Pakistan: PSO included in MSCI FM Index

PSOIn the latest MSCI semi-annual review certain Pakistani scrips were added to/removed from MSCI Frontier Market 100 Index and MSCI FM Small Cap Index. In this blog an effort has been made to analyze the likely impact of this review on Pakistani market and up-gradation of Pakistan State Oil Company (PSO) from MSCI FM Small Cap Index to MSCI FM 100 Index along with outlook and recommendation on the scrip.

Qatar and UAE witnessed a one notch jump in the MSCI announcement and upgraded to MSCI Emerging Market Index from MSCI Frontier Index, resulting 23 deletions from Frontier Index. The sizeable deletions allowed new inclusions and weight increase of existing constituents.

As a result, Pakistan’s weight in the MSCI FM Index is expected to double to approximately 9.5%. The inclusions from Pakistan in MSCI FM 100 Index are PSO, LUCK, KEL, and PAKT while the deletion includes HUBCO. Moreover, certain additions/deletions of Pakistani stocks in MSCI FM Small Cap index was also evident.  Analysts expect, the foreign inflows to grow as foreign funds track the respective indices as they become effective thus boost activity at local bourse.

PSO regained its position in the MSCI FM Index review while the same was dropped from MSCI FM Index in May 2013. The inclusion in MSCI FM Index is likely to bring more foreign investment in the Company as tracking funds rebalance their holdings.

In addition to this news, strong fundamentals of PSO further justify ‘buy’ instance on the scrip. However, PSO’s share price witnessed a significant drop from its recent high of Rs454 per share on account of liquidity crunch and resultant default on its international payments. Further, as per latest media reports, the Government of Pakistan (GoP) is planning to issue term finance certificates (TFCs) amounting Rs31 billion in coming week along with cash injection of Rs25 billion to provide liquidity relief to the Company.

PSO is currently trading at FY14E P/E of 5.5X based on normalized earnings and DY of 3.5%. We recommend ‘Buy’ on the stock with Jun’14 TP of Rs480/share providing an upside of 25% from current levels.

One US Dollar is equal to Rs100


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