Karachi, March 10, 2022 (PPI-OT): One-offs galore in Dec-2021 results; commodities key to profit outlook
JS Universe profitability rose 4% QoQ for the quarter ending Dec-2021, with 20 out of 33 companies under our coverage reporting sequentially higher earnings, where one offs led to positive earnings surprises in some companies.
Note that the heavyweight Banks and E and P had contrasting quarters where muted operational performance of banks was more than offset by lower provisions (profits up 7% QoQ), while strong operating performance of E and Ps was dragged by their investment in international JV, Pakistan International Oil Limited, taking sector bottom line growth to negative 3% QoQ.
Looking ahead, higher rates and oil prices are likely to benefit banks and E and Ps. The commodity price boom will however be a test for pricing power and inventory management of other sectors – where the same will be a key determinant of profitability.
Dec 2021 Result Season: 4% QoQ headline growth
JS Universe profitability rose mildly and somewhat unexpectedly in case of some sectors and a few companies in quarter ending Dec-2021. The headline earnings growth of JS Universe (covering c.63% of KSE100 capitalization and which we use as a proxy for the market) was tepid at 4% QoQ in the Dec-2021 quarter with 20 out of 33 companies under our coverage reporting sequentially higher earnings. On the revenue front, 31 companies under JS Universe showed positive jump, resulting in 10% QoQ topline jump.
Amidst number of one-offs
The headline earnings growth was somewhat distorted by a few non-recurring items. Some notable ones were:
PSO booked one-time higher other income of Rs8.9bn owing to penal mark-up income on receipts from power sector.
HUBC faced transformer failure related losses from its JV China Power Hub Generation Company (CPHGC).
FFBL booked allowance of expected credit loss on receivables for FML.
Bank Alfalah took a charge of Rs 1bn against its exposure in Afghanistan.
Noteworthy sector trends
Note that the heavyweight Banks and E and P had contrasting quarters where muted operational performance of banks was more than offset by lower provisions (profits up 7% QoQ), while strong operating performance of E and Ps was dragged by their investment in international JV, Pakistan International Oil Limited, taking sector bottom line growth to negative 3% QoQ.
Stripping out the contribution of Banks and E and P earnings from the universe results in 10% QoQ corporate earnings growth, most of which was led by Cement which exhibited strong earnings momentum as most cement players implemented cost efficiencies and better coal inventory procurement in face of stellar coal prices during the quarter.
Russia-Ukraine tensions and macros to drive profitability
Looking ahead, higher rates and oil prices are likely to benefit banks and E and Ps. The commodity price boom will however be a test for pricing power and inventory management of other sectors – where the same will be a key determinant of profitability. In addition, higher debt servicing cost will also likely be a key feature as the full impact of monetary tightening of 275bp seen since Sep-2021 translates into loan repricing. Sector specific:
In case of cements, similar to 2QFY22, coal inventory management and ability to pass on any cost pressures into retail prices will again be key. While company guidance suggests that cement players are well covered for next couple of months, prolonging of high coal price environment will strain profitability.
Steel players too are facing the double whammy of higher scrap prices and freight cost, where every US$50/ton increase in scrap prices requires Rs12,000/ton price increase. Effective pass on of the same in end prices could be the defining factor for steel profitability.
Increasing pressures on currency due to external account will be a litmus test for auto producers where the impact of continued price hikes and the follow through impact on demand and margins.