LAHORE

The Karachi Stock Exchange witnessed mixed sentiments during the outgoing week with the corporate results season in full swing. The benchmark KSE 100-index closed up 0.1% WoW at 33,993 while average trading volumes dropped by 22% WoW to 212m shares/day. Higher-than-expected result announcement by DG Khan Cement (DGKC) prompted fresh buying into the cement sector. However, news of potential expansion by DGKC cut short investors’ optimism. ENGRO remained in the limelight, announcing (1) better-than-expected 2014 earnings and (2) intention to sell its EXIMP business to Engro Fertilizer (EFERT). Other key highlights of the week were: Pakistan finalizing $21b LNG deal with Qatar, SBP revising down FY15 inflation target to 4.5-5.5% from initial target of 8%, OGRA asking the government to approve increase in gas tariff to save gas utilities from collapse, foreign exchange reserves rising to $16.04b and Federal Minster hinting at discontinuation of subsidized sale of power to K-Electric (KEL).

During the week, Indus Motor Company Limited announced 1HFY15 results, where the company posted earnings of Rs3,143m (EPS: Rs39.99), up 132% YoY. The result was in-line with expectation of Rs2,958m (EPS: Rs37.63). The company also announced an interim cash dividend of Rs20/share.

In 2Q alone, earnings clocked in at Rs25.65/share, a growth of 327% YoY and 79% QoQ, led by revenue growth of 86% YoY, gross margins improvement to 13.5% on the back of favourable PKR exchange rate and jump in other income by 210% YoY owing to higher cash balances.

DG Khan Cement (DGKC) also announced 1HFY15 earnings of Rs3.4b (EPS Rs7.75) as against Rs2.7b (EPS Rs6.09) last year, up 27%. In 1HFY15, DGKC recorded revenue of Rs12.6b as against Rs12.4b last year, which is up 2%, mainly led by 3% increase in net retention prices. Total cement dispatches declined by 1% due to 30% lower exports. However, local dispatches grew by 10% on the back of robust growth in private sector demand and start of mega construction projects around the country. In 1HFY15, financial charges witnessed a decline of 57%, resulting in profit before tax to increase by 17% to Rs4b compared to Rs3.4bn in 1HFY14. On quarterly basis, net earnings in 2QFY15 increased by 93% to Rs2.2b, well above market consensus, compared to Rs1.1b in 1QFY15. Although profit before tax grew by only 49% to Rs2.4b versus Rs1.6b, tax adjustment in 2QFY15 resulted in bottom-line to grow by 93%. Moreover, DGKC reported other income of Rs697mn, up 17%YoY from Rs598m in 2QFY14, in which, MCB Bank (MCB) contributed Rs358m as dividend income.

Engro Corporation Limited also announced its full year CY14 result during the week, bringing to a close an eventful year for the group. In full year CY14, the company posted consolidated earnings of PKR7b (EPS: PKR13.4) while also announcing a dividend of PKR4.0/share, bringing cumulative CY14 dividend to PKR6.0/share. Along with the result, the company also announced continued consolidation of its businesses as Engro Eximp will be transferred to Engro Fertilizer’s books for a consideration of PKR4.4b, bringing the entire fertilizer business under one umbrella. At the same time, Engro Eximp’s wholly owned subsidiary, Engro Eximp Agri products Limited (engaged in rice procurement, processing and sale) will be sold off to Engro Corporation for a sum of Rs4.4b. From an investment perspective, despite Eximp being sold off for a consideration of higher than recorded value, the transaction will result in only a book value gain of Rs2.5b with no gain being recorded in the P&L (on a consolidated basis) given intra-group nature of the deal. Consolidation has also continued within other group companies with Engro Foods (EFOODS) offloading its loss making Canadian subsidiary in 3QCY14 while market hearsay suggests ENGRO may also be looking to offload other loss making entities. This will be in-line with Engro’s strategy where management has already indicated a shift in strategy towards only agri allied and Energy sectors.

According to experts, with international oil prices falling by more than 50% since Jul 2014, energy analysts across the globe have been periodically revising their oil price forecasts downwards. In the most recent poll on oil prices, analysts have further downgraded their price forecast for 2015 by 21% from the Dec 22, 2014 poll.

 The recent poll suggests that Brent crude oil would average $58.3/bbl in 2015, $69.8/bbl in 2016 and $75.9/bbl in 2017. The poll also suggests that WTI crude would average US$54.2/bbl in 2015, US$64.9/bbl in 2016 and US$70.3/bbl in 2017. Following historical parity with Brent crude, Arab Light crude (reference crude basket for E&Ps in Pakistan) would therefore average $57.4/bbl in 2015, $68.8/bbl in 2016 & $74.8/bbl in 2017.