AKD Securities Limited Equity Research – Pakistan weekly update

Karachi, December 26, 2014 (PPI-OT): Stock Smart

Release of IMF US$1.05bn, and supplementary fourth, fifth reviews and accompanying documents by the IMF setting the tone for crucial GoP policies to come, the KSE-100 index reflected a resilient rise of 3.17%WoW, with the index settling at 31,993pts in just 4 trading days, for the last complete trading week of 2014.

Key news flows influencing the market included 1) Nepra approved a PkR2.97/unit reduction in power tariff for Nov’14 under a monthly fuel price adjustment formula but the government decided to pass on only PkR2.37/unit to consumers and keep the remaining PKR0.6 for debt servicing of Discos, 2)
According to a recent projection made by the IMF, Pakistan’s oil imports will stand at US$14.6bn in the current year, a decline of US$1.2bn compared to the purchases projected in the budget. Last year, oil imports stood at US$14.67bn.

According to PBS, oil imports of the country fell 5.37% to US$6.11bn in the 5MFY15. In comparison, they stood at US$6.46bn in 5MFY14, and 3) SBP in its latest auction of T-Bills raised PkR44bn against the target of PkR75bn, with a high level of participation seen in the 12-month paper. Scrips gaining value were UBL (+9.8%WoW), EFERT (+8.7%WoW), FATIMA (+7.8%WoW) and MCB (+6.8%WoW).

While, laggards within the AKD universe included AGTL (-5.5%WoW), ICI (-2.7%WoW), HCAR (-2.2%WoW) and ABL (-2.2%WoW). During the week under-review AKD Securities Limited seen healthy activity at the bourse as daily avg. traded volumes rose by 10.73% to 224.55mn vs. 202.79mn in the last week. Net FPI turned positive after four weeks of consecutive selling, inflow for the week clocked in at US$7.76mn vs. a net outflow of US$30.08mn in the previous week.


In anticipation of GoP initiated hikes in the gas tariff, fertilizer and cements may show signs of weakness, however, the notified hike between 16%-64% may be much lower than requested by the Ministry of Petroleum and Natural Resources. With volumes expected to remain tepid, AKD Securities Limited anticipated the KSE-100 index to close the year on a high, reflecting a strengthened macro-economic outlook and renewed investor confidence with GoP’s policies proving fruitful.

This Week’s Daily Reports

Engro Fertilizers: It never rains but it pours!, (AKD Daily, December 26, 2014)

ECC in its recent meeting approved a proposed agreement between Guddu Thermal Power and EFERT where as per the agreement the latter shall continue to receive 60mmcfd gas from Mari shallow (currently diverted from the former) till Dec’15. It seems that CY15 is going to be a good year for EFERT after all since the company will be able to operate both its plants at cumulative 80-85% utilization levels.

Resultantly, EFERT is now estimated to rack up its urea production by 12% to 1.86mn tons against AKD Securities Limited’s initial assumption of 1.65mn tons. Keeping these developments in mind AKD Securities Limited updates investment case for EFERT where AKD Securities Limited raises AKD Securities Limited’s CY15E earnings estimates by 22% to PkR11.59/sh and reiterate AKD Securities Limited’s Buy stance as the scrip offers potential upside of 25.5% against AKD Securities Limited’s updates Dec’15 TP of PkR85/sh. EFERT remains AKD Securities Limited’s preferred play within the fertilizer space, the scrip at current levels is trading at CY15E P/E of 5.8x and offers DY of 5.1%.

Pakistan and IMF: Relationship passes the latest test!, (AKD Daily, December 24, 2014)

The IMF, in its recently released staff report on the fourth and fifth reviews under the EFF has lauded Pakistan’s performance despite the country missing out on two quantitative performance criteria (PCs) against the Jun’14 and three PCs vs. the Sep’14 targets. Failure to meet the required targets for NDA (Net Domestic Assets) and the GoP’s borrowing from the SBP remained a common feature of both the reviews while additionally, the GoP also fell short of the NIR (Net International Reserve) target in the Sep’14 review.

In addition to this, the fund has also raised its projections for Pakistan’s GDP growth to 4.3% from previously 4.0% for FY15 where it also targets inflation to average below 8%YoY. IMF also expects C/A to widen to 1.5% of GDP to US$4.2bn on the account of sluggish exports and increase in non-oil imports. Moreover, the IMF also proposed new structural benchmarks, following are the key highlights of the staff review and AKD Securities Limited’s views regarding them.

Pakistan Fertilizers: High expectations for 2015, (AKD Daily, December 23, 2014)

After posting 17% returns on average during the past 3yrs, CY14 has proven to be a tough year for the fertilizer sector (ex. EFERT) as it managed to post returns of 6.9% and under-scored the broader index by 14.1ppts. On individual basis apart from EFERT (listed at the start of this year); performances of FFC, FFBL and FATIMA remained below par when pitted against the KSE-100 Index. AKD Securities Limited believes this is primarily due to changing dynamics of the sector, where the industry’s pricing power came under tight scrutiny.

Resultantly, for the first time in the past 3 years fertilizer manufacturers saw their gross margin depicting negative growth, which in turn led to bottomline dilution. In addition to this, precarious gas supply situation further soured the mood as sectors’ volumetric urea sales barring EFERT went southwards by 11%YoY to 3.04mn tons in 10MCY14. Going forward, AKD Fertilizer Universe is expected to post an earnings growth of 12% where AKD Securities Limited have a Market Weight stance on Fertilizer Sector as it trades at a CY15E P/E of 7.2x and offers DY of 9.1%.

Pakistan Market_CY14 to end with 5% CPI, (AKD Daily, December 22, 2014)

Based on SPI data (-ve 1.2%MoM), down for the second consecutive month, AKD Securities Limited projects Dec’14 CPI at 5.0%YoY (-ve 0.3%MoM). This will bring the CY14/1HFY15 CPI average to 7.3%YoY/6.2%YoY, implying real interest rates of at least +ve 2%. While CPI will pick up going forward, it could conceivably stay within the 7%YoY mark over the next 6m.

Together with anticipated incremental strength in the BoP position, this should enable the monetary easing cycle to pick momentum where AKD Securities Limited expected the DR to come off by 100bps to 8.0% in the Jan’15 MPS. With political noise appearing to drawdown, valuation multiples are likely to rerate – AKD Securities Limited sees the market’s forward P/E inching up to 9x across 2015, up from 8.3x at present, which should help drive the Index towards AKD Securities Limited’s Jun’15 target of 35,000 points. At current levels, AKD Securities Limited likes DGKC, MLCF, PSO, HUBC and PSMC, EFOODS and PTC. At the same time, AKD Securities Limited believes pockets of value are available in Banks (UBL) and E and P (POL).

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