AKD Quotidian about — KSE: CY11 Review & CY12 Outlook

Karachi: CV11 was a disappointing year for the Pakistan equity market as the KSE-100 Index, with thin trading, closed at 11,435.67 points yesterday, down 4.9%YoY.

According to AKD Securities, in this regard, escalating macroeconomic concerns, sustained political tension (both with the US and domestically), continuing law & order concerns and lack of positive sentiment (cold response to market leverage, CGT mechanism) came together to counter resumption of monetary easing and strong corporate earnings.

Within individual sectors, notable Outperformers included Food Producers (+39.9%) and Chemicals (+8.4%) while Index heavyweights Banks (-20.2%) and Oil & Gas (-9.0%) were major drags. While the Pakistan Market was lackluster in CV11 and witnessed consistent FPI outflow (-US$120mn), benchmark KSE performance was much better than MSCI EM and FM, down 20.6% and 22.1%, respectively. Considering that Pakistan trades at a discount of 48% to the region (on P/E), AKD Securities sees the KSE-100 Index recovering losses in 2012. However, macroeconomic concerns could cap upside potential.

Sector Review: While most sectors depicted lackluster price performance, a few managed to deliver stellar returns. Outperformers include Food Producers (+39.9%CYTD) and Chemicals (+84%CYTD) on the back of strong cost pass-through ability. However, gains in the latter were eroded by year-end with fertilizer companies facing severe gas curtailment. Circular- debt concerns kept a lid on Oil & Gas (-90%CYTD), Banks were down 20.2%CYTD on asset quality and margin compression concerns while Personal Goods (-21.0%CYTD) fell on sharply lower cotton prices and continuing Eurozone concerns.

Outlook: The KSE trades at a forward PER of 6.1x and dividend yield of 88%. These are attractive valuations by any measure where the Pakistan Market’s discount to the region (on PER) stands at 48% vs. a historical discount of 35%. 2012 EPS growth for the AKD Universe is projected at 11%YoY – re-rating aside, this should drive the KSE-100 Index to 12,700 points. While macroeconomic concerns pose a risk to broader Index upside, selected stocks with potential to Outperform include POL, PSO, LUCK, DGKC, PTC, ENGRO, MOB and BAFL.