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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