The KSE-100 index closed up at 40,330.30 having made an intra day high at 40,422.13, an all time high so far !!
Maple Leaf Cement on Monday announced a net profit of Rs4.84 billion in the financial year ended June 30, 2016, up 40% compared to Rs3.45 billion in the previous year, according to a company notice sent to the Pakistan Stock Exchange.Earnings per share jumped to Rs9.18 in FY16 compared to Rs6.55 in the previous year. “This result was above market estimates,” Topline Securities commented.The results were accompanied with an interim cash dividend of Rs2.5 per share, taking total pay-out for FY16 to Rs4 per share….The company also announced that it would set up a grey cement production line (brownfield) of 2.1 million tons. This would take its total production capacity to 5.3 million tons.
In the fourth quarter of FY16, Maple Leaf recorded revenues of Rs6.5 billion, up 15% year-on-year. This was mainly on the back of higher local cement sales, up 16% year-on-year to 0.7 million tons.“We attribute this to lower cost of production as a result of subdued commodity prices and cheap transportation fares (Maple Leaf is now using railway channels for coal transportation from Karachi Port to its production facility in the north),” the report added.Financial charges in the fourth quarter dropped 92% year-on-year to Rs16 million.Pre-tax profit increased 64% year-on-year to Rs2.2 billion in the fourth quarter. However, higher effective tax rate, which was up 20 percentage points to 38%, restricted profit growth to 24%…. EXPRESS TRIBUNE
The KSE-100 index finally closed above 40k today with an intra-day high of 40,104.15 and closed up at 40,030.52 !!
The KSE-100 index closed at an all time high of 39,528.82 points today !!
The KSE – 100 index made an intra-day high of 37,539.14 and closed at an all time high of 37,392.29 today !
Having made an intra day high of 36,809.31, the KSE-100 index closed at 36,685.05 , an all time high ( so far ) !
The Hub Power Company reported an after-tax profit of Rs2.8 billion or Rs2.38 per share for the quarter ended December 31, 2015, down 10.5% compared with Rs3.2 billion or Rs2.66 per share it earned in the same quarter of 2014….the Karachi-based power generation company also announced an interim cash dividend of Rs4.5 per share for the quarter under review.
The result was in line with market expectations, according to Topline Securities, which attributed the fall in the company’s net earnings to a decline in its sales – the company’s revenues clocked in at Rs23.3 billion during October-December period, down 31% when compared with Rs33.8 billion of the corresponding period of 2014.The recent slump in international crude oil prices resulted in a decline in furnace oil prices, Topline Securities said, explaining the fall in the company’s volumes during the quarter under review. Average furnace oil prices were 46% in the fourth quarter of 2015 when compared with that of the corresponding period of 2014.
Gross profit for the quarter improved by 3.7 percentage points to 18.5%, the report said. “The improvement can be attributed to normalisation of Operation & Maintenance (O&M) expense as overhaul of two boilers was carried out last year,” it said, adding the company has taken over O&M activities of its base plant at Hub through Hub Power Services Ltd (HSPL), a wholly owned subsidiary of the company.However, the company’s finance cost declined by 33% on year-on-year basis to Rs2.1 billion during July-December period, BMA Capital said in its report.It added that the lower finance cost is a factor of improved liquidity position of the company amid decline in furnace oil prices and subsequent improvement in the circular debt position and lower interest rate in the country.
On quarter-over-quarter basis, the company’s top-line declined by 13.5% while gross profit margins improved by 2 percentage points, Topline said in its report, adding they expect value addition from coal-based power plants being set up by the company at existing Hub plant site and investment in Sindh Engro Coal Mining Corporation (SECMC), which will be key catalysts to the company’s earnings going forward….. EXPRESS TRIBUNE
The National Electric Power Regulatory Authority (Nepra) on Tuesday approved the upfront tariff for $1.9 billion coal-based power project of China-Hub Power Company at a levelised tariff of 8.36 cents (Rs8.12) per unit for 30 years. The 1,320-megawatt project is a joint venture of Hub Power Company (Hubco), which currently operates the country’s largest 1,290MW thermal power station at Hub in Balochistan besides other smaller projects, and China Power International Holding Limited (CPIH), a wholly-owned core enterprise of China Power Investment Corporation.The project is one of the priority projects of $46bn China-Pakistan Economic Corridor (CPEC). The joint venture company — China Power Hub Generation Company (Pvt) Limited (CPHGCL) — will jointly develop two 660MW plants near Hubco’s existing plant to run on imported coal.
