Philosophy
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useful thread. Thanks @Thinkingsoldier for detail research on KSE performance. Please keep on sharing.
Daily Research Report Karachi Stock Exchange
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useful thread. Thanks @Thinkingsoldier for detail research on KSE performance. Please keep on sharing.
Viper0011.
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Actually, Pakistan's stock market would return on investment over 30% in majority of the cases if you pick the likes of Oil & gas, Energy, Cement, Steel and those companies who are involved in the construction area. There is a MASSIVE boom in infrastructure development, only going to increase with the Chinese investment so you could make plenty of money that way every year.
Neutron
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There is a massive boom in infrastructure and it is best opportunity to invest in KSE.
Neutron
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Pakistan Cement: Is the top-line secure?
While continuing with our bullish stance on the Pakistan Cements, we test the industry’s fundamental strength through a top-line analysis, in our report today. After exhibiting an overall dispatches growth of 2.6%YoY in Apr'15, the same for 10MFY15 is up 3.9%YoY (on the back of 8.0%YoY uptick in local dispatches. 9.1%YoY decline in exports). On the exports front, dispatches to Afghanistan are expected to remain fragile following down turn in overall Afghan demand and supply of Iranian cement in south western part of the country. On the local front, Iranian cement is hurting the industry as it has made its way to the Pakistani market and in effect restricting local players from maximizing their respective dispatches. That said, we believe the next leg of growth in the local market would come from infrastructural projects under the China Pakistan Economic Corridor (CPEC) on the back of certain positives which make Pakistani cement preferable over its Chinese counterpart. Few of the Chinese projects are expected to come online in the coming quarters, which would ensure a strong topline (ultimately the bottomline), considering already-strong local demand. DGKC (Jun'15 TP of PkR153.8/sh), along with MLCF (Jun'15 TP of PkR71.9/sh), are our top picks within the cement space.
10MFY15 dispatches: As per the recently released numbers by APCMA, 3.29mn tons of cement was dispatched in Apr'15 vs. 3.21mn tons dispatched in Apr'14, up 2.6%YoY. Conversely, on the exports front a decline of 4.7%YoY (due to weakening Afghan market) dragged down the 4.6%YoY improvement seen in local dispatches in Apr'15. Subsequently, 10MFY15 dispatches are up 3.9%YoY where major support came from increasing local demand (up 8.0%YoY) which diluted the negativity brought on by faltering exports (down 9.1%YoY). Within the AKD Universe (as per provisional numbers), MLCF's dispatches grew by ~8.8%YoY in Apr'15, followed by DGKC (up 2.6%YoY) and LUCK (up 1.8%YoY).
Afghan market: Pakistan exported highest ever 4.73mn tons cement to Afghanistan in FY11. However, ever since then similar figures could not materialize due to: 1) a down turn in the Afghani local cement demand and 2) availability of cheap Iranian cement. The situation is getting more worrying as post decline of 24.0%YoY in 10MFY15, exports to Afghanistan have brought the total cement exports down by 9.1%YoY. With Eastern and Southern Afghanistan (areas like Jalalabad, Kabul, Kandahar etc.) expected to continue with importing cement from Pakistan, other parts of the country (like Mazar-e-Sharif, Herat, Zaranj etc.) are anticipated to benefit from excessive production in Iran. We flag a possibility of transfer of 300k-600k tpa cement from being exported to be dispatched locally, which considering healthy local demand over the short to medium term may not hurt cement dynamics. Recall, over the past 3yrs Pakistani exports to Afghan market have posted a negative CAGR of 8.2%, where we estimate FY15 dispatches to reach 3.0mn tons, down 17.9%YoY (lower by massive 36.5% from its FY11 peak).
