Elixir Securities Limited – Pakistan Equity Market: Weekly Review

Karachi, December 08, 2017 (PPI-OT): Regulatory Risks Weigh on the Market

The KSE100 Index continued the bearish trend from last week, declining by 2.3% (930pts). The index declined 1,226pts by Thursday, however Friday saw some recovery, partly due to PKR/USD rate slipping to 110 in the interbank market. The dollar closed at 106 at day end possibly due to a liquidity injection by the State Bank.

Trading volumes jumped up 26% during the week to 141mn shares while traded value increased to USD54mn; a 14% jump.

The overall index decline was primarily concentrated in the Power Generation (down 4.4%), Oil Marketing (down 7.6%) and Banking Sector (down 2.8%). These contributed 149pts, 196pts and 293pts to the overall index decline. Refineries also declined by 6.8% during the week, while the Engineering sector declined by 6.5%. The decline in the Engineering sector was possibly due a slight USD6/ton rise in HRC prices, which closed the week at USD553/ton.

Three of the top five losers during the week were Kot Addu Power Company (KAPCO), Sui Northern Gas (SNGPL) and Sui Sothern Gas (SSGC). KAPCO declined due to weak sentiment as the market comes to terms with the plant’s expiry in FY21. The Sui companies declined due to a proposed tariff revision by OGRA, which could potentially change the company’s return formula detrimentally.

Developments in the power sector have brought into question the future of furnace oil, which has negatively impacted the energy chain. Attock Refinery Limited (ATRL) and Pakistan State Oil (PSO) declined 8% and 7% respectively as they stand to lose when furnace oil based generation goes down. Nishat Chunian Power (NCPL) was similarly down 6% while Nishat Power (NPL) was down 5%.

Political climate also reared its ugly head during the week. The much awaited judicial enquiry report on the “Model Town” incident was made public, helping Opposition put the blame on incumbent Punjab government for the unfortunate deaths. More importantly, Pakistan Awami Tehreek, supported by the other two parties PPP and PTI, have called for country wide protests demanding resignation of Punjab’s Chief Minister Shahbaz Sharif.

Foreigners and Individuals were net sellers on Friday offloading USD1.7mn and USD5.2mn worth of shares. Companies, Banks and Mutual Funds mopped up the shares with on average USD2mn of buying each. Aggregate buying during the week totalled USD1.0mn by foreigners compared to USD39.5mn outflow the previous week.

Equity Market Outlook and Perspective

Today’s currency slippage will re-affirm the market’s bearish sentiment on deteriorating External Accounts. While the Rupee largely recovered against the green back by the end of trading, it will once again bring the pending currency depreciation risk to the forefront. For the market, the best case from here would be a gradual depreciation which 1) bodes well for a number of listed sectors (E and P’s and Power, in particular) and 2) would likely propel foreign investors to start cherry picking in Pakistan equities. However till that happens, uncertainty is likely to loom on economic front. Political pressures may also mount up over the coming week, if Opposition parties do decide to act on their threats of country wide agitation against Punjab’s Chief Minister.

Key news this week

OPEC, Russia agree oil cut extension to end of 2018 (Oil): OPEC and non-OPEC producers led by Russia agreed on Thursday to extend oil output cuts until the end of 2018 as they try to finish clearing a global glut of crude while signalling a possible early exit from the deal if the market overheats.

OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8 million bpd. Both countries have been exempt from cuts due to unrest and lower-than-normal production.

Regulator starts consultation on gas tariff structure (SNGPL, SSGC): The Oil and Gas Regulatory Authority (OGRA), in collaboration with the World Bank, has kicked off a series of consultative sessions across the country for the Third Party Access Rules 2012 and the tariff structure under gas sector reforms.

The government has tasked OGRA with finalising third-party access rules and a tariff methodology by the end of December this year in an effort to execute the plan of splitting large public gas utilities as part of critical reforms.

