Morning Call about – Corporate profitability massively up 31% QoQ Arif Habib Limited

Karachi, March 06, 2013 (PPI-OT): Corporate profitability grows 31% QoQ!

Despite all odds facing the economy i.e. severe power cuts, deteriorated law and order and fresh investments being at historic lows alongside political transition being underway, Pakistan equities are on the go, and so for sure amid undeterred corporate earnings growth of the listed sector.

According to Arif Habib Limited has taken Arif Habib Limited coverage’s sample of the KSE100 companies that represents over 70% of the benchmark that recorded a massive growth 31% on a QoQ basis (Oct-Dec12 over Jul-Sep012).

Major sectors driving this QoQ earnings growth were Telecom, Fertilizer Cement despite heavyweights like EandP, OMC and Banking being key drags. However, on a YoY basis, 1HFY13 as well as full-year CY12 (Banking, Chemical, Fertilizer), profits were marginally up by 1%. Following is provided a table highlighting reasons underpinning corporate profitability growth in mentioned periods.

Sectors1HFY/CY121HFY/CY11YoYDec-12Sep-12QoQ
OMC

8,429

6,801

24%

2,949

5,480

-46%

EandP

77,207

67,855

14%

37,687

39,520

-5%

Cement

10,263

5,257

95%

5,616

4,648

21%

Chemical

78

3,471

-98%

417

(104)

NM

Power

11,179

7,575

48%

6,213

4,966

25%

Textile

2,858

1,902

50%

1,795

1,063

69%

Telecom

1,183

4,623

-74%

9,443

(8,260)

NM

Fertilizer

22,230

37,819

-41%

9,294

3,701

151%

Auto

2,236

2,561

-13%

369

498

-26%

Banking

63,174

59,423

6%

14,577

15,868

-8%

Sample

198,837

197,287

1%

88,360

67,379

31%

Analyst Comment

Despite a 51% higher other income and 38% lower Financial charges, sector posted a 46% QoQ earnings decline mainly on account of heavy inventory losses.

Earnings dropped by 5% QoQ mainly on account of a 7% QoQ drop in gas production, flat oil prices and rising Exploration costs.

Downwards sticky cement prices coupled with falling coal prices and decline in interest rates helped shape strong earnings growth

Plummeting primary margins and lower financial income dragged profitability for LOTPTA during CY12. For EPCL, higher VCM production enabled the company to come out of losses during CY12.

Depreciating PKR/USD provided major support to bottom-line. Higher fuel price magnified the impact of fuel efficiency gains, in addition to hefty Operations and Maintenance savings for smaller Nishat IPPs. Lower finance cost was also a breather!

Sustained product demand and favourable input prices improved gross margins. Further, dividend income from associated companies increased profitability.

LDI Revenues have massively increased on account of increased incoming call rates from ($0.009/min to $0.088/min), increase in broadband users by 50% YoY with stable revenues from Ufone as well, have mainly impacted PTCL top and bottom lines. The VSS reversal in PTCL’s 4QCY12 from 3QCY12 accounts of PKR 1.53bn, also had a positive EPS impact.

Despiyte severe gas shortage/curtailment on YoY basis, off take surged in the 4Q due to hike in demand and expected price increases.

Volumetric sale declined 11% QoQ, due to influx of imported cars, higher local product prices, and absence of any gov’t scheme. Better sales is expected in 2HFY13.

Net interest spreads squeezed during the year, mainly in 4Q, on account of rise in minimum PLS rate and 250bps cut in policy rate. However, some support came from lower provisioning while increase in operating cost was offset by higher non-interest income.

Outlook and Recommendation

Despite better-than-expected earnings growth recorded on QoQ basis by the corporate sector, Arif Habib Limited conservatively keep Arif Habib Limited full-year earnings growth expectation intact. To recall, Arif Habib Limited targeted the KSE100 index to reach 19,994pts by the year-end where ~1,400pts, or 8%, has already gained from Dec-12 closing. On valuations, KSE100 still trades at an attractive forward PE of 7.4x and DY

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