Iran - adding sourness to dream run! As per our channel checks, Iran faced an oversupply of ~14mn tons of cement in 2014 (local demand of ~54mn tons vs. supply of ~68mn tons), and is sighted to continue with similar situation in coming years. This has helped the country to tap a decent percentage of the Western and Central Afghan market, posting threat to Pakistani exports. Adding insult to injury, Iranian cement is reported to enter Pakistan as well via unofficial channels, denying local players from maximizing their utilization. Going forward, we feel this phenomenon may continue troubling Pakistan Cements, adding unwanted sourness to the sector.
India balancing our numbers: While the Afghan market is going through a lean phase, dispatches to India have picked pace (up by 40%YoY in FY14 to 677k tons). The particular trend continued in 10MFY15, as dispatches to India increased by 15.4%YoY totaling at 584k tons. Considering the existing govt. relationship with the neighbor (India), we believe that such increase in exports might cover up the negativity brought on by Afghan market, thus supporting the players to continue with swelled top-line.
Chinese projects, higher dispatches projected: The recent visit by the Chinese President where agreements for large scale infrastructural projects were signed, is anticipated to create additional demand for cement manufacturers. However, given China’s status as the largest cement producer in the world, there could be a potential threat of cement coming in from China. Pakistan shares its northeastern border with China's Xinjiang region, while majority of Chinese cement production is concentrated in regions other than Xinjiang and Tibet (also near to the Pakistani border but disputes and lesser number of producers are likely to restrict supplying cement to Pakistan). That said, we see few barriers that might keep the Chinese cement away from entering Pakistani projects like: 1) increased transportation costs due to a longer route (1300km long Karakorum highway) , 2) heavy presence of Pakistani players in the northern side can lead to competitive cements pricing, 3) quality and packaging concerns might erode the financial feasibility, 4) with falling Pakistani exports, players are expected to be aggressive in winning contracts to ensure current high capacity utilization levels. Keeping these developments in mind, we believe concerns of Chinese cement supply making its way to Chinese funded projects in Pakistan are a bit overblown. Conversely, we see these projects being a major positive for the local construction industry.
While continuing with our bullish stance on the Pakistan Cements, we test the industry’s fundamental strength through a top-line analysis, in our report today. After exhibiting an overall dispatches growth of 2.6%YoY in Apr'15, the same for 10MFY15 is up 3.9%YoY (on the back of 8.0%YoY uptick in local dispatches. 9.1%YoY decline in exports). On the exports front, dispatches to Afghanistan are expected to remain fragile following down turn in overall Afghan demand and supply of Iranian cement in south western part of the country. On the local front, Iranian cement is hurting the industry as it has made its way to the Pakistani market and in effect restricting local players from maximizing their respective dispatches. That said, we believe the next leg of growth in the local market would come from infrastructural projects under the China Pakistan Economic Corridor (CPEC) on the back of certain positives which make Pakistani cement preferable over its Chinese counterpart. Few of the Chinese projects are expected to come online in the coming quarters, which would ensure a strong topline (ultimately the bottomline), considering already-strong local demand. DGKC (Jun'15 TP of PkR153.8/sh), along with MLCF (Jun'15 TP of PkR71.9/sh), are our top picks within the cement space.
10MFY15 dispatches: As per the recently released numbers by APCMA, 3.29mn tons of cement was dispatched in Apr'15 vs. 3.21mn tons dispatched in Apr'14, up 2.6%YoY. Conversely, on the exports front a decline of 4.7%YoY (due to weakening Afghan market) dragged down the 4.6%YoY improvement seen in local dispatches in Apr'15. Subsequently, 10MFY15 dispatches are up 3.9%YoY where major support came from increasing local demand (up 8.0%YoY) which diluted the negativity brought on by faltering exports (down 9.1%YoY). Within the AKD Universe (as per provisional numbers), MLCF's dispatches grew by ~8.8%YoY in Apr'15, followed by DGKC (up 2.6%YoY) and LUCK (up 1.8%YoY).
