Market Roundup

Finally Supreme Court disqualified the Prime Minister on the back of contempt case. For the first time the ruling political party has accepted the decision of Supreme Court and announce Mr. Raja Pervaiz Ashraf as the candidate for the Prime Minister for a period of 244-days. The political tug of war continued to hamper the market sentiment and investors willingness towards investing in Pakistani Equity.

HUBC - Still The Ark To Cling On

After a long delay, NEPRA has finally notified the post-COD reference tariff for HUBC Narowal Power Project (HNPP). The 225MW project achieved commercial operation (COD) on April 21, 2011 after a delay of 385 days from required COD of March 31, 2010. Pre-COD tariff curtailed HUBC total earnings by PKR0.56/share during 9MFY12 as cost overruns were not accounted for in the tariff components including the debt schedule of HNPP. 

Post Gilani Dilemma

As per the Supreme Court Decision, Prime Minister Yousuf Raza Gilani was disqualified from holding a seat in the Parliament from the date of his conviction on April 26, 2012. Furthermore the decisions taken by the cabinet run by the Prime Minister stand dissolved from the same date. Hence the decision taken by Economic Coordination Committee (ECC), authenticated by the Prime Minister and various other decisions require validation from the new Prime Minister.

 

Market Roundup

LUCK: Present Risks and Our Take on Them

Lower than expected FED cut (PKR5/bag), imposition of cess on captive plants, rumors of disconnect gas supplies to captive plants and steep decline in PKR value has led LUCK to underperform broader index by 9% in last 2 weeks    The burden of higher energy cost from unlikely gas curtailment to CPPs and additional cess amount will be conveniently passed down by the manufacturers     The aggressive PSDP utilization expected in 1HFY13 (pre-election populist measures) will continue to keep the prices downward sticky    With lower debt/ton, higher interest coverage and rising cash balances, LUCK is best positioned to fend off the threat of increase in borrowing costs    Higher exports share and softening coal prices downplay the concerns emanating from PKR depreciation    1) LUCK’s capacity to add considerable debt to its predominantly unleveraged balance sheet and 2) Group level nature of the transaction further downplay the concerns regarding funding and liquidity issues relating to potential ICI acquisition    Despite 20% decline in coal prices during past two months, LUCK has underperformed the benchmark index by 11%. Thus, the current price level has yet to incorporate the impact of declining coal prices on LUCK’s gross margins    At our upward revised target price of PKR136/share, the stock offers an upside potential of 21% plus a dividend yield of 5%

LUCK: Present Risks and Our Take on Them

M2 growth of 11.54%YTD, not much convincing

           Written as on June 22, 2012

Highlights

            •         M2 growth of 11.54% FYTD, figures further derailed on WoW basis

            •         Budgetary borrowing increasing at alarming rate

            •         Massive borrowing amid increasing inflation risk ahead

In today's Value Seeker, we present an update on M2 growth figures issued by SBP till 08-June FY12 along with outlook over monetary side of economy.

M2 growth of 11.54% FYTD, figures further derailed on WoW basis

As per recent figures made available by SBP till June 08, 2012, M2 (broad money) has surged by 11.54%YoY to Rs772 billion during FY12TD compared to the growth of 14.07% during same period last year. On weekly basis, M2 growth posted surge of 50bpsWoW to 11.5%YTD compared to growth of 10.9%FYTD week earlier. Major surge was witnessed in currency in circulation which grew by 335bpsWoW to 15.9%YTD compared to growth of 12.2% FYTD a week earlier.  On flip side, growth in demand and time deposit witnessed the decline of 33bpsWoW to stand at 10.3%FYTD compared to growth of 10.7% last week. NFA posted the decline of Rs282bn during the same period, declining by 36.12%YTD compared to decline of 35.8%YTD week earlier, showing the further decline of 39bps during the week. On the others side, NDA posted the increase of 17.83%FYTD to Rs1.05tr compared to growth of 17.17%FYTD last week, showing the increase of 56bps during the period.

