Daily Call. Equities. Attractive Valuations Represent Buying Opportunity. REP- 300 Market Strategy. August 23, 2017
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- Ralf Grant
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1 REP Market Strategy Attractive Valuations Represent Buying Opportunity Daily Call Equities Market Return Asia Pacfic Region Return (USD) Aug17TD* CY17TD* China 1.4% 18.2% MSCI Emerg 0.6% 24.4% Taiwan 0.5% 12.1% Thailand 0.1% 9.8% Indonesia 0.6% 19.6% MSCI World 0.7% 12.5% MSCI Develop 0.8% 11.1% Philippines 1.6% 13.7% Vietnam 2.8% 14.7% S. Korea 2.8% 24.3% India 3.6% 24.5% Pakistan 8.8% 12.7% Source: Bloomberg, MSCI Barra, *Till 22Aug Net Foreign Flows Asia Pacific Region USD mn Aug17TD* CY17TD* Taiwan (652) 8,394 S.Korea (1,285) 7,344 India** (1,523) 7,372 Indonesia (320) 186 Philippines Vietnam Pakistan (64) (434) Thailand (160) 34 Total (3,919) 23,845 Source: Bloomberg, * Till 22Aug, ** Till 21Aug 1 Year Forward Estimates P/E P/Bv D/Y China % India % Indonesia % Philippines % S.Korea % Taiwan % Thailand % Vietnam % Peers' Avg % Pakistan % KSE (Disc) 38% 28% 56% Source: Bloomberg, AHL Research Market declined by 8.8% in August During Aug 17 to date the equity market has plunged by 8.8% taking the total decline in Calendar Year to date to 12.7%. The market has made an intra day low of 41,062pts during CY17 to date, correcting by 23% (12,065pts) from an intraday high of 53,127pts observed on 25th May 17. Major reasons for negative performance of the market are i) fear of devaluation due to weakening of external account, ii) selling by foreign institutional investors and iii) political uncertainty (which is largely over now). During Aug 17 foreigners have sold shares worth of USD 64mn which have been absorbed by the local investors. During the last 5 trading days the market has been pushed down by 7% where MF s have been at the forefront of the selling spree (offloading shares worth USD 27mn) while foreigners have exhibited a mixed trend. We view the investors have overplayed the negative sentiments, thus we advise them to cherrypick blue chips as valuations have massively opened up. Exhibit: Valuations Opening Up (x) May17 11May17 Source: SBP, AHL Research 21May17 KSE Index 31May17 10Jun17 20Jun17 55% 50% 45% 40% 35% 30% 25% 20% Balance of Payment situation fueling devaluation fears The Balance of Payment situation deteriorated during FY17 as quarterly Current Account Deficit (CAD) continued to widen throughout the year. The CAD reached 4% of GDP for FY17 compared to 1.7% for FY16. Rising imports (+18% YoY), stagnant exports (1% YoY) and declining remittances (3% YoY) worsened the situation. The implementation of CPEC has increased imports under Machinery and Transport Group coupled with surge in energy imports due to higher oil prices (as compared to last year) and higher quantity imported (on the back of increased power generation). During July 2017, the CAD reached USD 2.1bn, which is 210% / 41% higher on YoY / MoM basis. Inflows under the Financial Account have also dried up thereby leading to decline in Foreign Exchange Reserves. The import cover which was more than 5.5x in July 2016 is now approaching 3x. In addition, as per SBP, debt repayments for next 9 months (Sept 17May 18) amount to USD 4.4bn including interest payments. Therefore, investor sentiment has dampened over the fear of imminent devaluation. 30Jun17 Discount to EM (RHS) 10Jul17 20Jul17 30Jul17 9Aug17 19Aug17 Analyst Samiullah Tariq sami.tariq@arifhabibltd.com
2 Sector Performance Aug17TD* Index Return Sector Weight Cont. (MoM) Banks 23% (636.3) 6% Cement 10% (813.0) 16% Fertilizer 11% (469.7) 9% E&P 13% (251.1) 5% Power Generation 7% (228.0) 6% OMCs 7% (199.2) 8% Automobile Assembler 4% (218.5) 12% Food & Personal Care 4% (52.1) 5% Pharmaceuticals 2% (242.4) 18% Textile Composite 2% (147.1) 13% Insurance 2% (97.5) 10% Technology 2% (32.4) 4% Engineering 1% (82.8) 12% Refinery 1% (94.7) 15% Miscellaneous 1% (13.5) 3% Tobacco 1% (26.3) 5% Cable & Electrical 1% (141.9) 28% Paper & Board 1% (42.5) 8% Chemicals 1% (44.6) 7% Transport 1% (55.4) 6% Automobile Parts 1% (40.1) 10% Leather & Tanneries 0% (20.3) 8% Sugar 0% (14.5) 8% Mutual Fund 0% (6.9) 4% Glass & Ceramics 0% (18.2) 15% Inv. Banks 0% (16.2) 14% Textile Weaving 0% (11.0) 28% Textile Spinning 0% (1.9) 6% Leasing Companies 0% (4.2) 13% Modarabas 0% (0.9) 4% Synthetic & Rayon 