In its determination, Nepra said the average tariff for one unit of 660MW would have an average tariff of 9.064 cents per unit for first 10 years that would subsequently come down to an average of 7.042 cents for 11-30 years. The levelised tariff for 30 years was approved at 8.36 cents per unit….The application was processed in accordance with the relevant provisions of the regulations and finally granted upfront tariff for 660MW on foreign financing….The project will have a debt-equity ratio of 80:20. Its cost will go up to $2.4 billion because of an ancillary coal jetty to enable transportation of imported coal.
The company expects to achieve the financial close of the project by June 2016 and complete the project in 2020. The Hubco will have 49pc shares in the project and China International 51pc….. DAWN
Amid the slump in international crude oil prices, the Oil & Gas Development Company Limited (OGDCL) saw its net earnings decline by almost one-fifth to Rs16 billion in October-December quarter of 2015,…The country’s largest publicly listed company based on market capitalisation (Rs451 billion or $4.3 billion in today’s exchange rates), OGDCL reported a net profit of Rs15.9 billion or Rs3.71 per share for the quarter ended December 31, 2015, down 18% compared to Rs19.5 billion or Rs4.54 per share it earned in the same quarter of the previous year.
The average basket price, in the second half of 2015, plummeted to $47.73 from $91.86 of the corresponding period of last year, the company said in a notice to the Pakistan Stock Exchange. As a result, OGDCL’ average realised prices decreased to $43.09 per barrel during the review period compared to $76.57 per barrel of the comparable period of 2014. “The result was below market expectations,” Taurus Securities’ Head of Research Zeeshan Afzal said, attributing the decline in the company’s net earnings to lower oil and gas flows, which dented sales revenues, and fall in international petroleum prices, which hurt the profit margin.
Besides lower average oil prices, a 3% to 4% slowdown in the production also had an adverse impact on the company’s revenues, BMA Capital said in its report.The local E&P giant, which has 3.9% weight in the benchmark KSE-100 Index and constitutes over 40% of the listed Oil & Gas Sector, reported Rs41.8 billion in revenues during the fourth quarter of 2015, a decrease of 23% compared to Rs54.2 billion it earned in sales during the corresponding period of 2014.The index heavyweight is highly vulnerable to fluctuations in international crude oil prices thus, the recent slump in prices reduced its gross profit margin to 54.4% in the last quarter of 2015, down by 10 percentage points from 64.2% of the same quarter of 2014…. EXPRESS TRIBUNE
Fauji Cement (FCCL) announced a net profit of Rs2.77 billion in the first six months (Jul-Dec) of fiscal year 2015-16 (1HFY16), up a significant 67% compared to the same period of last fiscal year, …Earnings per share (EPS) jumped to Rs2.09 compared to an EPS of Rs1.25 in the period under review.In the second quarter, the company posted a net profit of Rs1.67 billion (EPS of Rs1.21), up 52% quarter on quarter from preceding quarter profit of Rs1.1 billion (EPS of Rs0.83).The company also announced interim cash dividend of Rs1.75 per share (2QFY15: 1.00/share).
