The New Year charm could not sustain at the local equity bourse with the KSE-100 index posting a negative return of 2.0% in Feb’22, closing down by 914 points MoM to 44,461 points.
To recall, the market remained green during initial weeks of the month on the back of i) proceeds of USD 1bn from Sukuk issuance, ii) disbursement of IMF’s USD 1bn tranche, and iii) approval of the long awaited Textile policy by the ECC. Albeit, by mid-month the market came under pressure amid crumbling global political order. As Russian forces commenced a military operation in Ukraine, worldwide equities quickly recoiled whereas commodities summersaulted to new highs. With Russia being the second largest exporter of oil and the largest exporter of natural gas in the world, concerns grew of eminent sanctions of the country, disrupting global supply. Rally in international oil prices (whereby the commodity crossed the USD 100/bbl. level after 7 years), caused a stampede at the domestic bourse with market participants fearing further hike in inflationary reading and expanding external account deficit, hence eroding previous gains made at the index.
Major News
Petrol price hiked by massive Rs12 a litre, Jan textile group exports decline 4.38% to USD 1.55bn MoM, IMF forecasts real growth at 4% at factor cost, Pakistan still a strategic partner, reaffirms US, IMF says Pakistan’s external debt to reach USD 138.568bn in 2022-23, IMF says Pakistan’s external debt to reach USD 138.568bn in 2022-23, and NBP fined USD 55m by US authorities for anti-money laundering violations, compliance failures.
Outlook and Recommendation
Recent result season has once again restored confidence in Pakistan’s corporates with the Dec-end period churning out the highest ever annual profitability (+47% YoY to PKR 940bn) while the quarterly data too suggests that earnings posted a jump of 20% YoY / 1% QoQ. Earnings growth in 4QCY21 was led by the highest weighted Commercial Banks sector amid interest rate hike and reversal in general provisioning made last year in lieu of COVID. Whereas cyclicals (Cements & Autos) also witnessed a massive growth in profitability given improved prices. Finally, the energy sector (O&GMCs & E&Ps) also posted a bottom-line jump led by higher oil prices. Moreover, Prime Minister Imran Khan also announced a relief package for the masses to curb the impact of inflation and enhance support to the most vulnerable strata of the society in the backdrop on rising global commodity prices. We believe the aforementioned, alongside decline in the COVID infection ratio, should help cushion the economy as well as the sentiment in the market.
Whereas potential key trigger in the short to medium term could be the resolution of the gas circular debt which will improve the liquidity of the energy chain in general, and OGDC and PPL in particular. Moreover, it will also help aid local gas utilities, whose working capital requirement has gone up significantly due to the aforementioned issue in recent years. While the gas bills passed in the outgoing month also offer good tidings for the gas sector. While a key downside risk to the market remains further deterioration in the global political order with Russia threatening use of Nuclear weapons. Further sanctions on Russia could once again slowdown work on the historic Karachi-Lahore pipeline to be constructed, whereas further surge in global oil prices will have a negative impact on the Pak economy.
The KSE-100 index is currently trading at a PER of 5.0x (2022) compared to Asia Pac regional average of 13.5x and offering a DY of ~8.9% versus ~2.4% offered by the region.
Our preferred stocks are OGDC, PPL, MARI, HBL, MCB, UBL, MEBL, FABL, LUCK, FCCL, ENGRO, FFC, HUBC, PSO, INDU, ILP, EPCL, and ASTL.
Courtesy – AHL Research