AKD Quotidian about — Banks: GoP stakes up for sale

Karachi, December 17, 2013 (PPI-OT): According to news reports, the GoP is planning to offload 12% shares of UBL and ABL in early CY14 as part of the privatization drive.

According to AKD Securities estimates that the GoP owns about a 20% share in UBL/ 12% share in ABL and while it is unclear whether the GoP will divest 12% from its stake or 12% of the bank’s total capital, this is a welcome sign that the privatization process is on track. Considering low fx reserves are a key area of concern for the SBP, AKD Securities believes part of the GoP’s holdings in these banks should be marked for foreign investors where the combined market value of the GoP’s stakes in UBL and ABL arrives at more than US$400mn. Going forward, other entities that could potentially see fast-track divestments include HBL, OGDC and PPL, where realization of fx proceeds on these big-ticket items (combined market cap: US$12.05bn) will likely provide time and space for the GoP to chalk out and implement turnaround/privatization plans for entities such as PIAA and Pakistan Steel Mills. Comfort on the external front could potentially lead to continued P/E rerating for the KSE-100 Index (forward P/E: 8.52x).

UBL – can be a big ticket transaction: The GoP owns close to 20% of UBL which at current market prices has a value of PkR32.8bn (US$306mn). While news reports indicate part of this stake could be sold through local Mkt Value of GoP Stake (US$mn) stock exchanges, it could be worthwhile to offload UBL’s stake in international markets (UBL already has a GDR) or reserving part of any offering for foreign investors. Although the offer price may have to be at a discount to market price, this will allow the GoP to raise much needed foreign exchange.

A third option could be to divest the GoP’s stake to UBL’s sponsor (Bestway Group). Recall that in late CY10, Bestway acquired a 20% stake in UBL from the Abu Dhabi Group at PkR80/share which was at a steep 40% premium to the then prevailing 6m average price of UBL. In this regard, a 40% premium over current market prices would value UBL at PkR189/share and the GoP’s 20% stake in UBL at PkR46.0bn (US$430mn). At current levels, AKD Securities’ TP of PkR145/share for UBL offers a 1yr total return of 14%. Accumulate!

ABL – can benefit from float: Through a combination of SBP, SECP and direct holdings, the GoP owns about 12% of ABL. At current market levels, the value of this stake comes to PkR11.6bn (US$108mn). Considering this transaction will have a relatively smaller ticket size, the GoP may consider offloading its stake in the local markets. For minority investors, this should have a beneficial impact for medium-term price discovery in ABL which AKD Securities believes suffers from an illiquidity discount (1yr average turnover of just US$0.07mn vs. US$1.02mn for UBL implies ABL trades at similar valuation multiples to UBL despite higher ROE). In this regard, a 50bps reduction in AKD Securities’ discounting factor for ABL would, ceteris paribus, push up PkR102/share from PkR95/share at present. Within this backdrop, AKD Securities retains AKD Securities’ positive stance on ABL.