KSE-100 beats regional peers to notch up 49.6% 2013 return – JSGCL Research
By: Farrah Marwat,
farrah.marwat@js.com
+ 9221 111-574-111Ext: 3035
JS Global Capital Limited
Hot on the heels of 2012’s 49% return, the KSE-100 extended its dream run in 2013, notching up a stellar 49.6% return for the year and comfortably outpacing regional average return of 7.0%.
Note that in US$ terms, Pakistan was the best performing market amongst Asian peers with 2013 US$ return of +37.6% clocking in well above the region’s -0.8% US$-based return.
With (1) the ‘democracy dividend’ post May 2013 General Elections; (2) lower risk of a Balance of Payments (BoP) crisis via entry into a fresh IMF program and (3) chunky foreign portfolio investment inflow, average turnover also headed up in tandem, rising 50% YoY to US$75mn in 2013.
The best performing KSE-100 sector in 2013 was Pharma (+92%), followed by Cement (+79%), Telecom (+71%) and Textile (+70%) while Gas Utilities (+25%) and Chemicals (+19%) were relative laggards.
In our universe, the best performing stocks in 2013 were FCCL (+169%), NML (+108%) and NCPL (+107%) while EFOODS (+6%), LOTCHEM (-1%) and AKBL (-8%) were at the bottom of the league table. For 2014, we flag POL, FATIMA, NML, NCL, DGKC, HUBC and APL as our preferred plays.
A stellar 2013 run at the Karachi Stock Exchange
Picking up where 2012 left off (49% market return over the course of the year), the Karachi Stock Exchange continued its dream run in 2013 where the benchmark KSE-100 index notched up a stellar 49.6% return for the year (Pak Rupee based), comfortably outperforming regional average (home currency based) return of 7.0%. While Pak Rupee weakness, pronounced in the latter part of the year, took a bite out of US$-based KSE return. Having said that, note that the same clocked in at +37.6% in 2013 – the highest amongst Asian peers and well above the region’s -0.8% US$ market return for the year.
Regional Performance 2013
Country
2013
US$ 2013
Japan
56.7%
29.3%
Pakistan
49.6%
37.6%
Taiwan
12.0%
8.8%
Malaysia
10.9%
2.9%
India
8.8%
-3.7%
Hong Kong
2.6%
2.5%
Philippines
1.3%
-6.3%
Korea
0.7%
1.6%
Singapore
-0.4%
-4.1%
Indonesia
-1.0%
-21.9%
Thailand
-6.7%
-13.1%
China
-7.6%
-5.0%
Average
7.0%
-0.8%
Pak vs. Region
42.5%
38.4%
Source: Bloomberg, KSE, JS Research
With the domestic bourse reaping benefits of (1) the ‘democracy dividend’ post Pakistan’s first democratic change of guard in May 2013; (2) lower risk of an outright Balance of Payments (BoP) crisis via entry into a fresh IMF program (staff level agreement in July 2013, formal agreement in September 2013) and (3) a continuous stream of foreign portfolio investment (FIPI) inflow to the tune of US$395.3mn (US$196.5mn in 2012), trading volumes also headed up. 2013 KSE Average Daily Turnover (ADTO) stood at US$75mn, +50% YoY though still shy of 5-year average ADTO of US$87mn. Note again, Pak Rupee weakness in recent years plays a role here where the number of shares traded in 2013 averaged 223mn, up 29% YoY and 64% higher than 5-year average of 136mn shares.
Drivers of KSE returns; Elections & IMF rule sentiments
We believe market momentum took its cue from two major events in 2013:
Nation-wide polls on May 11, 2013 where the country saw through its first democratic change of guard. Key positive takeaways were (1) Election results were far more decisive than pre-poll estimates, with PML-N emerging a clear leader and (2) General Elections witnessed an estimated voter turn-out of 60%, well higher than historical trends (2008: 44%, 2002: 42%). With earlier concerns of a massively hung parliament and weak coalition government at the centre out of the way and the PML-N’s pro-business stance finding broad support amongst corporates and investors alike, the KSE-100 also cheered election results, clocking up a 16% return in 2Q2013 vs. 7% a quarter prior.
