Morning Briefing for June 22, 2012 – Standard Capital

Karachi, June 22, 2012 (PPI-OT): PSO, KP Govt Plan Rs45bn Refinery

The government of KP, PSO and a private investor would form a joint venture company to share 20 per cent equity while the remaining 80 per cent funds would be arranged through commercial banks.

According to Standard Capital, with its receivables in excess of Rs215 billion leading to cut back on oil imports, the Pakistan State Oil (PSO) is contemplating setting up a refinery of 36,000 barrels per day of refining capacity in Khyber Pakhtunkhwa at an estimated cost range of $500‐750 million (Rs45‐65 billion).

Standard Capital considers PSO is at a significant given FY12 forecasted earnings of Rs 58 – 59 (enunciating PE of 3.8x – 3.9x) wherein Standard Capital recommends BUY despite lingering issues of its ballooning receivables.

Moody’s Discomfort with Pakistan External Debt Payments
Moody’s expressed discomfort with Pakistan’s external payment position. It is said that Pakistan’s external payments in under strain from rising trade deficit i.e. US$ 19.4bn and decline in capital inflows (current a/c deficit swells to US$ 3.8bn; which was in positive zone last year).

Some of the reasons of increase in trade deficit include weakening of real economy such as trade and industrial activity given perennial power shortage that has engulfed overall Pakistan. As for current a/c is concerned, one reason that could be sited for ballooning deficit figure is continuous outflow of foreign portfolio investments. This outflow in foreign private investments have international connotations such as crisis in Greece & Spain to name a few which has forced foreign fund managers to sell Pakistani cherry like equities that are available discount (as far as corporate earnings is concerned).

To cut short, key issues contributing this distress were include weak government finances, structural inflationary pressure, domestic political uncertainty, compounding downward pressure on sovereign creditworthiness.

MSCI classification of Pakistan may be diluted due to Morocco addition
MCSI has announced the annual market classification review in which Pakistan failed to consider for upgrade despite better liquidity in equity market in last six months. One of the reasons why Pakistani weightage may dilute from the present level is because MSCI Morocco shall be included in Frontier Market index in which Pakistan was also one of the contributories.

This entails that foreign participation may be insignificant as far as Pakistani market capitalization is concerned which Standard Capital feels is not even a bad idea. Standard Capital has always said that Pakistan should always get permanent FDI rather than short term natured portfolio investments since any outflow at the time when country braces for political crisis also prove to be counter productive.

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