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Stock Review

Stock review December 2022
Benchmark index up 3.3%WoW on positive outlook

The Year 2024 started optimistically for Pakistan Stock Exchange and its benchmark index surged 2,211 points on the first day. However, political noise cast a shadow, dragged the index 151 points below the week’s first day closing at 64,515 points, up 3.3%WoW to close the week on January 05, 2024.

Despite the headwinds, economic factors provided positive signals, foreign exchange reserves held by State Bank of Pakistan rose by US$1.3 billion in last two weeks of December 2023, marking a 23-week high, closing at US$8.22bn as of December 29, 2023 and would potentially exceed further with the anticipated US$700 million IMF second tranche in current month.

Additionally, 18-month high exports at US$2.8 billion narrowed the trade deficit by 40%YoY, resulting in the current account to remain in control. However, December 2023 CPI jump to 29.7%, spurred by fuel price adjustments, raising concerns about inflationary pressures.

Overall, market participation also witnessed a slight recovery, with daily traded volumes averaging at 687 million shares, up 5.4%WoW.

On the currency front, the Pakistani Rupee maintained its appreciation momentum by gaining 0.16%WoW against the US Dollar, closing at PKR281.4/US$ at the weekend.

Other major news flows during the week included: 1) Discos’ tariff hiked by PKR4.13/unit, 2) Pakistan’s dollar bonds gained 93% in 2023, 3) Cement exports jumped 155%, domestic sales fall 4% in December 2023, 4) Money supply rose to PKR35.18 trillion in November 2023 and 5) IMF set for first review on January 11, 2024.

On the sectorial front, Automobile Parts & Accessories, Sugar and Allied Industries, and Oil and Gas Exploration companies were amongst the best performers, whereas, Modarabas, Cable and Electrical Goods, and Miscellaneous were the top laggards.

Flow wise, major net selling was recorded by Individuals with a net sell of US$10.63 million. Other organizations absorbed most of the selling with a net buy of US$5.49 million.

Top performing scrips of the week were: PSMC, KEL, HCAR, SEARL, and OGDC; while laggards included: PSEL, ASL, PAKT, PSX, and LCI.

Looking ahead, the market is anticipated to maintain its bullish momentum, fueled by the disbursement of the IMF SBA’s second tranche.

The forthcoming elections will be closely watched, and uncertainty surrounding their outcome could potentially hinder the market’s bullish trend. However, a peaceful resolution could provide a significant boost to investor confidence.

Analysts recommend the investors to maintain long-term positions in companies with strong fundamentals, while tactfully managing any fundamentally weak entities through a timely profit-taking strategy.

Investors are also advised to focus on companies offering robust dividend yields, especially in the Banking, Energy, and Fertilizer sectors, presenting opportunities for accumulation.

Pakistan’s leading brokerage house, Topline Securities has reiterated its ‘Buy’ stance on Engro Corporation (ENGRO), offering a potential upside of 63%. The liking for ENGRO primarily stems from: 1) potential special dividend through the sale of its Thermal Energy portfolio, 2) likely implementation of Weighted Average Cost of Gas (WACOG) to benefit EFERT, 3) expanding Enfrashare (Tower) business along with declining interest rates to enhance profitability, and 4) anticipated resurgence of construction activities leading to an increase in EPCL earnings.

ENGRO has entered into discussions with Liberty Power to reduce its exposure in thermal energy assets which includes Engro Powergen Qadirpur (EPQL), Engro Powergen Thar Limited (EPTL), and Sindh Engro Coal Mining Company (SECMC).

ENGRO is planning to sell the majority of its stake in thermal assets for a cash consideration of around PKR30 billion – PKR40 billion. The net cash inflows after tax would be PKR26 billion (PKR48/share) as per estimates. Assuming no major projects, and recent history of paying all excess cash as dividend, the brokerage house anticipates ENGRO announcing a one-time special dividend of PKR45/share for 2025, bringing the total dividend to PKR91/share for the year.

EFERT is poised to emerge as the primary beneficiary of the implementation of the WACOG mechanism. EFERT is currently being charged US$5.6/mmbtu or PKR1,600/mmbtu) under Petroleum Policy 2012 on the feed gas at its base plant, that accounts for 40% of its total urea production compared to other fertilizer players at US$2/mmbtu or PKR580/mmbtu).

Since EFERT is already procuring 40% of its total gas required in feed gas at higher rates, following the increase in Urea price post WACOG implementation which is in line with other players, EFERT is expected to have a positive impact of PKR6/share on its bottom line.

Tower expansion and expected decline in interest rates to revive Enfrashare’s profitability. The business has progressed well in the last 5-years, with its portfolio of 4,000 towers by the end of 2023. Going forward, ENGRO plans to extend its tower network by addition of around 750 towers every year, aiming to exceed 8,000 towers by the end of 2028.

Due to record high interest rates Enfrashare is expected to post a loss of PKR1.7 billion for 2023. However, with expectation of decline in average 6-month KIBOR from 21.6% in 2023 to 18.7% in 2024 and 17% in 2025, the brokerage house expects the segment’s losses to decrease to PKR0.1 billion in 2024, turning into profits of PKR1 billion for 2025 and PKR3.6 billion for 2026.

The brokerage house anticipates revival of construction activities will lead to Increase in PVC sales; it expects EPCL’s PVC sales to increase at a 5-Year (2022-2026) CAGR of 5% to 285,000 tons. The current annual capacity of PVC is 295,000 tons. However, as per discussion with the management, the company has the capacity to increase production to 400,000 tons by incurring optimal capex.

As per Dividend Discount Model (DDM) based TP of PKR490/share offers potential upside of 63%. The brokerage house has assumed WACOG implementation from July 2024. If that doesn’t happen, Engro still remains a Buy with a TP of PKR430/share, a 43% upside.

ENGRO on its SOTP value of PKR495/share is trading at a discount of 39% as compared to last 5-Year average of 29%. The brokerage house expects this to reduce as company makes progress to unlock value and announce cash dividend.

Moreover ENGRO has attractive estimated dividend yield of 20% for 2024 and 31% for 2025 which is far higher than our universe dividend yield of 10% for 2024 and 12% for 2025.

Key Risks: 1) Higher than expected delays in conclusion of divestment of majority stake in Thermal Energy Assets, 2) delays in WACOG implementation, 3) significant drop in international Urea price, and 4) lower than expected decline in interest rates. These risks may not impact the current base performance but rather dent the potential upside mentioned.

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