Apr'15: Banking Sector Review & Outlook

SBP has recently updated the banking spreads for the month of Apr'15. The banking spreads ticked at 5.57% for month of Apr'15. In today's Value Seeker we discuss the banking spreads and the possible impact of falling interest rates on banking sector.

Banking spreads plunge by 35bps MoM

Banking spreads during Apr'15 declined by 35bps MoM to 5.57% as compared to 5.92% in Mar'15 mainly on account of decline in discount rates. The deposit rate of banking industry fell by 17bps to 4.38% while the lending rates dropped by a higher percent to 9.95% and witnessed a dive of 52bps thus squeezed spreads. Similarly, asset yields of private banks descended by 46bps MoM while spreads also reduced by 24bps MoM during Apr'15. Furthermore spreads on gross disbursements and fresh deposits depicted a drop of 39bps MoM to 3.70% in Apr'15.

A YoY analysis revealed the similar picture during Apr'15 and spreads observed a plunge of 49bps YoY as against 13bps YoY drop in Mar'15. Likewise asset yields of banking also observed a notable decline of 114bps YoY in Apr'15 and 66bps YoY drop in deposit costs which led to a decrease in spread YOY. Average spread for 10MFY15 of the sector stood at 5.84% whereas the same was 6.15% in 10MFY14 revealing a decline of 31bps YoY.

Pakistan Textiles: Decline in non-value dragging overall exports

Pakistan Textiles: Decline in non-value dragging overall exports

 

Textile exports continued their downtrend in the month of Apr’15 as 10MFY15 exports declined by 1.4%YoY to clock in at USD11.3bn from USD11.5bn in similar period last year. While on MOM basis, the total exports reported a growth of 4.6% to USD1.1bn from USD1.03bn clocked in the last month. Going forward, we expect the country’s total textile exports to remain flattish at ~USD14bn during the outgoing FY15. While on the budgetary front, the recommended hike on duty of textile exports (from 2%-5%)

Engro Powergen Qadirpur Ltd (EPQL)

IPO @ Rs30.02/sh |Buy |Commendable

 

Engro Powergen Qadirpur Limited was incorporated in Pakistan on February 28, 2006. The company completed construction and testing of its 217.2 MW(net) combined cycle power plant and commenced commercial operations on March 27, 2010.

Plant details

The company has set up a 217.2 MW (net) gas based thermal power project near Qadirpur, District Gothki, Sindh.

Company is using permeate gas as its primary fuel source and HSD as the startup and backup fuel. Permeate gas is a by-product of gas purification process earlier this gas was flared but EPQL makes it worthy and that allow EPQL to obtain an edge among other thermal based power plants.

The plant is a combine cycle plant with one gas turbine, one heat recovery steam generator and one steam turbine.

Engro Powergen: Public offerings on the way! ‘Subscribe’

Engro Powergen Qadirpur Limited (EPQL) is up for listing at Karachi Stock Exchange (KSE) and provisional trading of the scrip will start from 17Sep'14 and will end on 24Oct'14. The company has already divested 12.5% (40.475mn shares) of its paid up capital through private placement at the rate of Rs30.02/share and its present offer is to divest further 12.5% of its paid up capital to general public at the same price i.e. Rs30.02/share. The date of public subscription will start from September 22nd to 24th, 2014 (both days inclusive). In today's Value Seeker we discuss different aspects of the transaction along with our recommendation for the same.

Strong financials to support overwhelming response

The profitability of Engro Powergen is continuously on rising trajectory since its COD back in 2010 except for CY13 where the generation and resultantly the profitability halted due to plant shutdown in 2HCY13 on technical issues. Those plant issues are now completely resolved and the plant is fully operational therefore financial performance has significantly improved in 1HCY14 as evident from the results in the table below.  Furthermore, being a power generation company it holds a strong payout history and we expect same healthy dividends going forward.

