AKD Quotidian about — Pakistan Market: Aug’13: Review and Outlook

Karachi, September 02, 2013 (PPI-OT): Owing to a combination of global equity markets weakness, macro slippages and weak corporate profitability, the KSE-100 Index shed 4.9% in Aug’13 to close to 22,161 points.

According to AKD Securities this clips FYI4TD returns to just 5.5%. Drilling deeper into corporate profitability, AKD Securities finds that the combined profitability of a sample of 33 companies has clocked in at PkR75.8bn in 2QCVI3, down 16%YoV on a reported basis. While this decline has primarily been led by Banks and Oil and Gas, AKD Securities believes contrasting outperformance by both these sectors suggests an inflection point in that growth for them is expected to rebound strongly in the next year.

As such, within the backdrop of an imminent reversal in the interest rate cycle (which may put a lid on market PIE) AKD Securities believes that outperformers across FY14 will likely be scrips poised to report robust earnings growth. This dovetails with AKD Securities thematics preference for names such as UBL, BAFL, OGDC, ENGRO and LUCK where AKD Securities believes recent weakness at the KSE-100 (down 6.8% since peak) provides an opportunity to build fresh positions.

Aug’13 Review: The KSE-100 Index shed 4.9% in Aug13 to close at 22,161 points with avg. daily volumes slipping by 21%MoM to 199mn shares and avg. daily traded value clocking in at US$84mn. Weakness at the bourse came about due to a confluence of global equity markets weakness (possible QE drawdown by the US/Syria tensions) and negative news closer to home (poor corporate results/friction with India/flash floods/macro slippages i.e. higher inflation and a weaker PkR).

Key outperforming sectors during the month under review included Banks (+16% on expectations of higher interest rates ahead), Electricity (+11% post the announcement of the National Power Policy) and Oil and Gas. On the flipside, underperforming sectors included Cements (+3%, with drag emanating from concerns over industry pricing) and Food Producers (-5% on disappointing results). On a positive note, despite the PkR/US$ parity weakening by 2.5%MoM (bringing FYTD depreciation to 5.6%), net EPI inflows registered at US$27.Smn in Aug’13.

Results in so far: One of the lesser dwelled upon reasons for recent equity market weakness has been the slippage in corporate profitability. In this regard, combined profitability for a sample of 33 companies (which account for 67% of the KSE-100′s market cap) has clocked in at PkR75.8bn in 2QCY13, down by l6%YoY (-11%YOY excluding AKBL which conducted a book cleaning exercise).

While key Cement and Textile scrips have yet to announce their results, thus far this is the worst quarter since 3QCY12 on a normalized basis. In this regard, the Iranian culprits have been Banks (lower interest rate environment) and Oil and Gas (exploration write-offs/higher effective tax rate). Excluding these sectors, combined AKD Universe profitability is up by a contained 3%YoY, with this headline number expected to be boosted by upcoming Current and Textile results.

Outlook: With FY14TD gains clipped to 5.5%, the KSE-100 Index now trades at a forward P/E of 8.0x. While this is still at a discount of 31% to MSCI Asia Pacific ex-Japan as per Bloomberg data, PIE rerating appears unlikely considering the interest rate cycle is set to reverse. That said, while corporate profitability has been weak in 2QCY13, AKD Securities believes FY14 should close with a strong rebound in earnings growth.

This is particularly true for Index heavyweight Banks and Oil and Gas which are both poised to deliver 16%YoY+ growth in the next year. This dovetails with AKD Securities thematics preference for names such as LJBL, BAFL, OGDC, ENGRO and LUCK where AKD Securities believes recent weakness at the KSE-100 (down 6.8% since peak) provides an opportunity to build fresh positions.

The post AKD Quotidian about — Pakistan Market: Aug’13: Review and Outlook appeared first on AsiaNet-Pakistan.

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