PKR depreciation: A earning tool for power sector

                                                  Written as on June 12, 2012

Highlights

            •         IPPs facing a rough ride with liquidity constraints

            •         Tariff indexation with USD to provide cushion to topline earnings

            •         Recommendation 'Buy' on HUBC and KAPCO

 

In today's Value Seeker we present our analysis on developments in power sector along with our recommendation on sector's blue chips.

IPPs facing a rough ride with liquidity constraints

With low funds outlay by National Transmission and Dispatch Company Limited (NTDCL), local Independent Power Producers (IPPs) are facing substantial shortage of working capital requirements. However on other side, current depreciation in PKR against USD is positive developments which will improve the bottom line of the power producers. With decline in international oil prices, we expect it will also facilitate the Gov't FY13 budgetary targets for power sector subsidies.

Tariff indexation with USD to provide cushion to topline earnings

A major factor pulling the topline of the sector IPP is the accelerated depreciation of the PKR in 2QMFY12 (+10.2% YoY) along with increased US CPI; both of which serve as components that power sector's revenues are indexed with. During this quarter USD appreciated by 4.1%QoQTD against PKR therefore, we believe the power sector to take benefit of this development.

Circular debt still a big challenge

With no concrete steps observed to limit circular debt in this year budget, Gov't seems to be more inclined towards fixing the circular debt issue with short term measures. As past measures shows the Gov't took make shift solutions most of the time with issuance of TFCs and PIBs, we expect this issue to mount further pressure on fiscal economic factors and will remain a major challenge for Gov't. The current decline in oil prices will also provide some breather to power companies as the low prices oil will be available for improving utilization.

Low subsidy allocation in FY13 budget intends further tariff hike

In budget FY13 the Gov't has proposed lower overall subsidies, out of which Power subsidies stand at ~Rs185bn this time round, down 60% YoY from revised estimates (PEPCO subsidy down 68% to Rs135bn, KESC's up by 11% to R50bn for FY13) from revised estimates of Rs464bn during FY12. Although decline in subsidies is expected to increase electricity charges substantially, it would improve cash flows of this sector.

Recommendation 'Buy' on HUBC and KAPCO

With the target price of Rs47/share we recommend 'Buy' on HUBC. The scrip is currently trading at PE ratio of 6.6x and 6.9 coupled with dividend yield of 15.1% and 14.5% for FY12 and FY13 respectively. Likewise, at current levels, KAPCO is offering an upside potential of 24% with our Dec-12 TP of Rs54/share. With the FY12 and FY13 PE and dividend yield of 7.0x and 8.3x and 11.5% respectively, we recommend 'Buy' on KAPCO as well.

PKR depreciation: A earning tool for power sector

Cements: Downplaying the Concerns

 

          We downplay the concerns surrounding any negative impact of PKR depreciation on our cement universe profitability as the recent dip in international coal prices have more than offset impact of PKR/USD depreciation (9.3% since FYTD), we believe

 

          As per our estimates, depreciation of PKR10/USD presents a negative 1.5%-2.5% on our cement universe earnings; whereas, any USD5/ton contraction in coal prices translates into an upside EPS impact of 5% on our Cement Universe

 

          The recent upward revision in power tariffs by Ministry of Water and Power (also includes fuel price adjustment) will result in an increment of roughly 15-18 per bag on the cement manufacturers. Given the already peaking level of domestic prices, we foresee a gradual pass through of increase in power cost thus keeping intact our earnings estimates

 

          On cumulative basis, the overall dispatches surged by 3.3% YoY to 29.48mn tons in 11MFY12 as against 28.55mn tons in the same period last year. Local dispatches remained strong with an upside of 8.4% YoY to 21.64mn tons while exports continue to remain lackluster as the total exports of the sector fell by 8.6% YoY to 7.84mn tons

 

          We expect the trend in dispatches to continue in 1QFY13 on account of aggressive PSDP utilization owing to 1) pre-election populist measures and 2) start-up and completion on new/pending water/power projects

Cements: Downplaying the Concerns

Atlas Honda invests $35mn in its Lahore motorcycle

Government will support manufacturers through prudent policies and encourage them to enhance capacity and transfer of technology to benefit local consumers and increase exports of Made in Pakistan motorcycles, Chairman Federal Board of Revenue FBR Mumtaz Haider Rizvi said.

He was inaugurating Atlas Lahore Honda motorcycle’s plant production capacity enhancement to 0.75 million bikes a year with US$35 million investment. He said he looks forward to their next landmark of achieving production and sales targets of one million motorcycles a year, as it will be direct support to achieve FBR’s revenue collection targets. He asked visiting Honda Japan officials to plan two million motorcycles production for local market and tap regional markets.

