Topline Pakistan Market Outlook 2023.pdf
- 1. December 20, 2022 Prices as of Prices as of Prices as of Prices as of December 16, , , , 2 2 2 20 0 0 02 2 2 22 2 2 2 Topline Research [email protected] Tel: +9221-35303330 Ext:133 Topline Securities, Pakistan Best Local Brokerage House 2015-16, FY2020 Best Local Brokerage House Brokers Poll 2011-14, 2016-21 Best Brokerage House 2018,19-20 Best Research House 2019-20 Best Brokerage House 2019-21 Pakistan Market Outlook | Strategy REP-057 External Debt Repayment Issue & Political Noise Pakistan low PE to continue in 2023
- 2. 2 Table of Contents Pakistan Market Outlook 2023 2 Contents Page No. Executive Summary 3 Debt Restructuring & Bigger IMF Program likely in 2023 4 Weak currency, high interest rate in 2023 as well 5 Pakistan Economic Snapshot 6 Rising political noise as parties gear up for elections 7 Low PE ratio to continue; Base case Index Target at 47k 8 Foreigners, insurance firms and local funds main sellers 9 Pakistan market valuation compared to historical averages 10 Key Sectors & Top Picks 11 Comp Sheet 16 Analyst Certification and Disclosures 19
- 3. 3 Executive Summary Pakistan Market Outlook 2023 3 Pakistan market performance in 2023 will continue to remain dull mainly due to Pakistan’s external debt repayment crisis and increased political noise ahead of Election. Our base case index target is 47k generating a 14% return which is not attractive when compared to fixed income securities. Pakistan external debt obligations are in excess of US$73bn for the next 3-years (FY23-25) as compared to prevailing low FX reserves of US$6-8bn. We believe that there is an urgent need of debt restructuring and a much bigger IMF program in 2023. This will be accompanied by tough exchange rate, tighter monetary and fiscal measures. These developments will likely have implications for stock market in 2023. Political noise is also anticipated to remain elevated during 2023 ahead of General Elections scheduled in Oct 2023. Though opposition leader, Imran Khan, head of Pakistan Tehreek-e-Insaaf (PTI), is continuing to push for early elections there are few experts who are also expecting one year delay in Elections due to economic crisis. Developments on the Election and its timings will continue to affect market sentiments in 2023, we believe. Given challenging macroeconomic scenario and rising political noise, Pakistan market will continue to trade at low valuations with PE of close to 4x. Market currently trades at 2023 PE of 3.2x (4.5x ex circular debt and Govt. banks). This valuation is in-line with what happened in 1998-99 where market on average traded close to PE of 4x post Nuclear Tests sanctions followed by debt restructuring. Few countries like Srilanka, Zambia, and Ghana that are undergoing debt restructuring trades at PE of 2-4x. In our best case scenario, if crude oil price fall sharply and global credit market improves, equities may perform better than our expectations. Similarly, in our worst case if Pakistan defaults on its debt payments than a fall can be expected in 2023. High quality non-cyclical stocks with stable business that will gain from weak PKR and high interest rate should be preferred in 2023. We like selected stocks in the Banking, E&Ps, Fertilizer and Technology sectors. Our top picks for 2023 includes Meezan Bank (MEBL), United Bank (UBL), Mari Petroleum (MARI), Pakistan Oil Fields (POL), Lucky Cement (LUCK), Engro Fertilizer (EFERT), Systems Limited (SYS) and Interloop Limited (ILP). Pakistan Stock Market: Key Numbers 2020A 2021A 2022A/E 2023E 2024F PE (x) 5.4 4.0 3.6 3.2 2.8 PE (x)* 8.1 5.6 5.1 4.5 4.0 Earnings Growth 20.2% 33.5% 13.1% 13.2% 13.4% PBV (x) 0.8 0.7 0.6 0.5 0.5 Dividend Yield 7.2% 9.3% 9.7% 11.0% 12.0% ROE 15.5% 18.3% 18.4% 18.5% 18.5% Source: Topline Research*(Ex Circular debt & Govt. banks)
- 4. 4 Pakistan is facing severe economic challenges as it is going through one of toughest times in its 75-year history. Huge external financing gap, worsening global financial markets and political instability is increasing the risk of timely external debt payments. Falling foreign exchange (FX) reserves & rising external funding gap is worrisome and causing concerns for market participants. SBP FX reserves have fallen to US$6.7bn as of Dec 9, 2022 which is equivalent to 1.5 months of import cover as against 3-year average of 3 months. This is down from recent peak of US$16.6bn seen in Jan 2022. Pakistan’s funding gap (sum of external debt repayments + current account deficit) has now reached US$31bn as per the last published IMF staff report for FY23. It was US$25bn in FY19 and was in the range of US$10-17bn during the financial crisis of FY08. Pakistan’s external debt repayment obligations are US$73bn in 3-years (FY23-25) as per IMF (inclusive of annual rollovers). This is due to large external borrowings (external debt and liabilities) that doubled in 7-years from US$65bn in FY15 (24% of GDP) to US$130bn (40% of GDP) in FY22. This has increased worries that even if Pakistan is able to control Current Account Deficit, its repayment obligations are so huge that restructuring of debt is inevitable. Available financing against the funding gap could be difficult specially in prevalent global economic environment where it is tough to raise new commercial debt/Eurobond. Pakistan will have to restructure loans with its Bi-lateral lender specially with China which forms over 30% of its external debt. We have assumed debt restructuring of over US$30bn during next 3-5years. Pakistan also went under such restructuring in 1970s & 1998 when Pakistan restructured some portion of its Commercial, Euro-bond and Multi-lateral debt. Even if the process of debt restructuring is delayed due to political reasons, there is no way out other than a