Budgetary borrowing increasing at alarming rate

Figures under NDA till 08-June, FY12 shows heavy reliance of Gov't over budgetary borrowing to balance its books as massive surge of Rs1.23tr (47.35%YTD) has been witnessed during FY12 compared to the borrowings of Rs705bn during same period last year. The borrowings for the budgetary support during FY12 include borrowings from SBP of Rs502bn up 42%YTD (compared to the borrowings of Rs235bn during same period last year) and borrowing from banking system of Rs729bn, up 52%YTD (compared to the borrowings of Rs730bn during same period last year).

FX reserves declining constantly as IMF payments looms

With the beginning of June-12, a huge decline of 6% was witnessed in forex reserves of the country. The forex reserves reached at USD15.05bn YTD till June 15, 2012. Moreover, on YoY basis forex down by 4.2%YoY while 2.4% on weekly basis. The declining in forex reserves is mainly due to repayment to IMF installment and rising current account deficit. Going forward, the next installment of USD120mn due on June 29 will exert further pressure on FX.

Massive borrowing amid increasing inflation risk ahead

The huge volume of budgetary borrowing will exert further inflationary pressure in coming months ahead including issues on fiscal side which still stands unreciprocated. We expect SBP will hold tighter monetary maintaining in coming months maintaining the discount rate at 12%. We further expect the growth momentum in borrowings to continue as in our view Gov't has not taken any rationale step to curb the excessive budgetary expenditures this year especially from subsidies to power sector and losses from SOEs resulting in inflating the budget defect to Rs1,512bn FY12(Revised Estimates), 7.4% of FY12 GDP. 

M2 growth of 11.54%YTD, not much convincing

Four IPOs in FY12

 

June 22, 2012 (JS Research)

 

 

While the daily turnover at the KSE has improved by 1.4x times in FY12, more encouragingly the public offerings at the local bourse have also shown relative improvement from last year. Initial public offerings (IPOs) are considered a key indicator to gauge market’s depth. The market witnessed four IPOs worth Rs850mn in FY12 compared to only two worth Rs1.1bn in FY11 (based on date of public subscription). Notably, the offerings were subscribed by 0.96x this year compared to a subscription of 0.61x last year.

 

Four IPOs in FY12 vs. two last year

The public offerings improved to four in FY12 compared to only two in FY11. However, it remains much lower than 11 and 14 offered in FY04 and FY05, respectively. Cumulatively (including book-building exercise), a sum of Rs888mn was raised in FY12 vs. Rs1.17bn in FY11. Amongst the issues this year, one each belonged to the food producers and insurance sectors and two belonged to the services sector.

 

 

 

Post their listing at the bourse; ENGRO Foods (EFOODS) has posted an impressive return of 164%, while TPL Direct Insurance (TDIL) has recorded a gain of 5%. However, Next Capital (NEXT) value has declined by 28%.

 

 

Value-wise subscription improves to 0.96x

The value-wise subscription of the offerings stood at 0.96x in FY12, as opposed to 0.61x in FY11. A total of Rs812mn were raised from the general public against a target of Rs850mn. TPL Trakker stood out as the most favored offering to the general public with a subscription of 1.15x. Participation ratio (based on number of applications received) also improved from last year, clocking at 0.12x compared to 0.02x.

 

Outlook

Despite domestic political uncertainty and complicated ties with the US , the market has rallied by 20% in 2012 till date, while volumes have improved markedly as well. The improving confidence at the local bourse is likely to encourage future listings at the local bourse.

 

atif.zafar@js.com

92 (21) 111-574-111 (ext. 3118)

 

Also in focus

Forex reserves decline by US$371mn

Pakistan’s foreign exchange reserves have declined by US$371mn in a week to US$15.046bn. Reserves held by the SBP fell by US$437mn to US$10.680bn while reserves held by the commercial banks rose by US$65mn to US$4.365bn. According to the SBP the decline has come on account of routine payments as no extraordinary payments were made.

Four IPOs in FY12

Trade deficit details: Energy crises the major reason

      Written as on June 21, 2012

Highlights

            •         Gas crisis a core reason for widen gap b/w imports and exports

            •         Energy shortage dented textile exports considerably

•         Outlook: FX Reserves depletion risk ahead

In today's Value Seeker, we present detail of trade account figures published by Pakistan Bureau of Statistics for Jul-May 2012 along with its outlook.