Afghan market: Pakistan exported highest ever 4.73mn tons cement to Afghanistan in FY11. However, ever since then similar figures could not materialize due to: 1) a down turn in the Afghani local cement demand and 2) availability of cheap Iranian cement. The situation is getting more worrying as post decline of 24.0%YoY in 10MFY15, exports to Afghanistan have brought the total cement exports down by 9.1%YoY. With Eastern and Southern Afghanistan (areas like Jalalabad, Kabul, Kandahar etc.) expected to continue with importing cement from Pakistan, other parts of the country (like Mazar-e-Sharif, Herat, Zaranj etc.) are anticipated to benefit from excessive production in Iran. We flag a possibility of transfer of 300k-600k tpa cement from being exported to be dispatched locally, which considering healthy local demand over the short to medium term may not hurt cement dynamics. Recall, over the past 3yrs Pakistani exports to Afghan market have posted a negative CAGR of 8.2%, where we estimate FY15 dispatches to reach 3.0mn tons, down 17.9%YoY (lower by massive 36.5% from its FY11 peak).
Iran - adding sourness to dream run! As per our channel checks, Iran faced an oversupply of ~14mn tons of cement in 2014 (local demand of ~54mn tons vs. supply of ~68mn tons), and is sighted to continue with similar situation in coming years. This has helped the country to tap a decent percentage of the Western and Central Afghan market, posting threat to Pakistani exports. Adding insult to injury, Iranian cement is reported to enter Pakistan as well via unofficial channels, denying local players from maximizing their utilization. Going forward, we feel this phenomenon may continue troubling Pakistan Cements, adding unwanted sourness to the sector.
India balancing our numbers: While the Afghan market is going through a lean phase, dispatches to India have picked pace (up by 40%YoY in FY14 to 677k tons). The particular trend continued in 10MFY15, as dispatches to India increased by 15.4%YoY totaling at 584k tons. Considering the existing govt. relationship with the neighbor (India), we believe that such increase in exports might cover up the negativity brought on by Afghan market, thus supporting the players to continue with swelled top-line.
Chinese projects, higher dispatches projected: The recent visit by the Chinese President where agreements for large scale infrastructural projects were signed, is anticipated to create additional demand for cement manufacturers. However, given China’s status as the largest cement producer in the world, there could be a potential threat of cement coming in from China. Pakistan shares its northeastern border with China's Xinjiang region, while majority of Chinese cement production is concentrated in regions other than Xinjiang and Tibet (also near to the Pakistani border but disputes and lesser number of producers are likely to restrict supplying cement to Pakistan). That said, we see few barriers that might keep the Chinese cement away from entering Pakistani projects like: 1) increased transportation costs due to a longer route (1300km long Karakorum highway) , 2) heavy presence of Pakistani players in the northern side can lead to competitive cements pricing, 3) quality and packaging concerns might erode the financial feasibility, 4) with falling Pakistani exports, players are expected to be aggressive in winning contracts to ensure current high capacity utilization levels. Keeping these developments in mind, we believe concerns of Chinese cement supply making its way to Chinese funded projects in Pakistan are a bit overblown. Conversely, we see these projects being a major positive for the local construction industry.
Neutron
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K-Electric (KEL) has communicated enthusiasm for introducing a plant to create power through strong waste at the Dhabeji landfill site oversaw by the Sindh Solid Waste Management Board (SSWMB).An assignment of the substance, including its senior authorities in a meeting with SSWMB Managing Director Roshan Ali Shaikh on Friday, said that a practical methodology was expected to address the issue of force deficiencies.
Looking for backing of the SSWMB, they said that power era through waste is a system received in distinctive parts of the world as a substitute method for creating power.”The time it now, time that every concerned office and associations facilitate and chip in with one another to defeat the vitality emergency influencing all areas of society,” said a K-Electric authority.
SSWMB’s Managing Director Roshan Ali Shaikh, admiring the proposition, said the board has constituted six redesigned junk exchange stations over the city that, other than expanding cleanliness in the city, could be utilized to concentrate vitality to satisfy the perpetually expanding interest of Karachi.He included that there is further help of the plan through procurement of creating plants and transfer heater plants. Shaikh concurred that the landfill site, spread over a range of 3000, is rising as one of nation’s most famous treatment locales, which can be utilized as a spot for power era.
