AKD Quotidian about — Pakistan Market: Normalized growth in the high-teens

Karachi, March 14, 2014 (PPI-OT): The AKO Universe has posted combined earnings of PKRIO8.6bn in 4QCY13, translating into 11%YoYgrowth (ex-PTC: 18%YoY).

According to AKD Securities, normalized growth in the high-teens is broadly in line with the average pace of earnings growth over the last few years, which indicates both the resilience of Pakistani corporate as well as the potential for higher earnings provided the economic environment depicts sustainable improvement. Sectors that have led growth in 4QCYI3 include Oil and Gas, Autos and Textiles. On the flipside, the Electricity and Consumer sectors depicted declines with major negative surprises seen in Electricity following higher than expected maintenance charges. Going forward, we see Universe growth accelerating to -20%YoY in each of full-year FY14 and FY15 with impetus to be provided by Oil and Gas, Banks, Cements, Autos and selected Consumers. Within the backdrop of improving macros (soft CPI/stronger PKR), we believe the markets forward PIE of 8.62x remains un-stretched. Preferred plays include DGKC, ENGRO HUBC and IJBL. On the flipside, names such as MGB, HBL and PS0 may be ripe for profit taking.

Result season recap: The AKD Universe posted combined earnings of PKRI08.6bn in 4QCY13, up by l1%YoY (ex-PTC: 18 %YoY), Outperforming sectors include Oil and Gas (+39%YoY on buoyant results for OGDC,PPL and PSO), Autos (+73% coming from a low base) and Textiles (+38%YoY on higher non-core income). On the flipside, disappointing results were posted by Electricity (-44%YoY on high maintenance charges) and Consumers (-62%YoY on low demand and distribution issues).

Earnings surprises: Positive surprises were seen in Oil and Gas (10% over consensus estimates on stronger than expected postings by OGDC and PSO, particularly due to higher other income). Telecoms (PTC) also posted above-line earnings on higher than expected earnings from ICH. That said, misses were glaring and sizeable – Electricity results came in 35% below consensus estimates with both HUBC and KAPCO disappointing on higher maintenance charges and unscheduled plant outages while EFOODS struggle with distribution issues in the urban centres kept bottom-line subdued.

Growth to continue! Going forward, we expect an average growth of about Mark 20%YoY in both FY14 and FY15! fuelled by EandPs, Banks, Autos, Cements and selected Consumers. Taking a GM forward view, we expect results for EandPs to remain strong (higher production and other income) while results for Banks (worst behind for NBP plus provisioning reversals for other banks), Cements (declining coal prices), Power (low base with 1H suffering from unscheduled outages and consequent higher OandMs), Autos (appreciating PKR) and Consumers (low base) should ideally depict improvement n 2HFY14, Fertilizers (gas supply to EFERT) and Textiles (adverse impact of appreciating PKR) are likely to underperform while Telecoms are expected to remain flat (barring any activity on the 3G front).

Investment perspective: In the near term, market sentiment is likely to be dictated by currency movement and the upcoming MPS. in this regard, while the market has been quick to price in the PKR strength, it has yet to incorporate a potential DR cut. While strong Fx position (reserves at US$9.5bn), contained inflation on (8MFY14 avg. CPI: 8.6%YoY) and Strengthening PKR certainly do make a cases for a Discount Rate cut, volatility in the PKR/US$ may lead SBP to a adopt a cautious stance. from an asset allocation perspectives, we recommend investors to build positions in leveraged plays particularly Cements (preferred pick : DGKC) and Fertilizers (ENGRO). Easing interest rate may also bring high dividend yields into play where we particularly like FFC ,HUBC and POL.

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