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KSE-100 remained under pressure during the week where a disappointing budget, providing in-centives only to a few sectors against investor expectations of broad-based relaxations, resulted in index receiving a battering on first trading session of the week. Even the sector which were incentivized in the budget didn't receive a good response as cement and engineering sector wit-nessed a decline of 5.5%WoW each. As soon as index recovered from early onslaught, political uncertainty took a toll after a member party of ruling coalition announced to part ways. Result-antly, KSE-100 closed the week at 33,439pts, down 3.39%WoW. Foreigners remained net sellers during the week with net sell standing at USD4.78mn, taking CYTD net sell to USD274.9mn. Major news flow driving market sentiment included: 1) Prime Minister Imran Khan announcing that the lockdown would be further softened but the hotspots will face strict lockdown, 2) Pakistan's tex-tile and clothing exports tumbling for the third consecutive month in May'20, falling 36.5%YoY, 3) Government unlikely to extend subsidy on urea due to lack of implementation mechanism at least in three provinces, 4) Gas companies seeking a surge in gas tariff by PkR85-623/mmbtu, and 5) Balochistan National Party-Mengal (BNP-M) announcing its decision to quit the ruling coalition at the centre ahead of the vote on the federal budget. KSE-100 average traded volumes during the week grew 1.4%WoW to 228.8mn shares where stocks which generated large volumes in-cluded: 1) KEL (9.13mn shares), 2) UNITY (7.26mn shares), 3) BAFL (5.76mn shares) and 4) BGL (3.75mn shares). Major gainers from KSE-100 were: 1) HMM (+12.7%WoW), 2) JLICL (+11.1%WoW), 3) IDYM (+9.1%WoW) and 4) PTC (+4.1%WoW), whereas laggards dragging the index lower were: 1) IGIHL (-17.6%WoW), 2) GATM (-13.3%WoW), 3) FFBL (-11.2%WoW), and 4) SHEL (-9.7%WoW).
StockSmart
AKD Equity Research / Pakistan
Pakistan Weekly Update
Important disclosures including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
With spread of COVID-19 becoming severe every day and news' of strict lockdown circulating, we believe market is expected to remain rangebound in short term where political noise is only going to increase pressure, particularly as government looks to get the finance bill passed. From next week, market will also start looking towards inflation number for Jun'20 where a low number can propel hopes of further rate cut.
Assessing major index oscillations during the soon to conclude FY20, we highlight the large underperformance of KSE-30 index as an illustration of high market capitalization sectors un-dergoing significant headwinds.
In terms of volumes, brisk rise in average volumes across indices can be seen supporting fu-tures and ready market value as well, with cheap valuations the likely driver of momentum in mainboard names.
Additionally, the general “flight-to-safety” sentiment underpins increasing prominence of KSE-100 and KSE-30 volumes in the share of all stock volume over the period, with investors allo-cating to high D/Y plays.
In the backdrop of emergent macro risks propelled by COVID-19 pandemic and pricing the uncertainty of a waning economic outlook, we believe mean reversion is likely to play out over the medium term, with blue chip plays seeking to re-vamp profitability outlooks.
Any upward momentum in global crude prices, coupled with external pressures forcing PkR depreciation could drive E&P sector performance. Re-iterating our outlook for technology and pro work from home plays taking a lead during the short term, Banks in the mainboard offer attractive valuation based upsides as well.
Pakistan Banks: Interest rate, credit risks priced in valuations, (AKD Daily, Jun 18, 2020)
Mar’20 NPLs of private banks from our banking universe surged to PkR291.1bn (assuming Dec’19 close PkR/US$ parity, total NPLs stands at PkR284.2bn) vis-à-vis PkR281.2bn reported at CY19 close.
Tracking fresh credit charge to performing advances since CY13, the charge ratio for our pri-vate banking universe for Mar’20 at 0.2% remains inline with 5y avg. whereas reversal pipeline slackens (Mar’20 Reversals/NPLs: 1.1% vs. 5y avg. 1.9%) which can potentially pull up net credit charge, going forward.
Valuations (CY20/21F: 0.8/0.7x) adequately incorporate interest rate (AKD expects 100bps cut in FY20) and credit risks (cost of provisioning assumed at 0.5/0.6% for CY20/21F vs. 0.3% in CY19) in our view with CY20/21F ROE at 12.3/10.7%. We have our preference for MCB, MEBL, and UBL due to their relatively low risk profiles.
Given fluid macro situation and SBP’s intention of rolling out reliefs to businesses, further in-terest rate cuts cannot be ruled which could again put pressure on banking sector stocks. Hence, we advice investors to take a longer term investment horizon.
