Pakistan Stock Market Review

KSE logoDuring the week ended 11th September Pakistan stock market also remained under pressure due to volatile regional markets. The added concerns were enforcement of stricter regulations by SECP in Pakistan. As a result benchmark of Karachi Stock Exchange, KSE-100 index, closed almost flat at 33,673 levels as compared to a week ago. Foreign flows also took a hit with a net outflow of US$7.6 million as compared to an inflow of US$12.5 million a week ago. News flow affecting the market included: 1) cut-off yield in the latest auction of PIBs witness significant decline in yields on 3, 5 and 10 bonds and the Gop taking advantage of the position raised Rs87.8 billion against a target of Rs50 billion, 2) remittances received during August amounted to US$1.52 billion (up 13%YoY) taking first two month inflows to US$3.19 billion, reflecting 5.4%YoY increase, 3) the Chief of Elengy Terminal Pakistan Limited, a wholly owned subsidiary of ENGRO admitting that the NAB is investigating the process for awarding of its LNG terminal contract and 4) as part of ongoing diversification, ENGRO has appointed financial advisors to provide strategic options for its 56.2% owned Chemicals business, EPCL. The major gainers were MCB, HBL, MEBL and APL and the laggards included DAWH, HMB, INDU and SHEL. Markets are likely to remain volatile in the near short term, with result season coming to an end leaving little room for positive triggers. Foreign flows could set market direction going forward, as regional equity market performance remains uncertain. On the macro front, any reduction in discount rate will have a positive impact with leveraged scrips benefiting from the move. Further release of US$500 million tranche from IMF expected by the end of this month can also support positive sentiments.

Backed by consistent growth in volumes, sharp decline in global milk powder prices and lower farm‐gate prices on account of flush season, EFOODS gross margins have been on a constant mend (up 600bps YoY during 1HCY15 to slightly more than 26.%). However, a reported 12% increase in loose milk prices to Rs94/ltr due to the in-swing lean season can be a cause of concern for the branded dairy manufacturers, assuming the price hike goes through (negotiations underway between city administration and milk sellers). For EFOODS specifically, while this might pose downward pressure on margins in 2HCY15, the diminishing gap (down to Rs16/ltr assuming milk price at Rs94/ltr) between loose and packaged milk prices can potentially help increase the churning rate to branded milk. That said analysts see no major hit on Gross Margin (GM) where weakness in international milk prices (MILKCL1M index down 12% CY15TD) and increased sales from the high‐margin ice cream segment can be key compensating factors. Catalysts which can spur earnings growth include: 1) new product extensions, 2) commercial launch of powder milk and 3) likely restart of Omung sales in Punjab.

Following an increase of 62% in feedstock gas and 23% in fuel stock gas prices, earnings of fertilizer players, specifically FFC and FFBL (who do not have fixed gas price contracts) is expected to witness a major decline considering no price increment. However a more than required increase in urea prices to Rs1,991/bag (up by R1s59/bag versus Rs110/bag required to offset the cost increment) has not only neutralized the negativity but has also provided players with fixed raw material costs the opportunity to further augment their margins. While analysts see CY16F earnings going down by 4% and 2% for FFBL and FFC respectively, EFERT and FATIMA have come out as the key beneficiaries in this regard (CY16F earnings have been revised upwards by 7% and 4% for EFERT and FATIMA respectively).


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