Smidgen gain witnessed; IMF’s development, earning reports keenly awaited
During the week ended on 14th February 2020, the benchmark index of Pakistan Stock Exchange (PSX) closed at 40,243 points, up 0.25%WoW as trading activity remained muted. Foreigners remained net sellers with US$11.15 million that was mainly absorbed by insurance companies and other organizations. Top performers of the week included MLCF, HUBC and HBL, while PAEL, KAPCO and GWLC remained the laggards. Major volume churners included UNITY, HASCOL, MLCF, BOP and DGKC. The week started with market witnessing a major sell-off, amid fears of global slowdown on coronavirus outbreak in China, which subsided, posting positive moves in subsequent session. Investors gained further confidence with the news of smooth progress in discussions with International Monetary Fund (IMF). The week also witnessed yield on 12-month Treasury Bills increasing by 39bps in the latest auction and investors booking profits after the mid-week rally. Other major news flow during the week included: 1) Pakistan’s trade deficit shrinking more than 28% to US$13.8 billion during 7MFY20 due to import compression, but exports remained under pressure for the third consecutive month, 2) Prime Minister Imran Khan assuring the export-oriented sectors that there will be no change in tariffs of electricity and gas for next three years, 3) Federal cabinet approving a comprehensive package under which Rs10 billion subsidy will be provided on essential items, 4) Pakistan’s auto sector continuing to show dismal performance during 7MFY20 with cars sales plunging by 44%YoY, and 5) possibility of The Federal Board of Revenue (FBR) imposing a standard rate of 17% sales tax on certain items. With result season in full swing, near term market performance will largely be guided by earning surprises. PSO, UBL, HBL and ENGRO are some of the major corporates scheduled to announce their earnings next week. From a macro perspective, the market will be keenly watching developments pertaining to the second IMF review.
The government has reported a fiscal deficit of 2.3% of GDP in 1HFY20 compared to a fiscal deficit of 2.7% of GDP in 1HFY19. Importantly, the primary balance during the period was reported at 0.7% of GDP, close to the target of 0.6% set by the IMF. In the 2QFY20, the fiscal deficit came down to 1.6% of GDP as compared to fiscal deficit of 0.7% of GDP 1QFY20. All the four provinces recorded a budgetary surplus during the 1HFY20 and 2QFY20. During the 1HFY20, Total Revenues collection increased by 39%YoY, where the improvement was led by 18%YoY higher Tax Revenues (still less than the target) and 213%YoY higher Non-Tax Revenues. Looking into further breakup of revenues, government collected 17%YoY higher Direct taxes, 24%YoY higher Sales Tax and 68%YoY higher Petroleum Levy during 1HFY20. The government hugely benefitted from 575%YoY higher profits from State Bank of Pakistan (SBP) in 1HFY20, which was around 0.8% of GDP. The fees fetched through the auction of telecom licenses (PTA profits: 607% YoY higher in 1HFY20) also helped the government achieve the primary balance target. On the expenditures front, total expenses increased by 26%YoY. Current expenditures increased by 25%YoY, where Mark-up Payments were up 46%YoY and Defense expenses were up 10%YoY. Excluding these items, government’s own expenses increased by 17%YoY during the 1HFY20 (also up 49%QoQ in 2QFY20). Development expenditure remained healthy, where growth of 28%YoY was witnessed in 1HFY20 and 122%QoQ in 2QFY20.
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Local cement sales for January 2020 increased by 6.5%YoY where both the regions witnessed contrasting trends, local sales in North increased by 8.0%YoY, whereas South posted a decline of 18.3%YoY. For 7MFY20, total dispatches increased by 7.3%YoY where major growth was witnessed in exports up 25.4%YoY and local dispatches up by 4.0%YoY. Growth in dispatches can mainly be attributed to government speeding up release of development expenditure in the last few months, with low base effect also in play. However, seasonality along with the transporter’s strike has played a part in sequential decline of 7.7%MoM. Despite a healthy growth in North’s local dispatches, up 11.9%YoY for 7MFY20, cement prices came down by Rs70-90/bag.
Analysts expect weakness to continue particularly after addition of 8.1 million tons capacity coming online, prompting price war. Analysts also expect pressure on cement sector keeping in view weakening sector dynamics emanating from further weakness in 3QFY20 profitability.
DG Khan Cement (DGKC) has announced its financial results, posting a net loss of Rs946 million (LPS: Rs2.16) as against a profit of Rs1.67 billion (EPS: Rs3.82) for the corresponding period last year. The losses were mainly attributable to higher finance cost rising to Rs2.7 billion, from Rs1.4 billion on account of higher borrowings in the wake of a rising interest rate environment. The second major factor that eroded Company’s profitability was a jump in selling and distribution expenses to Rs1.00 billion, from Rs660.9 million mainly due to higher exports. The other factors include lower retention prices, higher fuel and power expenses which dragged the company’s profits towards the red zone. As the Company witnessed a recovery in local dispatches during the period mentioned above, its net revenues surged by 5.2% to Rs22.6 billion, from Rs21.4 billion. Furthermore, owing to the rise in cost pressure, the Company’s gross margins posted a significant decline to 5%, from 16%. Other income showed a muted growth of 14%YoY to Rs1.37 billion, from Rs1.2 billion on the back of lower dividend income from associate companies.
The Board of Directors of Pakistan Refinery Limited has approved increase in paid-up capital of the Company though issue of 315 million ordinary shares at par value. It is pertinent to mention that he proceeds of the right Issue shall be utilized to undertake short and medium-term projects to revamp certain units improving production of Motor Gasoline and HSD and to meet working capital requirements of the Company. The Share Transfer Books of the Company will be closed from March 5, 2020, till March 11, 2020 (both days inclusive) to determine the entitlements of the shareholders of the company with respect to the Rights Issue.