to as ‘DH NewCo’. This entity will be held by current shareholders of DAWH.
The second entity will include DAWH current shareholding in ENGRO and this will be rebranded to Engro Holdings Limited. Engro Corp will become wholly owned subsidiary of Engro Holdings Limited.
Minority shareholders holding 60% of ENGRO (as 40% is with DAWH) will be issued shares of Engro Holdings based on their proportionate holding without affecting their economic benefit.
The proposed restructuring will have the following benefits:
Engro Corporation will continue to focus on large scale industrial projects in its existing 5 verticals.
Other proposed company will focus on diversified investment opportunities in in capital market and other avenues.
Under this Scheme, tax efficiencies will unlock between Engro Corp and Engro Holdings (removal of dividend tax), as Engro Corp will become a wholly owned subsidiary.
With this, the double discount applied to DAWH will now be removed in our view.
Earlier, in the case of DAWH SOTP, we used to take the market value of ENGRO, which essentially used to trade at a certain discount to its SOTP value, normally in the range of 20-30% (Discount 1). Secondly, DAWH use to trade separately at a price lower than its SOTP value (Discount 2).
After this restructuring, SOTP of ENGRO will be the SOTP of Engro Holding, thus one layer to discount will be removed.
Cement dispatches for April 2024 were reported at 2.94 million tons, down 25%MoM, while remained flat on yearly basis. Local dispatches were reported at 2.33 million tons, down 30%MoM and 8%YoY, mainly on account of slowdown in construction activities due to Eid holidays as well as high base effect from the last month.
April exports rose to 0.61 million tons, posting 46%YoY increase. Sequentially, exports surged 2%MoM, mainly due to higher demand and better retention prices.
On the regional scale, dispatches in the North region observed a 5%YoY decrease, accompanied by a sequential decrease of 27% MoM. Notably, local dispatches plummeted by 29%MoM. Concurrently, export dispatches witnessed a notable growth of around 73%YoY, while on the sequential basis the dispatches rose by 17%MoM arriving at 0.15 million tons.
Total dispatches in the South region experienced a substantial 13%YoY increase. However, on a sequential basis the dispatches showcased 20%MoM decline, with exports recording 39%YoY growth. Nevertheless, exports dipped marginally, 3% on a MoM basis.
During 10MFY24, total industry dispatches reached 37.45 million tons, up 2%YoY as compared to 36.55 million tons in the SPLY. Wherein, local dispatches stand at 31.73 million tons, down 4%YoY, while exports were 5.72 million tons, witnessing a substantial growth of 65%YoY .
Average retail prices in the North currently stand at PKR 1,225/ bag as of May 02, 2024, up 12% from the SPLY. Whereas, average cement prices in the South posted an increase of 3%YoY currently hovering at PKR 1,200/bag as of May 02, 2024.
International coal prices (Richard Bay) are currently hovering at PKR 32,600/ton. Local coal is currently trading at PKR 29,000/ton. With the Afgan coal (PKR 38,000/ton) prices going up, companies can rely more on affordable imported coal—a positive sign for stronger margins.