The KSE-100 continued upwards in August 2020 (up 4.7%mom) after a sharp rebound of 14% in July (CYTD decline reversed to return of 1%). Market sentiment remained optimistic, as in other global markets, defying (i) a negative decision on GIDC against the corporate sector by the Supreme Court and (ii) downward revision in ROEs of IPPs.
Market activity rose to c.US$159mn average daily traded value (up c.30% mom). Foreign investments turned positive (c.US$7.0mn) after six consecutive months of net selling. However, this was majorly contributed by foreign individuals, while selling by corporates dwindled to US$3.9mn vs. US$70mn in July – supported partly by a relatively stable PKR/US$ (appreciating c.0.6% mom to 166).
KSE-100 has rallied c.51% from its CY20td low in March, where we expect the bullish momentum to continue as consistently soft macro data and slowing Covid-19 infection rate will reinforce the outlook for greater macroeconomic stability ahead. Our top picks are HBL, LUCK, DGKC, ENGRO and HUBC.
Major events during August 2020
Supreme Court rules GIDC decision in favor of the government: The Supreme Court ruled collection of outstanding GIDC in favor of the government, requiring companies to pay in full the outstanding amount (since mid-2015) of about PKR457bn. About PKR164bn of this amount is due from the fertilizer sector. Most companies in our coverage had prudently provided for the expense and will mostly bear a cash outflow. The companies most negatively affected by this decision include the fertilizer producers, FFC and FFBL. Although negative, the event settled a major overhang for the corporate sector, in our view.
Government revises ROEs for IPPs under 1994/2002 PP: The government has signed agreements with the Independent Power Producers (IPPs) for downward adjustments to their tariffs, which will pave the way for a settlement of outstanding circular debt of the IPPs. In particular, future capacity payments (fixed payments which includes the project’s ROE) will be slashed. The potential future benefits include (i) better cash-flow prospects for IPPs, (ii) reduction of government liabilities and (iii) lower national power tariffs. The agreement can potentially unlock payouts from hitherto cash-starved IPPs.
Remittances set a new record in July: Remittances in July 2020 clocked in at US$2.7bn (an all-time high), up 36% yoy, beating the record set only in the previous month (thus rising 12% mom), and is in contrast to US$1.8bn in April (pandemic-affected). Key factors include increase in flows through digital channels, Eid falling in July, and crackdown on informal means.
Encouraging 2Q results from Banks: The June 2020 results of most major banks (except that of MCB and BAFL) exceeded consensus expectations due to healthy NII which offset high general provisions. Under the SBP’s temporary regulatory measures, commercial banks have deferred PKR644bn of loan repayments (8.6% of total banking sector loans) for one year, to maintain banking system soundness and sustain economic activity (PKR173bn loans have been restructured).
Outlook
The KSE-100 has rallied c.51% from its CYTD low in March 2020 (amid the peak of pandemic related fears) reversing the CY20td decline to a return of +1%. The probable continuation of macroeconomic improvement and more business-friendly policies from the government will keep market sentiment upbeat, in our view. We think that select stocks in the Cement, Textile and Packaging spaces can outperform the market hereon. Our top picks include ENGRO, HBL, LUCK, DGKC and HUBC. (Intermarket Securities Limited.)