much bigger IMF program (US$10-20bn) as the ongoing 3-year EFF program is scheduled to be completed by May 2023. This will have significant implications on Pakistan Economy and Stock Market as currency may remain under pressures while interest rates may remain in high double digit under the IMF program. Debt Restructuring & Bigger IMF Program likely in 2023 Pakistan Market Outlook 2023 4 Source: SBP Climbing external debt’s slippery slope Annual funding requirements are multiple times FX reserves US$bn FY22A FY23E FY24F FY25F FY26F Current Account Deficit 17.5 6.5 5.5 4.5 4.5 Debt Repayments 16.9 21.5 26.7 25.1 27.0 Ext. Financing Requirement 34.3 28.0 32.2 29.6 31.5 Foreign Direct Investment 2.5 1.5 2.0 3.0 4.0 Disbursements - Private Creditors 6.1 0.0 0.0 0.0 0.0 Disbursements - Official Creditors 6.4 10.0 10.0 10.0 10.0 Rollover of Short Term Debt 11.8 10.0 10.0 10.0 10.0 Flood Assistance 0.0 1.0 2.0 2.0 2.0 Rescheduling 0.0 5.7 12.2 6.6 6.5 Total Financing 26.9 28.2 36.2 31.6 32.5 Change in FX Reserves -7.4 0.2 4.0 2.0 1.0 Total SBP Reserves 9.8 10.0 14.0 16.0 17.0 Source: Topline Research 65 74 83 95 106 113 122 130 24% 24% 25% 30% 40% 40% 34% 40% 20% 25% 30% 35% 40% 0 20 40 60 80 100 120 140 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 US$bn External Debt & Liabilities (LHS) as % of GDP (RHS)
- 5. 5 Due to falling FX reserves, Pak currency has come under severe pressure as it has weakened by 22% from Rs177 to Rs225 against USD in 2022 to date. Furthermore, the spread between interbank and black market has also increased recently as the PKR is trading at around Rs240-250 in black market as against USD whereas it is trading at around Rs225 in the interbank market. This reemergence of black market with 10% difference, we believe, cannot continue for long as it has started affecting USD inflows especially inward remittances. Given low FX reserves, it is highly likely that the official exchange rate will adjust to close to black market rate specially under an IMF program that encourages market based exchange rate. We expect PKR-USD parity to reach Rs270 by June 2023 from current Rs225 and to Rs290 by June 2024. PKR is likely to average Rs241 in FY23 and Rs280 in FY24 against USD. Inflation is also likely to remain high as we expect average inflation of 26% in FY23 and 14% in FY24. High inflation estimates is attributed to sharp currency devaluation, expected adjustment in petrol/diesel prices through PDL/sales tax and anticipated increase in gas prices in FY23. Consequently, interest rates are also expected to remain elevated as we expect policy rate to remain in range of 15-17% in 2023. Outlook on global commodity prices will remain key to Pakistan’s overall inflation & external account situation as any sharp drop in international oil prices could ease pressure on these fronts. We have taken EIA forecast of international oil price (WTI) of US$89/bbl in FY23, US$86/bbl in FY24 and US$80/bbl in FY25 and onwards. Pakistan credit rating was recently downgraded by Moody’s and Fitch to Caa1 & CCC+ respectively. There is a likelihood that Pakistan credit rating is downgraded further in case of a debt restructuring as perceived risk of Pakistan’s ability to repay its external debt obligations will also increase. Source: SBP, Topline Research Pakistan Import Cover (x) falling sharply Weak currency, high interest rate in 2023 as well Pakistan Market Outlook 2023 5 1.00 2.00 3.00 4.00 5.00 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Import Cover 3-Year Average 3-Y Average 2.74 Pakistan Credit Rating History S&P Credit Rating Moody's Credit Rating Rating Outlook Date Rating Outlook Date B- Negative Jul 28 2022 Caa1 Negative Oct 06 2022 B- Stable Aug 24 2009 B3 Stable Jun 11 2015 CCC+ N/A Dec 09 2008 Caa2 Negative Jul 13 2012 CCC N/A Nov 14 2008 B3 Stable May 21 2008 CCC+ Negative Oct 06 2008 B2 Negative Nov 05 2007 B Negative May 15 2008 B1 Stable Nov 22 2006 B+ Stable Nov 22 2004 B2 Stable Oct 20 2003 B Stable Dec 12 2002 B3 Stable Feb 13 2002 B- Stable Dec 21 1999 Caa1 Negative Oct 23 1998 SD N/A Jan 29 1999 B3 Negative May 28 1998 CC Negative Dec 03 1998 CCC- Negative Oct 12 1998 CCC Negative watch Jul 14 1998 B- Negative watch Jun 01 1998 B+ Negative watch May 22 1998 Source: S&P, Moody’s
- 6. 6 Pakistan Economic Snapshot Pakistan Market Outlook 2023 6 FY18A FY19A FY20A FY21A FY22A FY23E FY24F FY25F FY26F Real Sector GDP Growth 6.1% 3.1% -1.0% 5.6% 6.0% 2.0% 2.5% 3.0% 4.0% CPI Inflation (Avg.) 3.9% 6.8% 10.5% 8.9% 12.1% 25.9% 14.2% 10.5% 10.7% CPI Inflation (Period End) 5.3% 8.0% 8.5% 9.7% 21.3% 22.6% 10.6% 10.6% 10.7% External Sector Exports of Goods (US$bn)* 24.8 24.3 22.5 25.6 32.4 31.0 32.0 34.0 35.0 Imports of Goods (US$bn)* 55.7 51.9 43.6 54.3 72 57.0 60.0 62.0 65.0 Trade Deficit of Goods (US$bn) 30.9 27.6 21.1 28.2 39.5 26.0 28.0 28.0 30.0 Services Deficit (US$bn) 6.4 4.9 3.3 2.5 5.2 3.5 3.5 3.5 3.5 Remittances (US$bn) 19.9 21.7 23.1 29.4 31.2 28.0 31.0 32.0 34.0 Current Account Deficit (US$bn) 19.2 13.4 4.4 1.9 17.4 6.5 5.5 4.5 4.5 FDI (US$bn) 2.8 1.4 2.7 1.8 1.9 1.5 2.0 3.0 4.0 FX Reserves with SBP (US$bn) 9.8 7.3 12.1 17.3 9.8 10.0 14.0 16.0 17.0 Fiscal and Monetary Policy Rate – Period end 6.5% 12.3% 7.0% 7.0% 15.0% 17.0% 13.0% 12.0% 11.0% PKR/USD parity (Rs) – Avg. 110 136 158 160 180 241 280 305 325 PKR/USD parity (Rs) – Period end 121 162 168 157 240 270 290 320 330 Budget Deficit (% GDP) 5.8% 7.8% 7.1% 6.1% 7.9% 8.0% 7.5% 7.0% 6.5% Source: Ministry of Finance, Topline Research, *State Bank of Pakistan