Return to the IMF fold where the IMF approved a 3-year program for Pakistan on September 04, 2013, equaling US$6.64bn (425% of Pakistan’s quota) under the Extended Fund Facility (EFF). While IMF mandated reforms, as has been the case in the past, are proving tough to implement and Pak foreign exchange (FX) reserves still remain shallow post program, IMF’s loan has (1) alleviated concerns on an immediate Balance of Payments (BoP) crisis; (2) paved the way for anticipated flows from other IFIs and lenders which were awaiting the IMF’s green light; and (3) got the ball rolling on much needed structural reforms, including fiscal and energy sector reforms and re-structuring of problematic Public Sector Entities (PSEs). Following IMF loan approval, the KSE-100 clocked up a 16% 4Q2013 return as against 4% in 3Q2013.
Market leaders and laggards for the year
In terms of other key developments, 2013 was a mixed bag on both the macro and corporate front, where key good news included: (1) a chunky one-off circular debt payment of Rs326bn settlement in June 2013 coupled with sharp recent power tariff hikes (+30-50%) for industrial, commercial and residential users; (2) diversion of gas from Guddu power plant (on the Mari network) to ENGRO (TP: Rs161, Buy) which allowed the fertilizer major to hike urea production by 63% YoY in 11M2013; (3) Commercial Operation of HUBC’s (TP: Rs72, Buy) Laraib Hydropower Project; (4) Supreme Court’s decision to reinstate the International Clearing House (ICH) for telecom operators which was a boon for PTC (TP: Rs26, Sell); and (5) the EU’s much anticipated decision towards year-end to grant Pakistan GSP Plus status from 2014, paving the way for duty free exports and boosting outlook for textile majors, NML (TP: Rs139, Buy) and NCL (TP: Rs69, Buy).
There was also bad news, where (1) the State Bank (SBP) upped the ante on Banks’ regulation, linking the Minimum Deposit Rate on savings deposits to the Discount Rate (DR) and effectively curtailing spreads growth; (2) the start of monetary tightening in September 2013, where SBP has hiked the DR by 100bp so far (after a 50bp cut in June 2013) and we eye a further 100bp tightening by June 2014; (3) Pak Rupee came under pressure in 2H2013 on the back of SBP Dollar purchases and dwindling FX reserves, sliding by ~8.5% in 2013; and (4) Pharma pricing made headlines, where the government approved an ~15% Pharma product price hike (first price hike in 12 years) and then withdrew the same a day later. Note meanwhile that market return notwithstanding, KSE-100 earnings growth was relatively subdued in 2013 with 9M2013 headline earnings for our universe up just 5% YoY (flat YoY if adjusted for one-offs) resulting in somewhat punchy market valuations (KSE forward P/E closed 2013 at 9.7x vs. 7.4x at the start of the year).
Rounding up the market tally for 2013, the best performing KSE-100 sector was Pharma (+92%), followed by Cement (+79%), Telecom (+71%) and Textile (+70%) while Gas Utilities (+25%) and Chemicals (+19%) were relative laggards. Drilling down to stock performance, the best performing stocks within our universe in 2013 were FCCL (+169%), NML (+108%) and NCPL (+107%) while EFOODS (+6%), LOTCHEM (-1%) and AKBL (-8%) were at the bottom of the league table.
2014: Slimmer returns eyed; cherry picking in order
Going into 2014, we eye a relatively more modest market return where our back-of-the-envelope calculation suggests ~11% expected KSE return (based on expected 2014 KSE earnings growth of +15%; our Target Prices and historical multiples) to the 28,007 KSE-100 Index mark. The same builds in our view of further monetary tightening in the next 12-months as well as above-mentioned punchy valuations. From our vantage point, key drivers of 2014 market performance are likely to be (1) pace and delivery of the government’s privatization program; (2) Pak US relations; (3) unfolding details of IMF’s revised structural targets and (4) potential trading of T-Bills & PIB’s at the KSE which could give equity some competition. For 2014, we flag POL, FATIMA, NML, NCL, DGKC, HUBC and APL as our preferred plays.
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