Karachi: The KSE returned 2% in April 2012 through the result season as active coverage companies topped ours as well as consensus earnings forecast by 5% sequentially.
According to AKD Securities, this underpins AKD Securities’ positive outlook where AKD Securities sees earnings upgrades driving upside of 14% to AKD Securities’ revised Dec’12-end KSE-100 Index target of 16000 points. Autos and Oil/Gas topped forecasts for sequential quarter-end Mar’12 results by 33% and 10%, respectively, with bottomline growth of 80%QoQ and 35%QoQ. Banks remained in line with a marginal 3% deviation while Cements disappointed, missing quarter end Mar12 forecasts by 14%. Fertilizers posted the highest negative deviation, falling 26% below expectations as inventory backlog reined in product offtake. AKD Securities flags Index heavyweight Oil and Gas for sector wide earnings revisions where CYTD underperformance of 12.4% against the broader market should recouple with stronger sequential earnings outlook going forward. AKD Securities retains faith with Cements and expect Autos to be a pleasant surprise as the BoJ moves to lower yen side pressures.
Cements: Cements missed earnings forecast by 14% for the quarter ended Mar’12 as tax charges came in above line. AKD Securities retains selective faith for cements (conviction on DGKC) as topline expansion and margins remained broadly inline and AKD Securities continues to see sequential improvement within the backdrop of stronger domestic off take and sustained high cement prices.
Autos: Profits have more than doubled on a YoY basis, underpinned by higher sales coupled with margin expansion. AKD Securities expects sequential margin improvement as global risk aversion weighs in on steel prices while the BoJ is likely to expand unconventional monetary easing to lower yen side pressures (BoJ surprised with an extended asset repurchase program of JPY10tn in Feb’12).
Oil and Gas: Oil and Gas earnings topped forecast by 10% with OGDC beating AKD Securities’ forecast by 10% with earnings of PkR6.43/share for quarter ended Mar12. Asset monetizations, contained exploration expenditure and continuing high oil prices should support sectorwide earnings revisions, lending credence to AKD Securities’ view for positive price outperformance going forward.
Banks: Banking Universe 1QCY12 profits are up 22%YoY, inline with estimates but with individual surprises; UBL and AKBL beat expectations by a wide margin while HMB and NBP fell short. Key common denominator is the steep decline in loan provisions which countered tighter NIMs. While 2QCY12 could disappoint (impact of 6% floor on savings a/c), 2HCY12 can surprise if LLPs continue to taper off. AKD Securities’ top conviction pick is BAFL.
Fertilizers: Increasing rates of gas curtailments and urea inventory backlog depressed sales offtake for Fertilizers, leading sector wide earnings to miss forecasts by 26% for the quarter ended Mar’12. AKD Securities sees contained price performance in the near-term with fertilizer offtake unlikely to post a material uptick before May’12. Earnings growth momentum is likely to be skewed towards 2HCY12.
Textiles: Textiles disappointed with compressed order books through most of 1QCY12. That said, AKD Securities believes order books are likely to show improvement with stable margins going forward which should provide for selective opportunities going forward. AKD Securities expects sequential improvement in 4QFY12, helped by rising cotton prices as well as low cost inventory where AKD Securities flags NML as AKD Securities’ conviction play.
Chemicals: EPCL was the positive surprise, posting its first quarterly profit since 2QCY09 due to improvement in operating metrics as well as a one off PkR400mn insurance write back. LOTPTA also managed to return to profitability in 1QCY12 on improving margins, where AKD Securities expects margin expansion to on account of lower PX prices.
Investment Perspective: At current levels, the KSE-100 Index trades at a forward P/E of 7.2x (40% discount to the region) and a D/Y of 76%. Based on a blend of target price mapping, E/Y-T-bill differential, mean PER reversion and historical discount to the region, AKD Securities’ revised end-Dec12 Index target now stands at 16,000 points implying upside of 14% from current levels. Key checkpoints remain US-Pakistan relations, domestic political environment and Balance of Payments profile.