Equity Analysis /
Pakistan

Tax credits and one-offs veiled weak 2QCY18 results

    Intermarket Securities
    10 September 2018
    • Almost 70% of companies (86% of market cap) we track have announced 2QCY18 results, where earnings growth remained largely muted (up 3.0%yoy and down 2.7%qoq). This is largely due to range-bound profitability for Index heavyweights -Banks and E&Ps. 
    • Underlying trends indicate pain for sectors effected by 18% Dec-to-date Rupee devaluation (Pharma, Autos and OMCs) while improved pricing power drove Fertilizer results upwards. Drop in Cement sector pre-tax profits (-25%yoy), were tempered by hefty tax reversals, while Banks faced drag from impairment and pension fund charges. E&Ps provided support, benefiting from higher oil prices and weaker PKR.
    • The result season, with the exception of some surprises on bonus issues and tax credits in certain sectors, has been broadly disappointing. Nevertheless, we remain positive on earnings growth prospects in 2019F (18%yoy), to be led by Index heavyweights; Banks and E&P. Names we like include ENGRO, BAFL, UBL, PPL, ASTL and SHEL.        

    Headline growth remained weak in 2QCY18: 46 out of 65 companies (86% of the market cap) in our extended universe have announced their Jun’18 quarter results where profits are flat on sequential basis and up a limited 3%yoy, this is however lower on pre-tax basis. Results have been weak for Banks (-12%yoy; impairment on equity portfolios, and residual pension fund charges), OMCs and Pharmaceuticals (-34%yoy/-32%yoy; both led by impact of rupee devaluation) while Autos (+1.5%yoy), barely made the cut due to weak pricing power amid currency headwinds. On the flipside, sectors with a strong showing included Fertilizers (+56%yoy; strong urea offtake and pricing), and E&Ps (+41%yoy; higher oil prices and weaker PKR). Although profits from  Cements are up 15%yoy they are down 25% yoy on pre-tax basis.

    Defensive sectors are in the limelight amid market uncertainty…: Strong growth in profitability for Fertilizers (+56%yoy) and Power (+35%yoy), is heartening. Significant recovery in terms of pricing, sales and primary margins (especially on Urea) drove fertilizer earnings upwards in 2QCY18, with the exception of some one-offs (in EFERT and ENGRO). Although, RFO generation for IPPs remained thin, results encompassed dollar denominated gains which led to strong payouts. Defensive players have understandably delivered major positive earnings surprises where EFERT (+31%yoy), FATIMA (+71%yoy) and KAPCO (+49%yoy) stand out, albeit due mostly to one-offs during the quarter.

    …while cyclicals have taken a back seat: Earnings for the Foods, Pharmaceuticals and OMCs sector were depressed, lower by 13%yoy, 32%yoy and 35%yoy respectively in 2QCY18, where meaningful growth appears some way off. Rupee depreciation remained the main culprit behind broader decline during the quarter while the Auto sector also remained effected with growth muted at 1.5%yoy. Reported earnings for the Food companies we track were also lower by 13%yoy, driven mostly by a massive 25%yoy drop in NESTLE’s 2QYCY18 profits; somewhat offset by green shoots in EFOODS (driven by lower ETR) and NATF (robust sales growth) results. Banking results were also disappointing led by HBL (-48%yoy), UBL (-40%yoy) and MCB (-38%yoy); which faced drag from impairment on equities portfolio and residual pension fund charge. NBP (+73%yoy), BAFL (+41%yoy) and ABL (16%yoy) stood out. E&Ps (41%yoy) and Cements (+15%yoy) were an exception. Although Cements profitability was mostly marred by higher coal and fuel prices, this was largely tempered by hefty tax reversals. E&Ps (namely MARI, POL and OGDC) benefitted from higher oil prices, PKR depreciation and unwinding of wellhead gas price for Mari field, pertinent to MARI.

    Growth to be led by heavy weights; E&P/Banks in CY19F: IMS Universe growth is expected to remain tepid in 2HCY18, particularly as banks face drag from foreign operations and impact from D-SIBs charge- moderated to some extent by rising NIMs in an interest rate upcycle. We anticipate growth to accelerate in CY19F (+18%yoy) led by (i) Banks, (ii) selective cyclicals (Pharmaceuticals, Steel and Fertilizers to some extent) and (iii) E&Ps to a greater extent. IMS Universe currently trades at a 2019F P/E of 7.8x, where names we like include ENGRO, BAFL, UBL, PPL, ASTL and SHEL. 

    Risks: (i) Thinning of market volumes, (ii) further delays in clarity on Govt policies, (iii) worsening external account, and (iv) negative corporate developments.