Pakistan market closes week almost flat

PSX-png-logo-final-1Pakistan market regained some momentum after the PSX-100 index crossed 33,000 level during the week ended 1st April 2016, up 1.74%WoW despite volatility from global crude trends. Activity at the market showed sharp recovery, where average traded volumes for the week rose to 140 million shares as compared to 113 million shares a week ago. Key news flows guiding the market during the week included: 1) MARI announced crude oil discovery at exploratory well Halini Deep-1 in Karak block, 2) OGRA determined price of the LNG delivered on ex-ship (DES) basis at US$8.99/MMBTU exclusive GST and allowed increase in PSO margin to 2.5% on DES price from the previous 1.98 level, 3) CDWP approved Rs218.2 billion worth of development projects including Rs129.7 billion worth of motorway construction from Halka-Burhan on M-1 to Dera Ismail Khan as part of CPEC, 4) IMF’s Executive Board approved disbursement of US$502.6 million after the completion of the tenth review under the EFF arrangement, 5) MSCI released its reclassification proposal with regard to migration of Pakistan index from frontier to emerging markets, where formal is expected to take place in May’17 and 6) GoP increased the price of petroleum products taking refuge behind the recent hike in global crude oil price. Performance leaders during the week were MTL, AGTL, ABL, HCAR and DAWH, while laggards included NCL, OGDC, HASCOL, UBL and ICI. Lack of foreign interest persisted during the week with net outflows of US$9.56 million, higher than US$2.31 million recorded in the previous week.

MSCI has released its reclassification proposal with regards to migration of Pakistan index from frontier to emerging markets. While consultation with market participants will be carried out in May’16 to be followed by a decision in Jun’16, formal inclusion is likely to take place in May’17. As per the proposal, the MSCI Pakistan Index would have a potential weight of 0.19% in Emerging Markets (significantly lower than the current 9% weight in the Frontier space) with nine companies making the cut. Out of the total, three companies (OGDC, HBL and MCB) will be placed in the large cap index whereas the rest (UBL, LUCK, FFC, ENGRO, HUBCO and PSO) are likely to be placed in the Mid-cap index. Broadly meeting the set graduation criteria, minor problem areas particularly with reference to market accessibility highlighted in the document include: 1) inability of foreign investors to undertake short selling/stock lending or borrowing and 2) stability of institutional framework. Moreover, continuous shrinking of volumes during the year (1QCY16 average volumes at 134 million shares as compared to 236 million shares during 1QCY15) can potentially raise concerns on meeting the size and liquidity criteria, altering the number of constituents and weights accordingly. Hopeful for an inclusion, the market is eyeing increased visibility on the global front as a key benefit especially in the backdrop of continuous foreign selling (CYTD FIPI outflow registered at US$98 million). Also, precedence (recent entrants of other markets) indicates that market multiples can sharply expand once graduated in the Emerging Markets category.

According to the latest provisional dispatches data, cement demand remained less than impressive. Contrary to the prevailing trend, export dispatches posted the best month of the year so far with domestic demand remaining flat. On a cumulative basis, dispatches reached a record high level of +9.0%YoY in 9MFY16 as compared to +8.6%YoY in 8MFY16. Companies outperforming the industry during the month included DGKC, ACPL, MLCF and PIOC, while KOHC, FCCL, FECTC and LUCK were underperformers. On cumulative basis, KOHC, PIOC, FCCL, DGKC and MLCF continued to outpace the industry while LUCK, ACPL, CHCC and FECTC were laggards on account of loss of exports to some markets (South Africa/Iraq). While March’16 failed to keep up with the momentum, analysts expect domestic demand to pick up pace going forward on the back of higher construction activity in summers where additional positive surprise can come from any aggressive utilization of remaining PSDP funds (unutilized FY16 federal PSDP: 50%). While exports continue to decline, experts believe the recent uptick in dispatches during March’16 is encouraging. With demand expected to remain robust alongwith lower operating costs, brokerage houses maintain an Overweight stance on the sector where their top picks include LUCK and DGKC due to their ability to catch up with anticipated rising domestic demand.

Following below expected CY15 financial results and adjustment in NIMs, there is a need to revisit Bank Alfalah (BAFL). While CY15 earnings depicted the swiftest pace of growth for BAFL (earnings grew by 33% YoY), analysts do not expect such momentum to sustain as pressure on NIMs from its investment portfolio (upcoming PIB maturities worth Rs50 billion) is likely to take a toll on earnings considering lending rates are already at their multi-yearr lows.  That said, BAFL’s focus on attracting current accounts (37% of deposit mix in CY16F), efficient management of its staff cost (employee/branch to go down to 15.5 in CY16 as compared to 17 in CY14) and improvement in asset quality (credit cost to come down by 21bps to 0.45% in CY16) are key factors restricting earnings decline to some extent. Additionally BAFL’s push towards expanding the high margin consumer segment business (5% of loan book in CY15) can also come in handy. While dividend curtailment in CY15 was not received too well by investors, strengthening of CAR by 60bps to 13.4%, as a consequence, is encouraging making room available for BAFL to participate in the credit up-cycle. BAFL’s valuation can catch up with peers through: 1) sustainable and visible improvement in the cost structure, 2) an adequate CAR buffer and 3) higher payouts.



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