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Additional monetary stimulus from the central bank ahead of Eidul Fitr holidays set out a perfect opportunity for the investor to undertake some profit-taking, driving market lower -0.5%WoW (-171pts) to close the week at 33,837pts. Cyclical which gained in the expectation of rate cut became the obvious causality, as investors resorted to profit-taking, with Steel and Cements losing 3.8%WoW and 2%WoW, respectively. Recovering international oil pric-es extended support to E&Ps at home, with sector gaining 2.4%WoW. Market participation remained weak due to short trading hours, with average daily turnover declining to 205mn shares, down 6%WoW. Key news flows impacting the market during the week included: i) SBP slashing its policy rate by additional 1%, bringing the cumulative easing to 525bps over the past two months, ii) SC ordering the provincial gov’ts to open all shopping malls without any hindrance or obstruction while requiring strict adherence to standard operating proce-dures (SOPs), iii) National Account Committee (NAC) estimating real GDP growth for FY20 at negative 0.38%YoY, with all sub groups barring agriculture likely to witness declines, iv) the gov’t raising ~PkR200bn via Sukuk issue at a comparatively low rate of return of 6M KIBOR minus 10bps (vs. last issuance at 6M KIBOR plus 80bps) through competitive bidding at the PSX, and v) Moody’s Investors Service placing on review for downgrade both local and for-eign currency deposits highlighting the government’s weakening capacity to support banks in case of need, and vi) v) the gov’t raising PKR167.3 billion through T-bills, against the auc-tion target of PkR325 billion, with cut off yields declining (3M/6M/12M: 8.15/7.81/7.75%, down 24/19/0bps). Amongst the mainboard, top gainers during the week were i) ICI (+22.2%WoW), ii) IDYM (+13.8%WoW), iii) JDWS (13.2%WoW), iv) EFUG (+12.5%WoW), v) HCAR (11.3%WoW), while i) SHEL (-10.6%WoW), ii) CHCC (-8.9%WoW), iii) JLICL (-7.3%WoW), iv) MEBL (-6.8%WoW), and v) BoP (-6.5%WoW) were the major laggards.
StockSmart
AKD Equity Research / Pakistan
Pakistan Weekly Update
Important disclosures including investment banking relationships and analyst certification at end of this report. AKD Securit ies 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 the FY21 budget expected in early Jun’20, budgetary expectations will likely dictate sentiment at the bourse. The gov’t faces a tough choice between managing its fiscal affairs prudently (i.e. delivering on IMF targets) and providing relief to the masses who are hit hard by the corona induced slowdown in the economy. Moreover, macro reads particularly on the external side (CAD widened to US$572mn in Apr’20 compared to a monthly average of US$334mn in FYTD, FX reserves fell US$141mn in the last week) could turn investors risk-off. Although the probability of going back to lockdowns is relatively low given the authorities unofficially pursuing herd immunity approach, left tail risk cannot be completely ignored which can arise from a sharp jump in Covid-19 cases as daily testing increases leading to a prolonged and stricter lockdown.
CY20 began on a weak note for the Fertilizer sector, which posted a cumulative 1QCY20 NPAT of PkR1.8bn (excl. FATIMA; result awaited), down 69% YoY, with EFERT and FFBL being lag-gards.
The GoP’s agriculture package entailing PkR37bn of subsidy for the Kharif season is expected to support overall urea offtake (1.0mn tons, down 24%YoY in 1QCY20) through CY20, providing a real hedge to an otherwise weak demand dynamic.
While sector dynamics remain immune from negative implications of COVID-19, a potential downside risk could emerge in the form of higher LNG availability (with lower international LNG pricing) causing surplus situation.
FATIMA is in the process of finalizing an agreement with ExxonMobil for import of LNG for onward forwarding to their plant sites, to benefit from the low international LNG prices (at around US$2-3/mmbtu).
With Fatima Fert and Pak Arab having a cumulative capacity of 538K tons rendered un-operational due to shortage of gas, where materialization of directly procured LNG could par-tially eliminate the need for subsidizing urea price. We foresee FFC to remain relatively well shielded even in the case of excess urea supply, underscoring our bullish stance.