- 7. 7 General elections in Pakistan are scheduled for October 2023 as National Assembly completes its 5-year term in August 2023. After the dissolution of National Assembly, an interim government will be setup whose responsibility will be to conduct free and fair elections. To recall, in last election held in 2018 Imran Khan’s led PTI led alliance won majority seats in National Assembly. Imran Khan was later removed as Prime Minister through a vote of no confidence in April 2022. It has been observed in the past that due to political reasons the ruling political party avoids taking unpopular decisions ahead of election. But considering the current economic issues such delay in key decision making will add fuel to the fire. It is also likely that if ruling party delays much needed reforms on taxation, currency, etc. then the interim government will take necessary steps. This was seen during the caretaker government in May to August 2018, where caretaker government devalued PKR against US$ by 6% from Rs116 to Rs124 and raised interest rate from 7% to 8%. With continued pressure tactics from opposition leader, ruling government is more concerned over handling political pressures than managing country’s economics. Recent IMF review has also been delayed as government is not announcing measures as per IMF demand amid fear of political repercussions. Currently the ruling coalition government’s entire focus is to manage the pressure from opposition who is demanding early elections. Lately, opposition leader, Imran Khan, announced that provincial assemblies of Punjab and KPK (having PTI & its allies as its majority) will be dissolved in a bid to ascertain further pressure on government to hold early elections. It remains to be seen if general elections will be held as per scheduled time, earlier than schedule or with 1- year delay. Few political experts have also highlighted that there is also a possibility of delay in general elections by one year as per law declaring economic emergency as key reason. We believe that since Imran Khan, remains Pakistan’s most populous leader currently as evident from recent polls and bi-elections, probability is high that his party will get highest seats in 2023 Elections. But in Pakistan, as seen in the past, the actual trend and popularity will be known closer to the election. In 4 out of 5 General Elections held in last 20 years, equity market has improved before election as shown in the table. Interestingly in 2018 elections, no pre and post election rally was seen due to economic issues. We believe that considering the external debt repayment challenges we may not see any big pre or post election rally. Some recovery may be seen but that may not last unless effective measures are taken to address Pakistan debt payment ability. Rising political noise as parties gear up for elections Pakistan Market Outlook 2023 7 KSE Index Performance Pre & Post Elections Election Year Pre-Election Post-Election 3-Month 6-Month 1-Year 3-Month 6-Month 1-Year 1997 9% 6% 0% -3% 21% 4% 2002 17% 15% 80% 37% 36% 97% 2008 10% 13% 26% -1% -25% -59% 2013 13% 23% 40% 17% 17% 43% 2018 -10% -8% -10% -4% -3% -22% Source: PSX, Topline Research
- 8. 8 With continued high interest rates and external debt repayment uncertainties, we expect Pakistan market will continue to trade at low PE of close to 4x. This is based on our analysis of 1998 and 1999 when high debt and economic sanctions post nuclear test led to debt restructuring and equities were trading at an average PE of 4x. As a result, we expect benchmark KSE-100 index to reach 47,000 in 2023 in our base case i.e. larger IMF program and debt restructuring. This will generate a return of 14% from current index of 41,301. With 1-year T-Bill yield of ~17% and 10-year bond yield of 13.5%, the return from stocks will not be attractive in 2023 we believe. Few countries that are under process of debt restructuring like Srilanka, Zambia, and Ghana trades at PE of 2-4x. However, selective stock picking in high quality non cyclical companies can provide above average return in 2023. We expect a good recovery at PSX in 2024 after debt restructuring and we remain long term positive for Pakistan market. In best case scenario in 2023, if crude oil price fall sharply and global credit market gets back to normal then we may see Pakistan equities performing better. Similarly, in our worst case scenario if Pakistan defaults on its debt payment than a fall can be expected in index in 2023. We believe that any major market crisis is unlikely as risk management of PSX remains sound and the market is already trading at low valuation. Furthermore, many companies have announced buy backs/treasury stocks, which will provide support to market valuations in case debt restructuring does not happen smoothly. To recall, six buy backs worth approx. Rs31bn were announced by listed firms in 2022. Though, a short term pre-election rally can be seen but that may not sustain for long considering the economic challenges. During the last 20 years, pre-election rallies of 8% on average was seen 3-months before elections. But in 2018, no such rally was seen considering economic challenges. We have also assumed that higher corporate taxes will continue in 2023 to contain the rising fiscal deficit. As a result, earnings growth in coming years will remain below average. Low PE ratio to continue; Base case Index Target at 47k Pakistan Market Outlook 2023 8 KSE-100 Index’ 20-year annual CAGR of 19% in PKR (13% in US$) Year PKR US$ Year PKR US$ Return Return Return Return 2003 66% 68% 2013 49% 38% 2004 39% 34% 2014 27% 33% 2005 54% 53% 2015 2% -2% 2006 5% 3% 2016 46% 46% 2007 40% 38% 2017 -15% -20% 2008 -58% -67% 2018 -8% -27% 2009 60% 51% 2019 10% -2% 2010 28% 26% 2020 7% 4% 2011 -6% -10% 2021 2% -8% 2012 49% 38% 2022YTD -7% -27% Source: PSX, Topline Research, *Price Cut-off date = Dec 16, 2022 Source: PSX, PBS, PBS, PBS, PBS, Topline Research Market cap to GDP at record low level 7.8% 0% 5% 10% 15% 20% 25% 30% 35% Dec-12 May-13 Nov-13 Apr-14 Oct-14 Mar-15 Sep-15 Feb-16 Aug-16 Jan-17 Jul-17 Dec-17 May-18 Nov-18 Apr-19 Oct-19 Mar-20 Sep-20 Feb-21 Aug-21 Jan-22 Jul-22 Dec-22 Mkt. Cap. to GDP Average 10 Year Average 19%
