Pakistan: PSO deletion from MSCI Index


In this post presented is an update on MSCI’s recent Semi-Annual Index Review, regarding PSO’s deletion from the MSCI Frontier Market 100 Index. InvestCap, a leading brokerage house of Pakistan has highlighted the impact on price of shares of Pakistan State Oil (PSO), the largest oil marketing company though operating in the public sector but listed at all the stock exchanges of the country.
MSCI announced the results of Semi-Annual Index Review for MSCI Frontier Markets on 15May’13, the effective date for implementation is however 1st June 2013. Including PSO, twelve Pakistani stocks were participating in the constituents of MSCI Frontier-100 index.  According to the constituent revision, only PSO will be eliminated from MSCI Frontier-100 stock universe from 1st June 2013.
According to the brokerage house report, the immediate impact of this development is expected to be witnessed in the shape of selling pressure in this particular scrip by the international funds. InvestCap back such expectations by the rationale that due to the exclusion of PSO from the index, the index tracking funds currently following MSCI Frontier 100 index, will in turn seek to off-load their positions by selling in order to minimize tracking error.
However, with 1) an index weight of 0.17 percent, 2) Foreign Inclusion Factor (FIF) adjusted shares of 74.1 million (30 per cent of total shares outstanding) and 2) foreign investor holding of less than 4 per cent, selling from international investor is unlikely to affect price of the scrip in any significant manner in Pakistan market.  Moreover, with the reasoning for such exclusion still being unavailable, brokerage house still remain hopeful that PSO will gain back its position in the MSCI 100 index.
From the perspective of the local investor, this development is likely to stir investor confidence following the international investors’ sentiments. However, brokerage house expects this to be a short lived phenomenon. Going forward, on a fundamental basis, PSO looks attractive as the new political setup has been firm in its commitment to minimize circular debt gradually. PSO being a major stakeholder in outstanding circular debt, with an amount of Rs100 billion (till 13th March 2013) tied up in the debacle as compared to total circular debt of Rs537 billion (till April this year).
PSO is currently trading at an FY13 PE of 5.09x and PBV of 0.97x seems more attractive as compared to the OMC sector and its peers. PSO’s deletion from the MSCI Frontier-100 index appears to have only a sentimental impact on the price of the scrip and is therefore expected to pose a short term drag on the price performance and investor confidence. However, strong fundamentals justify a healthy return in the longer term.

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