He said Pakistan could be considered among biggest markets of motorcycles with talented workforce and thriving economy which is most suitable recipe for planning further investment. Atlas Honda’s plant saves valuable foreign exchange by deleting 94% of motorcycle parts and earns foreign exchange through exports. FBR regards Atlas Honda as one of role models among Pakistani tax paying organizations.
President Honda R&D Southeast Asia Kenji Kawaguchi assured consistent policies from government and continuous support from FBR will encourage Honda Japan to increase its role in Pakistani motorcycle market’s development. "I expect from Honda to introduce several new and improved models in coming years in order to serve better Pakistani customers." 
Chief Executive Atlas Honda Saquib Shirazi said company will now undertake feasibility study to increase annual production of motorcycles to one million units estimated to cost around additional $50 million. "Enabling environment provided by government was instrumental in phenomenal growth of this sector even during periods of economic recession. Atlas Honda was market leader in year 2000 and still enjoying same position with eight times increase in production of units."

"AHL believes in fair competition and this is reason motorcycles prices are stable. Having 94% localization of our brands, our exports doubled this year to around 20000 units. We hope to achieve export target of 100000 units in next three to five years," he added.

Atlas Honda invests $35mn in its Lahore motorcycle

Wall Street’s major averages followed up their best

Wall Street's major averages followed up their best week of 2012 with the biggest Monday drops of the year, as we continue to see volatile mood swings by investors. Of the past six times that the S&P 500 has been down 1 percent or more on the first trading day of the week, it's only finished the week on the upside once.
Investors will have a handful of stats to consider during today's trading session. The National Federation of Independent Business will be out at 7:30 a.m. New York Time with its small business sentiment index for May, expected to remain unchanged from the April reading of 94.5.
At 8:30 a.m. New York Time, the government issues its May report on import and export prices, with economists expecting both those measures to drop.
At 2 p.m. New York Time, the Treasury issues May federal budget figures, with consensus forecasts calling for a $125 billion deficit compared to the May 2011 shortfall of $57.6 billion.
The Treasury is also set to auction $32 billion in 3-year notes today, with the results of that sale available shortly after 1 p.m. New York Time.
Just a handful of earnings reports out today, including financial data provider FactSet (FDS) and luxury goods maker Michael Kors (KORS).
Juniper Networks (JNPR) is a stock to watch today, as the networking equipment maker announces a stock buyback of up to $1 billion. This plan is in addition to a prior $1 billion program, which has $162.2 billion in buyback authorization remaining.
Texas Instruments (TXN) could be under pressure after its mid-quarter update. The chipmaker has narrowed its second quarter EPS outlook to $0.32 — $0.36, short of estimates of $0.41. But analysts do point out that the mid-range of the new forecast remains intact, with demand for TI chips steady despite a shaky global economy.
Agrium (AGU) says it expects earnings for the second quarter and the year's first half to be near or at the top of its previous guidance, as it sees strong results across its fertilizer business. The prior second quarter guidance range had been $4.18 — $4.78 per share, versus analyst estimates of $4.57.
Sanofi (SNY) says its Genzyme unit is applying for both U.S. and European approval for its multiple sclerosis treatment Lemtrada. Lemtrada is administered just once per year, versus daily or weekly applications for older MS drugs.
Eastman Kodak (EKDKQ) has applied for bankruptcy court permission to auction its Digital Capture and Kodak Imaging Systems patent portfolios. Those portfolios hold more than 1,100 patents, as Kodak tries to raise money to lift itself out of bankruptcy.

Wall Street’s major averages followed up their best

Bulls pay no heed to Pak-US ties | Pakistan Today | Latest news | Breaking news | Pakistan News | World news | Business | Sport and Multimedia

Bulls pay no heed to Pak-US ties | Pakistan Today | Latest news | Breaking news | Pakistan News | World news | Business | Sport and Multimedia

