Tag Archives: AKD Securities Limited

AKD Securities Limited – Business Confidence Survey 2015: Decoding the Corporate Pulse

Karachi, May 20, 2015 (PPI-OT): In the backdrop of an improved macroeconomic environment, our latest ‘Business Confidence Survey – 2015’ echoes an optimistic operating environment sentiment, particularly with respect to business growth.

Our survey suggests that business confidence is relatively high and the current soft inflationary environment (low input cost pressures) coupled with a lower interest rate profile should have a visibly positive impact on corporate earnings and future growth.

Managements in major manufacturing sectors foresee improving business conditions over the near term with the highest optimism coming from: 1) Oil and Gas, 2) Chemicals (incl. fertilizers) and 3) Automobile and Parts sectors. Assuming continued macro positivity along with low inflation and monetary easing, AKD Securities Limited expects margin expansion and sustained corporate profitability, to unlock valuation re-rating of the benchmark KSE-100 Index.

Quantifying the survey: AKD Securities Limited conducts the second round of our ‘Business Confidence Survey – 2015’, with the aim of measuring the corporate pulse with respect to the business growth outlook. AKD Securities Limited interviews respondents from over 100 listed companies representing a broad spectrum of manufacturing industries along with few from the services sector.

The survey results indicate the corporate sector’s high confidence for the business environment, with recovery on the macro front emerging as a key driver of the positive sentiment.

AKD Securities Limited have quantified the survey results through: 1) A Diffusion Index calculated to be 72.6 compared to 58.0 for last year’s survey (measured on scale from 0-100, a level higher than 50 indicates an optimistic outlook, while 0 indicates the extreme for a worse outlook) and 2) A Growth Sentiments Index for this year calculated to be ~6 (a weighted average standardized score on a range of 1 to 10 with 10 being the highest).

The jump over the year in the Diffusion Index combined with the Growth Sentiments Index for 2015 reflects improvements on multiple dimensions which together build up the confidence of the corporate sector, in our view.

Favourable Business Conditions: Our survey results demonstrate growing optimism among business executives, where 68% of over 100 listed corporate have witnessed an improvement in business conditions in the past year. Moreover, 65% have demonstrated positive sentiments regarding the business environment, anticipating favourable conditions to continue at least for the next six months. Owing to the soft inflationary environment and low input cost pressures, 77% of managements do not see any significant changing in price levels over the short term.

Lower interest rates have led to an improvement in credit availability where 68% of corporate managements see easier borrowing going forward. 40% of businesses also plan to undertake capital expenditures with a primary focus on expanding operations (85% expansion projects) in Pakistan, with 15% looking to enhance their footings in the foreign market. Redundancies will also remain low with 77% expecting employee levels to remain same, while others are likely to hire in relation to said planned expansions.

Investment Perspective: In the backdrop of our survey results and expectations of healthy corporate profitability in the ongoing year, AKD Securities Limited expects the market to continue to re-rate. The KSE-100 index has gained 1.5%CYTD, to trade at a P/E of 9.14x. Though performance may remain sluggish over the short-term owing to budget and Ramadan effect, AKD Securities Limited expects a quick recovery thereafter, where AKD Securities Limited reiterates our index target for Dec’15 at 37,000 pts.

AKD Securities Limited — South African Anti Dumping Duty

Karachi, May 15, 2015 (PPI-OT): As per news sources and discussions with management of different companies, South African Revenue Service has imposed an anti dumping duty on every Pakistani cement manufacturer ranging from 14%-77%.

In this regard, Bestway cement has been charged the highest duty level of 77.2% while Lucky Cement is to be charged at the lowest duty level of 14.3%. Presently the duty is effective for 6 months, during which players can raise their individual cases, after which the duty would be fixed for 5 years.

Within the Pakistan cement industry, Lucky Cement and Attock Cement are the companies that dispatch the highest quantities to the South African market.

Lucky Cement is the largest Pakistani cement exporter to the South African market (~650k tpa). Assuming the worst case scenario (no cement exports to SA market), AKD Securities Limited expects earnings to taper off by ~8.5% on FY15F earnings (EPS impact: PkR3.30). However, AKD Securities Limited believes LUCK’s cost efficient production will serve to mitigate the negative impact to some extent.

Attock Cement, however, seems to be the worst hit on account of this development. ACPL dispatches ~275k tpa cement to the South African market, where imposition of a 63.5% duty is expected to lower annualized earnings by PkR1.85/sh (8.7% of 9MFY15 annualised earnings).

