AKD Quotidian about — Pakistan Market: Flagging the Underperformers!

Karachi: CV12 has kicked off positively for major world indices, with most having positive returns till date.

According to AKD Securities, in this regard, the KSE-100 Index has returned a stellar 20.7%CYTD, thereby ranking as the 4th best performing market in the world. US$-adjusted return for the Index stands at an impressive 18.2%CYTD. Despite robust recent gains, the Pakistan Market still trades at an attractive forward PER of 7.1x, significantly lower than PER for regional peers such as India and China at 13.2x and 8.5x, respectively. Considering improving fundamentals at the company level, the ongoing rally could potentially extend although the CGT SRO remains a key swing factor. In today’s daily, AKD Securities highlights some stocks that have missed out on the market hurrah, the potential reasons for their underperformance and AKD Securities’ outlook on them. AKD Securities flags DAWH, LOTPTA, PKGS and HMB as major underperformers, posting consecutive negative returns in both CY11 and CV12TD.

Dawood Hercules: On a consolidated basis, DAWH posted NPAT of PkR2.9bn (EPS: PkR6.O1) in CY11 vs. NPAT of PkR3.2bn (EPS: PkR6.75) in CY10, a decline of 11% YoY. The decline came about due to lower production at DAWH’s subsidiary Dawood Hercules Fertilizer Ltd. owing to gas supply issues. The loss was partly mitigated through higher income from its associated Engro. Going forward, the company will likely continue to face problems with both Dawood Hercules Fertilizer and Engro Fertilizer to face problems with both Dawood Hercules Fertilizer and Engro Fertilizer facing gas curtailments while competition from lower cost urea imports will further compound problems in 1QCY12. The group also recently invested in HUBC with cumulative investment of 137.74mn shares by DAWH and DAWH Fertilizers. Negative news flow regarding freezing of Hubco’s account and possible penalty of -PkR2.7bn (WHT + interest) may likely add further pressure on DAWH’s price in the shod term.

Lotte PTA Pakistan Limited: Weak fundamentals continue to drag down LOTPTA performance as the PTA-Px margins faced further compression in 1QCY12, possibility indicating another quarter of negative earnings.

With int’l oil prices downward sticky (Px has high correlation with oil), the only panacea would be increase in PTA import duties in the upcoming budget. In this regard, representatives of Lotte Group met PM Gilani in South Korea last week, where Lotte Group has indicated its interest in increasing investment in Pakistan. However, as far as the PTA business s concerned, the group has clearly stated that future investment is contingent upon upward revision in PTA import duty.

Packages Limited: With the company embarking on an ambitious expansion program starting CY07, much was expected from PKGS. However, the company has failed to deliver on all counts, with the bottomline in the red for the past 7 out of 9 quarters. Gross Margins have continued to be very poor with full-year CY11 margins standing at just 2%. Low margins have been mainly on account of high furnace oil prices, with increased wood pulp and local waste paper prices also compounding the company’s problems. Persistent low margins points to management’s inability to pass on prices to end-consumers, a problem AKD Securities thinks will likely continue going forward as imported paper continues to be sold in the market at throwaway prices. While detailed full year CY11 accounts are yet to be released, in 9MCY11 the company had a negative operating cash flow of PkR3.3bn. With about PkR11.1bn in loans on the company’s books, financial charges will also continue to hurt the company’s earnings. In a notice along with the result, the company has disclosed its intention to transfer the company’s paper and board and corrugated business into a separate 100% owned subsidiary. This is a mere accounting procedure in AKD Securities’ view and will not change the fundamentals of the company on a consolidated basis.

Habib Metropolitan Bank: Despite reported profit growth of 17%YoY to PkR3.29bn (EPS: PkR3.14) in CY11, HMB has shed 1%CYTD, underperforming the KSE-100 Index by 21% in the process. In AKD Securities’ view, this is because normalized profits (adjusted for incremental FSV benefit) are at PkR1.96bn (EPS: PkR1.87), effectively down 17%YoY. While asset quality risks remain (NPL stock up 41%YoY; NPL ratio: 12.9%; coverage: 65%), AKD Securities believes downside risk in HMB is limited while general bullish sentiment in Banking sector scrips may lead to investor attention turning to this underperformer. AKD Securities believes HMB’s ROE can come in the mid-teens for CY12F which justifies a P/B multiple of 0.8x. AKD Securities’ target price of PkR20/share offers upside of 19.4%. Accumulate!

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