AKD Securities Limited Equity Research – Pakistan weekly update

Karachi, January 09, 2015 (PPI-OT): Stock Smart

The KSE‐100 Index shot up by 1.81%WoW, reaching record highs at 33,325pts based on strong investor confidence boosted by positive macro developments ahead of this month MPS announcement. This was despite net FIPI outflow of US$6.1mn during the week under review.

Major events that managed to impact the stock market included 1) the country’s total Fx reserves exceeded US$15.2bn, 2) the Ministry of Water and Power voiced disapproval with the Sindh government’s appeal to extend NTDC’s agreement to supply K‐Electric with 650MW of electricity, 3) Pakistan’s total crude oil production crossed the 100,000 bpd mark, the highest for the country and 4) during 1HFY15, net government borrowings saw a significant decline of 51%YoY based on increasing foreign in lows.

Meanwhile, the federal government set its borrowing target for 3QFY15 at PkR975bn. In terms of price performance of the AKD Universe, the biggest gainers for the week were DAWH (+17.7%WoW, on the back of its holding companies particularly Engro), PSMC (+10.1%WoW), PTC (+9.5% WoW), EPCL (+7.4%WoW) and MEBL (+6.7%WoW).

Scrip’s that lagged were HCAR (‐8.2% WoW), PSO (‐3.5%WoW, continued to shed on lower oil prices), EFERT (‐3.3%WoW), FFBL (‐1.2%WoW) and SHEL (‐1.1%WoW). The average daily turnover during the week was 295.52 million shares (+27.3%WoW). Volume leaders were KEL (109.95mn shares), PAEL (92.07mn shares), JSCL (72.10mn shares), MLCF (51.37mn shares) and NIB (49.49mn shares).

Outlook

Considering a relatively stable political situation and improving macros, the market could extend its rally next week particularly in the run up to the SBP’s monetary policy announcement (expected DR cut of at least 50bps). That said, any continuation in foreign selling could emerge as a risk. At current levels, out top picks are UBL, BAFL, POL, PSMC and MLCF.

This Week’s Daily Reports

Pakistan Economy: CPI surprises again! (AKD Daily, January 02, 2015)

CPI for the month for Dec’14 has clocked in at a muted 4.3%YoY, effectively bring down the CY14 CPI average to 7.2%YoY and implying that real interest rates are comfortably above 2%. Following on from an improved reserves situation due to influx of funds in form of IMF disbursement taking total reserves above the US$15bn level, highest in 2.5yrs, the PkR is one of only three (3) frontier market currencies to have strengthened against the US$ last year.

In light of these encouraging developments on the macro front, it is likely that expected strengthening due to privatization proceeds and multilateral disbursements will support PkR/US$ parity across CY15 and the case for a further cut in the DR by up to 100bps is emboldened. Within this backdrop, AKD Securities Limited affirms AKD Securities Limited’s bullish stance on levered plays (MLCF, EFERT, ENGRO) and high dividend yielding scrips (HUBC, FFC, POL).

Pakistan Market: CY14 Review and Outlook, (AKD Daily, January 01, 2015)

Despite a rise in political noise and militant backlash following a major military offensive, the KSE‐100 Index rode the wave of macro rerating to gain 27% (31% in US$ terms) in CY14, bringing 3yr aggregate gains to 183%. Moreover, Pakistan market in terms of US$ returns was ranked as the third best equity market in the world by Bloomberg.

In this regard, while politics/law and order brought the eye‐catching headlines, the underlying economy kept humming, underpinned by SBP‐held FX reserves rising to US$10.4bn, with external a/c comfort dovetailing with single‐digit CPI to result in monetary easing. Going forward, with political temperatures coming off from peak and lower int’l oil prices positively impacting the external a/c, the economy should enter a sustained growth phase with interest rates poised to further come off in 2015.