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AKD Securities Limited – INDU: Auto financing to improve earnings

Karachi, May 12, 2015 (PPI-OT): Pakistan Auto Sector remained one of the top performer at the KSE-100 Index in CY15TD where it posted a return of 23% against market’s return of 1.2%, outpacing it by 22.2%. Similar has been the trend of the AKD Universe where with return of 23% in the aforementioned period, Auto Sector reigned supreme, beating AKD Universe’s return of 0.8%.

AKD Securities Limited sights 281%YoY/60%QoQ earnings growth of AKD Auto Universe, backed by 7% GMs expansion as the chief propellant behind aforesaid price performance. Within Pakistan Auto space, INDU with 177%YoY/63%QoQ earnings growth posted its highest ever NPAT of PkR3.27bn.

Going forward, the key concern in the minds of the investors remain whether INDU can improve upon its 3QFY15 performance or not. In this regard, with expected 156%YoY improvement in 4QFY15 sales on the back of pre-booking of its Corolla variant coupled with better margins (expected at 17% vs. 9% in 4QFY14) AKD Securities Limited believes the stage is set for INDU to punch in yet another all-time high return.

Adjusting for improved margins and robust volumetric growth, AKD Securities Limited raises AKD Securities Limited’s earnings estimates for INDU by 1.1%-1.2% across FY16F-FY17F while at the same time upgrade AKD Securities Limited’s Dec’15 TP by 7% to PkR1,242/share, Accumulate!

9MFY15 Result Highlights: The company posted NPAT of PkR 6.42bn (EPS: PKR 81.70) during 9MFY15, up 177% YoY compared to PKR 2.32bn (EPS: PKR 29.53) reported during 9MFY14. Growth is mainly driven by: 1) increase in top-line by 55%YoY and 2) improved gross margins (by 8%YoY) on back of depreciating JPY against USD and PKR.

On sequential basis, the company experienced NPAT growth of +63%QoQ to PKR 3.3bn (EPS: PKR 41.72). While 4QFY15 order book is strong, the company expects demand to taper off in FY16 as new model euphoria subsides. Besides that, presently it seems unlikely that the company has any plans of capacity expansion.

Volumes to grow: With DR at a decade low, revival of auto financing and launch of new Corolla variant is expected to deliver a 4 year revenue CAGR of 10% for INDU that would raise capacity utilization to 100% by FY19F (last achieved in FY12).

This is underpinned by buoyant auto financing where outstanding auto finance loans were recorded at PkR76bn at Mar’15, up by 23%YoY and at their highest level in 5yrs. Going forward, volumetric growth is expected to remain strong for the auto industry in general and INDU in particular on account of: 1) orders in hand, 2) agricultural income cycle.

In this regard, AKD Securities Limited have increased AKD Securities Limited’s volumetric growth assumptions to 5% per annum (previously 3.5%) which is still conservative when pitted against avg. annual volumetric growth of ~22% posted in the previous economic bull cycle (FY06-08). Also, the current GMs of 17% are unlikely to sustain in the medium to long run.

That said, AKD Securities Limited estimates the company’s GMs to hover around 11.5% mark on avg. for the next 3-years. Recall, similar margins were last seen in economic boom cycle (FY06-08). That said, any adverse movement in steel prices and/or USD/JPY would reflect negatively on AKD Securities Limited’s GMs estimations for INDU.

Investment Perspective: INDU has gained 29%CYTD, outperforming the broader market by 28% in the process, to trade at a FY15F P/E of 11.7x and FY16F P/E of 10.52x. Going by AKD Securities Limited’s projected 20% NPAT CAGR across FY14-FY19F, AKD Securities Limited believes the stock can sustain higher valuation multiples. AKD Securities Limited’s revised target price of PkR1,242/share implies an Accumulate stance. Key risks to thesis include any adverse currency/steel price movements and any negative surprises in the upcoming auto policy.

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AKD Securities Limited – Pakistan Cement: Is the top-line secure?

Karachi, May 08, 2015 (PPI-OT): While continuing with AKD Securities Limited’s bullish stance on the Pakistan Cements, AKD Securities Limited tests the industry’s fundamental strength through a top-line analysis, in AKD Securities Limited’s report today.

After exhibiting an overall dispatches growth of 2.6%YoY in Apr’15, the same for 10MFY15 is up 3.9%YoY (on the back of 8.0%YoY uptick in local dispatches. 9.1%YoY decline in exports). On the exports front, dispatches to Afghanistan are expected to remain fragile following down turn in overall Afghan demand and supply of Iranian cement in south western part of the country.

