Lacklustre witnessed; cpi data and interest rates in focus -Stock Review
The week ended on August 25, 2023 remained lackluster, with the KSE-100 index losing 547 points to close at 47,671 level. The anticipation of heightened inflation had a negative impact on the market, fearing an ad-hoc policy rate hike. However, the recent T-bill auction negated that sentiment, with yields largely maintaining their flat trend as compared to the previous auction.
Now the focus is on September 2023 CPI data and the Monetary Policy Committee meeting scheduled for September 14, 2023.
Nonetheless, owing to a week full of result announcements, market participation witnessed daily trading volume averaging at 206 million shares, as compared to the previous month average of 167 million shares.
The current account shifted from a four-month streak of surplus to a deficit of US$809 million, mainly due to an increase in imports (up 33%MoM) and worker remittances (down 15%MoM) during the month.
Foreign exchange reserves held by the SBP eroded by US$125 million to US$7.9 billion as of August 18, 2023. Additionally, due to import pressures and dividend repatriations, PKR depreciated by 1.74%WoW, to close at PKR301 against the greenback.
Furthermore, throughout the trading week, the gap between the interbank and open market exchange rates remained 4% to 5%. According to the IMF agreement, this gap should not be ±1.25% for five consecutive days.
Other major news flows affecting market during the week included: GoP borrowed US$2.89 billion borrowed from multiple financing sources during the first month of the current financial year, 2) Revised GDP growth under PDM government may turn out to be over negative one percent, 3) Power tariff hike, 4) Banking sector spread decreases by 64bps MoM in July, 5) Power generation was up 5% and cost of generation was down 22 percent, 6) RDA inflows touched US$6.487 billion, but faced headwinds from global rates, 7) Election Commission said election not possible before May 2024.
Synthetic & Rayon, Textile Weaving, and REIT were amongst the top performing sectors, while Cable & Electrical Goods, Pharmaceuticals, and Inv. banks/Inv cos/Securities cos were amongst the worst performers.
Net selling was recorded by Individuals with a net sell of US$8.2 million. Insurance absorbed the selling with a net buy of US$19.0 million.
Top performing scrips during the week were: SCBPL, HMB, IBFL, BAFL, and MARI, while top laggards included: AGP, PSX, GADT, PAEL, and FABL.
The IMF and the caretaker government are commencing talks, driving the market to potentially sustain a positive outlook due to a series of favorable developments and the confidence of bilateral partners
Given the ongoing trend of significant currency devaluation, analysts recommend investors to consider investing in companies with revenue in US$ (Tech and E&Ps). Another viable approach is to focus on companies that offer healthy dividend yields or companies with strong valuations.
Remarkably, corporate performance has displayed resilience, even in the face of the super tax impact during the last quarter of the listed sectors. With the conclusion of the corporate results for period ending June 30, 2023, anticipation for the upcoming corporate outcomes in September 2023 is building. This upcoming reporting period is expected to yield significantly more positive results, considering the absence of the super tax influence.
Noteworthy sectors like Exploration & Production, Banking, Fertilizers, and Cement are anticipated to exhibit enhanced earnings. This shift in circumstances leads us to believe that the market will closely trail corporate announcements in the short term and adjust its performance accordingly.
Multi-billion dollar investments are expected to flow for development of new deep conversion refineries, petrochemical complexes, and upgrade of existing refineries. Reducing reliance on imported petroleum products as the refinery sector shall produce Euro-V spec fuels, post upgrades.
As per the Brownfield Refinery Policy document released by the Ministry of Energy, refineries shall be allowed 10% tariff protection/ deemed duty applicable on ex-refinery price of Petrol (MS) and Diesel (HSD) for 6 years from the date of notification of the policy and opening of the joint Escrow Account with OGRA.
Furthermore, post-financial close of the upgrade project, 22% and 25% of the total project cost can be withdrawn from the Escrow Account for used and new plant & machinery imports, respectively. Additionally, refineries shall deposit 2.5% deemed duty on HSD and 10% on MS.
To avail the incentives, a refinery has to within 3 months sign an Upgrade Agreement with OGRA. The milestones/ deliverables and timelines will be firmed up in FEED of Upgrade Project.
Pakistan’s oil refining capacity is about 450,000 barrels per day (bpd), equivalent to 20 million tons per annum. However, as per expert forecasts, the country’s annual demand for Petrol and Diesel is expected to reach 33 million tons by FY35 at a CAGR of 5.1%.
Historically, local refineries have supplied about 45% of the country’s requirements of HSD, 30% of MS and more than 100% of Jet fuel for defense and aviation purposes.
Pakistan State Oil (PSO) announced result for 4QFY23 where company posted unconsolidated loss after tax of PkR4.62 billion (LPS: PKR9.85), down 134%QoQ basis as against profit after tax of PKR13.6 billion (EPS: PKR29.07) during the quarter before.
The result came in slightly higher than our expectations, wherein major deviations occurred due to higher opex and finance costs during the quarter. Furthermore, inventory losses are estimated to have clocked in at PKR3.48 billion (PKR7.4/share), as ex-refinery prices for MS and HSD fell by 10% and 16% during the period.
The company’s topline reached PKR-874 billion, up 8% QoQ, down 3% YoY; POL offtakes were 1.8 million tons, dropping 47% YoY.
Earnings remained dampened during the quarter due to higher finance costs as well reported at PKR15.2 billion during the quarter, as short term borrowings ballooned up to PKR410 billion as per 3QFY23 accounts. The situation worsened by the escalation of interest rates during the outgoing fiscal year, presently at multiyear high of 22%.
The company reported full-year earnings of PKR5.66 billion (EPS: PKR12.06), a 93% YoY decrease from PKR86.2 billion (EPS: PKR183.7) in FY22.
Along with the result, company declared a final dividend of PKR7.5/share (down 25%YoY) as compared to PKR10.0/share paid for the last financial year.