Foreign exchange reserves soar to $21 billion (Economy): The foreign exchange reserves have jumped to $21 billion after the country received $2.5bn it raised through auction of bond on the international market.

Pakistan’s exchange rate facing risks, UN body warns (Economy): The government’s policy of keeping the exchange rate stable by intervening in the foreign exchange market may become unsustainable if the US dollar appreciates against most major currencies in global markets, warns a new United Nations report.

The report forecasts a growth rate of 5.3pc for Pakistan in 2017 and 5.6pc in 2018. It notes the widening of the country’s current account deficit, which touched $12.1bn in FY17 which is about 4pc of GDP, “due to lower volumes of commodity exports, increased imports of capital goods related to both the China-Pakistan Economic Corridor (CPEC) and non-CPEC infrastructure projects.”

Sindh millers to get Rs30 billion as subsidy on sugar export sanctioned (Sugar): A handful of sugar barons will get Rs30 billion as subsidy on the export of sugar after the Sindh government doubled the amount for its millers.

On November 28, the Economic Coordination Committee (ECC) of the Cabinet had allowed the export of 1.5 million tons of sugar at Rs10.70 per kilogram subsidy. The subsidy was supposedly to be shared equally by the federal as well as the provincial governments, according to ECC decision.

This week’s top stories

Pakistan OMC Sector – Lowest Monthly FO Offtake In Over 11 Years

OMC sales declined 7/22% YoY/MoM in Nov-17 led by deteriorating volumes in FO which declined 29/55% YoY/MoM due to lower generation from FO based power plants.

Retail fuel growth remained muted during the outgoing month with HSD sales up – 2/2% YoY/MoM while MOGAS volumes increased 7/-9% YoY/MoM likely due to street agitation during the month which shut down major road junctions in Punjab.

HASCOL continued to lead competitors in volumetric growth with sales increasing 44/53% YoY in Nov-17/5MFY18 with impetus from HSD and MOGAS which rose 49% and 41% YoY in the outgoing month.

We foresee FO sales to recover in the ongoing month with Hydel production declining in December owing to severe winter conditions while our channel checks also suggest that HUBC and KAPCO plants are back online.

However we expect FO volumes to decline in the longer term with some of the decline being negated by sharp growth in HSD and MOGAS on the back of strong construction activity and automobile demand.

Pakistan IPPs Sector – Fuel Efficiencies to Evaporate as Utilization Levels Fall for Nishat IPPs

Following up on our detailed power sector report, we have incorporated changes in Nishat IPPs pertaining to falling utilization levels on furnace oil.

New capacity additions to the grid will reduce utilization levels for NPL/NCPL to 37.2% by FY19 from 76.4% in FY17.

This will eliminate roughly 28% of fuel savings and 18% of operational savings for both companies.

Resultantly we expect PKR3.0/4.0 in dividends for NPL in FY18/19 and PKR2.0/4.0 in dividends for NCPL in FY18/19.

We maintain a BUY call for NPL based on a revised PT of PKR35/share after rolling over our valuation to Dec-18. This results in 27.7% total potential upside (including 10.1% leading dividend yield)

We also maintain our BUY call on NCPL based on a revised PT of PKR33/share after rolling over our valuation to Dec-18. This results in 25.0% total potential upside from last close (including 7.1% dividend yield).

Kot Addu Power Company Limited – The End Draws Near

KAPCO has corrected by 20.3% YTD and 15.0% in the last two weeks as the HUBC deal got suspended and PPA expiry becomes the base case for the market.

We have removed the HUBC deal from our valuation model which reduces our PT by ~PKR10/share

While we maintain our base case of PPA expiry in FY21, we have delayed the terminal dividend payment by an additional two years as it is unlikely that KAPCO’s PKR100bn of receivables will be cleared in one timely payment.

We revise our stance to a HOLD call with a Dec-18 PT of PKR50/share, resulting in 14.4% total potential upside from last close (including 17.9% leading dividend yield).

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