On the local front, Iranian cement is hurting the industry as it has made its way to the Pakistani market and in effect restricting local players from maximizing their respective dispatches. That said, AKD Securities Limited believes the next leg of growth in the local market would come from infrastructural projects under the China Pakistan Economic Corridor (CPEC) on the back of certain positives which make Pakistani cement preferable over its Chinese counterpart.

Few of the Chinese projects are expected to come online in the coming quarters, which would ensure a strong top line (ultimately the bottom-line), considering already-strong local demand. DGKC (Jun’15 TP of PkR153.8/sh), along with MLCF (Jun’15 TP of PkR71.9/sh), are AKD Securities Limited’s top picks within the cement space.

10MFY15 dispatches: As per the recently released numbers by APCMA, 3.29mn tons of cement was dispatched in Apr’15 vs. 3.21mn tons dispatched in Apr’14, up 2.6%YoY. Conversely, on the exports front a decline of 4.7%YoY (due to weakening Afghan market) dragged down the 4.6%YoY improvement seen in local dispatches in Apr’15. Subsequently, 10MFY15 dispatches are up 3.9%YoY where major support came from increasing local demand (up 8.0%YoY) which diluted the negativity brought on by faltering exports (down 9.1%YoY). Within the AKD Universe (as per provisional numbers), MLCF’s dispatches grew by ~8.8%YoY in Apr’15, followed by DGKC (up 2.6%YoY) and LUCK (up 1.8%YoY).

Afghan market: Pakistan exported highest ever 4.73mn tons cement to Afghanistan in FY11. However, ever since then similar figures could not materialize due to: 1) a down turn in the Afghani local cement demand and 2) availability of cheap Iranian cement. The situation is getting more worrying as post decline of 24.0%YoY in 10MFY15, exports to Afghanistan have brought the total cement exports down by 9.1%YoY.

With Eastern and Southern Afghanistan (areas like Jalalabad, Kabul, Kandahar etc.) expected to continue with importing cement from Pakistan, other parts of the country (like Mazar-e-Sharif, Herat, Zaranj etc.) are anticipated to benefit from excessive production in Iran. AKD Securities Limited flags a possibility of transfer of 300k-600k tpa cement from being exported to be dispatched locally, which considering healthy local demand over the short to medium term may not hurt cement dynamics.

Recall, over the past 3yrs Pakistani exports to Afghan market have posted a negative CAGR of 8.2%, where AKD Securities Limited estimates FY15 dispatches to reach 3.0mn tons, down 17.9%YoY (lower by massive 36.5% from its FY11 peak).

Iran – adding sourness to dream run! As per AKD Securities Limited’s channel checks, Iran faced an oversupply of ~14mn tons of cement in 2014 (local demand of ~54mn tons vs. supply of ~68mn tons), and is sighted to continue with similar situation in coming years. This has helped the country to tap a decent percentage of the Western and Central Afghan market, posting threat to Pakistani exports. Adding insult to injury, Iranian cement is reported to enter Pakistan as well via unofficial channels, denying local players from maximizing their utilization. Going forward, AKD Securities Limited feels this phenomenon may continue troubling Pakistan Cements, adding unwanted sourness to the sector.

India balancing AKD Securities Limited’s numbers: While the Afghan market is going through a lean phase, dispatches to India have picked pace (up by 40%YoY in FY14 to 677k tons). The particular trend continued in 10MFY15, as dispatches to India increased by 15.4%YoY totaling at 584k tons. Considering the existing govt. relationship with the neighbour (India), AKD Securities Limited believes that such increase in exports might cover up the negativity brought on by Afghan market, thus supporting the players to continue with swelled top-line.

Chinese projects, higher dispatches projected: The recent visit by the Chinese President where agreements for large scale infrastructural projects were signed, is anticipated to create additional demand for cement manufacturers. However, given China’s status as the largest cement producer in the world, there could be a potential threat of cement coming in from China. Pakistan shares its north-eastern border with China’s Xinjiang region, while majority of Chinese cement production is concentrated in regions other than Xinjiang and Tibet (also near to the Pakistani border but disputes and lesser number of producers are likely to restrict supplying cement to Pakistan).

That said, AKD Securities Limited sees few barriers that might keep the Chinese cement away from entering Pakistani projects like: 1) increased transportation costs due to a longer route (1300km long Karakorum highway) , 2) heavy presence of Pakistani players in the northern side can lead to competitive cements pricing, 3) quality and packaging concerns might erode the financial feasibility, 4) with falling Pakistani exports, players are expected to be aggressive in winning contracts to ensure current high capacity utilization levels. Keeping these developments in mind, AKD Securities Limited believes concerns of Chinese cement supply making its way to Chinese funded projects in Pakistan are a bit overblown. Conversely, AKD Securities Limited sees these projects being a major positive for the local construction industry.