Pakistan OMCs: Out of the frying pan into the fire , (AKD Daily, Jun 17, 2020)
We assess the impact of long running operational impediments in the energy chain and their impacts on OMCs, while quantifying anticipated volumetric slowdowns from the COVID-19 pandemic and delayed margin revision for FY21 in weakening profitability, indicating possible room for re-rating in the space
In a nutshell, COVID-19 and ensuing curbs to industry, business activity, individual movement and transport restrictions only exaggerated the effects of long term forces, where inadequacy of refining infrastructure in ramping MS yields have forced OMCs to source through imports
Mapping stock price moves (as a proxy for investor expectations) for PSO/APL since COVID-19), we highlight possible under-pricing of volumetric growth (~6-7% from stock moves vs. our expectation of 10% for FY21), with expected inventory losses the likely culprit of investor apa-thy.
POL product volumes have shown to rebound at a fast clip globally (Chinese demand already at 90~ of pre-COVID levels), a trend confirmed by channel checks at home, with daily average MS sales for Jun'20 are already up by 42/30% against Jun'19/May'20
Margin indexation is another fundamental driver we study with every month of delay in mar-gin revision decreases our FY21 EPS by 1.8/1.5% for APL/PSO while, given our base case vol-ume assumption of 10/7%YoY growth for FY21/22, every one month delay decreases our TP by 2.3/2.9% for APL/PSO.
Jun 19, 2020
Jun 18, 2020
Jun 15, 2020
Jun 16, 2020
33,400
33,477
33,554
33,631
33,708
33,785
33,862
33,939
34,016
10:0
0
10:2
3
10:4
7
11:1
0
11:3
4
11:5
8
12:2
1
12:4
5
13:0
8
13:3
2
13:5
5
14:1
9
14:4
2
15:0
6
15:2
9
33,200
33,300
33,400
33,500
33,600
33,700
33,800
33,900
34,000
10:0
0
10:2
4
10:4
9
11:1
4
11:3
8
12:0
3
12:2
8
12:5
3
13:1
7
13:4
2
14:0
7
14:3
1
14:5
6
15:2
1
33,750
33,850
33,950
34,050
34,150
34,250
34,350
34,450
34,550
34,650
10:0
0
10:2
5
10:4
9
11:1
4
11:3
9
12:0
4
12:2
8
12:5
3
13:1
8
13:4
3
14:0
7
14:3
2
14:5
7
15:2
2
Source: PSX & AKD Research
33,300
33,350
33,400
33,450
33,500
33,550
33,600
33,650
33,700
33,750
9:4
9
10:1
2
10:3
6
10:5
9
11:2
3
11:4
6
12:1
0
12:3
3
12:5
7
Jun 17, 2020
33,600
33,700
33,800
33,900
34,000
34,100
34,200
34,300
34,400
34,500
10:0
0
10:2
3
10:4
7
11:1
0
11:3
4
11:5
8
12:2
1
12:4
5
13:0
8
13:3
2
13:5
5
14:1
9
14:4
3
15:0
6
15:3
0
AKD Securities Limited
19 June 2020
StockSmart
Pakistan Weekly Update
This Week’s Daily Reports
3
Pakistan Commodities: Limited gains, continued pain of COVID-19 , (AKD Daily, Jun 16, 2020)
Global macros depict a weak picture leading up to May’20 where economic activity took a backseat to enacting unprecedented transport, healthcare and business activity lockdowns to curb the spread of COVID-19. May’20 was the month of limited re-openings in major developed economies pushing the TRJ index ~13%YoY higher, but still down 29%CYTD.
Intermittent pain caused by severe global lockdowns (peaking in mid-April) are expected to im-pact global growth over the medium term, where questions over “second wave” and “infection peak” have fueled uncertainty over the shape of any recovery
Energy commodity prices responded to Asian economies re-opening, allowing for increased de-mand expectations, showcased by rising Oil benchmarks (up 57-60%MoM, assisted by OPEC+ members complying with agreed cuts) and Coal (+13%MoM, but average price still down). Addi-tionally, large spillovers for chemical feedstocks have caused significant distortions (PVC/Ethylene delta –24%MoM, PTA/PX margins flat Mom).
Dislocated agriculture production, global food supply chains and radical shifts in consumer de-mand (following from historic employment shifts) have softened FAO food price index to 17 month lows, while Urea prices have also receded during May’20. Cotton prices underwent minor moves despite being burdened by weak fundamentals.
Length and severity of global lockdowns, accompanied by consumption data are likely to dictate prices as major economies refrain from setting growth targets. Rise in energy prices are negative for Pakistan, with demand for exported agriculture products (including meat, fruits, vegetables, rice) having to find new markets due to global trade dislocations.
