Elixir Securities Limited – Pakistan Equity Market: Weekly Review

Karachi, February 09, 2018 (PPI-OT): Index Consolidates Amidst Havoc in Global Markets

The KSE100 index declined by 1.1%WoW (492 pts) to close at 43,808pts. The biggest worry amongst the investors during the outgoing week was the turmoil in global equity and commodity markets.

The Stoxx Europe 600 Index headed for its worst week since 2016, erasing a year’s gains while China’s benchmark fell the most in almost two years. By the time of writing this note, MSCI World Index is already set for its biggest weekly drop since 2011. The driving force behind this turmoil has been the declines in US markets, which reacted to the sharp rise in market interest rates. The S and P 500 has already erased its gain for the year, closed at a two-month low and is on track for its worst week since 2011. The Dow plunged more than 1,000 points for the second time in four days. Finally, over USD5trn has been wiped from global stocks since January’s peaks.

Coming back to the local market, Oil and Gas Exploration and Cement sectors contributed 162 and 196 points to the overall decline in the benchmark index. In percentage terms, Cement sector declined by 4.2% (post disappointment on result announcement by Cherat Cement which plunged 8.8% WoW) and Oil and Gas Exploration declined by 2.2% (tracking declines in global crude oil). The key outperformer during the week was Real Estate and Investment Trust sector (up 6.9%) as investors accumulated positions in Dolmen City REIT (DCR).

On economic front, SBP’s Fx reserves fell 1.3% WoW to USD13.1bn due to external debt servicing and other official foreign payments. Overall reserves stood at USD19.18 bn.

Another important news floated during the outgoing week was related to Regulatory Duties. Sindh High Court (SHC) gave its final judgment with regards to the recent increase in Regulatory Duties (via SRO dated 16th October). In its ruling, the Court declared this SRO ultra vires or no legal effect. The news was negative for Consumer Electronics Manufacturers (Pak Elektron and Singer Pakistan); and largely neutral for the rest of the listed sectors.

Foreigners remained major net sellers as they offloaded shares worth USD8.5mn during the week. Whereas, individuals were the major net buyers of USD8.7mn.

Equity Market Outlook and Perspective

The market is in consolidation phase after rallying 8.8% in January, driven by unprecedented foreign flows. However the sentiments next will likely be driven by trends in the international markets, as global investors absorb the structural shift and reversal in Monetary Easing across US and UK. Key corporate results over next week include Engro Foods (EFOODS, 12th February), Aisha Steel Mill Limited (ASL, 12th February), followed by MCB Bank (MCB) and Maple Leaf (MLCF) on 15th February 2018.

Key news this week

Asian Shares Tumble after US Market Rout: Asian shares and U.S. stock futures sank on Tuesday, after Wall Street suffered its biggest decline since 2011 as investors’ faith in factors underpinning a bull run in markets began to crumble. S and P mini futures fell as much as 2.5 percent to nearly four-month lows in Asia, extending their losses from the record peak hit just over a week ago to almost 12 percent. MSCI’s broadest index of Asia-Pacific shares outside Japan slid 3.5 percent to a one-month low, which would be its biggest fall in more than a year and a half, a day after it had fallen 1.6 percent.

Emerging Market Outflows Are Biggest Since 2016 U.S. Election: Investors have started pulling out of emerging markets with the biggest slump in portfolio flows since the 2016 U.S. presidential election. IIF analysts say the countries they are tracking registered nearly $4 billion in outflows since flows turned negative on Jan. 30. Some $3.4 billion of that has been from equities. Asia has taken the brunt of the reversal with South Korea, Indonesia and Thailand seeing the biggest outflows of the countries in the study.

Court removes regulatory duty from over 350 goods: The Sindh High Court (SHC) declared a legal amendment which has given the Finance Minister powers of imposing regulatory duty on more than 356 items. The FBR revenues for this fiscal year will get a dent as it has expected estimated receipt of minimum Rs. 25 billion from regulatory duty.

Oil sinks below $65 to hit its lowest point so far this year: FX reserves held by the State Bank of Pakistan decreased 2.21% on a weekly basis according to data released on Thursday by the central bank. On January 26, the FX reserves held by the central bank were recorded at USD13.234bn compared to USD 13.532bn in the previous week.

Switzerland, UAE being asked about Pakistanis’ assets: The government has started negotiations with the UAE and Swiss governments to collect information regarding Pakistanis holding billions of dollars of offshore assets and bank accounts to bring these Pakistanis into the tax net. The process of exchange of such information started among OECD-member countries with effect from Jan 1, 2018.

This week’s top stories

Engro Fertilizers Limited – 2017 Earnings to Increase Due to Urea Exports

We expect EFERT to announce PKR2.48/share in earnings for 4Q2017, a decline of 2%YoY. Full year 2017 earnings are expected to clock in at PKR7.49/share, up 11%YoY.

We also expect EFERT to pay out PKR2.5/share in dividends in 4Q2017, taking full year dividends to PKR8.0/share; a 14%YoY increase.

We maintain our HOLD stance on EFERT with a Dec-18 PT of PKR65/share, resulting in 5% total upside (including 11.5% dividend yield).

AGP Limited – First Pharma IPO in Over Two Decades

Major shareholders of AGP i.e. OBS Pakistan and M and P intend to offer combined 35mn shares to the public at a Floor Price of PKR80/sh.

AGP plans to invest ~PKR900mn into expansions of its two plants and development of a Nutraceutical manufacturing facility as it gears up to meet regulatory requirements and cater to the growing future demand.

The management projects revenues to grow at a CAGR of 19% leading to 20% CAGR in profitability over the next seven years as they 1) expect strong growth in existing products, 2) plan to introduce new products, 3) eye growth in Nutraceutical segment and 4) diversify into export markets.

Taking cues from 1) Pakistan Pharma Sector TTM PE of 22.8x and 2) regional Pharma premium of 155% over their respective market multiples, the justified price for the stock comes out to PKR101-110. Subscribe!

Mari Petroleum Company Limited – 2QFY18 EPS Expected at PKR31.25

We expect Mari Petroleum (MARI) to post earnings of PKR3.44bn (EPS: PKR31.25) in 2QFY18, growing by 86%YoY. The earnings growth is to be mainly led by jump in revenues on account of unwinding of entitlement factor on Mari Field gas pricing.

Sequentially, we expect earnings to drop by 5%QoQ owing to 5%QoQ dip in hydrocarbon production mainly from Mari Field.

This is expected to drive 1HFY18 earnings to PKR7.06bn (EPS: PKR64.02), up 53%YoY. Besides the result, we expect MARI to announce an interim DPS of PKR3 same as last year.

We have slightly revised down our FY18F/FY19F production estimate by 4%/2% mainly due to lower production from Mari Field resulting in 13%/9% lower FY18F/FY19F EPS of PKR157/PKR216. As a result, our Dec-18 PT comes down by 7% to PKR2,040/share, offering capital upside of 30% from last close. Buy.

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