Pakistan Stock Exchange Index up 5 percent

Investors returned to stock market on reduction in political noise after the Supreme Court initiated hearing on Panama leaks. The benchmark index of Pakistan Stock Exchange improved by nearly 5% WoW and closed at an all‐time high of 41,842 points. Apart from diffused tensions in the political space, positivity emanated from the announcement by KEL of planned shift in ownership to the Chinese power conglomerate Shanghai Electric Corp and the recent imposition of anti-dumping duty on Chinese steel imports as a protectionist move benefiting local players.

News reports during the week included: 1) Petroleum Minister Shahid Khaqan Abbasi announced that the GoP has decided not to increase the natural gas tariff for any category of consumers because of a decline in the cost of producing gas, 2) Minister of State for Water and Power stated that the GoP would likely renegotiate the terms and conditions of handing over KEL to the Shanghai Electric Power Company and expressed confidence in the Shanghai Electric’s ability to overcome the power crisis in Karachi, 3) French automaker Renault announced to start assembling cars in Pakistan by 2018 under the newly approved incentives announced in the Auto Investment Development Policy. Renault would enter the Pakistani market as a Joint Venture with GHNL, committing to investUS$100 million in Pakistan and 4) the cut in sales tax on petroleum products reducing an estimated more than Rs20 billion revenue of the FBR during the last four months.

While gainers at the bourse were: MTL, SHEL, ASTL, and ICI, laggards were: EPCL, AKBL, MEBL and CHCC. With the reduction in political noise, the market is expected to rally on the back of hastening inflation matching a bottoming out of the interest rate cycle, a positive for banks. Additionally, as November meeting of OPEC ministers approaches closer, any news flow on production cuts could trigger global oil price momentum.

S&P Global upgraded Pakistan’s sovereign rating to B/stable from B‐/positive driven by successful follow through on IMF dictated reform agenda. Major macro metrics qualifying the country for an upgrade are: 1) fiscal consolidation to 4.6% of GDP, 2) external account strength and 3) greater monetary flexibility. The agency maintains an optimistic outlook on the country’s economic prospects, projecting 5-year GDP growth at 5% (FY16‐19) primarily on the back of CPEC related development. Looking ahead, analysts expect Pakistan to maintain credit rating at current levels over the next year, where probability for another upgrade remains low. Their view emanates from the need for stringent reforms in tax collection to support Pakistan’s debt affordability (external debt up 20% over 3 years). However, likelihood of the current GoP turning to populist measures can hamper revenue boosting efforts and consequently eligibility for an upgrade.

K‐Electric (KEL) has notified that KES Power (Abraaj‐controlled) entered into an agreement to divest its 66.4% shareholding in KEL to the Shanghai Electric Power Company Limited (SEP). At a disclosed deal size of US$1.77 billion (Rs184.2 billion), the deal price works out to Rs10.05/share. As SEP is acquiring a majority stake in KEL and the shareholding of KES Power Ltd is shifting from Abraaj and Al-Jomiah/NIG to SEP, a tender offer is likely for 50% of the remaining shares voting shares. In this regard, regulations (Listed Companies Takeover Regulations 2008) suggest that the tender may be offered at the SPA price (which is the highest amongst the stated criteria). Despite risks evident in the operation environment of KEL, analysts opine that SEP (of which the 43.0% is owned by the State Power Investment Corporation) will be on firmer footing to negotiate with the GoP concerning crucial operational aspects (PPA with NTDC, renewal of MYT, generation licenses).

During this past week, Cherat Cement Company (CHCC) became focus of investors’ attention for two reasons, announcement of attractive quarterly financial results and COD one month earlier than planned. The Company announced its 1QFY17 financial results posting profit after tax of Rs404 million (EPS: Rs2.29), registering 51%YoY growth over net profit of Rs268 million (EPS: Rs1.52) for 1QFY16. Key highlights of results were: 1) Topline grew by 14%YoY to Rs1.77 billion due to improved dispatches, (2) gross improved owing to cheaper energy cost and 3) tax expense jumped 97%YoY due to 61%YoY higher pre-tax earnings and effective tax rate of 27% as compared 22% in 1QFY16.

CHCC’s 1.3 million tons per annum (tpa) expansion is expected to achieve COD by end November 2016, one month earlier than its plan. Currently, the new line is under testing. Being the first of expansions in the current cycle, CHCC can gain significant market share as other major manufacturers are operating above 90% utilization, while the next contender, Lucky Cement is not expected to commence production before end CY17. In this regard, AKD Securities report forecasts CHCC’s incremental production to result in growth in revenues. Likewise, its market share will also increase, boosting its EPS.



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