Index remains range-bound; results may offer easing
Pakistan Stock Exchange (PSX) remained range-bound during the week ended 17th January 2020 and its benchmark Index closed almost flat at 43,168 points, after having crossed its 17-month high mark a week ago. Despite Fitch forecasting a stable outlook for Pakistan, the cautionary tone kept the investors on the sidelines. Top performers of the week included: PSMC, MEBL, HMB, BOP and CHCC, while laggards included FFBL, KEL and HASCOL. Additionally, sector wise developments including a massive spike in coal prices and dismal auto sales data kept cement and auto sectors under pressure. Preliminary data for inflation for January 2020 also contributed to the lackluster week. A significant jump in foreign investments in T-bills in a single trading session also failed to spark any enthusiasm on the last day of the week.
Other major news impacting the market included: 1) remittances during December 2019 increasing 19.89% YoY and 15%MoM to US$2.01 billion) foreign direct investment (FDI) jumping 68.3% to US$1.34 billion during first half of the current financial year, 3) Goods transporters calling off strike after talks with the federal and provincial governments with an agreement on implementation of axle load regime and 4) Passenger car sales plunging 38% in December 2019 for the 9th consecutive month with no signs of an immediate recovery.
The market performance in the upcoming week will be defined by the results, where announcements by cyclical sectors are likely to continue to remain weak. Banks and Fertilizer sectors are expected to post an uptick in sequential earnings, based on preliminary calculations. Although, weak economic activity and an improving external account position merit some easing, the monetary policy announcement by the central bank (scheduled later this month) with its singular focus on inflation will likely not offer any easing. The market will also continue to keenly watch any developments on FATF side, where Pakistan has submitted its first report for review.
December 2019 total industry sales of 12,415 vehicles, consisted of 9,987 passenger cars, 2,116 LCVs, and 251 trucks, wrapping up another year of drastic operational shifts and intermingled headwinds. CY19 total industry sales of 191,085 units consisted of 161,004 passenger vehicles, 25,025 LCVs, 4,294 trucks and 762 bus units, marking the single largest decline since CY08, taking annual unit sales back five years to CY14-15 levels. PC sales were increasingly reliant on modest slippages in low-mid segment vehicle market (800CC/1000CC segments) as opposed to drastic declines in the premium 1300CC+ segment. Amongst major OEMs, PSMC/INDU/HCAR sold 109,858/46,943/28,102 vehicles during the period, specifically because consumers suffered from ‘sticker-shock’ over rapid price hikes. Lessons for CY20 remain the persistence of the ‘new model effect’, witnessed in CY19 segment-wise sales. Moreover, improvements in purchasing power, either from monetary loosening or relative PKR stability, accompanied by tax concessions for consumers (removal of FED) could catalyze demand in the coming year.
Resurgence in volumes understandably flowed through to throughput levels, with 4QCY19 retail volumes at 2.5 million tons, up 7.9%QoQ largely due to a 20.4%QoQ increase in HSD owing to low base and reported at 1.28 million tons while MS sales were reported at 1.26 million tons, down 2.3%YoY.
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Company-wise, HASCOL/SHEL/APL/PSO delivered throughput levels of 698,000/560,000/635,000/543,000 ltrs/outlet, moving +82.2%/-7.6%/+4.5%/+2.8%QoQ and -11.7%/ +1.6%/-10.8%/+20.3%YoY taking total average industry throughput +7.2%QoQ/+7.0%YoY to 598K lts/outlet, a sign of OMCs banking on expansive retail presence to retrench market shares. Sectoral demand figures indicate the hastening of an FO-lite downstream demand reorientation (furthered by slowing retail outlet expansions), as transport-linked demand formed 99.5/93.1% of the total volumes of MS/HSD for November 2019, coinciding with the competitive landscape cooling down, allowing larger OMCs to hold market share. With margins sagging under higher pump prices and outlet additions depleting mean throughput, slowing retail outlet additions are expected to prevail over the medium term, with OMCs focusing on pulling customers (through discounts, forecourt retail upgrades), in our view.
In this backdrop, PSO remains top pick where the Company has already gained retail market share (42.4% in 1HFY20 against 40.2% in 1HFY19) while Sukuk II is expected to ease liquidity concerns of the company, allowing it the financial muscle to expand its footprint.
Attock Petroleum (APL) is expected to announce half yearly results on 21st January 2020. Analysts expect the Company to post profit after tax of Rs2.3 billion (EPS: Rs23.5), up 11.4%YoY, despite a decline in volumes of 7.5%YoY, courtesy inventory gains. Topline of the company is expected to rise to Rs132.8 billion, increasing by a paltry 1.1%YoY after increasing prices compensated for disappointing volumes. Market share of APL has suffered (10.5% for 1HFY20 as compared to 11.4% for 1HFY19) as influx of grey product (mainly HSD) has started hurting while aggressive strategy of competitors is also playing a part. For 2QFY20, an exuberant growth is expected with net profit rising to Rs1.1 billion (EPS: Rs11.2) against Rs556 million (EPS: Rs5.6) for 2QFY19 on the back of inventory gains and higher finance income (short term investments reported at Rs2.1 billion as of September 2019. Sequentially, a decline of 8.8%QoQ is expected on the back of lower volumes (down 2.5%QoQ) coupled with lower inventory gains. Along with the result, the Company is also expected to announce a payout of Rs12/share, maintaining the payout ratio of 50%.
Pakistan Oilfield (POL) will also announce its 1HFY20 results on 21st January 2020. Analysts estimate the Company to post cumulative consolidated earnings of Rs7.8 billion (EPS: Rs27.57), lower by 1%YoY. Stable profitability is expected from: 1) variations in oil prices keeping revenues stable, where a lagging production profile, keeping expected topline on a weak footing, 2) lack of aggressive devaluations witnessed during 1HFY19, where a modest pullback in the PKR against Greenback, diminished the role of macro factors in covering for production declines and 3) lack of major exploration and production activity. In short, the relative high base on both the macro front, and production should keep earnings in check for 1HFY20. On a sequential basis, 2QFY20 net profit may rise to Rs3.94 billion (EPS: Rs13.89/share), marking -9%QoQ decline, with NM receding to the 34% mark as compared to 37.2% for 1QFY20 on the back of modest exploration and drilling activity. In line with its payout ratio, analysts expect the Company to announce a payout of Rs20.0/share.