- 9. 9 With interest rate likely to remain high (15-17%) in 2023, local liquidity of insurance companies and local mutual funds will continue to flow to fixed income market. In 2022YTD, we saw insurance firms net selling of Rs27bn (US$126mn) while local mutual funds sold Rs36bn (US$164mn). Currently 1-year T-bill is yielding 17% compared to our sample companies' dividend yield of 13%. This compares unfavorably with last 5-year average T-bill yield of 10% vs 8% dividend yield. This is making investors to invest in fixed income products. We have also seen some liquidity going into FX Market amid fear that PKR may fall further. We also expect PKR to fall to Rs270 by mid of 2023. After PKR adjustment we can see some funds turning back to stock market. So far there has been no restrictions for foreign portfolio investors to remit out their sale proceeds through SCRA (Special Convertible Rupee Accounts). In 2022, foreign corporates net selling stood at Rs22bn (US$106mn) till Dec 16, 2022. In 2023, we expect this trend to continue as Foreign Portfolio Investment currently stands at US$1.4bn (17% of free float and 5% of market cap) down from peak of US$8.4bn on May 26, 2017. In last 5-years, foreigner corporates have sold shares worth of US$2bn at PSX. Index methodology for MSCI frontier markets have also been revised which becomes effective from Aug 2023. As per the proposed changes, Frontier Market cut-off size for index classification will be de-linked from development market cut-off and will be much lower than the existing cut-off for Frontier Markets. Furthermore, 2 companies meeting index classification criteria for a country to be classified as Frontier Market is now relaxed to 1. Possible relaxation in cut off can result in new addition to FM index form Pakistan and may result in some inflows. Foreigners, insurance firms and local funds main sellers Pakistan Market Outlook 2023 9 Source: SBP, SBP, SBP, SBP, Topline Research Foreign holding has fallen to its lowest 1.6 1.9 3.0 2.3 3.1 4.4 6.2 6.1 8.2 6.7 4.4 4.1 3.0 2.1 1.40 14% 17% 20% 23% 26% 29% 32% 35% 38% - 2.3 4.5 6.8 9.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E US$bn SCRA Foreign Portfolio % of Free float held by foreigners FIPI: Net Buying/(Selling) in 2022 LIPI: Net Buying/(Selling) in 2022 (US$mn) (US$mn) Foreign Individual 23.2 Individuals 145.3 Foreign Corporates (106.2) Banks 91.9 Overseas Pakistan 54.7 Companies 70.6 Others 24.2 NBFC (3.1) Brokers Inv. (10.7) Insurance (125.7) Mutual Fund (164.3) Source: NCCPL, Topline Research *Till Dec 16, 2022
- 10. 10 Pakistan market valuation compared to historical averages Pakistan Market Outlook 2023 10 Source: Bloomberg, Topline Research KSE -100 Index trading at PE of 4x versus 17-year average of 10.1x Source: MUFAP, Topline Research Spread between Earnings Yield and T-Bill Yield Source: Bloomberg, Topline Research KSE-100 Index trading at PBV of 0.7x versus 17-Year average of 1.7x Source: MUFAP, Topline Research Spread between Dividend Yield and T-Bill Yield 4.0 9.0 14.0 19.0 24.0 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 PE Average 17 Year Average 10.11 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 PBV Average 17 Year Average 1.70 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 2012A 2013A 2014A 2015A 2016A 2017A 2018A 2019A 2020A 2021A 2022E 2023F Dividend Yield 12M T-bill Yield 4.0% 9.0% 14.0% 19.0% 24.0% 29.0% 34.0% 2012A 2013A 2014A 2015A 2016A 2017A 2018A 2019A 2020A 2021A 2022E 2023F Earning Yield 12M T-bill Yield
- 11. 11 Pakistan Market Outlook 2023 Key Sectors & Top Picks
- 12. Outlook on Major Sectors 12 Banks: Over Weight Banks are set to benefit from high interest rates, strong deposit growth, and adequate coverage ratio. The recent hike in policy rate by 1% to 16% will further support Net Interest Margins (NIMs) of the sector. We anticipate interest rates to remain in high double digit within the range of 15-17% in 2023. High NIMs along with strong deposit growth of 14-15% will keep Net Interest Income (NII) of the bank strong. The banking sector also enjoys strong total coverage ratio of 98% which is likely to keep provisioning expense in check despite a possible increase in NPLs. Higher taxes on baking sector as witnessed last year due to government fiscal challenges can’t be ruled out. The sector is currently trading at historic low valuations with 2023 PE of 3.0x and PBV of 0.4x. The sector is also offering dividend yield of 13%, making it a compelling case. Fertilizers: Over Weight Fertilizer sector remains a priority of Govt. in terms of giving maximum relief to the poor people and farmers community in election year. In Nov-21, Govt. also announced Kissan Package for the agriculture sector, which includes a subsidy on Urea, DAP and agriculture loans among others. Increasing delta between international and local Urea prices of around Rs6,000/bag is positive for the sector as fertilizer manufacturers have strong pricing power to pass any cost pressures to final consumers. Imposition of GST and hike in gas prices will be easily passed to consumers. DAP prices have also came down from US$1,240/ton to US$692/ton in Nov-2022 which will also increase local demand for DAP in 2023 as local DAP prices are linked with international prices. Along with improving sales & margins of the sector, we think high dividend yielding stocks in the fertilizer sector will likely generate interest. Topline fertilizer trades at a 2023 PE of 4.7x and dividend yield of 16%. Pakistan Market Outlook 2023 Technology: Over Weight A majority of technology sector revenue is USD denominated which is a big advantage given PKR devaluation expectations. On average 80% of IT company revenue is export based, whereas 80% of costs is PKR based, thus provides currency hedge for the investors. Quality cost-effective resource and government focus has resulted in IT sector growing at CAGR of 30% for the past 3 years. Going forward, due to incentives provided by the government and expenditure of IT companies in improving the ecosystem, sector will continue to grow in the range of 15-20% in the next 3-5 years. IT companies of the country aim to achieve inorganic growth through acquisitions and introduction of new products. Besides this they are also expanding to new regions and making inroads into the Middle East which is undergoing a digitization boom. Topline Technology trades at a 2023 PE of 14.3x and PS of 3.1x.
