AKD Securities Limited Equity Research – Daily Report

Karachi, March 27, 2020 (PPI-OT): Pakistan Strategy: Lockdown for Mar-Jun’20 could lower CY20 Universe profitability by 19%, P/E of 5.7x implied

Conducting a “time box” scenario analysis for the upcoming 2QCY20 (4QFY20) across our active coverage cluster (34 companies), where a worst case outlook for demand is punched in, we highlight the potential loss of ~PkR34bn or 19.3% in cumulative profitability, with earnings falling 9.3%YoY for CY20 vs. our base case (rise of 12.3%), attributed wholly to demand shocks emanating from the COVID-19 outbreak.

Underlying our forecasts are assumptions that current policy actions (particularly health care interventions) to mandate demand compression will lead to positive results, where the virus is limited to regional resurgence and GoP policies are effective in laying the groundwork for a quick business cycle recovery.

Under these assumptions, we model 50-70%QoQ declines in volume for cyclical and consumer industries, while a spike in NPLs with depressed fee income assumptions impact banks and crude oil averages US$30/bbl for E and Ps, arriving at significantly downgraded industry profitability metrics vs. our base case.

Finally, resulting from our analysis, the 33.5% CYTD slide in equity benchmarks (as of 25th March) is somewhat justified, where under our stressed 2QCY20 “timebox” scenario the KSE-100 now trades at CY20 P/E of 5.7x (6.25x ex-banks and E and Ps) compared to our base case forecasted CY20 P/E of 4.4x (4.98x ex-banks and E and Ps).

Both severity and length of COVID-19 implications on equity markets remain fluid, forcing us to err on the side of caution in calling a bottom. We flag the release of high-frequency industry metrics (OMCs volumes, Cements, Auto, Fertz sales) coupled with lagged macro numbers to crystalize profitability assumptions accordingly.

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