He additionally said that under the introductory plan, a smaller than normal timberland would likewise be produced at the site with 40% of Karachi’s waste transported and proficiently arranged off.The members of the meeting hailed measures being wanted to give Karachi a green and clean look with added procurement to turn itself adequate in force era.
Looking for backing of the SSWMB, they said that power era through waste is a system received in distinctive parts of the world as a substitute method for creating power.”The time it now, time that every concerned office and associations facilitate and chip in with one another to defeat the vitality emergency influencing all areas of society,” said a K-Electric authority.
SSWMB’s Managing Director Roshan Ali Shaikh, admiring the proposition, said the board has constituted six redesigned junk exchange stations over the city that, other than expanding cleanliness in the city, could be utilized to concentrate vitality to satisfy the perpetually expanding interest of Karachi.He included that there is further help of the plan through procurement of creating plants and transfer heater plants. Shaikh concurred that the landfill site, spread over a range of 3000, is rising as one of nation’s most famous treatment locales, which can be utilized as a spot for power era.
He additionally said that under the introductory plan, a smaller than normal timberland would likewise be produced at the site with 40% of Karachi’s waste transported and proficiently arranged off.The members of the meeting hailed measures being wanted to give Karachi a green and clean look with added procurement to turn itself adequate in force era.
Neutron
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Correction Resumes
Short‐Term: Shocking many complacent bulls, the benchmark KSE breached its minor averages through an extremely weak line yesterday to settle around the 55-day average (32,590). Immediate support placed within 32,370 — 32,164 levels may allow a temporary relief with limited upside up to 33,000 level. However, the short-term profile would remain bearish, sighting possibility for weakness towards 31,572 — 31,350 levels. According to our observation, market has possibly entered the wave C fall which could drag the index down to much deeper levels. On the upside, a breakout above 34,000 level is required to mitigate the Zig Zag corrective count and consider an alternate scenario.
13-day Leaders: EFUL, INDU, HCAR, AHCL, SHFA, ABOT, NESTLE, JGICL, PSEL & PSMC
13-day Laggards: GATM, JSCL, HMB, NATF, KOHC, BATA, BNWM, SNBL, KTML & PUNO
Short‐Term: Shocking many complacent bulls, the benchmark KSE breached its minor averages through an extremely weak line yesterday to settle around the 55-day average (32,590). Immediate support placed within 32,370 — 32,164 levels may allow a temporary relief with limited upside up to 33,000 level. However, the short-term profile would remain bearish, sighting possibility for weakness towards 31,572 — 31,350 levels. According to our observation, market has possibly entered the wave C fall which could drag the index down to much deeper levels. On the upside, a breakout above 34,000 level is required to mitigate the Zig Zag corrective count and consider an alternate scenario.
13-day Leaders: EFUL, INDU, HCAR, AHCL, SHFA, ABOT, NESTLE, JGICL, PSEL & PSMC
13-day Laggards: GATM, JSCL, HMB, NATF, KOHC, BATA, BNWM, SNBL, KTML & PUNO
Neutron
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Bullish Piercing Line
Short‐Term: As suspected, support around 32,370 level enabled a recovery towards 33,000 level through a bullish piercing line yesterday. Any further strength is likely to counter immediate resistance around 33,390 level with intervening 21-day average at 33,245 level. However, the short-term profile would remain restrictive below 34,020 level, sighting possibility for weakness towards 31,572 — 31,350 levels. According to our observation, market has possibly entered the wave C fall which could drag the index down to much deeper levels. On the upside, a breakout above 34,143 level is required to mitigate the Zig Zag corrective count and consider an alternate corrective scenario.
