AKD Quotidian about — Pakistan Market: The OGDC conundrum

Karachi, March 24, 2014 (PPI-OT): With the PKR appreciating by 7.2% against the US$ from its CYTD bottom, there was an element of concern that currency gains could tempt foreign investors to book profits where Friday’s net sell of US$4.7mn (primarily in Oil and Gas sector; likely OGDC which came off by 4.4%) was the highest in a single day in this calendar year.

According to AKD Securities, with Franklin Templeton looking to liquidate a small fund (173k shares of OGDC; 266k shares of MCB as of Sep-13) coupled with likely profit taking in its larger Asia fund, AKD Securities believes panic (unjustified) may have ensued even for local shareholders. That said, OGDC’s recent underperformance may also be a function of its planned secondary offering (GDR/local SPO) on concerns over consequent supply-demand mismatch. While this may keep a lid on OGDC’s near-term share price performance, a potential local SPO may provide an attractive entry point/opportunity to lower average holding cost. With the company’s fundamentals unchanged, AKD Securities maintains AKD Securities’ Buy stance based on AKD Securities’ target price of PKR302/share.

Stronger PKR may have sparked foreign profit taking: Since its CYTD low, the PKR has appreciated by 7.2% against the US$ where currency gains may have tempted foreign investors to book profits. In this regard, Friday’s net sell of US$4.7mn by foreign investors was the largest in a single day CYTD, bringing the MTD net sell to US$13.7mn. Although it is too early to say if this will continue, AKD Securities flags scrips such as OGDC, MCB, LUCK, DGKC, HUBC and UBL as names that have sizeable foreign ownership.

What’s up with OGDC/MCB pressure? In a letter issued in early Mar’14, Franklin Templeton Investments stated their intention to terminate and liquidate their Asian Growth Fund. With Templeton owning ~350mn shares of OGDC (source: Bloomberg), this may have caused a panic of a selling spree in the Index heavyweight item. That said, AKD Securities understands that the fund coming up for liquidation is just US$12.3mn in size and owned just 173k shares of OGDC and 266k shares of MCB as of Sep-13. The larger fund, which owns 348mn shares of OGDC and 54.6mn shares of MCB, is not coming up for liquidation although AKD Securities speculates that it may have engaged in profit taking in its Pakistan positions. Other than the panic element (unjustified in AKD Securities’ view), AKD Securities believes OGDC’s recent underperformance is also a function of its planned secondary offering (GDR/local SPO) on concerns over consequent supply-demand mismatch.

Investment perspective: Going by precedence, any general public offering in OGDC may come at a 5%-10% discount to its 6m average price, which comes to ~PKR240/share. At this price, OGDC trades at a FY14F/FY15E PE of 8.3x and 7.4x, against broader market FY14F/FY15E PE of 8.3x and 7.2x. In AKD Securities’ view OGDC remains attractive, particularly relative to the region, where the secondary public offering can potentially provide an attractive entry level. AKD Securities maintains a Buy stance on OGDC with a target price of PKR302/ share.

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