- 13. Outlook on Major Sectors Pakistan Market Outlook 2023 13 Textiles: Market Weight Textile sector would be beneficiary of PKR devaluation against US dollar since majority of revenue is export based. We also believe that the sector will continue to remain priority of the Govt. at a time of low foreign exchange reserves. However, decision of hike in concessionary markup rates i.e. Long Term Financing Facility (LTFF) and Export Finance Scheme (EFS) and linking them to policy rate along with surge in RLNG tariff to US$9/MMBTU (Previous: US$6.5/MMBTU) will some what off set its positive impact. Global recession and falling export orders will be major risk for textile sector. Topline Textile universe trades at a FY23 PE of 3.2x and offers dividend yield of 6%. E&Ps: Market weight E&P sector is likely to get benefit from PKR devaluation and is expected to post above earnings growth of 42% YoY in FY23 after a increase of 30% YoY in FY22. However, rising liquidity crunch and flat production numbers remain a key concern for the sector. We prefer select E&P companies (like MARI and POL) that are less exposed to circular debt, have better production outlook and offers decent dividend yield. In contrast, OGDC & PPL are more impacted from circular debt. Topline E&Ps trade at FY23 PE of 2.3x (PE ex OGDC/PPL of 4.5x) with dividend yield of 11% (13% excluding OGDC/PPL). Cements: Market weight Cement sector has been affected due to economic slowdown, contained development allocation, floods, higher interest rates and higher construction cost which had dampened dispatches growth. We anticipate cement dispatches to decline by 15% in FY23 followed by an increase of 10% in FY24. Coal prices have already come down by 50% from its peak of US$460/ton and a further decline could improve margins of sector. We also do not expect any threat to pricing as cement expansion projects specially greenfield project will witness delay. Sector is trading at a FY23 PE of 5.0x and EV/ton of US$32. IPPs: Market weight The ballooning issue of circular debt continues to impact the liquidity position of Independent Power Producers (IPPs). Quantum of circular debt has now crossed Rs2.4trn. Govt. has recently increased base tariff by Rs7.91/unit to Rs24.82/unit. We believe, this step will certainly improve the cash flow situation of the sector, however, steps for further reduction in losses and timely adjustment in power tariff is required to curtail rising circular debt. Resolution of revolving account will reduce circular debt of CPEC IPPs to some extent and would be positive. Topline IPPs is currently trading at a FY23 PE of 2.0x.
- 14. Outlook on Major Sectors Pakistan Market Outlook 2023 14 OMCs: Under Weight Oil & Marketing Companies (OMCs) in FY22 recorded significant profits, however, earnings are expected to decline in FY23. This is due to lower volumetric sales amid higher fuel prices, lower auto sales and overall slowdown in economic activity. To note, total oil sales is down 20% YoY (Ex FO down 23% YoY) in 5MFY23 and we expect OMC sales to decline by 20-25% in FY23. Besides this, the sector is expected to record inventory losses in FY23 amid declining international oil prices. However, revision in OMC margins to Rs6/liter on Motor Gasoline (MOGAS) and High-Speed Diesel (HSD) from average Rs3.3/liter in FY22 will be positive trigger for sector. Pileup of circular debt will also remain a key concern for the sector specially for PSO which restrict its payout capability and leads to higher borrowings. Topline OMC’s universe is currently trading at a FY23 PE of 2.4x. Steels: Under Weight Steel demand is likely to slowdown in FY23 due to lower construction activities amid cut in PSDP, higher interest rates and elevated construction cost. The slowdown is also expected in flat steel driven from lower automobile and appliances sales. Topline steel is currently trading at a FY23 PE of 6.2x. Autos: Under Weight Pakistan’s rising import bill & deteriorating trade balance and foreign exchange reserves, we expect import restriction on CKD imports will continue in 2023 which will restrict auto production. This coupled with rising policy rates and higher car prices are likely to result in decline in volumetric sales. To recall, around 30-40% of the industry car sales are through bank finance. We now expect, Pakistan car sales to fall by 50% to 180k in FY23. Auto sector is currently trading at a FY23 PE of 14.2x with dividend yield of 5%. Consumer & Pharma Under weight Consumer and Pharmaceutical companies is likely to get a hit due to exchange losses amid PKR devaluation in 2023. Passing of full impact on consumers in inflationary environment would be very challenging and will result in lower gross margins. Furthermore, delay in opening of LCs by SBP in order to save depleting foreign exchange reserve will result in revenues downfall for companies such as Pak Elektron (PAEL). Consumer and Pharmaceutical companies are trading at 2023 PE of 9.2x and 11.7x respectively.