13-day Leaders: EFUL, SHFA, HCAR, AHCL, ABOT, SHEL, PSMC, INDU, GHGL & JGICL
13-day Laggards: HMB, GATM, NATF, BATA, PKGS, JSCL, ICI, PUNO, ARPL & MARI
Short‐Term: As suspected, support around 32,370 level enabled a recovery towards 33,000 level through a bullish piercing line yesterday. Any further strength is likely to counter immediate resistance around 33,390 level with intervening 21-day average at 33,245 level. However, the short-term profile would remain restrictive below 34,020 level, sighting possibility for weakness towards 31,572 — 31,350 levels. According to our observation, market has possibly entered the wave C fall which could drag the index down to much deeper levels. On the upside, a breakout above 34,143 level is required to mitigate the Zig Zag corrective count and consider an alternate corrective scenario.
13-day Leaders: EFUL, SHFA, HCAR, AHCL, ABOT, SHEL, PSMC, INDU, GHGL & JGICL
13-day Laggards: HMB, GATM, NATF, BATA, PKGS, JSCL, ICI, PUNO, ARPL & MARI
Neutron
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Finding Difficulty In Reclaiming The Minor Averages
Short‐Term: Recovery attempt from 32,534 level has so far failed to reclaim the 21-day average (33,362) with the 14-day RSI momentum resistance intact at 65 reading. The short-term profile remains restrictive below 34,020 level, sighting possibility for weakness towards 31,572 — 31,350 levels. According to our observation, market has possibly entered the wave C fall which could drag the index down to much deeper levels. On the upside, a breakout above 34,143 level is required to mitigate the Zig Zag corrective count and consider an alternate corrective scenario.
13-day Leaders: PAKT, AHCL, SHFA, ABOT, EFUL, IDYM, JGICL, JDWS, PSEL, POL
13-day Laggards: PUNO, JSCL, SRVI, BNWM, ICI, ATBA, DGKC, ATLH, HMB & MCB
Short‐Term: Recovery attempt from 32,534 level has so far failed to reclaim the 21-day average (33,362) with the 14-day RSI momentum resistance intact at 65 reading. The short-term profile remains restrictive below 34,020 level, sighting possibility for weakness towards 31,572 — 31,350 levels. According to our observation, market has possibly entered the wave C fall which could drag the index down to much deeper levels. On the upside, a breakout above 34,143 level is required to mitigate the Zig Zag corrective count and consider an alternate corrective scenario.
13-day Leaders: PAKT, AHCL, SHFA, ABOT, EFUL, IDYM, JGICL, JDWS, PSEL, POL
13-day Laggards: PUNO, JSCL, SRVI, BNWM, ICI, ATBA, DGKC, ATLH, HMB & MCB
Neutron
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Gas tariff hike; nothing to worry about
News flow regarding gas price increase is once again making the rounds post a recent statement by Ministry of Petroleum and National Resources hinting towards a potential gas price increase of ~5%-6% from Sep1’15. In this regard, Cement, Fertilizer & Textile sectors remain the key affectees where we present a sensitivity analysis on earnings for a potential 5%-15% hike. For companies in the fertilizer space, an increase of 10% on both feedstock and fuelstock gas prices will hurt the earnings of players that do not have fixed gas price contracts (FFC & FFBL). In this regard, FFC stands to lose out the most with an annualized earnings impact of PkR0.63/sh (4% of CY16 earnings). Both FATIMA and EFERT will be partially shielded against the price hike, while any increase in urea/DAP selling price will allow these companies to enjoy a piggy back effect. As far as cement sector is concerned, we see minimal impact due to lower utilization of gas by the sector (LUCK, DGKC & MLCF have gas fired CPPs). That said our analysis indicates LUCK as the most affected (annualized impact of ~PKR0.61/sh or 2% of FY16 earnings). Whereas in the textile space, NML is expected to suffer an annualized earnings compression of ~PKR0.15/sh or 1% of FY16 earnings. While news regarding gas tariff hike can dampen market sentiments we feel any dip available in this regard should be considered as a buying opportunity. \
Jul'15 CAD shrinks 80%YoY
