Pakistan market regained some momentum after the PXE-100
index crossed 33,000 level during the week ended 1st April 2016, up
1.74%WoW despite volatility from global crude trends. Activity at the market
showed sharp recovery, where average traded volumes for the week rose to 140 million
shares as compared to 113 million shares a week ago. Key news flows guiding the
market during the week included: 1) MARI announced crude oil discovery at
exploratory well Halini Deep-1 in Karak block, 2) OGRA determined price of the
LNG delivered on ex-ship (DES) basis at US$8.99/MMBTU exclusive GST and allowed
increase in PSO margin to 2.5% on DES price from the previous 1.98 level, 3)
CDWP approved Rs218.2 billion worth of development projects including Rs129.7 billion
worth of motorway construction from Halka-Burhan on M-1 to Dera Ismail Khan as
part of CPEC, 4) IMF's Executive Board approved disbursement of US$502.6 million
after the completion of the tenth review under the EFF arrangement, 5) MSCI
released its reclassification proposal with regard to migration of Pakistan
index from frontier to emerging markets, where formal is expected to take place
in May’17 and 6) GoP increased the price of petroleum products taking refuge
behind the recent hike in global crude oil price. Performance leaders during
the week were MTL, AGTL, ABL, HCAR and DAWH, while laggards included NCL, OGDC,
HASCOL, UBL and ICI. Lack of foreign interest persisted during the week with
net outflows of US$9.56 million, higher than US$2.31 million recorded in the
previous week.
MSCI has released its reclassification proposal with
regards to migration of Pakistan index from frontier to emerging markets. While
consultation with market participants will be carried out in May'16 to be
followed by a decision in Jun'16, formal inclusion is likely to take place in
May'17. As per the proposal, the MSCI Pakistan Index would have a potential
weight of 0.19% in Emerging Markets (significantly lower than the current 9%
weight in the Frontier space) with nine companies making the cut. Out of the
total, three companies (OGDC, HBL and MCB) will be placed in the large cap
index whereas the rest (UBL, LUCK, FFC, ENGRO, HUBCO and PSO) are likely to be
placed in the Mid-cap index. Broadly meeting the set graduation criteria, minor
problem areas particularly with reference to market accessibility highlighted
in the document include: 1) inability of foreign investors to undertake short
selling/stock lending or borrowing and 2) stability of institutional framework.
Moreover, continuous shrinking of volumes during the year (1QCY16 average
volumes at 134 million shares as compared to 236 million shares during 1QCY15)
can potentially raise concerns on meeting the size and liquidity criteria,
altering the number of constituents and weights accordingly. Hopeful for an
inclusion, the market is eyeing increased visibility on the global front as a
key benefit especially in the backdrop of continuous foreign selling (CYTD FIPI
outflow registered at US$98 million). Also, precedence (recent entrants of
other markets) indicates that market multiples can sharply expand once
graduated in the Emerging Markets category.
According to the latest provisional dispatches data,
cement demand remained less than impressive. Contrary to the prevailing trend,
export dispatches posted the best month of the year so far with domestic demand
remaining flat. On a cumulative basis, dispatches reached a record high level
of +9.0%YoY in 9MFY16 as compared to +8.6%YoY in 8MFY16. Companies
outperforming the industry during the month included DGKC, ACPL, MLCF and PIOC,
while KOHC, FCCL, FECTC and LUCK were underperformers. On cumulative basis,
KOHC, PIOC, FCCL, DGKC and MLCF continued to outpace the industry while LUCK,
ACPL, CHCC and FECTC were laggards on account of loss of exports to some
markets (South Africa/Iraq). While March'16 failed to keep up with the
momentum, analysts expect domestic demand to pick up pace going forward on the
back of higher construction activity in summers where additional positive
surprise can come from any aggressive utilization of remaining PSDP funds
(unutilized FY16 federal PSDP: 50%). While exports continue to decline, experts
believe the recent uptick in dispatches during March'16 is encouraging. With
demand expected to remain robust alongwith lower operating costs, brokerage
houses maintain an Overweight stance on the sector where their top picks
include LUCK and DGKC due to their ability to catch up with anticipated rising
domestic demand.
Following below expected CY15 financial results and
adjustment in NIMs, there is a need to revisit Bank Alfalah (BAFL). While CY15
earnings depicted the swiftest pace of growth for BAFL (earnings grew by 33%
YoY), analysts do not expect such momentum to sustain as pressure on NIMs from
its investment portfolio (upcoming PIB maturities worth Rs50 billion) is likely
to take a toll on earnings considering lending rates are already at their
multi-yearr lows. That said, BAFL's focus on attracting current accounts
(37% of deposit mix in CY16F), efficient management of its staff cost
(employee/branch to go down to 15.5 in CY16 as compared to 17 in CY14) and
improvement in asset quality (credit cost to come down by 21bps to 0.45% in
CY16) are key factors restricting earnings decline to some extent. Additionally
BAFL's push towards expanding the high margin consumer segment business (5% of
loan book in CY15) can also come in handy. While dividend curtailment in CY15
was not received too well by investors, strengthening of CAR by 60bps to 13.4%,
as a consequence, is encouraging making room available for BAFL to participate
in the credit up-cycle. BAFL's valuation can catch up with peers through: 1)
sustainable and visible improvement in the cost structure, 2) an adequate CAR
buffer and 3) higher payouts.