- 15. Pakistan Market Outlook 2023 Top Picks for 2023 Top Picks: Key Numbers PE (x) Dividend Yield PBV (x) 2022E 2023F 2024F 2022E 2023F 2024F 2022E 2023F 2024F MEBL 4.6 3.5 3.3 8% 10% 11% 1.7 1.2 1.0 UBL 4.5 3.9 3.7 17% 19% 21% 0.5 0.5 0.5 MARI 6.7 4.5 4.0 8% 11% 13% 1.7 1.4 1.2 POL 4.4 4.1 3.6 17% 19% 20% 2.2 2.0 1.7 LUCK 4.9 4.7 3.9 0% 0% 0% 0.7 0.6 0.5 EFERT 7.6 5.0 4.6 15% 20% 22% 2.4 2.4 2.4 SYS 19.3 14.3 11.5 2% 2% 3% 6.1 4.1 3.0 ILP 4.5 4.3 5.2 6% 6% 6% 1.9 1.4 1.2 Topline Universe^ 3.6 3.2 2.8 10% 11% 12% 0.6 0.5 0.5 (ex Circular debt & Govt. banks) 5.1 4.5 4.0 9% 10% 11% 0.7 0.7 0.6 Source: Topline Research, ^adjusted for calendar year We prefer companies that benefits from high interest rates, PKR devaluation, and have cash rich balance sheets. Our top picks includes Meezan Bank (MEBL), United Bank (UBL), Mari Petroleum (MARI), Pakistan Oil Field (POL), Lucky Cement (LUCK), Engro Fertilizer (EFERT), Systems Limited (SYS), and Interloop (ILP). In mid cap stocks, we prefer, Citi Pharma (CHPL), National Foods (NATF), Murree Brewery (MUREB), Avanceon (AVN), and Attock Petroleum (APL). 15
- 16. Pakistan Market Outlook 2023 Comp Sheet 16
- 17. Pakistan Market Outlook 2023 17 Current Price (PKR) Mkt Cap US$mn Year end Diluted (EPS) Diluted (DPS) Earnings Growth PE (x) Dividend Yield PBV (x) ROE Symbol Stance 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F E&Ps 30% 42% 14% 3.2 2.3 2.0 9% 11% 13% 0.5 0.5 0.4 18% 22% 21% OGDC BUY 73 1,387 June 31.1 43.6 50.1 7.3 8.5 9.0 46% 40% 15% 2.3 1.7 1.4 10% 12% 12% 0.4 0.3 0.3 16% 20% 19% PPL* BUY 56 677 June 19.7 31.2 35.2 2.0 3.5 4.0 2% 58% 13% 2.8 1.8 1.6 4% 6% 7% 0.3 0.3 0.3 13% 18% 17% MARI BUY 1,652 980 June 247.8 365.5 416.7 124.0 182.8 208.3 5% 47% 14% 6.7 4.5 4.0 8% 11% 13% 1.7 1.4 1.2 27% 34% 33% POL* BUY 405 511 June 91.4 97.8 113.4 70.0 75.0 80.0 94% 7% 16% 4.4 4.1 3.6 17% 19% 20% 2.2 2.0 1.7 57% 51% 52% Banks 8% 12% 8% 3.4 3.0 2.8 12% 13% 14% 0.5 0.4 0.4 16% 16% 15% MCB BUY 117 617 Dec 23.2 26.2 30.2 19.0 20.0 22.0 -12% 13% 15% 5.1 4.5 3.9 16% 17% 19% 0.7 0.6 0.5 14% 14% 14% HBL BUY 64.5 421 Dec 23.1 24.8 26.8 7.5 8.0 9.0 -3% 7% 8% 2.8 2.6 2.4 12% 12% 14% 0.3 0.3 0.3 11% 11% 11% UBL BUY 105 573 Dec 23.5 27.0 28.6 18.0 20.0 22.0 -5% 15% 6% 4.5 3.9 3.7 17% 19% 21% 0.5 0.5 0.5 12% 14% 14% MEBL* BUY 105 834 Dec 22.8 29.6 32.0 8.0 10.0 11.5 44% 30% 8% 4.6 3.5 3.3 8% 10% 11% 1.7 1.2 1.0 41% 40% 34% NBP HOLD 24 231 Dec 14.1 13.8 14.7 0.0 0.0 0.0 5% -2% 6% 1.7 1.8 1.7 0% 0% 0% 0.2 0.1 0.1 10% 9% 9% BAHL BUY 55 272 Dec 20.7 24.3 26.7 7.0 7.5 7.5 24% 18% 10% 2.7 2.3 2.1 13% 14% 14% 0.6 0.5 0.4 24% 24% 23% BAFL BUY 31 243 Dec 11.8 12.9 13.1 4.0 5.0 5.0 45% 9% 2% 2.6 2.4 2.3 13% 16% 16% 0.5 0.4 0.4 20% 19% 17% BOP BUY 5 65 Dec 3.7 3.2 3.4 0.0 0.0 0.5 -12% -14% 9% 1.3 1.6 1.4 0% 0% 10% 0.2 0.2 0.2 17% 12% 12% Fertilizers -13% 32% 14% 6.2 4.7 4.1 13% 16% 18% 1.2 1.1 1.1 20% 25% 26% ENGRO BUY 276 706 Dec 41.8 53.3 61.1 34.0 40.5 45.9 -14% 27% 15% 6.6 5.2 4.5 12% 15% 17% 0.7 0.7 0.7 11% 14% 15% FFC* BUY 102 578 Dec 18.5 22.3 25.1 14.5 16.7 18.8 8% 20% 13% 5.5 4.6 4.1 14% 16% 18% 2.5 2.2 1.9 47% 50% 50% EFERT BUY 80 477 Dec 10.5 16.0 17.6 11.9 16.0 17.6 -33% 52% 10% 7.6 5.0 4.6 15% 20% 22% 2.4 2.4 2.4 30% 47% 52% FFBL* BUY 16 91 Dec 4.3 6.5 7.9 0.0 1.0 1.0 -13% 51% 21% 3.7 2.4 2.0 0% 6% 6% 0.8 0.6 0.5 24% 28% 27% Cements 32% 2% 22% 5.1 5.0 4.1 0% 0% 0% 0.6 0.6 0.5 14% 12% 13% LUCK BUY 451 648 June 91.2 95.0 114.5 0.0 0.0 0.0 29% 4% 21% 4.9 4.7 3.9 0% 0% 0% 0.7 0.6 0.5 17% 14% 15% DGKC* HOLD 50 97 June 6.8 3.0 3.8 1.0 1.0 1.0 -20% -56% 27% 7.3 16.6 13.1 2% 2% 2% 0.3 0.3 0.3 4% 2% 2% MLCF BUY 23 109 June 4.2 4.5 5.9 0.0 0.0 0.0 19% 6% 31% 5.4 5.1 3.9 0% 0% 0% 0.6 0.5 0.4 11% 10% 12% FCCL BUY 12 115 June 3.3 3.1 3.6 0.0 0.0 0.0 105% -6% 17% 3.6 3.9 3.3 0% 0% 0% 0.4 0.4 0.4 18% 11% 12% KOHC HOLD 153 137 June 25.0 33.0 41.0 0.0 0.0 0.0 44% 32% 24% 6.1 4.6 3.7 0% 0% 0% 1.1 0.9 0.7 20% 22% 22% Comp Sheet
