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

National Bank of Pakistan posts 28 per increase in net profit



On Tuesday the Board of Directors of National Bank of Pakistan (NBP) approved financial results of the Bank for the six months period ended June 30, 2014, posting 42 percent increase in net earnings.

On a consolidated basis, NBP has posted profit after tax of PkR7.67 billion (EPS: PkR3.60) for 1HCY14 against restated net profit of PkR6.01 billion (EPS: PkR2.83) for 1HCY13, translating into 28%YoY growth.

Had last year’s accounts not been restated (changes to share of associates’ profit and admin expenses), growth would have tapered to 11%YoY. The result was above expectations with the deviation due to higher than expected Net Interest Income (NII) and exceptionally high capital gains.

Key 1HCY14 result highlights include: 1) a 2%YoY reduction in NII, 2) a 66%YoY reduction in total provisions, 3) a 13%YoY non-interest income growth largely due to capital gains and 4) a 12%YoY increase in non-interest expenses.

For 2QCY14 alone, NBP posted net profit of PkR4.44 billion (EPS: PkR2.09), up 79%YoY/38%QoQ making this the best quarter since 1QCY12. Capital gains for the quarter rose to PkR3.83 billion, one of the highest on record which together with a sequential spike in NII, enabled total income to register at record high levels. Despite the high capital gains, deferred tax pushed the overall tax rate for 2QCY14 to 39.3%.

The Bank is strongly capitalized with capital and reserves of PKR 160 billion, which translates into break- up value per share of over PKR 75 per share. The bank’s rating was re-affirmed at “AAA” by JCR VIS Credit Rating Agency in June 2014.

At current levels, the target price of PkR65/share implies an accumulate stance. That said, investors must revisit detailed accounts where asset quality position would be critical.

Pakistan: POL earnings up by 19 percent

Pakistan Oilfields Limited (POL) announced its FY14 result posting profit after tax of PKR12.9 billion (EPS: PKR54.5), a growth of 19%YoY. The result was below market expectations due to higher than estimated amortization charges, primarily due to Manzalai reserve downgrade write-off. The result announcement was also accompanied by a final cash dividend of PKR32.5/share taking full year payout to PKR52.5/share. The notable surge in earnings during FY14 can be attributed to a 23% increase in the topline to Rs35.5 billion on account of 1) a 25%YoY increase in oil production to 6,000bpd and 2) a 6.3%YoY depreciation in average Pak Rupee value against the US Dollar. Analysts maintain BUY stance on POL with a target price of PKR655/share, offering a total return of 29%.

Attock Petroleum posts full year results, EPS up 11 percent

Attock Petroleum Limited (APL) posted profit after tax of PKR4.3 billion (EPS: PKR52.2) for FY14 (financial year ended June 30, 2014) as compared to PKR3.9 billion (EPS: PKR47.1) for the corresponding period last year, depicting a growth of 11 percent YoY.
The result was below expectations due to higher than estimated inventory losses in 4QFY14.
The increase in earnings can be attributed to a) 18% higher volumetric sales of major petroleum products, b) increased margins on HSD and motor gasoline and c) lower late payment charges.
The announcement was also accompanied by final dividend of PKR30/share, taking full year FY14 payout to PKR47.5/share.
At current levels, analysts maintain ‘accumulate’ stance on APL with a trade price of PKR625/share, offering a total return of 15 percent.

OGDC discovers gas near Karachi

Oil and Gas Development Company (OGDC) has discovered hydrocarbon reserves in exploratory well Pasakhi deep well-4 in Hyderabad district, some 200 kilometers from mega city Karachi. The oil and gas giant has 100 per cent working interest in Pasakhi lease.

“The structure of Pasakhi deep well-4 was delineated, drilled and tested using OGDC’s in-house expertise. The well was drilled down to the depth of 3,460 meters, targeting to test the hydrocarbon potential of massive sands of lower Goru formation where the Company hit on the hydrocarbon reserves.

According to the information made public by OGDC the zone had been tested with 14.015 mmscfd of gas and 125bpd of condensate at 36/64inch choke size.

“This discovery of hydrocarbon in Pasakhi deep well No 4 will add to the total hydrocarbon reserves base of OGDC.

Analyst Mohammad Affan Ismail at a local brokerage house, BMA Capital commented that the discovery, which stands at 14.02mmcfd of gas and 125bpd of oil would slightly impact the Company’s annualised earnings.

According to Pakistan Petroleum Information Service (PPIS), the E&P giant ‑ OGDC ‑ is further pursuing exploratory drilling of seven more wells (four wells were near completion) mainly in gas rich Sindh and Balochistan regions.

Pakistan Stock Market Rocked by Politics

One of the leading brokerage houses of Pakistan, AKD Securities has once again reiterated that country’s equities market is still under pressure due to volatile political situation.

On Monday the benchmark KSE-100 Index lost more than 1,300 points or 5 percent during first half of the day. Nearly 100 stocks (18 percent of total companies listed at Karachi Stock Exchange) hit their lower circuits. The Index has shed about 8 percent from its CYTD high.

The most recent decline is due to further increase in political noise over the weekend, with the PAT announcing its own long march on Independence Day (August 14) and the Army calling a corps commanders' meeting on Monday.

In the absence of a resolution, these developments could continue to drag the market lower in the immediate-term where the market's regional discount (40 percent at present) is likely to expand.

The brokerage house continue to advocate a cautious stance in the immediate-term but flag that Pakistan Equities are beginning to look very attractive from a bottom-up vantage as company level fundamentals remain intact.

Now there is a big question, will political noise rise further? While the market shed 3.1% last week, strong buying was witnessed throughout the week from foreign institutions, with net FPI inflow of US$21.6 million increasing CYTD inflow to US$359.6 million.

In addition, local participation was also witnessed at the tail end of the week with news flow pointing towards a potential breakthrough in the political impasse through talks.

However, the weekend added to the quagmire with PTI remaining firm about long march plan and fresh clashes taking place between the police and PAT activists, leading to the PAT announcing its own long march in the capital on the same day.

Within this backdrop, the Pakistan Army has also called in a corps commanders' meeting to discuss the ongoing Operation Zarb-e-Azb as well as the domestic political situation. While a military takeover still appears unlikely, it cannot be ruled out completely, particularly if street protests turn violent.

The Pakistan market has seen its fair share of political crises over the last 10 years; prominent ones being PPP Chairperson Benazir Bhutto's assassination and resignation of President Musharraf.

In such scenarios the market has at an average shed 5 percent during political crises with the highest fall of 16.3 percent in the week after President Musharraf's resignation and before the imposition of the price floor.

To date the KSE-100 Index has shed 8 percent from its CYTD high. Extending this analysis to the 1990s shows a similar picture (average market decline of 5 percent), with the greatest loss in market cap of over 10 percent following President Musharraf's coup. Based on Monday's intraday low, the KSE-100 Index trades at a forward P/E of 7.9x which is at a 40% discount to the MSCI Asia Pacific (excluding Japan Index).

Although the economic indicators are showing a positive trend but political uncertainty is negatively impacting the market. Analysts recommend investors to follow 'wait and see strategy' policy till stabilization of the political situation. Local equities are now trading at a discount. Although, numbers like these have not been seen for quite some time in recent past. In fact, there are many stocks which have the potential to provide above-average return going forward.