The bulls dominated matters at the Karachi stock market on the first working day of the week with benchmark, KSE 100-share index gained 42.76 points. The day saw the index closing up by 0.32 percent at 13,601.46 points against 13,558.70 points of Friday. The Pakistan stocks closed higher amid thin trades on institutional support in oversold market according to Ahsan Mehanti, Director at Arif Habib Investments Limited.
On Monday, the trading volumes at the ready-counter were recorded lower at 60.206 million shares against 124.437 million shares of the previous day. The trading value too decreased to Rs 1.690 billion compared to Rs 4.019 billion of the previous session. The intraday high and low, respectively, stood at 13,676.49 and 13,551.20 points.
He added that the-concerns over rupee fell and macroeconomic uncertainty affected the activity. Recovery in global commodities on expectations for ease in euro-zone debt crisIs, speculations ahead of year end close played the catalyst’s role in bullish sentiments despite cautious activity pending uncertainty over Pak-US relations.
The market capitalisation increased to Rs 3.471 trillion from Rs 3.468 trillion a day earlier. Of the total 323 traded scrips, 131 gained, 129 lost and 63 remained unchanged. The free-float KSE-30 index also gained 37.69 points to close at 11,746.65 points against the previous 11,708.96 points.
Jahangir Siddiqui Company was the day’s volume leader counting its traded shares at 6.875 million with the opening and closing rates standing at Rs 13.93 and Rs 14.49, followed by Nishat Power Limited, P.T.C.L.A, D.G.K Cement, and Azgard Nine with turnover of 5.091 million, 4.998 million, 3.550 million and 2.968 million shares respectively.
On the future market, the turnover recovered remarkably by over three million shares to 10.772 million against 14.141 million shares of last working day of the week Friday. The Rafhan Maize XD and UniLever Pakistan, up Rs 130.18
and Rs 39.16, led highest price gainers while, UniLever Food and Bata Pakistan Limited, down Rs 110.00 and Rs 14.31 respectively, led the losers. 

Bulls pay no heed to Pak-US ties | Pakistan Today | Latest news | Breaking news | Pakistan News | World news | Business | Sport and Multimedia

Islamabad stocks decrease 98 points

Daily Times - Leading News Resource of Pakistan

ISLAMABAD: The Islamabad stock market witnessed selling pressure during the week, analysts said here on Saturday. The Islamabad Stock Exchange (ISE) 10-share index decreased by 97.6 points to close at 2,703.81 points as against the previous week’s close of 2,801.41 points. The ISE 10-share index remained negative for three days (June 4, 5 and 8) and positive for two days (June 6 and 7). Total volume of transactions stood at 0.207 million shares as against 0.134 million shares last week, showing a total increase of 0.073 million shares or 54.48 percent. The minimum transaction in the outgoing week was recorded on June 4 when the market reached 0.009 million shares and the index decreased by 45.65 points to close at 2,755.76 points from the previous level of 2,801.41 points. The maximum transaction in the outgoing week was 0.097 million shares as compared with last week’s 0.039 million shares. The maximum decrease in share price of a company was observed in Siemens Pakistan Engineering, the price of which fell Rs 24.51 on June 6 when the index increased by 7.46 points. The maximum increase in share price of a company was also observed in Unilever Pakistan, which rose Rs 60.19 on June 5 when the market lost by 21.08 points. staff report

Islamabad stocks decrease 98 points

Budget fails to halt KSE freefall as index loses 318 points

Daily Times - Leading News Resource of Pakistan

The Karachi stock market continued to witness a bearish trading week as investors adopted a cautious approach despite a positive budget for the capital markets.

The reasons for the negative trend are prevailing concerns among investors related to continued diplomatic tension between the US and Pakistan, rupee depreciation, weakness in oil prices and monetary policy expectations, which weighed heavily on their minds.

The Karachi Stock Exchange (KSE) 100-share index shed 318.27 points or 2.29 percent to close at 13, 558.70 points as against previous week’s close of 13,876.97 points.

“Investors adopted a cautious approach throughout the week despite a positive budget for the capital markets,” said JS Sec analyst Furqan Ayub. “Foreigners too were downbeat as they sold shares worth $16.8 million.”

The US did agree to reimburse $1.18 billion to Pakistan on account of Coalition Support Fund but the issue of reopening of NATO supply routes remains unresolved, he said and added that the stalemate was further fueled on the difference of opinions on drone strikes and the Salala tragedy. A senior US official is expected in the country next week to break the deadlock between the two countries on reopening of NATO supply routes.

As per market expectations, the State Bank of Pakistan (SBP) adopted a wait-and-see approach by keeping interest rate unchanged at 12 percent. In its monetary policy statement, the SBP highlighted managing external and fiscal pressures as key concerns in the immediate term. Moreover, the SBP also emphasised on the importance of reviving private investment in the economy and the need of fundamental reforms to turnaround the economy.

News of restoration of gas supply to Engro’s Enven plant kept the stock in the limelight throughout the week as it outperformed the market by 4.0 percent. On the other hand, Pakistan Oilfields Ltd underperformed the market by 1.6 percent on the recent slide in oil prices.

The turnover fell 16.19 percent and traded 124.43 million shares as compared to previous week’s 107.09 million shares

“Tumbling global stocks outweighed the stock market related positive budgetary measures,” said Topline Sec analyst Samar Iqbal. “In the absence of any trigger investors remained on the sidelines as volumes fell by 40 percent to Rs 3.2 billion.”

Budget fails to halt KSE freefall as index loses 318 points