- 18. Pakistan Market Outlook 2023 Current Price (PKR) Mkt Cap US$mn Year end Diluted (EPS) Diluted (DPS) Earnings Growth PE (x) Dividend Yield PBV (x) ROE Symbol Stance 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F 2022A/E 2023E 2024F Oil and Gas Marketing 145% -62% 33% 0.9 2.4 1.8 10% 11% 11% 0.3 0.3 0.3 46% 14% 16% PSO* BUY 139 290 June 183.7 51.2 74.3 10.0 10.0 10.0 196% -72% 45% 0.8 2.7 1.9 7% 7% 7% 0.3 0.3 0.3 48% 11% 14% SNGP BUY 38 107 June 19.3 20.6 22.7 7.0 7.5 7.5 12% 7% 10% 2.0 1.8 1.7 18% 20% 20% 0.6 0.5 0.4 33% 29% 27% Autos -5% -48% 49% 7.4 14.2 9.5 7% 5% 8% 1.5 1.5 1.4 21% 11% 15% INDU BUY 997 348 June 201.0 89.2 130.5 93.8 56.2 82.2 23% -56% 46% 5.0 11.2 7.6 9% 6% 8% 1.5 1.4 1.3 31% 13% 18% HCAR HOLD 142 90 Mar 17.6 7.1 13.1 7.0 2.8 5.2 40% -60% 86% 8.1 20.2 10.8 5% 2% 4% 1.0 1.0 0.9 13% 5% 9% PSMC HOLD 135 49 Dec (23.0) 8.6 15.2 0.0 1.7 3.0 NM NM 77% NM 15.7 8.8 0% 1% 2% 0.4 0.4 0.4 -7% 3% 5% MTL* HOLD 535 230 June 56.0 27.4 37.1 26.9 36.4 54.9 -6% -51% 35% 9.6 19.5 14.4 5% 7% 10% 7.3 7.7 7.6 67% 39% 53% Textiles 86% 6% -16% 3.3 3.2 3.7 7% 6% 6% 0.7 0.6 0.5 21% 20% 15% NML* BUY 56 88 June 29.3 31.5 26.8 4.0 4.0 4.0 74% 7% -15% 1.9 1.8 2.1 7% 7% 7% 0.2 0.2 0.2 13% 13% 10% ILP BUY 60 249 June 13.2 13.8 11.6 3.8 3.5 3.5 96% 4% -16% 4.5 4.3 5.2 6% 6% 6% 1.9 1.4 1.2 49% 37% 25% Consumers -1% -27% 37% 6.7 9.2 6.7 0% 0% 0% 0.5 0.5 0.4 8% 5% 7% PAEL HOLD 15 56 Dec 2.0 1.3 1.9 0.0 0.0 0.0 10% -36% 48% 7.4 11.7 7.9 0% 0% 0% 0.3 0.3 0.3 5% 3% 4% UNITY* HOLD 15 81 June 2.4 1.9 2.5 0.0 0.0 0.0 -6% -22% 32% 6.3 8.1 6.1 0% 0% 0% 0.8 0.8 0.7 17% 10% 12% Chemicals -8% -38% 20% 5.3 8.5 7.1 14% 10% 12% 1.6 1.5 1.4 32% 18% 21% EPCL HOLD 45 183 Dec 11.5 7.3 8.7 11.5 7.3 8.7 -30% -37% 20% 3.9 6.2 5.2 25% 16% 19% 1.4 1.4 1.4 35% 22% 26% ICI BUY 645 265 Dec 91.7 56.4 67.7 35.0 40.0 40.0 52% -38% 20% 7.0 11.4 9.5 5% 6% 6% 1.8 1.7 1.5 29% 15% 16% Power HUBC BUY 63 362 June 21.9 32.0 38.5 6.5 20.0 12.0 -15% 46% 20% 2.9 2.0 1.6 10% 32% 19% 0.6 0.6 0.6 24% 33% 40% Pharmaceuticals CPHL BUY 25 26 June 2.8 2.2 2.9 0.0 0.0 2.0 81% -22% 35% 9.2 11.7 8.7 0% 0% 8% 1.2 1.1 1.0 14% 10% 12% Steel ISL BUY 46 90 June 12.4 7.5 9.5 6.5 5.0 4.5 -28% -40% 27% 3.7 6.2 4.9 14% 11% 10% 0.9 0.9 0.8 27% 15% 17% Technology SYS BUY 515 637 Dec 26.7 36.1 44.9 8.0 10.7 13.5 67% 35% 24% 19.3 14.3 11.5 2% 2% 3% 6.1 4.1 3.0 42% 34% 30% Topline Universe^ 13% 13% 13% 3.6 3.2 2.8 10% 11% 12% 0.6 0.5 0.5 18% 19% 19% (ex Circular debt & Govt. banks) 10% 12% 13% 5.1 4.5 4.0 9% 10% 11% 0.7 0.7 0.6 15% 15% 16% Comp Sheet *unconsolidated, ^adjusted for calendar year 18
- 19. The research analyst(s), denoted by an “AC” on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities/sectors and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Furthermore, it is stated that the research analyst or its close relative have neither served as a director/officer in the past 3 years nor received any compensation from the subject company in the past 12 months. Additionally, as per regulation 8(2)(i) of the Research Analyst Regulations, 2015, we currently do not have a financial interest in the securities of the subject company aggregating more than 1% of the value of the company. Rating System Topline Securities employs three tier ratings system to rate a stock, as mentioned below, which is based upon the level of expected return for a specific stock. The rating is based on the following with time horizon of 12-months. Rating Expected Total Return Buy Stock will outperform the average total return of stocks in universe Neutral Stock will perform in