The company witnessed a 24% quarter on quarter rise in dispatches (751,000 tonnes in 2QFY16) owed to improved domestic/export demand (up 24% and 26%, respectively), coupled with stable cement prices in the north region of the country, resulting in a 27% sequential growth in turnover.Gross margins expanded by 600 basis points during 2QFY16 to 48%, in contrast to 43% in 1QFY16 due to lower average coal prices which dipped 8.7% quarter on quarter in 2QFY16 along with contracting fuel costs amid dwindling oil prices. While 1HFY16 gross margins rose 11 percentage points to 46%.The selling and distribution expenses escalated by 57% quarter on quarter to Rs58 million…. EXPRESS TRIBUNE
Pakistan Petroleum Limited (PPL) announced a profit after tax of Rs11.78 billion in the first six months (Jul-Dec) of fiscal year 2015-16, down 47% compared to Rs22.14 billion in the same period of last fiscal year, ….Earnings per share (EPS) dropped to Rs5.98 from Rs11.23 in the period under review.The company posted a profit after tax of Rs5.88 billion (EPS of Rs2.98) in the second quarter (Oct-Dec) of fiscal year 2015-16 (2QFY16), depicting a flat sequential growth despite a 20% quarter on quarter decline in average Arab Light prices.The company also announced an interim cash dividend of Rs. 2.25 per share.
The company recorded net sales of Rs20.5 billion in 2QFY16, flat compared to previous quarter mainly on the back of 14% increase in oil production, 7% increase in gas production and stagnant gas prices in the quarter under discussion.However, wellhead prices are expected to be revised downwards for 2HFY16. The exploration cost clocked in at Rs9.8 billion, down 10% quarter on quarter…. EXPRESS TRIBUNE
GHGL : 20% CASH – EPS : 6.08
EFERT : 30% CASH – EPS : 11.30
MCB : 40% CASH – EPS : 22.96
NRL : EPS : 36.07
APL : 150% CASH – EPS : 19.78
ATRL : EPS : 8.53
POL : 150% CASH – EPS : 15.50
ACPL : EPS : 10.07
CHCC : 10% CASH – EPS : 3.83
PSO : 50% CASH – EPS : 24.76
AKBL : 12.5% CASH – EPS : 4
PPL : 22.5% CASH – EPS : 6.12
FCCL : 17.5% CASH – EPS : 2.09
OGDC : 12% CASH – EPS : 7.95
DGKC : EPS : 8.75
HUBC : 45% CASH – EPS : 4.59
ENGRO : 70% CASH – EPS : 26.32
UBL : 40% CASH – EPS : 21.36
LUCK : EPS : 22.17
MARI : 30% CASH – EPS : 18.63
KAPCO : 42.50 % CASH – EPS : 4.92
NCPL : 20% CASH – EPS : 4.52
ASC : EPS : 1.48
GHGL : 4TH
EFERT : 8TH
MCB : 9TH
POL : 10TH
CHCC : 11TH
PSO : 15TH
PPL : 16TH
HUBC : 17TH
ENGRO : 18TH
PAKT : 19TH
LUCK : 20TH
MARI : 23RD
KAPCO : 24TH
NCPL : 25TH
Maple Leaf Cement announced an after-tax profit of Rs.1.5 billion in the second quarter ended December 2015, an increase of around 69% over earnings of Rs888 million in the same period of previous fiscal year, ….Earnings per share stood at Rs2.8 in the October-December quarter compared to Rs1.7 in the same period of previous year.With the financial numbers, the cement manufacturer also declared an interim cash dividend of Rs1.5 per share as opposed to Rs1 per share last year.
“The result was well above market estimates,” commented Topline Securities in its report.
In the October-December quarter, revenues of the company jumped 13% year-on-year to Rs5.9 billion primarily due to higher cement sales in the domestic market.In the quarter, local sales of the company grew 15% year-on-year to 700,000 tons in the face of rising demand from the private sector…. Gross margins of the company improved a robust 734 basis points to 44% in the three months to December 2015. The strong margins were the result of booking coal at a lower cost as prices were down 21% year-on-year on the Richards Bay Index. Moreover, a substantial fall in oil prices – Arab light crude was down 45% year-on-year – led to a 20% decline in power tariff, which further aided the company’s gross margins. Maple Leaf also benefited from lower financial charges, which dropped 52% thanks to the reduced interest rate environment as the policy rate stood at a 42-year low of 6%…In the first half (July-December), revenues were up 12% and net earnings rose 63%….. EXPRESS TRIBUNE
PAEL : 25% RIGHTS AT A PREMIUM OF RS.30
MLCF : 15% CASH – EPS : 4.44
FFBL : 30.5% CASH – EPS : 4.35
PRL : EPS : 0.69
EFOODS : EPS : 4.13
FFC : 34.20% CASH – EPS : 13.18
PAEL : 4TH
MLCF : 20TH
FFBL : 26TH
EFOODS : 27TH
KOHC : 28TH
The KSE-100 index started the first trading session of the year by closing up at 33,228, an increase of 412.64 points and a positive start to the year !