Pakistan Autos: Balance sheets are ready for any rebound, (AKD Daily, May 20, 2020)
Coalescing around our expectations of tapered CAPEX (brought on by demand down-cyle) where three consecutive quarters (upto 1QCY20) of softened CAPEX bring the industry closer to maintenance levels (TTM outlay at PkR10.6bn) with PSMC/INDU/HCAR constituting 20/75/5% of period outlays (vs. CY14-18 avg of 41/43/16%), with INDU the only major OEM still incurring significant outflows
Concurrently, the industry’s TTM topline/gross profit levels have receded 32/52%YoY showcas-ing persistent strains on core profitability (four consecutive quarters of declining sales and gross profits), where players dealt with FX fluctuations drastically hiking retail prices coinciding with a period of demand weakness (monetary tightening, inflationary pressures, lower dispos-able incomes)
In terms of cash flows, net working capital outflows dragged operating cash flows for three consecutive quarters (June’19-Dec’1), improving in March’20. While slowing CAPEX helps in reducing outflows, all three major OEMs have now added leverage to their balance sheets (net borrowing inflow since Sept’19 at PkR32.6bn led by PSMC followed by HCAR).
We re-iterate our stance on strong catalysts in the macro domain (controlled inflation, low fuel costs, cratering cost of borrowing) supporting any recovery in consumer demand, however, present circumstances (COVID-19 containment, reopening and repercussions for aggregate durables consumption) are likely overshadow these positives.
Pakistan OMCs: Tough time to grow (AKD Daily, May 19, 2020)
Depressed volumes directly softened throughput levels, with 1QCY20 retail volumes at 3.SHEL/APL/PSO delivered throughput levels of 574/490k/523k/0mn tons, down 21%QoQ largely due to a 32%QoQ decrease in HSD, owing to players limiting product in storage to mitigate against fluctuating oil prices and COVID-19 containment restrictions put in place during the period
Company-wise, HASCOL/402k ltrs/outlet, moving -17.7%/-12.6%/-17.6%/-26.0%QoQ and -39.8%/-20.9%/-17.7%/-11.7%YoY taking total average industry throughput -22.5%QoQ/-19.4%YoY to 463K lts/outlet.
Sectoral demand figures indicate the hastening of an FO-lite downstream demand re-orientation (furthered by slowing retail outlet expansions), as transport-linked demand formed 99.6/90.2% of the total volumes of MS/HSD for Feb’20, while unlisted players continued to make inroads in share of listed players.
With volumes facing a downturn and outlet additions depleting mean throughput, slowing retail outlet additions are expected to prevail over the medium term, with OMCs focusing on pulling customers (through discounts, forecourt retail upgrades), in our view.
May 21, 2020
May 20, 2020
May 19, 2020
Source: PSX & AKD Research
May 18, 2020
33,740
33,784
33,828
33,872
33,916
33,960
34,004
34,048
34,092
10
:15
10
:38
11
:02
11
:26
11
:49
12
:13
12
:36
13
:00
13
:23
13
:47
33,720
33,780
33,840
33,900
33,960
34,020
34,080
34,140
34,200
34,260
10
:15
10
:38
11
:02
11
:25
11
:49
12
:13
12
:36
13
:00
13
:23
13
:47
33,600
33,687
33,774
33,861
33,948
34,035
34,122
34,209
34,296
34,383
34,470
10
:15
10
:40
11
:05
11
:30
11
:55
12
:19
12
:44
13
:09
13
:34
13
:58
33,840
33,905
33,970
34,035
34,100
34,165
34,230
34,295
34,360
34,425
10:1
5
10:3
8
11:0
2
11:2
6
11:4
9
12:1
3
12:3
7
13:0
0
13:2
4
13:4
7
AKD Securities Limited
22 May 2020
StockSmart
Pakistan Weekly Update
This Week’s Daily Reports
3
In this backdrop, PSO (TP: PkR203.5/sh, 26.2% upside) remains our top pick where company has already gained retail market share (40.9% in 10MFY20 against 37.6% in 10MFY19) while Sukuk II is expected to ease liquidity concerns of the company, allowing it the financial mus-cle to support its footprint.
Pakistan Economy: SBP moving along the curve, (AKD Daily, May 18, 2020)
The MPC of the SBP delivered yet another 100bps rate cut (5.5% cumulative cut since March’20), citing improved inflation outlook following May’20 steep reduction in the Gov’t administered fuel prices (~20%) and countering COVID-19 containment spillovers by en-hancing liquidity support to keep businesses afloat.
This bold move from the central bank underscores two important points, namely, the eco-nomic pain of COVID-19 and resulting health challenge may be more adverse than earlier expected. Secondly and arguably of greater heft, the IMF is more accommodative than usu-al, seconding much-needed stimulus to the economy.