line with the average total return of stocks in universe Sell Stock will underperform the average total return of stocks in universe For sector rating, Topline Securities employs three tier ratings system, depending upon the sector’s proposed weight in the portfolio as compared to sector’s weight in KSE-100 Index: Rating Sector’s Proposed Weight in Portfolio Over Weight > Weight in KSE-100 Index Market Weight = Weight in KSE-100 Index Under Weight < Weight in KSE-100 Index Ratings are updated daily to account for the latest developments in the economy/sector/company, changes in stock prices and changes in analyst’s assumptions or a combination of any of these factors. Valuation Methodology To arrive at our 12-months Target Price, Topline Securities uses different valuation methods which include: 1). Present value methodology, 2). Multiplier methodology, and 3). Asset-based methodology. Research Dissemination Policy Topline Securities endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as email, fax mail etc. Nevertheless, all clients may not receive the material at the same time. Disclaimer This report has been prepared by Topline Securities and is provided for information purposes only. Under no circumstances this is to be used or considered as an offer to sell or solicitation of any offer to buy. While reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time, Topline Securities and/or any of its officers or directors may, as permitted by applicable laws, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided only for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report. Investments in capital markets are subject to market risk and Topline Securities accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors, who should seek further professional advice or rely upon their own judgment and acumen before making any investment. The views expressed in this report are those of Topline Research Department and do not necessarily reflect those of Topline or its directors. Topline as a firm may have business relationships, including investment-banking relationships, with the companies referred to in this report. All rights reserved by Topline Securities. This report or any portion hereof may not be reproduced, distributed or published by any person for any purpose whatsoever. Nor can it be sent to a third party without prior consent of Topline Securities. Action could be taken for unauthorized reproduction, distribution or publication. 19 Analyst Certification and Disclosures Pakistan Market Outlook 2023
- 20. 20 Contact Us Mr. Mohammed Sohail CEO Dir: +92 (21) 35303333-4 [email protected] Research Team: Mr. Umair Naseer Associate Director Research +92 (21) 35303330-2 [email protected] Mr. Sunny Kumar Deputy Head of Research +92 (21) 35303330-2 [email protected] Mr. Nasheed Malik Research Analyst +92 (21) 35303330-2 [email protected] Mr. Fahad Qasim Senior Manager Research +92 (21) 35303330-2 [email protected] Mr. Faraz Assistant Manager Database +92 (21) 35303330-2 [email protected] Equity Sales Team: Ms. Samar Iqbal Head of International Equity Sales Dir: +92 (21) 35370799 [email protected] Mr. Saad Hashmi Head of Retail Sales Dir: +92 (21) 35303428 [email protected] Mr. Ali Najib VP, Senior Dealer - Equities Dir: +92 (21) 35303429 [email protected] Mr. Muhammad Arbash Senior Dealer - Equities Dir: +92 (21) 35303343 [email protected] Mr. Nabeel Haroon Senior Manager International Equity Sales Dir: +92 (21) 35370799 [email protected] Mr. Mohammad Yakub Senior Manager Equity Sales Dir: +92 (21) 35370799 [email protected] Corporate Office: 8th Floor Horizon Tower, Plot 2/6, Block-3, Clifton, Karachi Tel: +9221-35303330-2 Fax: +9221-35303349 Pakistan Market Outlook 2023