Karachi, March 03, 2014 (PPI-OT): Despite a late surge, the KSE-100 Index ended Feb14 lower by 3.7%MoM, its first monthly decline since Sep13.
According to AKD Securities, while corporate results were largely on track (save for -ve surprises for IPPs), investor sentiment was hurt by an escalation in militant activity that led to airstrikes and speculation that a full scale military operation would be launched soon.
As a result, the Pakistan Market ignored positive macro developments (soft CPI; uptick in fx reserves) and also failed to take advantage of the regional equity rally. This was punctuated by net FPI inflow in Feb14 dwindling to US$9.5mn, much lower than the FY14TD run rate of US$21mn.
From an investment perspective, the markets forward P/E contracting by 4.5% since its recent peak to 8.5x at present appears to provide an entry point for investors. That said, AKD Securities continues to recommend a blend of growth (DGKC, NML, UBL) and high D/Y names (POL, FATIMA, KAPCO) where uncertainty with respect to the GoP-TTP standoff may lead to continued valuation suppression in the near-term.
Market drivers: The KSE-100 Index shed 3.7% in Feb14, its first monthly decline since Sep13 with investor sentiment hurt by an escalation in militant activity that led to airstrikes and speculation that a full scale military operation would be launched soon.
In doing so, the market ignored positive macro developments including continuing soft CPI (Jan14: 7.9%YoY), a bottoming out of fx reserves (last recorded at US$8.6bn) and approval of the 3G license auction (expected in Apr14). The month under review was also characterized by a downtick in activity net FPI inflow in Feb14 dwindled to US$9.5mn, much lower than the FY14TD run rate of US$41mn while average daily volumes contracted by 24%MoM to 237mn shares.
Sector performance: Within the main board sectors, sharp declines were witnessed in Food Producers (-18.7%MoM with subdued growth failing to support premium valuations), Textiles (-10.9%MoM on weak margins for spinners and weak exports in Jan14 despite commencement of GSP Plus) and Electricity (-9.5%MoM on weak results for the larger names due to high maintenance charges).
Chemicals were one of only few sectors to gain, buoyed by the Engro Groups strong performance led by newly listed EFERT. With respect to the ongoing results season, while IPPs have disappointed (22%YoY decline in 1HFY14 earnings), EandP (+31%YoY), OMCs (+63%YoY) and Chemicals (+66%YoY) have performed impressively where AKD Securities flags that the Index heavyweight EandP sector is due for a catchup rally.
Investment perspective: The KSE-100 Index now trades at a FY14F P/E of 8.5x, with falling P/E having fallen by 4.5% from its recent peak of 8.9x. With corporate results largely in line, AKD Securities sees near to medium term market performance being dictated by valuation rerating where key checkpoints include 1) successful 3G auction, 2) Eurobond issue and 3) revival of the privatization process. Factors that could result in de-rating include law and order particularly the conclusion to the GoP-TTP standoff. AKD Securities continues to recommend a blend of growth (DGKC, NML, UBL) and high D/Y names (POL, FATIMA, KAPCO).