The KSE-100 index closed up at 32,816.30 in the last trading session of the year. On 31st Dec 2014 the index was 32,131.28. The increase in one year is just 2.13% compared to 31-12-13 to 31-12-14 which was 27.19 % !!
KAPCO : EPS : 2.39
EFERT : 15% CASH – EPS : 7.45
CHCC : EPS : 1.52
CYAN : EPS : 6.65
UBL : 30% CASH – EPS : 16.01
KOHE : EPS : 0.96
PAEL : EPS : 6.60
FFBL : EPS : 1.01
PNSC : EPS : 0.45
FFC : 27.5% CASH – EPS : 10.14
HUBC : EPS : 1.76
PSO : EPS : 11.97
GASF : EPS : – 0,12
DGKC : EPS : 3.93
FCCL : EPS : 0.83
ENGRO : 50% CASH – EPS : 16.95
NCPL : 20% CASH – EPS : 2.37
LUCK : EPS : 9.18
KAPCO : 22ND
EFERT : 26TH
UBL : 27TH
FFC : 28TH
FCCL : 29TH
KOHC : 30TH
The number of listed companies has gone down by 5% in the last three years, the latest annual report of the Karachi Stock Exchange (KSE) shows. As many as 30 companies have unlisted since 2012 when stocks of 590 entities were traded on the largest stock exchange of Pakistan. Their number clocked up at 560 at the end of 2014-15, just three notches above the number of listed companies at the end of 2013-14. Although market capitalisation has gone up by a massive 111% over the last three years, total capital listed on the stock exchange has grown by just 11.1% during the same period.
However, privately held companies seem to have become more interested in going public of late. The last fiscal year saw nine new listings on the KSE as opposed to five, four and four listings in the preceding three fiscal years, respectively. The listed capital of new companies also surged notably along with nine new listings. New companies listed capital of Rs38.1 billion in 2014-15, which was almost twice the capital listed on the bourse during the preceding fiscal year.
However, financial accounts of the exchange show it doubled its advertising and marketing expenses to Rs16.5 million in 2014-15 in order to create awareness about the KSE, which could lead to higher liquidity and more listings in the future. Companies that were listed in 2014-15 included Colony Textile Mills, Engro Powergen Qadirpur, Saif Power, Sindh Modaraba, Systems Limited, Synthetic Products Enterprises, Mughal Iron & Steel Industries, Ghani Global Glass and Dolmen City REIT.
New listings raised funds amounting to Rs11 billion as opposed to equity generation of Rs4.7 billion in the preceding year….EXPRESS TRIBUNE
POL : EPS : 5.95
NRL : EPS : 5.08
APL : EPS : 8.34
ATRL : EPS : 6.20
OGDC : 15% CASH – EPS : 4.25
SEARL : EPS : 5.94
EFOODS : EPS : 3.39
PAKT : 60% CASH – EPS : 24.78
MLCF : EPS : 1.60
DAWH : EPS : 44.40
MCB : 40% CASH – EPS : 18.16
PPL : EPS : 2.98
PIOC : EPS : 1.60
PRL : EPS : – 2.28
ACPL : EPS : 4.20
POL : 15TH
OGDC : 16TH
EFOODS : 19TH
DAWH : 20TH
PPL : 21ST
Dera Ghazi Khan Cement – one of the largest cement makers of the country and part of the Nishat Group – has posted net earnings of Rs7.63 billion in the year ending on June 30, up 28% compared to full-year earnings of Rs5.97 billion in the same period of last year. Earnings per share (EPS) increased to Rs17.40 against an EPS of Rs13.62 in the period under review.
