Investors returned to stock market on reduction in political
noise after the Supreme Court initiated hearing on Panama leaks. The benchmark index
of Pakistan Stock Exchange improved by nearly 5% WoW and closed at an all‐time
high of 41,842 points. Apart from diffused tensions in the political space,
positivity emanated from the announcement by KEL of planned shift in ownership
to the Chinese power conglomerate Shanghai Electric Corp and the recent
imposition of anti-dumping duty on Chinese steel imports as a protectionist
move benefiting local players.
News reports during the week included: 1) Petroleum Minister
Shahid Khaqan Abbasi announced that the GoP has decided not to increase the
natural gas tariff for any category of consumers because of a decline in the
cost of producing gas, 2) Minister of State for Water and Power stated that the
GoP would likely renegotiate the terms and conditions of handing over KEL to
the Shanghai Electric Power Company and expressed confidence in the Shanghai
Electric's ability to overcome the power crisis in Karachi, 3) French automaker
Renault announced to start assembling cars in Pakistan by 2018 under the newly
approved incentives announced in the Auto Investment Development Policy. Renault
would enter the Pakistani market as a Joint Venture with GHNL, committing to
invest US$100 million in Pakistan and 4) the cut in sales tax on petroleum
products reducing an estimated more than Rs20 billion revenue of the FBR during
the last four months.
While gainers at the bourse were: MTL, SHEL, ASTL, and ICI,
laggards were: EPCL, AKBL, MEBL and CHCC. With the reduction in political
noise, the market is expected to rally on the back of hastening inflation
matching a bottoming out of the interest rate cycle, a positive for banks.
Additionally, as November meeting of OPEC ministers approaches closer, any news
flow on production cuts could trigger global oil price momentum.
S&P Global upgraded Pakistan's sovereign rating to
B/stable from B‐/positive driven by successful follow
through on IMF dictated reform agenda. Major macro metrics qualifying the
country for an upgrade are: 1) fiscal consolidation to 4.6% of GDP, 2) external
account strength and 3) greater monetary flexibility. The agency maintains an
optimistic outlook on the country's economic prospects, projecting 5-year GDP
growth at 5% (FY16‐19) primarily on the back of CPEC related
development. Looking ahead, analysts expect Pakistan to maintain credit rating
at current levels over the next year, where probability for another upgrade
remains low. Their view emanates from the need for stringent reforms in tax
collection to support Pakistan's debt affordability (external debt up 20% over
3 years). However, likelihood of the current GoP turning to populist measures
can hamper revenue boosting efforts and consequently eligibility for an
upgrade.
K‐Electric (KEL) has notified that KES
Power (Abraaj‐controlled)
entered into an agreement to divest its 66.4% shareholding in KEL to the
Shanghai Electric Power Company Limited (SEP). At a disclosed deal size of US$1.77
billion (Rs184.2 billion), the deal price works out to Rs10.05/share. As SEP is
acquiring a majority stake in KEL and the shareholding of KES Power Ltd is
shifting from Abraaj and Al-Jomiah/NIG to SEP, a tender offer is likely for 50%
of the remaining shares voting shares. In this regard, regulations (Listed
Companies Takeover Regulations 2008) suggest that the tender may be offered at
the SPA price (which is the highest amongst the stated criteria). Despite risks
evident in the operation environment of KEL, analysts opine that SEP (of which
the 43.0% is owned by the State Power Investment Corporation) will be on firmer
footing to negotiate with the GoP concerning crucial operational aspects (PPA
with NTDC, renewal of MYT, generation licenses).
During this past week, Cherat Cement Company (CHCC)
became focus of investors’ attention for two reasons, announcement of
attractive quarterly financial results and COD one month earlier than planned. The
Company announced its 1QFY17 financial results posting profit after tax of Rs404
million (EPS: Rs2.29), registering 51%YoY growth over net profit of Rs268 million
(EPS: Rs1.52) for 1QFY16. Key highlights of results were: 1) Topline grew by
14%YoY to Rs1.77 billion due to improved dispatches, (2) gross improved owing
to cheaper energy cost and 3) tax expense jumped 97%YoY due to 61%YoY higher
pre-tax earnings and effective tax rate of 27% as compared 22% in 1QFY16.
CHCC's 1.3 million tons per annum (tpa) expansion is
expected to achieve COD by end November 2016, one month earlier than its plan.
Currently, the new line is under testing. Being the first of expansions in the
current cycle, CHCC can gain significant market share as other major
manufacturers are operating above 90% utilization, while the next contender, Lucky
Cement is not expected to commence production before end CY17. In this regard,
AKD Securities report forecasts CHCC's incremental production to result in
growth in revenues. Likewise, its market share will also increase, boosting its
EPS.