Gas crisis a core reason for widen gap b/w imports and exports

The impact of shortage of natural gas in the country has been gradually seen as a pinnacle factor for widening of trade deficit this year as substitution towards oil based products resulted in 5%YoY surge in oil import volumes to 17.5metric tons.   Also power shortage in the country  impacted the real sector of economy as major textile exports including Cotton Cloth, Knitwear, Bed wear and Readymade garments quantity declined by 12%YoY, 24%YoY, 19%YoY and 27%YoY respectively. The detailed trade figures for the 11MFY12 revealed by Pakistan Bureau of Statistics notify that the imports have grown significantly by 12%YoY to USD40.9bn, but exports remained subdued and decline by 4%YoY to USD21.5bn. Therefore, trade deficit of the country is depicting a 37% increase to USD19.4bn11MFY12. If we see month on month growth, exports for May 2012 have also reduced mere 3.6%MoM, while imports for the same month have increased with the same 3.6%.

Energy shortage dented textile exports considerably

On the exports side, overall textile exports which contain 52% in total exports has declined by 9.6%YoY to USD11.3bn during 11MFY12 compared to USD12.5bn during same period last year. The largest category under the textile exports head is cotton cloth, which hold 20% share in textile group and 10% in total exports, has declined by 3.1%YoY to USD2.2bn during the underlying period compared to USD2.3bn last year. Cotton Yarn also stood among the looser category in terms of percentage as it has denoted decline of 20%YoY to USD1.64bn. Moreover, bedwear, knitwear and readymade garments category exports down by 15%YoY, 13%YoY and 6.5%YoY respectively during same period.

Oil imports remained a big challenge

Further analysis of the import data shows that the POL group continues to be the leader in absolute terms as it contains 34% share in total imports during 11MFY12, imports under this head grew by 33%YoY to USD13.9bn from USD10.5bn. Similarly, Machinery group imports augmented by 6%YoY to USD5.1bn, while this group has shared 12% in total imports. Under the food group, Palm oil was the major imported commodity witnessed the increase of 16%YoY to USD2.1bn. In the Machinery group, telecom was the major component while the imports of this segment increased by 25%YoY to USD 1.2bn, whereas Mobile phone category swelled by 32%YoY to USD632mn. Under Agri & Chemical group, fertilizers was the key commodity which imports increased by 112%YoY to USD1.1bn during 11MFY12. In the metal group, Iron & steel's value expended by 12%YoY to USD1.2bn.

Outlook: FX Reserves depletion risk ahead

We expect the FY12 trade gap continue to be widen as the country is facing worst crises of energy including gas and electricity shortage which reduce the production of manufacturing sector. The rising trade gap is putting pressure on both forex reserves and the currency.

Trade deficit details: Energy crises the major reason

FY12: a tale of two halves

 

June 21, 2012 (JS Research)

 

 

In FY12 so far, the KSE-100 has recorded a relatively muted gain of 9.4% vs. an average increase of 32.1% in the preceding two fiscal years. Nevertheless, the local bourse has outperformed its regional peers by an average 11.4%, while bettering commodities by a fair margin of 27.4% (measured through the CRB index). Interestingly, the gains at KSE have been largely limited to 2HFY12 (up 20.4%) mainly owing to the amnesty scheme offered by the government. Whereas in 1HFY12, the market contracted by 9.2% on concerns over domestic political scenario, complicated ties with the US and weak global economic outlook. Looking ahead, concerns over the validity of the federal budget (which includes the amnesty scheme) is likely to keep investors cautious, in the near term. However, clarity on this front and improvement in ties with the US should boost investor confidence, going forward.

 

 

2H show stealer in FY12

FY12 started on a murky outlook on concerns over domestic political scenario, complicated ties with the US and weak global economic setting. However, activity at the local bourse picked up pace in 2HFY12 as government announced favorable changes in the Capital Gain Tax regime (including an amnesty scheme for the investors). The KSE-100 has gained 20.4% in 2H so far (vs. a decline of 9.2% in 1H), while the average volume improved by 242% to 203.8mn shares/day. However, the activity has been skewed towards second tier stocks, which is evident from an improvement of only 80% in average traded value to US$57.8mn. Overall, the KSE-100 has gained 9.4% in FY12 till date, outperforming the regional peers by 11.4%; despite a net outflow of US$110.6mn by the foreign investors.

