MARKET REVIEW The KSE continued its strong run this week, with the KSE-100 rising by 1.6% WoW, closing at an all-time high of 26,914 points. Activity fell slightly from last weeks subdued levels, with average daily turnover falling to 296mn shares, down 7% WoW, whereas US$ value traded fell by 10% WoW to US$89mn . The week saw a net FIPI inflow of US$7.6mn . It is interesting to note that although the KSE-100 has rallied 6.54% rally in Jan-14 to date, net FIPI flows month to date have been just US$5.35mn . The most significant corporate news this week was in the fertilizer sector, where after a meeting with govt officials, fertilizer manufacturers reduced urea price by PRs114/bag. Furthermore, approval of 70cents gas for Engro Fertilizer was also given by the ECC on Thursday, on the eve of its first day of public trading on Friday. The share closed at its upper circuit, without a single share being traded, and a bid of more than 30mn shares on its upper circuit. In the off-market (negotiated sales), Engro Fertilizer traded for as high as PRs39/sh. This underscores expectation of continued strong performance in the week ahead. Engro Corp also closed on its upper circuit on Friday. On the macro front, SBP announced its bi-monthly monetary policy this week, in which it kept interest rates unchanged. Many market participants had expected this, given that inflationary pressures have been easing significantly. Based on latest SPI numbers, we expect a CPI reading of below 8% in Jan-14. OUTLOOK The market is expected to open strongly next week, buoyed by the SBP’s decision to keep the discount rate unchanged, and the expected strength from Engro Fertilizer . Banks may be relative under-performers, and interest rates were kept unchanged by the SBP. Strong Dec quarterly results expected from EFert, PSO, and FFBL could garner stock specific interest. Overall, we believe the markets strength should be seen as an opportunity to sell the rally. NEWS THIS WEEK GIDC-DRIVEN HIKE IN UREA PRICES REVERSED After a 4-hour meeting with govt officials, fertilizer producers have agreed to reduce urea prices by PRs114/bag to PRs1786 from PRs1900. Recall urea prices were raised by PRs178/bag to PRs1900/bag early this month in response to PRs103/mmbtu and PRs50/mmbtu hike in GIDC on feed and fuel gas for fertilizers. FREIGHT MARGIN: FINANCE MINISTRY CALLS FOR CRITERIA TO STOP MISUSE The Ministry of Finance and Planning Commission have floated a proposal that calls for setting criteria for taking strict action against the oil marketing companies (OMCs) that are involved in dumping petroleum products and misuse of inland freight equalization margin (IFEM) to pocket billions from consumers. The proposal comes in the wake of the goahead given by the Ministry of Finance for reopening six abandoned oil storages. However, it would not bear any financial impact and has suggested that the OGRA should develop a mechanism to prevent dumping and misuse of freight margin by the OMCs. WORLD BANK, SBP FORECAST HIGHER GROWTH RATES THAN IMF The World Bank has projected Pakistan's GDP growth rate at 3.4% for the current fiscal year against government's projection of 4.4% in budget for 2013-14. According to SBP, the growth rate for the current fiscal year will be in the range of 3.0-4.0%. The IMF had, however, projected a 2.5-3.0% growth rate. ECC APPROVES 70CENTS GAS PRICING FOR ENGRO FERTILIZER As per the press release issued by ECC and notice given by Engro Corp , the Economic Coordination Committee (ECC) has approved 70cents gas pricing for Engro Fertilizer . ECC has approved the proposal given by Law Ministry that Engro should be given gas at 70cents for the residual number of days SNGPL was not able to meet its contractual obligation to supply 100mmcfd of gas to Engro’s new urea plant. We highlight, SNGPL has supplied gas to Engro for only 189days in 2011, 45days in 2012 and 28days in 2013, totally to gas availability of gas for 262days in 