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AKD Securities Limited – Pakistan Market: Apr’15 saw normal service resuming at KSE

Karachi, May 04, 2015 (PPI-OT): After a dismal run of form seen in the previous two months (Feb’15 and Mar’15) where the market cumulatively lost 12.2% of its market capitalization (US$10.2bn), normal service was resumed in Apr’15 as the KSE-100 Index gained 11.5% to close at 33,730 levels. Apr’15 saw the market regaining 83.0% (3,496pts) of the ground it lost in the previous two months. The disconnect that was evident between the swiftly improving macros and the KSE-100 Index prior to Apr’15 eased out and led the index to yield aforementioned monthly return after a hiatus of 23 months.

Key corporate developments taking place in Apr’15 included: 1) successful sale of the GoP’s stake in HBL, fetching US$1.02bn out of which around 75% was from foreign investors, 2) ENGRO’s private placement of 7% of its fertilizer subsidiary’s holding, proceeds of which are likely to be invested in the company’s upcoming energy projects and 3) 8%YoY growth in 1QCY15 corporate profitability (35%YoY ex-oil and gas), primarily driven by exceptional results posted by the banking sector.

With corporate profitability likely to remain robust going into 2QCY15, AKD Securities Limited reiterates AKD Securities Limited’s P/E rerating theme where AKD Securities Limited remains bullish on the market over the medium term with MLCF, UBL, EFOODS, HUBC, FFC, FFBL and POL as AKD Securities Limited’s preferred plays. That said, AKD Securities Limited advises caution going into May’15 on the back of pre-budget jitters.

Market activity: The out-going results season provided market with much needed momentum as investors’ participation on both local and foreign front saw improvements. This led to the market’s avg. trading volumes rising by 70%MoM to 275mn shares in Apr’15 as against 162mn shares in Mar’15. Similarly, avg. traded value also headed northwards, increasing by 63%MoM to US$140mn in Apr’15 vs. US$86mn in Mar’15.

After more than 2 month of consecutive outflow, Apr’15 saw foreign portfolio investors remaining net buyers at the bourse where they purchased net equities worth US$33.9mn; in addition to US$764mn invested in the GoP’s HBL offering. On the local front, mutual funds led the way with net equities worth US$82.12mn bought in Apr’15 followed by NBFC’s net buy of US$3.47mn while Banks (US$50.74mn), Individuals (US$38.26mn), Corporates (US$26.05mn) and others (US$4.48mn) remained net sellers.

Sectoral performance: Within the 10 main board sectors (representing 88.3% of the Index’s weight) all barring tobacco remained in the green zone. Amongst the positive yielding sectors, Autos, backed by superior results, led the way, punching in a return of 18.5%MoM followed by Construction and materials (+ve 13.2%MoM, due to improving GMs) and Commercial Banks (+ve 12.2%MoM, on the back of substantial increase in non-funded income).

Conversely, Tobacco, Food producers and Personal Goods (Textiles) remained laggards, underperforming the market by 17.2%MoM, 9.6%MoM and 8.0%MoM, respectively. As for sideboard sectors (representing 11.7% of market’s capitalization) 17 out of a total of 22 recorded positive growth in Apr’15. The gainers were led by Support Services (+ve 23.7%MoM), Engineering (+ve 21.4%MoM) and Household Goods (+ve 17.1%MoM) while Beverages, Media and Telecom trailed behind.

Economic Update: On macro-economic front, improvements continued during Apr’15 with the major highlight being the Chinese Premier’s visit where MoUs worth US$28bn. On external front, foreign reserves depicted further strength to reach US$17.49bn on receipt of US$501mn from the IMF and the successful privatization of HBL (total proceeds of US$1.02bn). Furthermore, CAD shrunk by 46%YoY to US$1.45bn on account of CFS payments of US$717mn. Inflation for the month is expected to clock in at 2.0%YoY (+1.2%MoM) primarily owing to a high-base effect which has further strengthened the case for an additional 50bps cut in the upcoming May’15 MPS.

Outlook and Investment Perspective: MSCI is scheduled to hold its semi-annual index review in May’15 where AKD Securities Limited sees HBL’s inclusion in MSCI FM 100 Index (as the stock’s free float has increased to 45% from previous 10%) is likely to bolster Pakistan’s weight in the index by 110-125bps (Pakistan’s weight in the said index was at 9.56% at Mar’15 end).

This coupled with further improvements in macro-economic environment could possibly increase the velocity of foreign funds to Pakistan over the medium term. With low Apr’15 inflation expectations, room for further DR cut remain available, however, AKD Securities Limited believes the Index has already priced in a 50bps DR cut.