This should enable the Pakistan Market to continue its valuation rerating drive where the forward P/E multiple has risen to 8.5x (vs. 6.9x prior to the May’13 general elections), but is still lower than the 10yr average P/E multiple of 9.1x. AKD Securities Limited retains AKD Securities Limited’s Jun’15 Index target of 35,000 points where preferred plays include MLCF, DGKC, UBL, POL and PSMC.

MLCF: Cementing gains!, (AKD Daily, December 31, 2014)

MLCF has gained 47% since AKD Securities Limited’s Buy call issued on Oct 28’14. On the back of continued positives, AKD Securities Limited updates AKD Securities Limited’s investment case for MLCF where AKD Securities Limited raises FY15F earnings by 6% to PkR6.33/share while upping AKD Securities Limited’s 3 year NPAT CAGR (FY14‐17) to 27% vs. 22%, previously. Together with a lower discounting factor, AKD Securities Limited raises AKD Securities Limited’s Jun’15 TP by 24% to PkR56.24/share.

Resplendent growth of over 15%YoY in the company’s total dispatches during 2QFY15 (as per provisional numbers), is a level above the peers, also promises to boost the company’s bottom line in 2QFY15 as cement prices remained stable and input costs further dived southwards.

AKD Securities Limited reiterates that MLCF is in the process of lowering its borrowing costs in the coming quarters through swift deleveraging which can enable a surprise dividend of PkR1.0‐1.5/share alongside full‐year FY15 results. MLCF trades at a FY15F P/E of 6.95x and offers 28% upside to AKD Securities Limited’s revised TP of PkR56.24/ share Buy!

Textile sector outlook, (AKD Daily, December 30, 2014)

As per the latest data issued by the PBS for Nov’14, textile exports exhibited an enhancement of 13%YoY as the exports settled at US$1.12bn, against US$1.00bn in Nov’13. However, due to the high base effect, exports remained down by 4%MoM. Cumulatively, textile exports were up by a meagre 1%YoY during the 5MFY15 owing to dismal performance by the low value segment, (down by 11% YoY), which diluted the improvement brought in by value added segment (up 9% YoY).

Post cotton prices breakdown, a slight recovery was witnessed as the official KCA spot rate for 40kg rose from PkR4,983 to PkR5,251 in the last few days. This is expected to bring in a small sigh of relief for textile players. Furthermore, with the GoP aiming to rationalize gas tariff in Jan’15, assuming a hike of 15%, NML’s annualised earnings are estimated to erode by PkR0.45/share, while the same will lead to NCL’s earnings contracting by PkR0.33/share.

Weak farm‐economics lead to 11MCY14 urea offtake decline, (AKD Daily, December 29, 2014)

Official statistics released by the National Fertilizer Development Centre (NFDC) show a slight decrease in 11MCY14 fertilizer offtake. During the period under‐review cumulative fertilizer sales of the sector were realized at 7.43mn tons against 7.62mn tons during the corresponding period previous year, down 3%YoY. Specifically, in 11MCY14 country’s urea sales were recorded at 4.97mn tons, 5%YoY down when pitted against 11MCY13’s offtake figure of 5.22mn tons.

However, upon separating locally manufactured urea offtake and the imported one, AKD Securities Limited sees the former’s sales improving by 1% to 4.38mn tons on the back of 17%YoY additional sales coming in from EFERT while at the same time imported urea offtake faltered by 32%YoY to 590k tons.

On sequential basis, improvement was seen in Nov’14 where sector’s total urea offtake was recorded at 467k tons, up 14%MoM. Conversely, DAP offtake depicted less divergence against last year’s figures and was down by mere 1%YoY to 1.43mn tons in 11MCY14.

That said, major boost to 11MCY14 DAP sales figures was received in Nov’14 where the sector cumulatively sold 380k tons, which also happens to be the highest monthly offtake for CY14TD. AKD Securities Limited cites seasonality to be the prime propulsion factor behind aforementioned impressive DAP offtake.

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