Pakistan Market: Searching for the Comeback Cure! (AKD Research, Jun 15, 2020)
Budget’21 appears an exercise in frailty where the need to provide Covid related relief measures ap-pears held back by IMF mandated austerity requirements. Government targets of i) 2.1% GDP growth, ii) FBR revenue at PkR4.96tn and iii) fiscal and primary deficit targets of 7.0% and 0.5% of GDP, re-spectively, appear ambitious and unlikely to be met. On face, the GoP appears to bank on administra-tive measures to fuel tax collection, where several steps to this end have been announced. From capi-tal markets’ vantage, Budget’21 was anti-climactic and can be characterized as a ‘Construction sector Budget’. Focus will now shift towards Aug/Sep’20 months, the period of expected peak COVID-19 transmission and its fallout on wellbeing – both economic and healthcare. Modeling in a 1Q slow-down in our estimates, we see the index trickling to 39k over the next one year, with upside limited by already justified valuations (P/E: 6.8x) while in a worst case, assuming an aggressive and prolonged slowdown throughout 1HFY21 and de-rating index to 5.3x, we see the market re -testing 27k level intra-year. In terms of preferred plays, technological scrips have lit up screens worldwide particularly given changing corona induced working norms where we like Systems Limited (software development & implementation). On the traditional side, we like MEBL, MCB and UBL in Banks, FFC in Fertz, LUCK & MLCF in Cements and NML in Textiles.
AKD Securities Limited
19 June 2020
StockSmart
Pakistan Weekly Update
4
Commodities
International Major Currencies
Source: Bloomberg
Source: Bloomberg
Major World Indices’ Performance
Source: Bloomberg
TRJ-CRB Index
Source: Bloomberg
PkR/US$ Trend
Source: Bloomberg
SPOT Units 19-Jun-20 12-Jun-20 WoW CYTD
TRJ-CRB Points 137.0559 134.3208 2.04% -26.23%
Nymex (WTI) US$/bbl. 40.15 36.26 10.73% -34.25%
ICE Brent US$/bbl. 42.4 38.46 10.24% -36.16%
N. Gas Henry Hub US$/Mmbtu 1.44 1.66 -13.25% -31.10%
Cotton USd/Pound 68.6 67.4 1.78% -12.44%
Gold US$/Tr.Oz 1730.03 1730.75 -0.04% 14.02%
Sliver US$/Tr.Oz 17.5304 17.4916 0.22% -1.80%
Copper US$/MT 5783.5 5761.5 0.38% -5.94%
Platinum US$/Oz 812.34 813.26 -0.11% -15.96%
Coal US$/MT 55.85 57.1 -2.19% -29.92%
SPOT 19-Jun-20 12-Jun-20 Chg +/- WoW CYTD
Dollar Index 97.403 97.319 0.084 0.09% 1.05%
USD/PkR 166.850 164.750 2.100 1.27% 7.72%
USD/JPY 106.960 107.380 -0.420 -0.39% -1.52%
EUR/USD 1.121 1.126 -0.004 -0.40% -0.02%
GBP/USD 1.242 1.254 -0.012 -0.98% -6.34%
AUD/USD 0.687 0.687 0.000 0.04% -2.16%
NZD/USD 0.643 0.645 -0.002 -0.28% -4.64%
CHF/USD 0.951 0.952 -0.001 -0.12% -1.58%
CAD/USD 1.358 1.359 0.000 -0.04% 4.57%
USD/KRW 1,210 1,204 5.750 0.48% 4.62%
CNY/USD 7.074 7.084 -0.011 -0.15% 1.58%
Country Bloomberg Code 19-Jun-20 12-Jun-20 WoW CYTD
Pakistan KSE100 Index 33,439 34,638 -3.46% -17.9%
Srilanka CSEALL Index 4,999 4,915 1.72% -18.4%
Thailand SET Index 1,375 1,383 -0.56% -13.0%
Indonesia JCI Index 4,942 4,880 1.27% -21.5%
Malaysia FBMKLCI Index 1,507 1,546 -2.51% -5.1%
Philippines PCOMP Index 6,315 6,476 -2.49% -19.2%
Vietnam VNINDEX Index 869 864 0.58% -9.6%
Hong Kong HSI Index 24,644 24,301 1.41% -12.6%
Singapore FSSTI Index 2,652 2,685 -1.23% -17.7%
Brazil IBX Index 40,593 39,182 3.60% -16.6%
India SENSEX Index 34,655 33,781 2.59% -16.0%
China SHCOMP Index 2,968 2,920 1.64% -2.7%
S&P SPX Index 3,115 3,041 2.43% -3.6%
DJIA INDU Index 26,080 25,606 1.85% -8.6%
NASDAQ Composite CCMP Index 9,943 9,589 3.69% 10.8%
UK UKX Index 6,277 6,105 2.82% -16.8%
Germany DAX Index 12,374 11,949 3.56% -6.6%
Qatar DSM Index 9,320 9,233 0.94% -10.6%
Abu Dhabi ADSMI Index 4,345 4,295 1.17% -14.4%
Dubai DFMGI Index 2,078 2,103 -1.18% -24.8%
Kuwait KWSEIDX Index 6,633 6,633 0.00% 0.0%
Oman MSM30 Index 3,516 3,514 0.06% -11.7%
Saudi Arabia SASEIDX Index 7,356 7,310 0.63% -12.3%
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AKD Research Team
Analyst Tel no. E-mail Coverage
Usman Zahid +92 111 253 111 (693) [email protected] Executive Director Research