3-years’ time frame. THIS WEEK’S TOP STORIES MONDAY, JANUARY 13, 2013 - AUTOS: STRONG SALES IN DEC; WATCH OUT FOR 2014 Latest data by PAMA indicates total auto sales rose by 5% YoY but declined by 7.5% MoM to 8,868 units in Dec-13, with Indus posting 26% growth on a YoY basis whilst PSMC sales remained flat. Dec-13 sales for PSMC remained flat on YoY and basis at 5,981 units; cultus sales were up by 64%YoY, whilst Mehran sales were down 27% YoY. During 2013 auto sales are down 13% YoY, in line with our forecast. Total sales in 2013 were 139,030 units, including both cars and LCV’s, compared with 160,570 units in 2012. Trading at 6.3x 2014E earnings, PSMC is our top pick in the sector. We see PSMC’s earnings growing to PRs26.2/sh in 2014E on strong volumes and improving margins. We reiterate our Buy rating for both PSMC and Indus. HUSSAIN YASAR ( Hussain.email@example.com ) WEDNESDAY, JANUARY 15, 2014 - FFC: PO CUT ON DIP IN UREA MARGINS; REITERATE U/P Reiterating our Underperform rating, we lower our PO for FFC by 11% to PRs107 in response to a decline in urea margins. FFC’s 2014 P/E of 8.8x still remains higher than our cluster average of 8.0x, despite a bleak profitability outlook Our estimate cuts reflect a PRs71/bag decline in urea margins due to govt intervention to lower urea prices by PRs114/bag. Strong 4Q13 cash payout is a good opportunity to exit the stock. We see further risk to margins from price cuts/higher costs. SHAGUFTA IRSHAD KHURRAM ( Shagufta.firstname.lastname@example.org ) THURSDAY, JANUARY 16, 2014 – FATIMA FERTILIZER : POSITIVES PRICED-IN; DOWNGRADE TO U/P After rallying 19% over the past 3-mths on 1) potential margin increase from urea price hike expected in Jan-14 and 2) 4Q13 payout, we believe the positives for Fatima are now priced-in. Thus, we lower our rating on Fatima to Under-perform. Fatima is trading at 7.2x 2014E P/E and slightly above our new PO of PRs28/sh. Lower than peers 2014E D/Y of 7% already accounts for slightly better earnings growth profile (Fatima: 3-yr EPS CAGR of 8% vs no growth for FFC). Our PO change (down from PRs29 to PRs28) reflects 1) 5% cut in 2013E EPS due to lower product prices in 4Q13, 2) 4% increase in 2014-16E EPS due to rise in urea and CAN prices, 3) decline in terminal value due to increase in LT gas price assumption post end of gas price subsidy, 4) increase in interest rate forecast. We recommend profit taking in the stock before it re-enters a lull period post annual payouts, after which the stock usually trades in a narrow range. SHAGUFTA IRSHAD KHURRAM ( Shagufta.email@example.com ) FRIDAY, JANUARY 17, 2014 - MPS: IMF TOUGH LOVE MAY SEE DR RISE TO 10.5% In the SBP’s monetary policy meeting today, we expect the discount rate (DR) to be raised by 50bp to 10.5%. Unlike the Nov-13 MPS, a DR hike is not a unanimous expectation this time. Inflationary pressures are on the decline, with a lower than expected CPI reading of 9.2% in Dec-13, and Jan-14 CPI expected to be around 8%, which has raised expectations that SBP will not raise rates in the Jan-14 MPS. However, we believe the central bank will give greater weight to IMF’s insistence on using monetary policy to re-building reserves, rather than to the recent decline in inflationary pressures. Strongly worded statements from the recently released IMF staff report highlights that "SBP must unhesitatingly use every policy tool at its disposal to boost reserves." The IMF report went further by saying "SBP policies have thus far failed to give sufficient priority to the crucial challenge of rebuilding reserves." FARRUKH KHAN , CFA ( Farrukh.firstname.lastname@example.org ) STOCK MARKET SYNOPSIS LAST WEEK THIS WEEK % CHANGE Mkt. Cap (US$bn) 60.9 61.9 1.7% Avg. Dly T/O (mn. shares) 319.5 296.0 -7.3% Avg. Dly T/O (US$ mn.) 98.3 88.8 -9.7% No. of Trading Sessions 5.0 4.0 - KSE 100 Index 26,488.3 26,913.9 1.6% KSE ALL Share Index 19,797.9 20,007.5 1.1%
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