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March 01, 2019
Pakistan Strategy MORNING BRIEFING
Recent correction creates opportunities
to5 build long positions
100 Index: Closing 39,054.61 ↑ (361.92)
One point gleaned from many events in Feb-2019 was Pakistan’s clear
and powerful message of peace to international observers.
On economic matters, the Saudi Crown Prince (a.k.a. MBS) visit was the
most critical event of the month, followed by a better performance on
Balance of Payments in Jan-2019. However, fiscal concerns remain firmly
in place, particularly with slowdown in economic growth and looming
revenue collection shortfall.
Forty out of forty-five companies under our coverage have announced
results for the December quarter. Profitability has improved by 16.1%
YoY / 9.6% QoQ. However, excluding Banks and E&Ps, profitability
declined by 0.8% YoY / 4.5% QoQ.
We reiterate that the current market situation is presenting long term
buying opportunities for investors. Our favored picks include mid-tier
banks (BAHL, BAFL, BOP and MEBL), Cement companies (DGKC, LUCK
and CHCC), EFERT, ENGRO, HUBC, PPL, APL and SEARL.
Key Equity Market Takeaways for Feb-2019
If one point was to be gleaned from the many events that transpired in the month of
Feb-2019, it was Pakistan‟s very clear and powerful message to international
observers that it wants peace in the subcontinent. Following are the key takeaways
for the month:
Pakistan has pushed for friendly relations with India, particularly since the
elections held in July last year. This can be gauged by looking at the following
events, i.e. (1) invitation by Imran Khan to Indian friends such as Navjot Singh
Sidhu to his inauguration as Prime Minister (in Aug-2018), (2) a highly
understated event, i.e. the reopening of the Kartarpur Corridor to allow Indian
pilgrims into Pakistan (in Nov-2018), (3) no reciprocation policy following
India‟s imposition of 200% customs duties on imports from Pakistan, (4)
emphatic statements by the DG Inter Services Public Relations (DG-ISPR) and
the PM following the Pulwama incident repeatedly desiring peace with India,
and (5) possibly the clearest gesture towards peace was the commitment
made by the PM yesterday by announcing to return the Indian pilot captured
following his intrusion in Pakistan‟s air space.
However, we reiterate that the current scenario is unique in some ways, such
as the release of a pre-attack video by the culprit of the Pulwama attack, who
was also a resident of the affected region. These factors carry a very powerful
message for global analysts and observers, given their similarity to the
methods used by infamous Middle East based terror outfits.
We are optimistic that the situation will deescalate during the coming days by
way of talks and to quote the Pakistani Prime Minister, better sense will prevail,
which should be good news for the stock market. We repeat that such events
have occurred many times in the past. Perhaps it is time for both countries to
resolve their differences through talks and treat terrorism as a common foe.
Research Entity Notification Number: REP-084 JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com
www.JamaPunji.pk Please refer to the important disclosures and disclaimer on the last page
Page 1March 01, 2019
MORNING BRIEFING
PSX Sector-wise performance The two key external account indicators
20% 17% SBP FX Reserves (US$ bn)-LHS
Feb-19 YTD 2019
15% Current Acc. Deficit (US$ bn)
9% 14.0 3.0
6%
5%
10% 6% 6%
1%
1%
5% 12.0 2.5
0%
10.0
0%
0%
2.0
-1%
-5%
-1%
-3%
-3%
-4%
-4%
-4%
-4%
-5%
-5%
8.0
-6%
-6%
-10%
-6%
-9%
1.5
-9%
-10%
-15%
-13%
6.0
-20%
-19%
1.0
4.0
0.5
Textile
E&P
Power
OMCs
Food
Banks
Engg.
Cement
KSE100 Index
Refinery
Chemical
Autos
Pharma
Fertilizer
2.0
0.0 0.0
Jan'19
Mar'18
Jan'18
Jun'18
Feb'18
Apr'18
Oct'18
May'18
Jul'18
Aug'18
Dec'18
Sep'18
Nov'18
Source: JS Research, PSX Source: SBP
Turning our attention towards economic matters, clearly the most significant
event during Feb-2019 was the MBS visit and the signing of US$21bn worth of
investments in Pakistan, which is positive for market sentiments and building
investor confidence. Moreover, the central bank‟s foreign exchange reserves
are currently stable at a touch above US$8bn, having dipped close to US$7bn
in the not too distant past. Positive developments from the aspect of FX
reserves are visible improvement in the current account deficit in Jan-2019 and
receipt of US$6bn from friendly countries. We hope that this trend continues in
coming months.
However, problems from the external front continue to permeate the fiscal
accounts. For instance, latest numbers revealed today in the press showed
that revenue collection for 8MFY19 stands at Rs2,328bn or avg. collection of
Rs291bn per month. This means that in order to meet the annual revenue
collection target of Rs4.3tn, the monthly average in the remaining four months
of FY19 will need to increase to Rs517bn. What makes it even more intriguing
is the statement by the Finance Minister, who assured that no new taxes would
be implemented in order to achieve this collection target. Only time will tell if
this goal is achievable.
What makes the task of revenue collection even more difficult is a slowdown in
the economy. Large Scale Manufacturing (LSM) numbers indicate a decline of
10.2% YoY in Dec-2018, taking 1HFY19 LSM decline to 1.5% YoY. Moreover,
amid fiscal tightening, development spending as usual has become collateral
damage (down 37% YoY in 1HFY19), which again would curtail economic
growth.
Looking at corporate profitability, 40 out of 45 companies under our coverage
have announced results for the December ending quarter. Results show that
profitability of these companies has improved by 16.1% YoY / 9.6% QoQ.
However, if we exclude Banks and E&Ps, profitability declined by 0.8% YoY /
4.5% QoQ. This is in line with expectations, as Banks and E&Ps were
expected to lead the results season. A surprising point for the market was
Page 2March 01, 2019
MORNING BRIEFING
higher than expected results in Cements (in some cases), which was however
in line with our expectations.
Turning towards market performance, for YTD CY19, E&Ps (up 17%),
Pharmaceuticals (up 9%), Fertilizer, Banks and Cement (all three up 6%)
outperformed the market. Among the worst performing sectors were Refineries
(down 13%), Chemicals (down 9%), Engineering (down 6%) and Food &
Personal Care (down 5%).
NCCPL data indicate that total net buying by foreigners for YTD CY19 stood at
US$49mn (US$ 36mn in Feb-2019 alone). On the local front, selling was
mainly witnessed from Mutual Funds (US$19mn) and Insurance Companies
(US$12mn) during the two months of CY19.
The market is currently trading at a FY19E P/E of 7.6x (as per Bloomberg
estimates). We reiterate that recent the current market situation is presenting
long term buying opportunities for investors. Our favored picks include mid-tier
banks (BAHL, BAFL, BOP and MEBL), Cement companies (DGKC, LUCK and
CHCC), EFERT, ENGRO, HUBC, PPL, APL and SEARL.
Syed Hussain Haider, CFA, CIPM
hussain.haider@js.com
+ 9221 111-574-111 Ext: 3118
Page 3March 01, 2019
MORNING BRIEFING
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Page 4March 01, 2019
MORNING BRIEFING
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