Current account deficit (CAD) for Jul'15 clocked in at US$159mn (vs. US$284mn in Jun'15), considerably lower than US$820mn recorded in Jul'14 implying a decline of 80%YoY. While trade deficit at US$1.77bn (as per PBS data) continued to pull down the current account, the deficit for the month remained limited on the back of 1) trade services surplus at US$90mn reflecting receipt of US$337mn under the Coalition Support Fund, and 2) remittance inflows of US$1.66bn, up 0.9%YoY. As per recently released data, exports remained on their downward trajectory coming in at US$1.59bn down 17%YoY where the sector continues to struggle with low global commodity prices and low cost competitiveness. Imports growth at 4%YoY to US$3.37bn also remained low as international oil prices fail to find a bottom. Going forward, we remain optimistic for the current account to remain stable over the year with projections of CAD of ~0.4% of GDP for FY16 backed by 1) strong growth in remittances (likely to touch US$20bn) and 2) shrinking import bill as global oil prices struggle to bottom. In this regard, we also point out space for positive surprise - possibly a current account surplus for the year - if oil prices fail to recover to previous levels, where an avg. US$5/bbl lower oil price could result in US$0.8-1.0bn worth savings.
News flow regarding gas price increase is once again making the rounds post a recent statement by Ministry of Petroleum and National Resources hinting towards a potential gas price increase of ~5%-6% from Sep1’15. In this regard, Cement, Fertilizer & Textile sectors remain the key affectees where we present a sensitivity analysis on earnings for a potential 5%-15% hike. For companies in the fertilizer space, an increase of 10% on both feedstock and fuelstock gas prices will hurt the earnings of players that do not have fixed gas price contracts (FFC & FFBL). In this regard, FFC stands to lose out the most with an annualized earnings impact of PkR0.63/sh (4% of CY16 earnings). Both FATIMA and EFERT will be partially shielded against the price hike, while any increase in urea/DAP selling price will allow these companies to enjoy a piggy back effect. As far as cement sector is concerned, we see minimal impact due to lower utilization of gas by the sector (LUCK, DGKC & MLCF have gas fired CPPs). That said our analysis indicates LUCK as the most affected (annualized impact of ~PKR0.61/sh or 2% of FY16 earnings). Whereas in the textile space, NML is expected to suffer an annualized earnings compression of ~PKR0.15/sh or 1% of FY16 earnings. While news regarding gas tariff hike can dampen market sentiments we feel any dip available in this regard should be considered as a buying opportunity. \
Jul'15 CAD shrinks 80%YoY
Current account deficit (CAD) for Jul'15 clocked in at US$159mn (vs. US$284mn in Jun'15), considerably lower than US$820mn recorded in Jul'14 implying a decline of 80%YoY. While trade deficit at US$1.77bn (as per PBS data) continued to pull down the current account, the deficit for the month remained limited on the back of 1) trade services surplus at US$90mn reflecting receipt of US$337mn under the Coalition Support Fund, and 2) remittance inflows of US$1.66bn, up 0.9%YoY. As per recently released data, exports remained on their downward trajectory coming in at US$1.59bn down 17%YoY where the sector continues to struggle with low global commodity prices and low cost competitiveness. Imports growth at 4%YoY to US$3.37bn also remained low as international oil prices fail to find a bottom. Going forward, we remain optimistic for the current account to remain stable over the year with projections of CAD of ~0.4% of GDP for FY16 backed by 1) strong growth in remittances (likely to touch US$20bn) and 2) shrinking import bill as global oil prices struggle to bottom. In this regard, we also point out space for positive surprise - possibly a current account surplus for the year - if oil prices fail to recover to previous levels, where an avg. US$5/bbl lower oil price could result in US$0.8-1.0bn worth savings.
