Corporate profits in 4Q soared by 26 per cent YoY, the most in any quarter in FY11. The growth was led by the banking sector and the cement and fertiliser manufacturers – taking corporate earnings growth for FY11 to 18 per cent. Interestingly, 4Q has contributed the most to both FY10 and FY11 earnings, with the least coming from 1Q.
However, market response to this impressive growth in corporate earnings remained muted, with the KSE-100 falling by 9% (despite 40% of the companies reporting higher than expected earnings) since the start of the corporate result season (Jul 25th). Going forward, it is expected that the positive momentum in earnings is to withstand in FY12, with an expectation of a broad based rise of 15 per cent YoY.
This translates into an impressive earnings yield of 17 per cent, offering a positive spread of 360bps over 6month t-bills and 480bps over inflation.
Key takeaways from 4QFY11 corporate results:
Ali Zafar at JS bases his analysis on a sample of 35 companies, representing 75 per cent of the KSE-100 market cap. According to which, corporate earnings in 4QFY11 were recorded at Rs72.1 billion ($845 million) versus Rs57.4 billion ($679 million) in 4QFY10, up 26 per cent YoY. Barring one-timers such as retrospective downward revision in revenues of Rs15.3 billion for OGDC (in 4QFY10) and a deferred tax asset (DTA) write off of Rs2.6bn for PSO (4QFY10), earnings growth would have settled at 37 per cent YoY.
While weak domestic demand and energy shortages led to drop in volumes for the manufacturing concerns in 4Q, profits soared for the cement (+1054 per cent YoY), fertiliser (+54%YoY) and the textile sector (+23%YoY) owing to margin expansion amid higher product prices.
Energy Sector:
The energy companies posted below than average growth of 14 per cent YoY in their profits during 4Q owing to a one time downward revision in revenues of Rs15.3bn for OGDC. Excluding this and a DTA write off for PSO, earnings for this sector would have risen by 37 per cent YoY led by growth in production volumes for Exploration & Productions, higher average Arab light crude oil prices and improved GRMs of the refiners.
Service Sector:
The growth in services sector (+45 per cent YoY) was primarily on account of improved banking sector profits (+43 per cent YoY) amid higher net interest income (spreads up 23bps YoY) and non interest income. PTCL also recorded an impressive growth of 71 per cent YoY owing to higher other operating income.
