AKD Quotidian about — Textile Exports: Up 6%YoY in FY13

Karachi, July 25, 2013 (PPI-OT): The Pakistan Bureau of Statistics recently released exports data for Jun’13. In this regard, while textile exports fell sequentially by 4%MoM to US$1.14bn, on a `toY basis exports were up by 5%.

According to AKD Securities cumulative exports for FYI 3 came in at US$1 3.06bn, a rise of 6%YoY with notable increase witnessed in yarn exports (+24%Y0Y to US$2,244mn). For Jun’13, yarn exports slipped by 5%MoM to 60.3k tons following a 15%MoM decline (increase of 34%YoY) in Chinese yarn imports.

Outlook for Chinese yarn imports is clouded by the recent slowdown in manufacturing activity (HSBC Flash China PMI reading of 47.7 for Jul’13, down from 48.2 in Jun’13) as well as potential change in cotton policy. Nevertheless, secular shift towards high value added textile production in China should support yarn import demand in the long term.

Within the textile space AKD Securities continue to favour NCL and NML due to their strong client base, thereby resulting in relatively lower sales risk as well as healthy portfolio income. AKD Securities has an `Accumulate’ stance on NCL and a `Buy’ recommendation on NML which are trading at FYI4F P/E of 4.2x and 6.lx, respectively, and offer 18% and 20.5% upsides to AKD Securities TP of PkR81/sh and PkR131/sh.

Banks: Spreads average 6.53% in FY13
Weighted average spreads for Jun’13 have stayed sequentially flat at 6.35% but lower by 79bps vs. Jun’12. As a result, spreads have averaged 6.53% in FY13 vs. 7.44% in FY12, lower by 91 bps. Drilling deeper, while Jun’13 average lending yields have come off by 13bps to 11.36% on a MoM basis, the same has been neutralized by a similar reduction in average deposits costs to 5.01%.

The latter is easily the lowest since the imposition of the rate floor on savings deposits back in May’08. Going forward, the end-Jun’13 DR cut by 50bps to 9% will likely lead to a modest contraction in spreads across 2HCYI3 but AKD Securities remains confident that interest rates, and consequently spreads, will be higher in CYI4 which should drive double-digit earnings growth next year particularly if overall asset quality continues to improve.

This, together with upcoming IHCYI3 results, is causing banks to rally (the sector is up 23%FYTD, beating the KSE-100 Index by 10% in the process) where valuations, for the most part, remain un-stretched. In this regard, while AKD Securities retains selective preference for the larger banks, AKD Securities believes that the next leg of the banking sector rally will be led by the medium/smaller banks (e.g. FABL and BIPL) that appear poised for catch-up price performance.