The company has also announced a final dividend of Rs5.00 per share. The company posted a profit of Rs2.25 billion in the fourth quarter (April to June 2015), exhibiting a growth of 11% against a net profit of Rs2.02 billion in the same period of last year. Earnings per share (EPS) in the fourth quarter jumped to Rs5.14 from an EPS of Rs4.61. The key reasons behind the earnings performance were; improvement of 80 basis points (bps) year on year (YoY) in gross margins to settle at 42.4% during fourth quarter of fiscal year 2015 (4QFY15) fuelled by falling coal prices.
Secondly, 18% YoY decline in borrowing costs due to lower interest rates and deleveraging of balance sheet, and reduced administration and selling expenses (down 17% year on year) also provided support. The share price of the company has already gained 24.4% in calendar year to-date (CYTD). The production capacity of the company is 14,000 tons per day (4,200 million tons per annum). It has three cement plants; two are located in Dera Ghazi Khan and one in Khairpur District, Chakwal…. EXPRESS TRIBUNE
On the back of volumetric growth, Lucky Cement Limited – Pakistan’s largest cement-maker with more than 19% market share – boosted its net earnings by one-tenth to more than Rs.12 billion in fiscal year 2014-15,…The company reported an after-tax profit of Rs12.43 billion or Rs38.4 per share for the year ended June 30, 2015, up 9.6% compared to Rs11.3 billion or Rs35.08 per share last year. The results were accompanied by a dividend of Rs9 per share for the year.
Revenues improved by 3.9% to Rs44.8 billion compared to Rs43 billion in the previous year. The increase in net sales was attributable mainly to the increase in volumes, ….Local sales registered a growth of 7% with 4.42 million tons compared to 4.13 million tons reported last year, whereas export sales showed a decline of 4.5% at 2.37 million tons compared to 2.48 million tons reported last year, the press release said. “The growth in earnings was primarily on the back of 4% year-on-year dispatch growth, expansion in margins, which increased by 170 basis points, and 27% jump in other income,” BMA Capital said in its report. The company also reported progress on its key foreign and local projects, which include a fully integrated cement manufacturing plant in the Democratic Republic of Congo, a 660-megawatt coal-based power project, a 50MW wind farm, electricity supply to Pesco and waste heat recovery at Pezu power plant, which is expected to be completed by the end of October this year…. EXPRESS TRIBUNE
Pak Elektron Limited (PEL), the popular brand behind home appliances, has been around since the 1950s. Acquired by a branch of the Saigol family in 1978, the company has since then partnered with engineering giants like Carrier, expanded into making capital goods including power transformers, grid stations and even ventured into the large-scale contracting business.From an investor’s perspective, however, the company started losing its charm sometime around the mid-2000s; its share price spiralled down, along with net profit. However, all that was till last year.
In 2014, the company posted a net profit of Rs2.24 billion, more than the combined profits of the previous seven years – and that does not include the loss of Rs1 billion incurred in 2011. In the first half (January-June) of 2015, PEL had already booked a profit of Rs2.13 billion, with the target of taking it to Rs4 billion by year-end.
What’s driving the growth? Some luck and years of perseverance, said its chief financial officer (CFO) Syed Manzar Hassan. “If you look at our profits, they have gone up at a time when oil prices came down. Consequently, price of other commodities like plastic and metals have been affected the world over,” ….“ A Cut in the interest rate with improvement in Pakistan’s economic outlook also helped clamp down financial charges, “he said. “Rupee remained relatively stable, which also worked in our favour.”
But behind these external factors that have improved the gross margins lies another story. Its revenue is almost equally divided between its two business divisions – power and appliances. The power division relies on manufacturing and distributing transformers, switch gears, energy meters and EPC service. It has won orders to build grid stations for state-run power distribution companies and has laid electricity infrastructure for DHA.
In its appliances business, PEL derives 92% of its revenue from the sale of refrigerators. “And 60% of these are sold in rural areas. As a matter of fact, the 60-40 ratio between rural and urban has been there for a few years,” said Hassan….“ A fridge has become kind of a necessity even with all the electricity shortages. People need to store food and they need a glass of cold water.”…Unlike other appliances, refrigerators are also protected from import competition. “It doesn’t make sense importing refrigerators, which are vacuum from the inside. It would be like importing a lot of air,” added Hassan.