While aggressive action hitherto has clearly narrowed room for further easing, we do not rule out additional monetary action yet, considering the high level of prevailing uncertainty (policy actions, re-opening, demand shocks, employment and recovery of cumulative con-sumption) due to COVID-19. Both length and intensity need to be closely monitored and may necessitate further monetary action.
That said, the exact course of monetary action will be determined by the i) parallel fiscal policy – gov’t slated to present FY21budget in early Jun’20, where soft fiscal targets may create room for further easing – and ii) how the external account fares going forward, where higher than expected deterioration could restrict the SBP from further easing.
With extended holidays looming, all eyes are set on Budget FY21, where comments from GoP functionaries, trade bodies and revenue authorities are likely to dictate sentiment at the bourse. In this regard, the GoP will have to triage the triple imperatives of taxation ex-pectations (of specific industries demanding relief), with IMF stipulations while mitigating harm from COVID-19 pandemic.
AKD Securities Limited
22 May 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 21-May-20 15-May-20 WoW CYTD
TRJ-CRB Points 130.9107 124.7466 4.94% -29.54%
Nymex (WTI) US$/bbl. 34.26 29.43 16.41% -43.89%
ICE Brent US$/bbl. 35.29 31.51 12.00% -46.87%
N. Gas Henry Hub US$/Mmbtu 1.91 1.66 15.06% -8.61%
Cotton USd/Pound 67.35 66.3 1.58% -14.04%
Gold US$/Tr.Oz 1734.66 1743.67 -0.52% 14.33%
Sliver US$/Tr.Oz 17.1825 16.6109 3.44% -3.75%
Copper US$/MT 5417.5 5156 5.07% -11.90%
Platinum US$/Oz 840.62 789.47 6.48% -13.03%
Coal US$/MT 53.9 53.45 0.84% -32.37%
SPOT 21-May-20 15-May-20 Chg +/- WoW CYTD
Dollar Index 99.195 100.402 -1.207 -1.20% 2.91%
USD/PkR 160.775 160.350 0.425 0.27% 3.80%
USD/JPY 107.740 107.060 0.680 0.64% -0.80%
EUR/USD 1.099 1.082 0.017 1.56% -2.00%
GBP/USD 1.224 1.212 0.012 1.00% -7.69%
AUD/USD 0.657 0.641 0.016 2.49% -6.38%
NZD/USD 0.613 0.594 0.019 3.22% -9.11%
CHF/USD 0.966 0.972 -0.006 -0.61% -0.10%
CAD/USD 1.391 1.411 -0.020 -1.40% 7.10%
USD/KRW 1,231 1,231 -0.300 -0.02% 6.46%
CNY/USD 7.105 7.102 0.003 0.04% 2.03%
Country Bloomberg Code 21-May-20 15-May-20 WoW CYTD
Pakistan KSE100 Index 33,837 34,008 -0.50% -16.9%
Srilanka CSEALL Index 4,785 4,439 7.79% -21.9%
Thailand SET Index 1,321 1,281 3.12% -16.4%
Indonesia JCI Index 4,546 4,508 0.85% -27.8%
Malaysia FBMKLCI Index 1,452 1,403 3.47% -8.6%
Philippines PCOMP Index 5,604 5,542 1.13% -28.3%
Vietnam VNINDEX Index 863 827 4.32% -10.2%
Hong Kong HSI Index 24,280 23,797 2.03% -13.9%
Singapore FSSTI Index 2,555 2,524 1.26% -20.7%
Brazil IBX Index 34,269 32,671 4.89% -29.6%
India SENSEX Index 30,933 31,098 -0.53% -25.0%
China SHCOMP Index 2,868 2,868 -0.02% -6.0%
S&P SPX Index 2,972 2,864 3.77% -8.0%
DJIA INDU Index 24,576 23,685 3.76% -13.9%
NASDAQ Composite CCMP Index 9,376 9,015 4.01% 4.5%
UK UKX Index 6,022 5,800 3.82% -20.2%
Germany DAX Index 11,075 10,465 5.83% -16.4%
Qatar DSM Index 8,873 8,735 1.58% -14.9%
Abu Dhabi ADSMI Index 4,113 4,067 1.13% -19.0%
Dubai DFMGI Index 1,939 1,894 2.35% -29.9%
Kuwait KWSEIDX Index 6,633 6,633 0.00% 0.0%
Oman MSM30 Index 3,408 3,422 -0.40% -14.4%
Saudi Arabia SASEIDX Index 7,051 6,717 4.97% -16.0%
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Analyst Tel no. E-mail Coverage
Usman Zahid +92 111 253 111 (693) [email protected] Executive Director Research