Pakistan Stock Market Review

KSE ChartAfter putting up robust performance over the last three weeks, the benchmark KSE-100 index ended flat at 34,526 levels, rather shedding 0.36% for the week ended 19th June amid profit taking before the start of Ramadan. Volumes for the out-going week remained healthy with average daily turnover recorded at 458.13 million shares, up by 46.15%WoW. Top gainers for the week were: SNGP, DAWH, 3) SSGC, and KEL, while FFBL, HCAR, NCL and EPCL remained laggards. The news flows impacting the market during the week included: 1) CAD deficit for May’15 recorded at US$521 million as against US$223 million surplus in April’15 (11MFY15 deficit at US$1.98 billion as compared to US$3.02 billion for 11MFY14, a significant reduction mainly due to lower oil prices, 2) acceptance of budget proposals including a Rs20 billion subsidy on phosphoric fertilizer and extension of income tax exemption on Halal meat units till June’17, a move likely to boost Halal food export, 3) proposal for allocating Rs5 billion subsidy for farmers for purchase of 25,000 tractors in the Punjab budget for next financial year, 3) increase in regulatory duty on the import of sugar from 20% to 40% to protect the mills mostly owned by politicians, 4) credit ratings upgrade by Moody’s of local-currency deposits from Caa1 to B3 for five banks (UBL, HBL, MCB, ABL and NBP) as well as the base-line credit assessments (BCA) for all banks except NBP, again from Caa1 to B3, and 5) proposal to exempt tax on capital gains on disposal of securities held for four years or more for Tax year 2015-16. Foreigners remained net sellers during this past week. With commencement of Ramadan and curtailment in trading hours, analysts anticipate volumes to remain leaner market likely treading in a narrow band. Lack of performance from heavyweight sectors Banks and Oil & Gas, along with a slowdown in construction activities during Ramadan affecting Cement sector can potentially lead to a temporary correction. Having said that analysts expect the market to pick momentum with the onset of results season, supported by strong underlying corporate fundamentals

Market performance prior and post announcement of the Federal Budget FY15‐16 has been relatively healthy. However, can the KSE continue its momentum during the holy month of Ramadan remains to be explored? Historical analysis of the past 20 years (Ramadan) suggests a 65% probability of gain and 35% probability of loss. Statistically speaking the findings suggest that on 13 occasions, the benchmark‐100 Index yielded positive gains while on 7 instances, it yielded negative returns. Furthermore, on 6 occasions, average trading activity during Ramadan compared favorably against the same which took place during that particular fiscal. However, while history is skewed in favor of gains, a high standard deviation of 9.02% of sample of ADK Securities suggests lack of positive triggers for both index heavy weights viz. 1) Banks and 2) Oil & Gas sectors, and slowdown in construction activities during Ramadan impacting Cement, and Steel & Allied sectors, a temporary correction cannot be ruled out. Analysts also believe that trading activities are likely to remain healthy from a medium term perspective in the backdrop of a stable economic outlook and as investors continue to realign their portfolios post Federal Budget FY15‐16 announcement.

Current Account surplus of US$223 million posted in April’15 proved a one‐off gain as a widening trade deficit hiked the deficit to US$521 million for May’15. The pressure came as a consequence of a widening trade deficit of US$1.89 billion in May’15 against a trade deficit of US$1.79 billion in April’15. The increase highlights the country’s sliding exports, down by 7.6%YoY to US$1.9 billion in May’15 (11MFY15 down by 5.26% to US$21.7 billion) as key textile and food continue to suffer owing to soft commodity prices. That said, 11MFY15 deficit of US$1.98 billion compares favorably against US$3.02 billion recorded in FY14. Analysts attribute this improvement in current account to: 1) receipt of US$717 million under CSF payments in February this year, 2) strong growth in remittances to reach US$16.63bn, up by 16%YoY, countering the trade gap, and 3) low international oil prices which have allowed a decline in oil imports (19%YoY in 10MFY15). As foreign reserves continue to remain strong at US$17.44 billion, with a higher current account deficit analysts, expect PkR/US$ parity to sustain at current levels.

Higher volumes and recent spur in price performance has yet again brought KEL (formerly KESC) to the forefront where aspects of investors’ confidence stem from: 1) ongoing operation Burq reportedly raising Rs2.5 billion in collections with 50% consisting of old dues, 2) fully subscribed issue of Rs22 billion Sukuk expected to reduce the weighted average cost of debt to 10.8% in FY15 from 13% in FY14, and 3) status quo regarding the 650MW supply being received from NTDC. Incorporating the proceeds from Operation Burq and a better than expected T&D profile analysts expect improved results for the year ending 30th June 2015. The next leg of earnings growth rests on: 1) successful rollout of three year US$300 mullion transmission CAPEX plan to contain T&D, 2) continuous improvement in recoveries as billed units rises to 92%, and 3) K‐energy being fully operational by 1HFY18 with converted units (420MW) running at a load factor of 80%. That said, downside risks with respect to price performance emanates from regulatory overhang and offloading of interest by sponsors.

While Federal Budget FY16 focus remaining on stimulating infrastructure developments, it failed to create much excitement for textiles and clothing industry that earns 65% of total export proceeds. The few textile specific proposals were mere continuation of promises made in the previous budget while others were already made known in the earlier announced Textile Policy 2014‐19. Few positives that the GoP offers to the sector included reduction in ERF and LTFF rates through announcement of financial packages over the next 5years whereas a one‐time super tax imposition of 3% is a potential earnings dampener. Apart from the budgetary developments, USDA released its monthly report maintaining its expectation of global consumption exceeding production, India with 27 million bales to continue as world’s largest cotton producer. In the backdrop of textile exports declining by 1.2% YoY during 10MFY15 amid a stable PkR/US$ rate and lower cotton prices, the outlook for textiles and clothing sector remains bleak.

After a dull run up in CY14, FFBL, the sole producer of DAP in Pakistan, gained 27%WoW last week to close at Rs62.93/share. Analysts opine that the recent price run up was on account of positive budgetary developments (tax exemption of 4 years for Halal meat business) which are expected to be beneficial for FFBL’s subsidiary, Fauji Meat Limited (FML). To recall, FML is a Halal abattoir and meat processing facility near Port Bin Qasim Karachi with an estimated project cost of Rs7.5 billon is expected to achieve COD in the latter half of July’15. Additionally, successful book building of Al‐Shaheer Corporation at a strike price of Rs95/share against a floor of Rs43/share and oversubscription by 2.7x further bolstered investors’ confidence in the company’s meat initiative. While fundamental outlook of the company remains unexciting (1QCY15 net profit of Rs98.12 million and EPS: Rs0.11), analysts believe FFBL’s diversification initiatives into lucrative meat and power businesses can be a major value addition in the medium to long term.

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