STOCK MARKET AT A GLANCE.
Foreign selling (US$16mn this week adding to US$6mn selling last week) and apprehensions related to the same remained the key theme of the week at the KSE. Despite the reintroduction of the much-awaited leverage product and a resolution to the simmering diplomatic crisis between Pakistan and the United States, the market declined 3.6% WoW. Macro news flow remained mixed where additional revenue measures of PRs53bn were implemented via a Presidential Ordinance. While this could strain corporate profitability to a certain extent (up to 2.5% impact of 15% flood tax on 2011 profits), the same should bode well from a broader macro viewpoint. The new measures target to address the fiscal situation and GoP borrowing from SBP and should in turn have positive implications for Pakistan's negotiations with the IMF.
OUTLOOK FOR THE FUTURE
The threat of foreign selling is likely to dictate market sentiments till the trend abates or is reversed. Therefore the situation developing in Japan post the natural calamity and unrest in the MENA region would be tracked closely, as these could have follow through impact on behavior of foreign investors. Also worth tracking would be response to recently unveiled MTS product after a relatively lackluster inaugural week. The announcement of monetary policy for the next two months is scheduled for March 26th where recent developments appear to have shaped market sentiments towards a likely status quo outcome. We expect that the impact of the same on the market is likely to be limited. In terms of stock picks, we would use any meaningful weakness in stock prices due to foreign selling to accumulate our preferred picks. PPL, POL, PSO and APL remain our preferred picks in the oil space. With fertilizers, we prefer urea plays and hence FFC and Engro deserve attention in our view.
Rounding off our list of picks would be Lucky Cement, KAPCO, PTCL, Tripack and LOTPTA.
NEWS THIS WEEK
GOVERNMENT REINTRODUCES 2%/MTH POWER TARIFF HIKE
As per media reports, the federal government increased retail consumer power tariff by 2% with immediate effect on Friday, 12th March 2011, after a formal agreement was reached with the International Monetary Fund. Reportedly, the government has agreed with the IMF to increase power tariffs by 6% within the remainder of FY11; i.e. 2% apiece in March, April and May 2011.
CONTROVERSY OVER UCH II PROJECT RESOLVED
The Public Procurement Regulatory Authority has approved the amended bid bond for EPC contract of Uch II development project. The amended bid was submitted by M/S Petrosin for US$186mn project being undertaken by OGDC.
REVENUE GENERATION MEASURES ANNOUNCED
After being the news for ~6 months, a onetime flood surcharge @15% on tax payable was implemented via a Presidential Ordinance. The revenue generating measures to the tune of PRs53bn, included removal of General Sales Tax (GST) exemptions on a number of items (notably farm inputs including fertilizers) and increase in Special Excise Duty to 2.5% from 1% currently.
AUTOMAKERS RAISE PRICES TO PASS ON 1.5% ADDITIONAL SED
Reportedly, all the three leading automakers are raising selling prices to pass-on the increase in SED by 1.5% to buyers. Pak Suzuki, the leading automakers, will be increasing prices by PRs6,000-30,000/car. Honda Atlas will raise prices of City by PRs17,000 and Civic by PRs24,000. Similarly, Indus has increased prices of its locally assembled Toyota and Daihatsu cars and LCVs by PRs10,000 -30,000. While other automakers are only passing-on the impact of higher SED to buyers, Indus has raised prices of Cuore and Hilux by another PRs35,000-55,000 and PRs20,000-25,000 respectively to adjust for higher input costs too. The price hikes to pass-on higher taxes/duties are inline with the historical trend that should not affect demand going forward, in our view.
THIS WEEK'S TOP STORIES
MONDAY, MARCH 14, 2011 - MACRO: INFLATION DOWN TO 12.9% YOY IN FEB-11
wo key factors drove Feb-11 YoY CPI down; 1) food index (40% weight) which declined by 2.1% MoM due to moderation in perishable food item prices and 2) FBS did not incorporate ~4% increase in petroleum product prices.
Core and trimmed core inflation also showed moderation to 9.2% YoY and 11.7% YoY. However, this is partly due to the smoothening factor of HRI.
WPI on the other hand remains downward sticky and above 20% on a YoY basis. In Feb-11, the WPI index increased by 1.87% MoM and 24.43% YoY.
Given 1) the external account is still robust and 2) deficit monetization is contained, SBP is likely to stick to its 'wait and see approach' and is likely to keep policy rate unchanged at 14.0% in March-11 statement.
Hamza A. Marath, CFA (Hamza.email@example.com)
TUESDAY, MARCH 15, 2011 - POL: NEAR-TERM TRIGGERS TO UNLOCK VALUE
With approval for re-entry and the restart of drilling, we believe Pakistan Oilfields is nearing a potential find in Domial.
The potential find should bring to light POL's volume growth story and exposure to high prospect exploration blocks. The same should deliver out-performance of the stock versus the KSE-100.
We see low risk attached to the Domial find. Our estimates suggests this could raise POL's future earnings by 5-7% and PO by 5%
Whilst Domial remains a high impact drilling for POL, the market seems to assign low importance.
POL remains our high conviction Buy among Pakistan EandPs. It provides 18% potential upside to our PO and trades at FY12E P/E of 6.1x.
Mohammad Fawad Khan, CFA (Fawad.firstname.lastname@example.org)
WEDNESDAY, MARCH 16, 2011 - IMPACT OF REGIONAL TURMOIL ON PAK AND KSE
While KSE has withstood regional pressures, we highlight some follow through developments in addition to commodity prices which could have an impact.
Continued closure of Egypt market could result in its classification as Frontier market. In addition, if potential upgrade of UAE and Qatar is delayed, Pak weight in MSCI FM will stand reduced by 0.4% from its current weight of 4%.
Combined with foreign flows, regional developments will be important but reintroduction of leverage after ~2 years could help counter potential pressures.
Imtiaz Gadar, CFA (Imtiaz.email@example.com)
THURSDAY, MARCH 17, 2011 - TAX EXEMPTION WITHDRAWN FROM FARM INPUTS
The government has decided to (1) withdraw General Sales Tax (GST) exemption on agri inputs, including fertilizer and (2) levy a one-time flood surcharge @15% on income tax payable.
Flood tax would impact our fertilizer universe earnings by 5.2-7.5% on an annualized basis, though details on period of applicability are still murky.
We believe the government's decision to levy GST on key agri inputs could push up FY12E farm costs by ~5-6%. This should be partly covered by higher farm revenue, as output prices have sky-rocketed FY11-to-date.
That said, farmer liquidity may be squeezed in the interim, which poses risk to near-term demand, in particular for DAP. With domestic urea still the cheapest option for farmers, we do not see protracted impact on Pak urea demand.
Farrah Marwat (Farrah.firstname.lastname@example.org)
FRIDAY, MARCH 18, 2011 -
Due to unavoidable technical issues, we were unable to release the Morning Shout for 18th March 2011. We regret any inconvenience caused due to the same.
STOCK MARKET SYNOPSIS
###LAST WEEK###THIS WEEK % CHANGE
Mkt. Cap (US $ bn)###38.02###36.48###-4.05%
Avg. Dly T/O (mn. shares)###88.43###112.44###27.16%
Avg. Dly T/O (US$ mn.)###52.92###45.28###-14.43%
No. of Trading Sessions###5###5###.
KSE 100 Index###12,045.25###11,606.61###-3.64%
KSE ALL Share Index###8,356.50###8,082.05###-3.28%.