Elixir Securities Limited – Pakistan Equity Market: Weekly Review

Karachi, December 22, 2017 (PPI-OT): Index inches closer to 40,000pts

In a refresher, the KSE100 index gained 824pts WoW (2.0%) and closed at 39,470pts led by banking stocks. Habib Bank Limited (HBL) and United Bank Limited (UBL) led the gain, boosted by foreign buying and rising expectations of an interest rate increase post 5% devaluation of the currency over the past few weeks.

The banking sector was the biggest contributor to the index at 543pts, making up 68% of the overall index increase. HBL and UBL contributed 172pts and 187pts respectively. Oil and Gas Development Company (OGDC) was the third biggest contributor to the index at 67pts (rose 3.2%).

Average daily traded volume rose by 2.3% during the week to 138mn shares while traded value fell by 17.3% to USD52mn. The week started with meagre volumes of 50mn shares, but jumped four fold to 222mn shares by Friday. Traded value recorded a similar increase, with USD24mn traded on Monday and USD83mn traded on Friday.

Nov-17’s power generation numbers came in during the week where FO based generation dropped by 47% due to new capacity additions to the grid. The month also saw commercial operations of the 1,320 MW Port Qasim Power Plant. Further LNG and hydroelectric based additions to the system in 2018 will continue the decline of furnace oil usage in the country.

Nov-17’s Current Account Deficit clocked in at USD1.4bn, with Jul-Nov FY18 deficit of USD6.4bn; up 91%YoY. Exports showed healthy growth of 8.6%MoM in Nov-17, while imports growth remained subdued at 0.8%MoM. However the USD134mn gain on the trade account was wiped off by a seasonal drop in remittances of USD100mn. The key to controlling the CA deficit is a drastic drop in imports, as exports growth is unlikely to ease short term pressures on the external account.

Compared to USD8.8mn of foreign selling in the preceding week, the current week saw foreign outflows of USD5.4mn. Individuals, Other Organizations and Insurance Companies were net buyers of USD2.0mn, USD5.2mn and USD1.6mn. Banks were net sellers of USD4.5mn.

Equity Market Outlook and Perspective

Market wide fears of a delay in 2018 Elections subsided with the passing of the Delimitation Bill. Elections will now be held on the basis of the 6th Population and Housing Census 2017’s provisional numbers. Some clarity has emerged on both the political and the economic front, where PKR devaluation and increased certainty of elections in mid-2018 has improved sentiments. The next week could see some further upside in the index, particularly in financial stocks and more generally in blue chips where valuations have significantly opened up. As 2017 draws to a close next week, the market could rally on buying from mutual funds.

Key news this week

Foreign direct investment grows by 57pc (Economy): Foreign direct investment (FDI) increased 57.2 per cent year-on-year to $1.14 billion in the first five months of 2017-18. FDI was dominated by China as its share was 73pc in total inflows, according to data released by the State Bank of Pakistan (SBP) on Friday. It was $729 million in the comparable five-month period of 2016-17.

Pakistan, IMF revise budget deficit target up to 5pc of GDP (Economy): Pakistan and the IMF have revised the budget deficit target upward up to 5 per cent of the Gross Domestic Product (GDP) against earlier envisaged target of 4.1 per cent for the current fiscal year 2017-18, The News has learnt.

Hyundai’s automobile plant to be inaugurated on December 20 (Autos): Nishat Mills Limited announced on Friday that it would hold the ground breaking ceremony for its automobile plant on December 20th.

Power sector receivables soar to Rs 800 billion (Power): The country’s power sector receivables have soared to Rs800 billion as of September 2017 as compared to Rs729.9 billion on June 30, 2017, showing an increase over 9 per cent in just three months. According to official documents, Discos’ collection has registered a 17.8 percent decline to Rs321.6 billion as of September 30, 2017 against billing of Rs391.16 billion during three months of current fiscal year 2017-18.

First quarter fiscal year 2018: over $2 billion spent on external debt servicing (Economy): The country’s total external debt servicing exceeded $ 2 billion mark during the first quarter of current fiscal year (FY18). Sources in banking sector told Business Recorder Monday that with a huge burden of $85 billion external debt and liabilities, the payments under external debt servicing continued to surge compelling the country to spend over $ 2 billion on principal and interest payments.

Rupee at its fair value: SBP chief (Economy): The National Assembly’s Standing Committee on Finance was informed on Tuesday that the rupee had lost around 8 per cent of its value against the dollar since July, but the central bank declined to offer any measures if the local currency depreciates further. “The rupee is at its fair value,” said Governor State Bank of Pakistan (SBP) Tariq Bajwa talking to media after the meeting.

Current account deficit nearly doubles in July-November FY18 (Economy): Current account deficit almost doubled to $6.430 billion in the first five months of the current fiscal year of 2017/18 as a widening trade gap offset growth in external inflows on account of foreign direct investment and remittances, the central bank data showed on Wednesday.

This week’s top stories

Pakistan OMC Sector – Incorporating Lower FO Sales Forecasts

Following up on our detailed report on Power Sector, we revise our OMC sector investment case accounting for sharp decline in FO offtakes with industry volumes forecasted to decline by 24/44/11% over FY18/19/20. Subsequently, we estimate volumes to drop 10% annually to reach sustainable levels of 2.5mn tons.

Resultantly our earnings projections decline by 2 -12% and 5 – 17% in FY18 and FY19 respectively from our previous estimates. Within this space, PSO takes the biggest hit owing to its high ~74% market share in the FO segment.

We revise down our stance on the sector to Market weight owing to the ongoing themes of i) exchange losses arising out of recent 5% PKR depreciation, ii) continued buildup of circular debt in the ongoing election year and iii) reduction in FO sales which will negatively impact sales and also hinder domestic procurement owing to possible disruption in refinery operations.

Amongst the OMC players, we maintain a liking for APL due to its relatively limited exposure to circular debt concerns while high local procurement also makes its relatively immune to exchange losses.

Pakistan IPPs Sector – November RFO Generation Falls 47%

Overall electricity generation in November rose 2.8%YoY to 7,132Gwh. Generation on select RFO plants declined by 46.9%YoY.

Despite decline in utilization levels of NCPL/NPL, their earnings are expected to rise slightly in 4Q2017 by 4.0%/10.0% due to a low base set in 4Q2016 caused by lower thermal efficiency in that period.

LPL and PKGP will greatly benefit from lower utilization levels with LPL’s earnings expected to rise by 90%YoY in 4Q2017.

HUBC’s base/Narowal plants operated at 27.7%/23.8% utilization during Nov-17 compared to 47.2%/51.7% in Nov-16.

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