0% (2.8) 12% Vanaspati & Allied 0% (0.6) 7% Woollen 0% (0.5) 9% Jute 0% % Source: PSX, AHL Research, * Till 22Aug Exhibit: Current Account Deficit Source: SBP, AHL Research Exhibit: Declining import cover (USD bn) Jul15 Source: SBP, AHL Research C/A Deficit (USD bn) C/A Deficit % of GDP QFY17 2QFY17 3QFY17 4QFY17 FY17 1MFY18 Sep15 SBP Reserves Comm. Banks Reserves Import Cover (RHS) Nov15 Jan16 Mar16 May16 Jul16 Foreign selling continues Foreign investors have offloaded shares worth USD 434mn during CY17 to date, a rise of 10.5x times YoY. Major selling has been observed in Cements (USD 162mn), Commercial banks (USD 60mn), Power Generation (USD 53mn), E&Ps (USD 19mn) and Textile (USD 12mn). The sentiment of foreigners seems negative attributable largely to fear of Pak Rupee Depreciation, rising CA deficit and declining FX reserves. We believe that foreign investors are waiting for PKR depreciation and an adjustment will inculcate confidence. In CY17 to date, 15% of avg. valued traded is of foreigners whereas the majority share is of locals led by Individuals, MF s and Insurance Companies. Recap of Political Events Equity market has declined significantly as political events following the release of Panama Papers continued to unfold. Although optimism regarding the entry of Pakistani market into MSCI (Morgan Stanley Capital International) EM Index did not let the market decline, however, as soon as the date for inclusion of Pakistani stocks into MSCI EM approached, optimism waned and the index started tumbling. Following this, the FY18 Budget, termed unfavorable for the capital market, also effected index trajectory. Subsequently, on 20 th Apr 17 the Supreme Court formed a Joint Investigation Team (JIT) following escalating noise from the opposition escalated both in and out of courts. With submission of the JIT s findings disclosing disparity in the Premier s income and assets, the Court reserved its decision on 21 st Jul 17. Thereafter, on July 28 th 2017, the then Prime Minister Nawaz Sharif was evicted from the role of Premiership, following decision of the 5 member Panama case bench formed by the Supreme Court unanimously disqualifying him on charges of not being Saadiq Sep16 Nov16 Jan Mar17 May Jul
3 (truthful) and Amin (trustworthy) under the article of the constitution. The court also ordered the National Accountability Bureau (NAB) to file references against the Prime Minister. Although leader of the ruling party (PMLN) stepped down immediately, he soon commenced a caravan journey from the Capital (Islamabad) to Lahore in a show of street power. That rally gave a sense of confrontation between the ruling party and the Supreme Court of Pakistan. Therefore, after a brief recovery, the market once again took a beating. Going forward, we believe, that the political noise is settling down as the new government is functional. Moreover, we expect similar economic policies as PMLN continues to be the ruling party. The economic numbers remain healthy aside from external account The economy recorded GDP growth in FY17 at 5.3% (FY18E: 5.5%). Inflation too has been contained at 2.91% YoY in Jul 17 (FY17: 4.15% YoY), while Largescale manufacturing posted a 4yr high of 5.6% (FY17). Intandem, the private sector credit offtake has been commendable (PKR 633bn in FY17, up by a stellar 126% YoY) in the wake of historic low interest rates. Moreover, we believe that the increase in trade and the Current Account Deficit are not that alarming as majority of the increase in imports is for capital goods meant for increase in domestic production. Secondly, a lot of this machinery is being imported with loans/financing being arranged by the EPC contractors. Therefore, we believe the situation is not as bad as it is being perceived. Advising investors to take positions as concerns have overplayed Despite concerns over the external account and apprehensions on the political front (Supreme Court has largely cleared out the uncertainty that was killing the investor sentiments for months), we advise investors to take positions and accumulate fundamentally strong stocks. Our thesis of recommendation is premised on attractive valuations (KSE index trading at a forward PER of under 8x which is lower than the preelection period of 2013), strong outlook on GDP growth and continuation of progress on CPEC. Consequently, the earnings of AHL universe are expected to