LAHORE - The local bourse remained lacklustre owing to the political uncertainty prevailing in the country. On the macro front, swelling of trade deficit also dampened the investor sentiment. On a positive note, inauguration of Kunnar-Pasakhi Gas Pipeline Project by the prime minister created some excitement for investors. Overall, the benchmark KSE 100 Index lost 111 points to 11,014 level, depicting a decline of 1 percent WoW. Dullness in market activity can be vindicated by 33 percent WoW drop in volumes to 28m shares. This tamed performance led to the market underperforming the regional markets by 3 percent, however, foreigners were net buyers of $0.2m.
Outlook on the external account got bleaker with the widening of the trade deficit. In 1HFY12 Pakistan’s trade deficit stood at US$11.5bn, rising by 38.5 percent YoY. During the period under review, exports of the country increased by only 3.9 percent YoY to $11.2b, mainly due the decline in cotton prices. On the other hand, country’s import bill rose by 18.9 percent YoY to US$22.7b owing to higher oil prices. In Dec-11, exports plummeted to $1.9bn, down 11.5 percent YoY, whereas imports increased to $4.3b, up 13.6 percent YoY. Encouragingly, remittances sent by overseas Pakistanis have amounted to US$6.3bn in 1HFY12 against US$5.3bn in the same period last year, up 19.5 percent YoY. Both FFC and FFBL raised urea prices this week, consequently outperforming the market by 5 percent and 4 percent, respectively. Amongst other blue chip stocks, MCB and LUCK outperformed the market by a respective 3 percent and 2 percent on the back of attractive valuations.
Experts raised earning estimates for LUCK by 19 percent-6 percent for FY12E-14F on the back of 1) continuous firmness in average retention prices and 2) restrained coal prices. This has led to a revision in our target price by 8.7 percent to Rs112. Thus, for FY12 we anticipate the company to report an EPS of Rs18.35, while in 2QFY12 LUCK is likely to post an EPS of Rs5.11. Going forward, they expect cement prices to remain steady, however few sporadic periods of marginal downward adjustments in 2HFY12 cannot be ruled out. Overall, though net retention prices are likely to average higher compared to FY11 level. Moreover, coal which is down 7 percent since September 30, 2011 may remain under check amid the gloomy global economic outlook. We reiterate our ‘Buy’ call on the stock as it offers an upside of 45 percent to our revised target price. At current levels, LUCK is trading at FY12E PE of 4.2x versus market’s FY12E PE of 5.7x.
Experts said that one argument that has been given over the years to invest in Pakistan equity market is its discount to regional valuations. That is Pakistan trades at lower levels compare to regional/comparable markets based on PE, PBV, dividend yield, etc. And that discount to its peers should be taken positively by foreign fund managers while exploring opportunities in Pakistan capital markets. But there are following factors that needs to be analyzed when comparing Pakistan with other markets
Economic conditions, security concerns and local political issues are few of the factors due to which Pakistan trades below average PE multiples of other countries. For foreigners Pakistan dollar paying ability as measured by its sovereign rating is also a key factor dictating the discount. Since August 2009 Pakistan long term sovereign rating by S&P is B- with stable outlook. This is many notches below investment grade.
This is a difficult question to answer. However, looking at historical trend, Pakistan trades at 30-50 percent average discount to Emerging markets in the past. Recently, this discount has slightly reduced as Pakistan in 2011 has performed relatively better than other emerging and frontier markets. MSCI Pakistan was down 17 percent in 2011 compared to fall of 20 percent in MSCI EM and 22 percent in MSCI FM.
Normally Pakistan’s PE is compared with average PE of regional countries whether they are Asian peers or other emerging and frontier markets. Recently many fund managers were curious to find out which other countries trade below Pakistan and that is why we have given this information in the accompanied graph. All these countries like Pakistan have their own economic and political problems. This comparison may hint as to why foreigners have been net sellers since the start of new year in spite of low PE in Pakistan. Foreigners in first 6 trading sessions of 2012 has sold shares worth US$7mn (net selling) at a time when volumes are at abnormally low levels. In these 6 trading sessions, KSE settled shares of US$60mn only due to which foreigners selling is creating an impact on the market which is down 3 percent in last 6 sessions.