Neutron
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Weekly Reviews
The KSE-100 index closed the week at 34,447pts, depicting a slight decline of 0.21%WoW, with trading sessions marred by heightened volatility and prevalence of adverse external factors (tumbling Asian markets, volatility in global oil prices). Key news flows included: 1) heightened volatility witnessed in global oil prices as Brent fell below US$45/bbl for the first time in six years, only to rise by more than 10% on Friday maintaining stability at US$47/bbl, 2) inking of a MOU by the three stock exchanges of the country to incorporate a unified Pakistan Stock Exchange, 3) SBP stating that it expects the PkR to remain stable against the US$ as the Rupee declined 2.9%WoW against the Greenback, 4) country’s total liquid fx reserves for the week ended Aug 21’15 marked a decline of US$146mn to US$18.51bn, and 5) GLAXO announcing a spinoff of its consumer healthcare unit into a separate entity GSK Consumer Healthcare Pakistan Ltd. Gainers for the week were: 1) MLCF (+10.3%WoW), 2) HMB (+7.5%WoW), 3) ABL (+4.9%WoW), and 4) KAPCO (+4.0%WoW) whereas laggards were: 1) AGTL (-6.2%WoW), 2) LOTCHEM (-5.2%WoW), 3) INDU (-5.0%WoW) and 4) MCB (-4.4%WoW). Average traded volumes reflected a rise of 4.89%WoW clocking in at 300.5mn shares. Foreign outflows for the week registered a slight increase to US$42.2mn vs. US$43.5mn of outflows for the week before.
The KSE-100 index closed the week at 34,447pts, depicting a slight decline of 0.21%WoW, with trading sessions marred by heightened volatility and prevalence of adverse external factors (tumbling Asian markets, volatility in global oil prices). Key news flows included: 1) heightened volatility witnessed in global oil prices as Brent fell below US$45/bbl for the first time in six years, only to rise by more than 10% on Friday maintaining stability at US$47/bbl, 2) inking of a MOU by the three stock exchanges of the country to incorporate a unified Pakistan Stock Exchange, 3) SBP stating that it expects the PkR to remain stable against the US$ as the Rupee declined 2.9%WoW against the Greenback, 4) country’s total liquid fx reserves for the week ended Aug 21’15 marked a decline of US$146mn to US$18.51bn, and 5) GLAXO announcing a spinoff of its consumer healthcare unit into a separate entity GSK Consumer Healthcare Pakistan Ltd. Gainers for the week were: 1) MLCF (+10.3%WoW), 2) HMB (+7.5%WoW), 3) ABL (+4.9%WoW), and 4) KAPCO (+4.0%WoW) whereas laggards were: 1) AGTL (-6.2%WoW), 2) LOTCHEM (-5.2%WoW), 3) INDU (-5.0%WoW) and 4) MCB (-4.4%WoW). Average traded volumes reflected a rise of 4.89%WoW clocking in at 300.5mn shares. Foreign outflows for the week registered a slight increase to US$42.2mn vs. US$43.5mn of outflows for the week before.
Neutron
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Mobilink-Warid Merger: Possible Implications
The recent merger deal between Mobilink (Vimpelcom) and Warid Telecom (Abu Dhabi Group) has sparked quiet an interest in BAFL that holds 8.24% stake in Warid Telecom (fully impaired). While deal specifications with regards to price and valuations are still unclear, the structure of the deal is most likely to be of a non-cash nature (Mobilink to buy 100% stake in Warid in exchange for Dhabi Group getting a 15% stake in the merged entity). Considering Bank Alfalah Limited has completely impaired its Warid holding, any share swap may result in reversals with the quantum depending upon the valuation of the two entities involved. That said, taking cue from the SingTel-Abu Dhabi Group where Warid was valued at PkR50bn in 2013, BAFL may stand to book a one-off gain of PkR1.9/share or PkR0.29/share at the lower end of the spectrum. At current levels, BAFL trades at a P/B / P/E multiple of 1.0x/7.0x where our TP of PkR31/sh implies 6.8% upside.Apart from its consequence on BAFL, we believe this deal has marked a consolidation phase in the cellular industry that was suffering on account of intense competition. Post merger, Mobilink will be the largest mobile operator with 45mn subscribers and possible access to Warid's technology neutral license (subject to regulatory approvals).