There was a time when PEL was the leading maker of window air conditioners with a 50% market share. But with the advent of spilt ACs, it lost the market almost completely by 2012. While the company made a comeback with its own split ACs in 2014, the product has not yet become its main focus. After 9,000 units last year, it has managed to sell 20,000 this year so far.
“Margins on other products are higher. We have a four-month window during the summer season to sell the stock otherwise, you are stuck with it for rest of the year.”But PEL intends to shift its focus over the next two years. “We will be moving aggressively on deep freezers, microwave ovens and split ACs. That is where we see a growth of 30% to 40%. Growth in refrigerator market will remain around 10 to 15%.” Capitalising on the good times, PEL has also raised Rs3.8 billion in equity in the last two years that has helped it reschedule its debt and raise enough cash to meet future working capital requirements….. EXPRESS TRIBUNE
Pakistan State Oil (PSO) was unable to escape the wrath of the fall in price of crude oil as its net profit for fiscal 2014-15 dropped 68% to Rs6.9 billion, down from the previous year’s Rs21.8 billion. Much of the slide in earnings was due to a hefty loss booked earlier this year on inventory of petroleum products, which saw a decline in price in tandem with global trends. PSO’s net revenue was down 23% to Rs.913 billion, reflecting the impact of lower petroleum product prices in the past year.
Profitability was affected by sharp decline of 46% in the OPEC basket price of crude oil, which came down to $59 per barrel in June 2015 from $109 per barrel in July 2014, …..Its other income, a major part of which comes from interest it earned on delayed payment from power producers, was down 28% to Rs14 billion.PSO has been operating without a board of directors since earlier this year and all decisions have being taken by the managing director under the directives of the government.
Refocus of attention
Over the years, the company has lost market share to private firms in the petrol and diesel categories as the government has refocused its attention to import of furnace oil, which is used to run thermal power plants.In recent months, PSO has also been importing liquefied natural gas (LNG). Information related to that will come out once detailed accounts are made public.The company says it continues to dominate market with a share in black oil and white oil segments standing at 66.6% and 49.8 %, respectively. Black oil is used to refer to furnace oil while white oil is used for all the other products.Sales volume for petrol grew by 18.5% in fiscal 2015 over the same period last year due to an upsurge in demand as petrol price decreased and shortage of CNG persisted, The company’s diesel sales were almost stagnant. PSO still managed to announce a final cash dividend of Rs4 per share, which is in addition to the earlier interim cash dividend of Rs6 per share…. EXPRESS TRIBUNE
Higher margins coupled with a decline in finance cost helped Fauji Cement Company Limited (FCCL) boost its net earnings by more than a half to Rs4 billion in fiscal year (FY) 2015, …A subsidiary of Fauji Group, the Rawalpindi-based cement manufacturer earned an after-tax profit of Rs.4.1 billion or Rs.2.9 per share in FY2015, up 56.7% compared to Rs2.6 billion or Rs1.8 per share of the last fiscal year.The company also approved a final cash dividend of Rs1.5 per share, taking the total pay-out for the year to Rs2.5 per share.
The company’s revenues for the year under review clocked in at Rs18.6 billion, up 6.3% compared to Rs17.5 billion it grossed in the corresponding year.“The growth in earnings was led by expansion in its margins, which increased by 300 basis points and a 32% decline in its finance cost,” BMA Capital said in its report. Effective tax rate of 28% in FY15 – lower compared to 42% of FY14 – also contributed to the growth, it said….On a sequential basis, the report said, FCCL’s profits surged by 133% to Rs1.4 billion or Rs0.92 per share in quarter ending on June 30, 2015. This growth mainly emanated from activation of Waste Heat Recovery Plant along with a surprising decrease in taxation, …. EXPRESS TRIBUNE
Pakistan is an example of a country many investors have shunned due to negative news and perceptions, but our take is that often things aren’t always as sensational as may be reported. We do know that we have found some well-run companies in which to invest. We also believe that Pakistan will attract wider investor interest in the coming years for a number of reasons.