With disconnect between the improving macros and the KSE-100’s price performance diminishing, AKD Securities Limited reiterates AKD Securities Limited’s P/E rerating theme where AKD Securities Limited remains bullish on the market over the medium term with MLCF, UBL, EFOODS, HUBC, FFC, FFBL and POL as AKD Securities Limited’s preferred plays. That said, AKD Securities Limited advises caution going into May’15 on the back of pre-budget jitters.

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AKD Securities Limited – KEL: Electrifying returns yet to be priced in!

Karachi, April 30, 2015 (PPI-OT): Pakistan’s largest vertically integrated electric utility continues on a growth trajectory, despite. Growth is predominantly underpinned by: 1) persistent reduction in T and D losses (currently at 23.8%, ~2% cut p.a. down from 36% in FY09), 2 substantial governance turnaround, 3) improved fleet efficiency and 4) enhanced transmission infrastructure. With several projects in the pipeline, growth and value creation are set to continue simultaneously in the medium and long term (5yr forward EBITDA CAGR of 18.5%).

The debt re-profiling post issuance of PkR22bn Sukuk, has aligned KEL’s capital structure with planned long term investment prospects, while capitalizing on the current low interest environment (reducing weighted average interest rate by ~2%). Moreover, the remaining PkR395bn in deferred tax assets, of which PkR290bn are deductible by FY17, further the case for sharp EPS growth. With a 5yr forward NPAT CAGR of 40.8%, AKD Securities Limited believes KEL offers an undemanding valuation set (FY16F/17F P/E of 6.1x/4.5x ) underpinning AKD Securities Limited’s bullish stance. Based on AKD Securities Limited’s Dec’15 TP of PkR13.5/share, the stock offers an upside of 82% – BUY!

Strong track record: The persistent decrease in T and D (36% in FY09 to 23.8% on 1HFY15) accompanied by increase in fleet efficiency (30.4% in FY09 to 37.0% in FY14) make up for the core of the turnaround affected by Abraaj controlled management. The impact of qualitative changes is well reflected in the company’s financial performance where it achieved a positive EBITDA by FY11 and PBT was in the green zone by FY12. This continuous growth in the bottom line enabled KEL to post NPAT of PkR12.9bn (EPS: PkR0.47) in FY14. With this trend likely to continue AKD Securities Limited estimates the company’s EBITDA to expand by a 5yr CAGR of 18.5%.

Projects in the pipeline: Following formal approval of the K-energy’s generation license and tariff, two units of BQPS-I (420MW) are to undergo coal conversion by FY17. Furthermore, KEL has signed an MoU for an EPC contract with China Datang Corporation for a 700MW Greenfield coal power plant. Also devised is a US$300mn transmission package spread over 3yrs for rehabilitating and enhancing transmission lines, underground cables, grid and substations. These planned projects aim to enhance operations by: 1) increasing low cost generation (coal generation at PkR4.1/KwH vs. PkR14.3/KwH for RFO), 2) curbing remaining T and D losses with infrastructure improvements (1% reduction in T and D adds ~PkR0.1/share) and 3) executing new ventures to modernize the utility.

Capital Restructuring: Debt restructuring allows KEL to capitalize on prevailing monetary easing by reducing financial charges (~16%YoY reduction in FY16F), improving cash flows and reducing the weighted average cost of debt. Aligning the debt structure to the firm’s long term project commitments, while leaving room for additional borrowing, the PkR22bn Sukuk issue (with green shoe option of PkR2bn) connects short term liquidity with long term capital efficiency. Remaining sizeable accrued tax benefits of PkR395bn, with PkR290bn deductible by FY17, bringing 5yr forward NPAT CAGR to 40.8%.

Investment Perspective: RFO prices easing off by 41%FY15TD, allows for a reduction, not only in the cost of generation but also the cost of purchased electricity. Additionally, due to the built in allowance for 15% T and D in the multi-year tariff (MYT), the quantum of additional losses (past 15%) born by the company is curtailed. Coupled with improvements in the debt structure unlocking cash flows, increased CAPEX delivering value, KEL is positioned for price performance. Value signified by FY16F/FY17F P/Bv of 1.6x/1.2x and organic cash flow generation signaled by a 5yr CFO CAGR of 41.8%, affirm AKD Securities Limited’s bullish stance on the scrip. The scrip at present trades at FY16F/FY17F P/E of 6.1x/4.5x and provides an upside of 82% against AKD Securities Limited’s Dec’15 TP of PkR13.5/share,

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