PPL: Sleeping giant waking up; 2nd discovery in 2 months

PPL has announced a discovery in Gambat South block (65% owned by PPL), having initial flow of 16.8mmcfd of gas and 144bpd of condensate. Our calculations suggest annualized EPS impact of PRs0.58.

Despite a 19% performance in 2-mths, we believe valuations are still attractive at 7.1x FY14E P/E given the presence of positive volume catalysts.

Update on Makori East-III drilling, exploration in Tal Kot-1 & Gambat, reserve upgrade for Nashpa, Adhi & Tal would be the triggers to watch out for.

Nishat mills limited Still going strong

We reiterate our ‘Buy’ call on Nishat Mills Limited (NML) with a target price of Rs115. The stock is currently trading at FY13E and FY14F P/E of 6.4x and 6.0x, respectively.

We believe NML will close FY13E with earnings of Rs15.92/share, backed by higher margins (up 2ppts YoY) and healthy dividend income from its group companies.

 

Potential future triggers include (1) listing of Lalpir Power Ltd via offer for sale (likely to result in a gain of Rs0.17/share on NML bottom line) and (2) approval of GSP plus status for exports to EU.

Although the recent implementation of GST on retail textile made-up items and garments might result in initial dip in volumes at the domestic level, we believe the impact of GST will easily be passed on to end consumers.

Research Report

By: JS Research

Clariant Pakistan: Selling few businesses

On Wednesday, Clariant Pakistan (CPL) has announced its intention to divest its few segments, which caused 10% surge in the stock price in last two trading days. According to the notice to KSE, CPL will spin-off all business segments except textile chemicals, paper specialties and emulsions to an unlisted firm Clariant Chemicals (Pvt.) Ltd.

The announcement was anticipated as SK Capital Partners announced in December last year that it has signed asset and share purchase agreements to acquire the textile chemicals, paper specialties, and emulsions businesses of Clariant International. To seal the deal, Clariant International is divesting all other businesses so that SK Capital could acquire Clariant International.

About CPL, Clariant International & SK Capital

With the paid up capital of Rs341mn and market cap of Rs10.7bn, Clariant Pakistan (CPL) is involved in textile chemicals, paper specialties, emulsions, masterbatches, leather services, pigments, additives, industrial & consumer specialties, oil & mining, detergents & intermediates and catalyst businesses. At present, Clariant International owns 75% of company's outstanding shares.

During last 5 years, company reported sales and profitability CAGR of 11.4% and 20.4%, respectively. In 2012, company earned Rs1.18bn (EPS Rs34.5) compared to Rs0.78bn (EPS Rs22.8) in 2011.

Clariant International is involved in specialty chemical products and provides dyes and chemicals for the textile, leather and paper industries, pigments, printing inks, decorative paints, plastics, cosmetics, additives and packaging.

SK Capital is a private investment firm focusing specialty materials, chemicals and healthcare sectors and seeks buyouts, recapitalizations and growth equity investments.

Lalpir Power: Market depth to digest OFS looks strong

We expect favorable investor appetite for upcoming listing of Lalpir Power where a high payout policy translating into prospective D/Y of 18-20% (at the floor price) barring a dip in 2014E, should be the key selling point.

From a total offer of 37.9mn shares, 28.5mn shares are targeted to HNWI’s via book building process and the remainder (9.5mn shares) for public subscription.

Key investment considerations show fuel losses (10-12gms/kWh) as the prime irritant, even as the company aims to mitigate these through efficiency upgrade projects. Cumulatively these measures are expected to allow Lalpir to save ~4.7gms/kWh and push thermal efficiency to ~37.5% by 2015E.

Sensitivities suggest 4-6% EPS upside from incremental 1% deval in PkR/US$ parity while exposure to inter-corporate debt is nominally negative for earnings. 

For Complete Research Report: Click Here

Via: KASB Securities and Economics Research   

Why interest rates should decline in Pakistan?