grow by 12% for We find it necessary to highlight that PKR devaluation remains a positive event for the market as 48% of KSE index companies provide a hedge against the PKR/USD parity whereas the remaining major sectors have enough pricing power to pass on the FX cost, thus rupee devaluation is a positive event. It is advisable to invest in Power, E&P s, Textile and Banks (given imported inflation would trigger a faster uptick in policy rate). The KSE index is currently trading at a cheaper PER of 8.6x (2017) compared to Asia Pac regional average of 13.8x while offering alluring dividend yield of ~5.6% versus ~2.5% offered by the region. In addition the market is trading at a 50% discount to EM. AHL Universe Top picks are as follows. Exhibit: AHL Research Top Pick (CY17/FY18) AHL Top Picks PER(x) P/BV(x) DY(%) 1 UBL MLCF EFERT PPL PSO PAEL DGKC FFC KOHC NCPL Source: AHL Research 3
4 KSE CY17TD Performance Daily Call KSE Volume KSE Index (mn Shares) 58,500 53,500 Inclusion of Six companies in FTSE Supreme Court gives verdict to form JIT JIT Summoned Ex Prime Minister in Panama Case JIT submit investigation report in Supreme Court ,500 43,500 38,500 33,500 Budget Termed Unfavorabale for Capital Market Reentry in MSCI Index PM disqualified by the Supreme Court Nawaz rally from Islamabad to Lahore ,500 Jan17 Feb17 Mar17 Apr17 May17 Jun17 Jul17 Aug17 4
5 Exhibit: KSE Index Returns in the month of August 20.0% 15.0% 10.0% 5.0% 0.0% 5.0% 10.0% 15.0% MoM Average MoM Aug00 Aug01 Aug02 Aug03 Aug04 Aug05 Aug06 Aug07 Aug08 Aug09 Aug10 Aug11 Aug12 Aug13 Aug14 Aug15 Aug16 Aug17 Exhibit: PSX Monthly Activity (mn Shares) Avg. Traded Volume Avg. Traded Value (RHS) Aug17 Jul17 Jun17 May17 Apr17 Mar17 Feb17 Jan17 Dec16 Nov16 Oct16 Sep16 Aug16 Jul16 Jun16 May16 Apr16 Mar16 Feb16 Jan16 (USD mn) Source: PSX, AHL Research Source: PSX, AHL Research Exhibit: Monthly KSE returns KSE Index 15.0% 10.0% 5.0% 0.0% 5.0% 10.0% 12.2% 6.8% 1.8% 2.0% 2.4% 2.6% Sep16 Oct16 Nov16 Dec16 Jan17 Feb17 Mar17 Apr17 May17 Jun17 Jul17 Aug17 1.6% Source: PSX, AHL Research 0.5% 0.8% 1.2% 8.0% 8.8% Exhibit: FIPI Sector wise (CY17 to date) USD mn 50.0 (50.0) (.0) (150.0) (.0) Cements All Others Commercial (19.0) (12.8) (60.5) (8.8) (2.5) (52.6) (133.2) (162.4) Source: NCCPL, AHL Research Sectorwise FIPI Power Gen E&P Textile Fertilizer Telecom 3.5 Food 13.6 OMC Exhibit: LIPI CY17 to date (USD mn) Exhibit: Local absorbing foreign selling (50) () 240 Mutual Funds 154 Insurance Comp 74 Companies Broker NBFC Other Orgnizations BanksDFIs Individuals (34) (55) 1, (500) (1,000) Jan16 FIPI Companies Others Mar16 May16 Jul16 Sep16 Nov16 Individuals BanksDFIs Mutual Funds Jan17 Mar17 May17 Jul17 Source: NCCPL, AHL Research Source: NCCPL, AHL Research 5
6 Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. In addition, we currently do not have any interest (financial or otherwise) in the subject security (ies). Furthermore, compensation of the Analyst(s) is not determined nor based on any other service(s) that AHL is offering. Analyst(s) are not subject to the supervision or control of any employee of AHL s nonresearch departments, and no personal engaged in providing nonresearch services have any influence or control over the compensatory evaluation of the Analyst(s). Equity Research Ratings Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December 2017 for Target Price. In addition, return excludes all type of taxes. For more details kindly refer the following table; Rating Description BUY Upside* of subject security(ies) is more than +10% from last closing of market price(s) HOLD Upside* of subject security(ies) is between 10% and +10% from last closing of market price(s) SELL Upside* of subject security(ies) is less than 10% from last closing of market price(s) * Upside for Power Generation Companies (Ex. KEL) is upside plus dividend yield. Equity Valuation Methodology AHL Research uses the following valuation technique(s) to arrive at the period end target prices; Discounted Cash Flow (DCF) Dividend Discount Model (DDM) Sum of the Parts (SoTP) Justified Price to Book (JPTB) Reserved Base Valuation (RBV) Risks The following risks may potentially impact our valuations of subject security (ies); Market risk Interest Rate Risk Exchange Rate (Currency) Risk Disclaimer: This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report. 6
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