What's in it for BAFL? Considering the non-cash nature of the transaction (Mobilink to buy 100% stake in Warid in exchange for Dhabi Group getting a 15% stake in the merged entity), the share swap deal may result in reversals with the quantum depending upon the valuations of the two entities involved. Going by the SingTel-Dhabi Group deal in 2013 where Warid was valued at PkR50bn (break-up value: PkR1.89/sh in 2013), implying a P/B of 6.6x, BAFL may potentially be able to reverse the entire provisioning charge for Warid (PkR4.36bn) while Warid's break-up value of PkR2.19/sh in 2014 can be considered the minimum. However, considering lack of clarity on the said transaction and its accounting treatment, sensitivities are provided in the table below:
Much needed consolidation in the cellular space: The Mobilink-Warid merger has marked the first ever merger deal in the Pakistan cellular industry. The industry landscape will now include four players with Mobilink leading the market by 45mn subs. While consolidation was much needed, we believe Mobilink's access to Warid's technology neutral license (subject to regulatory approvals) might become a cause of concern for existing players without 4G spectrum (Ufone and Telenor). Competition is expected to remain cut-throat where we see no major improvement in margin profile or ARPUs.
The recent merger deal between Mobilink (Vimpelcom) and Warid Telecom (Abu Dhabi Group) has sparked quiet an interest in BAFL that holds 8.24% stake in Warid Telecom (fully impaired). While deal specifications with regards to price and valuations are still unclear, the structure of the deal is most likely to be of a non-cash nature (Mobilink to buy 100% stake in Warid in exchange for Dhabi Group getting a 15% stake in the merged entity). Considering Bank Alfalah Limited has completely impaired its Warid holding, any share swap may result in reversals with the quantum depending upon the valuation of the two entities involved. That said, taking cue from the SingTel-Abu Dhabi Group where Warid was valued at PkR50bn in 2013, BAFL may stand to book a one-off gain of PkR1.9/share or PkR0.29/share at the lower end of the spectrum. At current levels, BAFL trades at a P/B / P/E multiple of 1.0x/7.0x where our TP of PkR31/sh implies 6.8% upside.Apart from its consequence on BAFL, we believe this deal has marked a consolidation phase in the cellular industry that was suffering on account of intense competition. Post merger, Mobilink will be the largest mobile operator with 45mn subscribers and possible access to Warid's technology neutral license (subject to regulatory approvals).
What's in it for BAFL? Considering the non-cash nature of the transaction (Mobilink to buy 100% stake in Warid in exchange for Dhabi Group getting a 15% stake in the merged entity), the share swap deal may result in reversals with the quantum depending upon the valuations of the two entities involved. Going by the SingTel-Dhabi Group deal in 2013 where Warid was valued at PkR50bn (break-up value: PkR1.89/sh in 2013), implying a P/B of 6.6x, BAFL may potentially be able to reverse the entire provisioning charge for Warid (PkR4.36bn) while Warid's break-up value of PkR2.19/sh in 2014 can be considered the minimum. However, considering lack of clarity on the said transaction and its accounting treatment, sensitivities are provided in the table below:
Much needed consolidation in the cellular space: The Mobilink-Warid merger has marked the first ever merger deal in the Pakistan cellular industry. The industry landscape will now include four players with Mobilink leading the market by 45mn subs. While consolidation was much needed, we believe Mobilink's access to Warid's technology neutral license (subject to regulatory approvals) might become a cause of concern for existing players without 4G spectrum (Ufone and Telenor). Competition is expected to remain cut-throat where we see no major improvement in margin profile or ARPUs.
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