Friday, 17 June 2016

Pakistan reclassification in MSCI EM provides new impetus

After Pakistan’s reclassification in the MSCI EM space, the PSX-100 index skyrocketed reaching its all-time high to close the week ending 17th June at 38,777 level, up 4.97%WoW. The key drivers were Cement, Bank and Fertilizer sectors. Additionally, Oil & Gas sector remained volatile due to weakness in global oil prices.
Participation during the week remained stayed strong, with average daily traded volumes rising to 183.2 million, up 20.7%WoW as compared to 151.9 million shares a week ago despite shorter trading sessions on account of Ramadan.
Key news flows guiding the market included: 1) MSCI announced to reclassify Pakistan in the MSCI EM (Emerging Market) Index in its Annual Classification Review this week, coinciding with the May'17 Semi-annual index review, 2) National Assembly Standing Committee on Finance recommended 7 key amendments in Finance Bill 2016 that includes maintenance of zero-rating sales tax regime on dairy and milk products, 3) ECC of the cabinet in its meeting ordered increasing the price of RLNG by about US$1.2/unit by allowing a series of factors in its price previously rejected by the OGRA, 4) SECP approved draft amendments in Non-Banking Finance Companies (Establishment & Regulation) Rules 2003, and Non-Banking Finance Companies & Notified Entities Regulations 2008 for smooth transition of Micro Finance Institutions (MFIs) into Non Bank Microfinance Companies  and 5) Ministry of Petroleum & Natural Resources sought approval of the ECC for the award of second LNG terminal contract to the successful bidder.
Gainers at the bourse were: HBL, MCB, BAFL, DAWH and MLCF while scrips losing value were: MTL, HASCOL, PSMC, PPL and EPCL. Volume leaders were: KEL, PIBTL, EFERT and TRG. Foreign participation also stayed positive, with foreigners buying US$19.6 million worth equities during the week as compared to net buy of US$70.2 million a week ago.
The market rallied significantly on MSCI driven sentiments, where analysts expect this momentum to continue in coming week also. While benefits to derive are numerous, increased foreign visibility and participation particularly along with potential multiple re‐rating are likely to be the most profound. Post reclassification in MSCI Emerging Market index, investors are likely to shift interest to scrips that are likely to enter the EM index, namely LUCK, ENGRO, HBL, UBL, MCB, OGDC, PSO and FFC.
Lucky Cement (LUCK) price performance remained volatile during the year likely due to 1) fears of possible pricing indiscipline owing to expansions announcements, 2) persistent foreign selling due to market volatility on global growth concerns and 3) tumbling exports amid anti‐dumping duty imposed by South Africa. However, LUCK's recent rally (+47% returns to date from its low in February) on expectation of inclusion into MSCI Emerging Market Index in spite of increased taxation (increase in FED on local cement price and re‐imposition of super tax for another year), more than made for the earlier losses. Budgetary implications have resulted in an increase in cement prices where prices in the northern region have risen by Rs22/bag to Rs530/bag. That said, southern region has not yet passed on higher costs as the price in the region was already at a premium. Additionally, LUCK continues efforts to diversify its energy needs by 10MW WHR at Pezu Plant (expected COD last month of 2016). This will likely contribute in after tax operational savings of Rs1.37/share from FY18 and onwards. LUCK trades at a slightly higher price owing to recent bull‐run on inclusion in MSCI EM Index. Higher multiples are also reflective of associated lower premium and fast paced earnings growth (5‐year forward CAGR of 21%).

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