Pakistan Stock Market: Beginning of results season

The PSX‐100 index closed flat for the week ended 22nd April at 33,740 levels due to ongoing political conflicts and failure of global oil producers to arrive at consensus regarding an output freeze last week that eclipsed attractive earnings announcement. The news flow during the week included: 1) current account balance for March’16 recording a surplus of US$239 million taking 9MFY16 cumulative deficit to US$1.61 billion, down 18.5%YoY, 2) GoP borrowing Rs136 billion in PIB auction, 3) large scale manufacturing sector posting 8MFY16 growth at 4.35%YoY, 4) Ministry of Petroleum and Natural Resources seeking increase in profit margins of 2.6% on both diesel and petrol separately for OMCs and dealers from the ECC, 5) CCP serving show cause notices to four dairy manufacturers ‑ EFOODS, Shakarganj Foods Products, Haleeb Foods  and Noon Pakistan on alleged deception through advertising tea whiteners as milk and 6) FBR informing the National Assembly Standing Committee on Finance on plans to propose conversion of dairy sector’s zero‐rating status to an exempted sector.

Gainers at the bourse were SNGP, POL, PPL, SSGC and APL; laggards included FFBL, EFERT, DGKC, MLCF and 5) PIOC. Activity at the bourse saw commendable recovery with daily trading volumes for the week averaging at 239.3 million shares, up 27.75%WoW. However, foreign flows came under further pressure with foreigners selling US$28.27 million, higher than US$1.46 million last week.

Results season is set to enter full swing next week with major players in the Cement (LUCK, MLCF), Banks (ABL, UBL, BAFL, NBP), Fertilizer (EFERT, ENGRO, FFC), Power (KEL, HUBC) and Oil & Gas (OGDC, PPL) sectors reporting earnings. That said, any escalation in political noise is likely to drive caution from investors, in particular planned protest by the opposition parties. On the global front, US Fed is due to announce interest rate stance on 27th April with firm expectations of no change. However, a dovish outlook on future interest rate trajectory can further put pressures on the dollar, proving a positive for Pak Rupee.

In line with expectations, MCB Bank (MCB) has posted consolidated profit after tax of Rs6.1 billion (EPS: Rs5.50) for 1QCY16 as against net profit of Rs8.03 billion (EPS: Rs7.22) for 1QCY15, down 24%YoY. Alongside the result, MCB also announced a first interim dividend of Rs4.0/share (payout: 73%). Sequentially, analysts see 13%QoQ improvement in earnings on the back of provisioning reversals worth Rs431 million against a charge of Rs1.6 billion for 4QCY15.  Key 1QCY16 result highlights included: 1) decline in NII by 3%YoY, 2) reversals of Rs431 million in the quarter, 3) decline in non-interest income amid lower capital gains by 42%YoY, 4) a 5%YoY increase in expenses. While CY16 remains a challenging year for the banking industry as banks struggle to find lucrative investment avenues to compensate for their high yielding PIB book, MCB’s excellent deposit franchise particularly efforts to scale up current accounts  and renewed focus on building its consumer book can turn out to be key earnings drivers.

Lucky Cement (LUCK) is scheduled to announce its 3QFY16 financial results on 23rd April where analysts expect the company to post net profit of Rs3.43 billion (EPS: Rs10.61) during 3QFY16, down 7%YoY. In spite of expected growth in PBT (+14%YoY) led by improved gross margins (GMs) up 212bps YoY and lower distribution cost down 46%YoY, profit after tax is expected to be lower than last year likely due to relatively higher effective tax rate of 30% compared to 14% last year. GMs are expected to go up as a result of coal price/FO price rout (average coal price down by 23%YoY and furnace price down by 46%YoY), recent addition of 5MW WHR and substitution of lost exports by higher margin domestic market. While distribution cost is expected to plunge owing to 45%YoY slump in exports as major export markets (South Africa and Iraq) imposed high anti‐dumping duties on Pakistani cement exports last year. Sequentially, earnings are expected to improve by 4%QoQ due to relatively higher sales (+2%QoQ) and stronger GMs (+67bps QoQ). The later is likely owed to 31%QoQ decline in furnace oil price and continued shift of falling exports to local market. On a cumulative basis, analysts expect 9MFY16 earnings to improve by 4%YoY to Rs9.69 billion (EPS: Rs29.95) as compared to Rs9.30 billion (EPS: Rs28.77).


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