 

 

Cements the investors’ darling in FY12

The cement stocks remained in the limelight throughout FY12 on the back of consistent increase in product prices leading to supernormal growth in their profitability. As a result, the Construction and Material sector outperformed the index by an average 78%.

 

 

On the other hand, Oil & Gas sector owing to the circular debt and Chemicals (predominantly fertilizers) due to gas curtailment underperformed the market by 11% and 10%, respectively. The banking sector outperformed the index by a nominal 3%.

 

Murky outlook to keep investors sidelined

The uncertain domestic political scenario following the disqualification of the Prime Minster and unresolved ties with the US are likely to keep investors cautious in the near term. We prefer stocks like POL, APL, HUBC, KAPCO, PTC and NBP offering double digit dividend yields, while we maintain our positive bias towards PPL, PSO and LUCK on the back of their compelling valuations.

 

atif.zafar@js.com

92 (21) 111-574-111 (ext. 3118)

 

Also in focus

Textile exports down 8.9%YoY in May 2012

The Pakistan Bureau of Statistics (FBS) released the textile export numbers for May 2012, which stood at US$1.14bn, down 8.9%YoY. The same however remained flat on a MoM basis. The dip in exports was mainly on account of the energy crisis in the country. Cumulative exports in 11MFY12 came in at US$11.27bn, a decline of 9.6%YoY.

FY12: a tale of two halves

MSCI Annual Review and implications for Pakistan

 

MSCI Inc announced the results of its Annual Review overnight where the key takeaways from Pakistan’s vantage point were mostly negative.

 

Pakistan failed to get a mention, despite MSCI having invited feedback on Pakistan’s case for an upgrade in last year’s review.

 

UAE and Qatar upgrade (and expected weight-age gains for Pakistan) failed to materialize, while MSCI highlighted the possibility of Morocco and Saudi Arabia being included in MSCI FM in future, which would dilute Pakistan’s current weight of 4.4% in MSCI FM.

 

In what could be termed as a sole positive, MSCI stated that it could consider consulting investors on excluding Argentina from MSCI FM, which would yield nominal weight-age gains (~0.15%) for Pakistan.

MSCI Annual Review and implications for Pakistan

Money supply – no sign of improvement

• Recent money supply figures indicate M2 growth picking up as it reached 11.54% YTD (13.3% YoY). Weekly comparison shows a 3.4% jump in currency in circulation while deposit base depicted a decline of 0.3% compared to previous week's balances.

• With external account showing continuous deterioration, country's NFAs showed decline of USD2.9bn YoY up till Jun8'12. On the other hand, NDAs continue to drive domestic money supply as they rose by 19% YoY. The result is aptly reflected in the NDA-NFA ratio, which has now deteriorated to 14x compared to 8x during same period last year.

• Total GoP borrowing from the banking system has reached PKR 1,185bn (on cash basis) out of which borrowing from SBP is now at PKR 509bn. On YoY basis, borrowing from SBP is 19% higher while it now contributes 45% to total outstanding borrowing from the banking system.

• Despite heavy borrowing currently driving money supply and crowding out private credit, GoP's investment remained static at 2.1% of GDP in FY12, unable to coup up with the decline in private investment.

Money supply – no sign of improvement

BAHL: Safety All the Way

 

          High asset quality and lowest infection ratio coupled with ROE comparable to top tier banks constitute our investment thesis for BAHL

 

          On the back of aggressive branch network expansion, the deposit base of the bank has witnessed a CAGR of 21% in last five years against industry average of 11%. We expect the bank to continue expanding its network at the same pace largely through sub branches

 

          Lowest infection ratio of 2.4% and excess coverage by way of higher than required provisions make the bank stand out in the whole industry

 

          Given investment-heavy asset side of the bank the future course of NIMs will depend upon discount rate scenario. We believe NIMs will average at 4.1% during CY12-15E

 

          With NPL accretion slowing down, expansion through low-cost sub branches and investment-heavy balance sheet, our projection for CY12 earnings stands at PKR5.2/share, up by 15% YoY

 

          With a Justified PB multiple of 1.69x and CY12 book value of PKR20.3/share, our target price for BAHL comes out to be PKR34.4/share, yielding an upside of 21%. With a CY12 dividend yield 12%, the stock offers a total return of 33%. BUY!

BAHL: Safety All the Way