Lahore - The mood at the local bourse remained subdued given a heinous attack in Peshawar on Tuesday, where terrorists stormed into an army school killing 141 people including 132 children but scrips of cement sector remained in the limelight as investors believe that cost saving will result in better earnings due to cut in power tariff.
Experts said that even though PTI called off their 126-day long sit-in in Islamabad in the wake of the terrorist attack, the KSE-100 closed down by 1.8% WoW to 31,011 as net foreign selling clocked in at US$30mn during the outgoing week. Meanwhile, average daily volumes also dropped by 15% WoW to 203mn shares/day. Heavy-weight Oil & Gas sector remained under duress due to uncertain outlook over oil prices, while the textile sector felt the heat after the Prime Minister removed moratorium over death penalties as the decision could potentially risk Pakistan’s GSP Plus status. Other key highlights of the week were: (1) IMF board approving US$1.05bn tranche for Pakistan, (2) Cotton arrivals increasing by 8.03% YoY to 13.2mn bales in YTD FY15, (3) Power sector’s receivables soaring to Rs581bn, (4) FDI jumping by 19%YoY to US$423mn in 5MFY15 and (5) Prime Minister announcing Rs2.32/unit cut in power tariff.
Following continued downward spiral in international oil prices, PM Nawaz Sharif approved a reduction of PKR2.32/unit in power tariffs as fuel adjustment. Though the cut is expected to have widespread economic benefits, within the listed equities space, experts believe the Cement sector will likely be the primary beneficiary of the development given continued substantial reliance on grid based electricity. Of particular prominence are North based manufacturers including FCCL, PIOC, LPCL, KOHC and FECTC. These companies are expected to have an average earnings impact of 10% on earning (annualized basis). Amongst these, experts highlight FCCL as top pick offering 32% upside over target price of PKR32/sh. At the same time, manufacturers with partial grid dependency including DGKC and MLCF are expected to experience earnings growth of 2.2% and 4.1%, respectively attributable to the recent tariff reduction. Moving ahead, experts believe there may potentially be another power tariff cut in the offing given continued declining oil prices, thereby further augmenting manufacturers’ margins.
With FY15TD KSE-100 return of 8.4% being eclipsed by regional returns, experts believe the market is primed for a sustained bull run in the latter half of FY15 underpinned by ever improving macros. In the past six trading sessions post the below consensus Nov’14 CPI announcement, the KSE-100 has gained an impressive 3.2% (951 points). While consistent decline in international oil prices may lead to a drag on the price movement of the heavyweight Oil & Gas sector, economic themes including a continued easing cycle in 2HFY14, money flow to equities as fixed income rates decline and continued improvement in reserves (USD1.1b IMF tranche in Dec 2014) should keep index movement robust.
According to experts, Oil and Gas Development Company (OGDC) is expected to witness a dull FY15 owing to declining oil prices coupled with hefty amortization and exploration write-offs leading to 9%YoY contraction in earnings of the company during FY15. In addition to dwindling oil prices (down 48%FYTD), the exclusion of OGDC from KMI-30 post recent re-composition of KMI-30 (w.e.f. 22 Dec’14) may continue to keep the sentiment negative.
Experts believe the supply overhang issue will be short lived where they maintain long term conviction on the stock driven by i) aggressive development plan leading to 3 year production CAGR of 7%-8%, ii) exploration drilling in high prospect areas, iii) strong cash generation despite mounting circular debt and iv) low production risk on diversified basket of producing assets. Going forward, experts believe i) materialization of key development projects in 2HFY15 and ii) ramp-up of exploration drilling in high priced new concessions may improve the sentiment. At last closing, the stock is trading at an undemanding FY15F and FY16F P/E of 7.7x and 7.6x, respectively.