OGDC: Secondary Divestment of Shares by Government of Pakistan

The Government of Pakistan (GoP) intends to sell shares of Oil and Gas Development Company, (OGDC) through secondary offer.  It is sale of 10 percent or 322 million shares of its holding. The move will enhance OGDC’s free float from the present 15% to 22.5%. With the reported aim of raising US$800 million from the transaction, OGDC’s indicative offer price comes to PkR 248/share. While the final floor price is yet to be decided, a discount cannot be ruled out going by the size of the offer.  For details visit shkazmipk.com

State Bank of Pakistan Keeps Policy Rate Unchanged

The State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 10.0 percent. The decision was taken by the Central Board of Directors of SBP at its meeting held under the chairmanship of Governor Ashraf Mahmood Wathra in Karachi Saturday. Policy vigilance requires balancing the tradeoffs between ensuring the continuation of macroeconomic stability, especially in the external sector, and assuaging the fallout of potential damages due to floods. Therefore, the Board of Directors of SBP has decided to keep the policy rate unchanged.

The post July monetary policy decision period continued to witness stable macroeconomic conditions. This was most visible in the headline variable of inflation that declined to 7.0 percent YoY in August 2014, the lowest level since June 2013. Moreover, after recording an improved 4.1 percent growth rate in FY14, real economic activity is expected to continue in FY15. The other highlight of this stability is the gains on fiscal liberalization, shrinking budget deficits, contained government borrowings and improved debt profile.

Following on the actual number of 8.6 percent in FY14, the average CPI inflation during Jul-Aug 2014 was recorded at 7.4 percent. This declining trend is broad based since both measures of core inflation, Non-Food Non-Energy (NFNE) and trimmed mean, also decelerated YoY to 7.8 percent and 7.14 percent in August 2014 as compared to 8.7 percent and 7.9 percent in June 2014, respectively. Although, actual low inflation might weigh positively on market sentiments, it is the future path of inflation that matters for monetary policy decision. The current outlook of around 8 percent average CPI inflation for FY15 might change adversely if the subsidy to electricity is cut and Gas Infrastructure Development Cess is levied.

After demonstrating low growth since 2008, real economic activity started to show signs of revival in FY14. Continuation of the current growth momentum, however, primarily hinges on agriculture productions in FY15. This is because Large Scale Manufacturing (LSM) growth might remain constrained due to continued energy shortages; reduced production capacity of independent power plants; low supply of gas to fertilizer plants; lower domestic and international prices in the sugar sector; and higher inventories and slower exports growth prospects in food and textile sectors, respectively.

Incorporating the latest trends in exports and imports, oil payments in particular, trade deficit is going to dominate the composition of external current account deficit, even with a healthy growth in workers’ remittances. Declining private capital inflows, foreign direct investments in particular, would present continued challenges in managing the balance-of-payments position. In this regard, realization of expected privatization receipts and issuance of dollar-denominated Eurobond/Sukuks would be important.

In addition to the risks identified above, ongoing political impasse, delay in the finalization of fourth IMF review, and the current heavy rains and floods, which have engulfed central and southern Punjab, threaten the nascent recovery in economic activity. The former two would weigh more on the private capital inflows. The latter can potentially disrupt the output and supply chain of the perishable food items, which challenges an otherwise benign inflationary outlook. While it is going to take some time before the full extent of damages arrive, initial opinions and past experiences suggest that the current floods would damage some khariff crops and may disrupt supply chain temporarily. Besides having implications for economic growth, floods can also create macroeconomic imbalances by putting pressures on fiscal and external sector. Moreover, supply of loanable funds in the credit to private sector market may also be adversely affected, at least initially. Reflecting these apprehensions indeed, there is deterioration in SBP-IBA’s Consumer Confidence Survey of September 2014 as well. 

Pakistan: Initial Public Offering by Engro Powergen

Scheduled to become the latest addition to Pakistan’s listed power companies, Engro Powergen Qadirpur Limited (EPQL) will be formally listed on October 27, 2014 after an initial public offering (IPO) of 40.475 million shares (12.5% of total paid up capital) at PkR30.02/share. The unique hallmark of the 225MW plant (net 217.3MW) includes utilization of flare gas from Qadirpur gas field, which insulates it from gas shortages being faced by other independent power plants (IPPs).

This allows EPQL to more fully benefit from the cost efficiency of a combined cycle plant. EPQL posted profit after tax of PkR1.09 billion (EPS: PKR3.36) for 1HCY14, up by 4%YoY. At the same time, interim 1HCY14 dividend stood at PkR1.54/share. On an annualized basis, this translates into an attractive P/E of 6.72 and offering dividend yield of 10% which compared well against a forward P/E of 9.85 for LPL and D/Y of 12% and 12.8% for HUBC and KAPCO, respectively.         . 

EPQL was set up under the 2002 Power Policy and operates a 225MW combined cycle, gas and HSD fired power plant in Qadirpur, Sindh. The Company has a 25-year power purchase agreement (PPA) with NTDC commencing from Mar 27'10 (COD), and a Fuel Supply Agreement (FSA) with SNGP/OGDC for running the plant on unsweetened flare gas (75mmcfd) from the second largest gas field of Pakistan. This is underpinned by an average load factor of 85% over 2011-13, which improved to 95% in 1QCY14 following turbine repairs in 4QCY13.  

EPQL posted NPAT of PkR1.09 billion (EPS: PkR3.36) for 1HCY14, up by 4%YoY (increase in other income by PkR148 million YoY). It paid interim dividend of PkR1.54/share for 1HCY14 stood at adding PkR552 million to unappropriated profit).

For CY13, EPQL posted net profit of PkR1.01 billion (EPS: PkR4.5), lower by 31%YoY due to a rotor blade fault that shut the plant down for 95 days. That said, the full-year CY13 dividend was PkR6.17/share, following the circular debt repayment last year.    

A total of 80.95 million shares are being offered (inclusive of 40.47 million shares under pre-IPO placement through institutional investors). Priced at PkR30.02/share, this issue will help in raising an amount of PkR2.43 billion. The purpose of the issue is ostensibly to pay-off liabilities incurred by EPL for project financing and finance new projects including the LNG terminal being constructed by ENGRO subsidiary, Elengy Terminal Pakistan Ltd. 

Compared to Lalpir Power Ltd (LPL), a recently listed IPP of similar capacity, EPQL's implied valuation multiples at PkR30.02/share. Furthermore, EPQL stacks up well on payouts as well with a CY14E dividend yield of 10% as compared to a forward dividend yield of 12% for HUBC and 12.8% for KAPCO. In this regard, HUBC and KAPCO trade at a forward P/E of 10 and 7.35, respectively. A consistent payout ratio of 50% (ex-CY13 payout of 137% due to circular debt payment) and a consistent 31% average ROE over 2011-13 would encourage investors to buy its shares