While Pakistan is currently classified as a frontier market, index provider MSCI announced in June that it would consider adding the MSCI Pakistan Index to the review list for its potential reclassification to emerging market status as part of the 2016 Annual Market Classification Review. We approach investing on a stock-by-stock basis, so in terms of our investment process, we don’t really pay too much attention to these sorts of index changes. However, in the eyes of global investors, this potential change could bring heightened attention to Pakistan, along with greater international asset flows. Moreover, the consideration of the status upgrade reaffirms the ongoing efforts by the government and the potential we see in the country.
We have been investing in Pakistan for a number of years, and see it as an overlooked investment destination with attractive valuations due to negative macro sentiment. Pakistan has benefited from an improving growth outlook, continued efforts toward fiscal consolidation, steady progress in achieving structural reforms under the International Monetary Fund (IMF) program and ongoing support from regional partners.
China and Pakistan recently signed trade, energy and infrastructure agreements worth US$28 billion as part of a US$46 billion plan toward establishing the China-Pakistan Economic Corridor (CPEC), a combination of cooperative initiatives and projects that include connectivity, information network infrastructure, energy, industries and industrial parks, agricultural development and poverty alleviation, tourism and financial cooperation. Infrastructure projects associated with the CPEC, including the development of a deep-sea port offering direct access to the Indian Ocean and beyond, should help strengthen trade and investments in the region. China and Pakistan have a friendly partnership, and officials in China have dubbed the CPEC the flagship project of the broader “One Belt, One Road,” initiative, an ambitious plan to broaden China’s market connections to the rest of the world.
The announcement of these wide-ranging projects and the possibility of Pakistan’s move to emerging market status have stabilized the Pakistani economy and helped trigger gains in Pakistan’s stock market in recent years.
The Pakistani stock market has been one of the top-performing markets in the last five years (ended June 2015).3 The MSCI Pakistan Index has more than doubled with a 129% return during that time frame, compared with a 45% return for the MSCI Frontier Index and 22% increase in the MSCI Emerging Markets Index in US dollar terms.4 In our view, despite that strong performance, valuations of Pakistani stocks still remain relatively attractive. As of end-June 2015, the trailing price-to-earnings ratio of the MSCI Pakistan Index was 10 times, versus 11 times for the MSCI Frontier Index and 14 times for the MSCI Emerging Markets Index.5
Improving Fundamentals—and Fighting Terrorism
The country’s macroeconomic environment has been improving in recent years. In recent months, easing inflation has allowed Pakistan’s central bank to cut its benchmark interest rate to its lowest level in 42 years. The IMF currently forecasts gross domestic product growth in Pakistan of 4.3% this year and 4.7% in 2016, up from 2.6% in 2010.6 The fiscal situation has also been improving, supported by multilateral disbursements in recent years as well as a recent international Sukuk issuance.7 More recently, lower oil prices have also improved the country’s trade balance, although exports have been impacted by lower cotton prices and a stronger rupee.
Elsewhere, we believe government efforts on expenditure control and divestments have been positive, but the government will need to remain committed to the economic and structural reform program. For foreign investors, the most important concerns are security and political stability. An internal anti-terrorism drive was made in the wake of the tragic Peshawar incident in December 2014, which targeted schoolchildren. We think these efforts need to be maintained over the longer term to develop a better security climate for businesses and the society as a whole. In the political environment, delays in the implementation of reforms or deterioration in the political or security situation could adversely impact the country’s macroeconomic development and fiscal position, hinder investment and weaken investor confidence.
From a business perspective, the energy situation is another area of concern and also opportunity. Energy sector reforms need to be accelerated, including capital investments in every aspect of electric power: generation, distribution and transmission. Electricity tariff revisions and reduced electricity subsidies appear positive. Of course, those reforms can be more easily implemented now that prices of oil and gas have been coming down. We think it’s an ideal time for Pakistan to implement reforms that will put electric power supply on a sound financial footing, enabling adequate supply at a reasonable price for local businesses that need to be internationally competitive.
Despite a number of ongoing challenges, we see many reasons for a brighter future for Pakistan……VALUEWALK
Dr. Mark Mobius Ph.D., is the executive chairman of Templeton Emerging Markets Group