With June monetary policy announcement due in few days, markets in Pakistan are still confused about the SBP expected stance on policy rate. Much of the prevailing ambiguity is due to low inflation but no clarity on foreign inflows coupled with high budgetary borrowings target set by the new government in FY14. We still believe it is not the question of whether the interest rate will come down but when and by how much the rate will come down.

Current year average inflation now estimated at 7.5% which is much lower than government's target of 9.5% and SBP's initial target of 9.1% (SBP 1Q review). Further, with Topline forecast of 8-9% inflation in FY14, the central bank is providing an arbitrage like investment opportunity to those who believe that foreign funding through IMF, KSA or US will materialize soon. Contingent upon these factors, we expect discount rate to decline by 50-100bps by Dec 2014. Whether central bank will adopt wait and see strategy in June 21, 2013 meeting and provide more time to investors to make short term gains at the cost of government will be a subjective judgment of the SBP board.

Record high real interest rate

Pakistan monthly CPI has dipped to 5.1% YoY in May 2013 which is a 9-year low. In last 3 months, average inflation is 5.8% while cumulative CPI has eased to 7.5% in 11MFY13.

On monthly basis, real interest rate has spiked to 4.4%, which has occurred after a gap of 3.5 years. Very few countries in the world would be providing such a high real interest rate. Though in FY14, we will see slight increase in inflation due to recent taxation measures in federal budget, expected hike in energy prices and excessive government borrowings but it may not be a restraining factor in monetary easing as we expect CPI to range between 8-9% against government target of 8%.

 

PKR/USD - Speculation or demand?

Highlights

• PKR/USD parity - the major factors influencing PKR         
• Interbank & open Market gaps providing speculating opportunities         
• Is IMF program the only way out?

We have talked to several forex traders and got their feeler on the recent movement of Pak Rupee against US Dollar, where the former experienced a freefall against the later. In today's Value Seeker, we discuss the influencing factors behind the aforesaid downward velocity of PKR against USD.

PKR/USD parity - the major factors influencing PKR

PKR has been continuously heading downwards because of numerous economic and speculative reasons. The prime reason behind the massive fall in PKR is identified as the payments of IMF loans. These payments started from Jun-12 and PKR since the same period has shed its worth by alarming 4.7% till now. Moreover, poor law & order situation in the country coupled with energy crises can be classified as the reasons that are forcing foreign flows to diminish by hurting the country of its export front. Conversely, it has led to outflow that resultantly have impacted the PKR value in the negative way. This has inflated the transfer of money through grey channels. Furthermore, short term gain opportunities for individuals amid limited investment avenues in the country also played its due role and speculators grasped this opportunity with warm welcome.

Interbank & open Market gaps providing speculating opportunities

Looking through the historical trend, not only has PKR touched its all-time low against the greenback (over Rs99.75) in the open market, but also discount to interbank market has widened further to ~1%. The same situation was observed back in Jun-12 when open market-interbank discount stood at an average of 2.3%. SBP is expected to curb off speculation in the open market. With our discussions with different forex traders it came to our knowledge that the current upward trend is encouraging the investors to book their gains before they take new positions in the currency market. Therefore, Rs98.50/USD remains the resistance level for short term, while investors are said to take the new positions at Rs97.20/USD.

Is IMF program the only way out?

Although workers' remittances and Collation Support Funds (CSF) are supporting the USD inflows in the country, these avenues are not enough to support the government reserves. The reserves fell to their 40 month lowest level of USD13.4bn. The previous minimum level was realized at USD12.86bn during end of August, 2009 which was due to IMF payments coupled with financing of the oil import bill. In the short run CSF and energy support funds of USD700-800mn is likely to support the reserves, however, going forward the door of IMF looms at large as it seems to be the only way to support the reserves and in effect limiting the downward spiral that PKR has been stuck in against the greenback.  

ValueSeeker 18-December-12