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Pakistan Strategy_Pakistan Market — The Return to Normal! (AKD Detailed Report, Dec 22, 2020)

Pakistan Market Strategy CY21 (Detailed Report)

 

The Return to Normal!

 

CY20 went completely off-script where COVID19 played havoc with street estimates. Captioning our report ‘The Return to Normal’, we eye the benchmark KSE-100 scaling new highs with a CY21 index target of 56,000. As always, the road to 56k is unlikely to be linear, with pockets of volatility, particularly in 1HCY21, likely in abundance. While uncertainties, both on the social and economic front, are unlikely to placate immediately, the advent of vaccines, at least on the global stage, should result in a narrative change towards optimism. The KSE-100 has already ratcheted a 61%+ gain since its low in May’20 – a direct consequence of GoP policy response where CY21 will witness much the same. This is likely to be particularly true for the latter half of the year where eyeing elections in just 2 years’ time, policy shift will be a balancing act between growth and consolidation. Key events to watch out for in CY21 include Pakistan’s return to the IMF, subsequent tariff adjustments and interest rate alignment where we estimate the tightening phase to initiate by May’21 (cumulative 150bps in CY21). Thematically, we expect a broad based uptrend with blue chips taking center stage. Top picks include HBL, MEBL and MCB in Banks; OGDC in E&P; LUCK and MLCF in Cements; HUBC in Power; PSO in OMCs; NML in Textiles and INDU in Autos.

 

Exciting year ahead! What’s not to like? Covid cases on one side, rowdy opposition on the other. But we’ve been here before! Betting people should wager on the government, in our opinion. Lest one forget, the GoP passed the initial COVID test with flying colors, both socially and economically. Construction sector package, Export refunds, Industrial support package and Power sector MoUs are just some of the key achievements of the government, where we expect broad based business support to continue into CY21. A possible Senate majority may provide further impetus to required legislation while a possible inclusion into the FATF’s white list, if successful would unlock valuations within the PSX where Pakistan already trades at undemanding CY21 P/E of 6.5x with an impressive D/Y of 7.5%.

 

But IMF may want to rain on your parade.. Despite Pakistan embarking on an economic recovery path, we believe GDP growth may remain modest at 2.4% in FY21. IMF program’s restart will likely focus on reigning in fiscal spend as well carrying out energy reforms wherein we foresee a 10%/20% gas/electricity adjustment in Mar’21, taking inflation to 10.84% by FY21 end. Entailing inflation pressure will necessitate interest rate hikes where we expect policy rate to be increased by 150bps over the next 12-18 months. At the same time, near term fiscal policy response will likely comprise a mix of additional taxation measures and spending cuts in the range of 0.8-1% of GDP.

 

Market Strategy – Play the changing narrative: While the ongoing social and economic issues underpinned by the COVID19 pandemic will not suddenly subside come end CY20, we believe the change in narrative towards eventual normalcy, particularly in wake of vaccine launches, will result in a sustainable economic recovery and resulting market upside. Market recovery is likely to follow the post crash playbook – an inevitable strong rebound after a black swan event. Take cue on this from CY08 (decline of 58% in CY08 followed by surge of 60% and 28% in CY09 and CY10, respectively). Our conviction on CY21 market outlooks stems directly from profitability expectations of the broader market where ex-Banks, we foresee earnings growth of 23% while D/Y stands at an impressive 7.5%. While across the board bullish on Pakistan equities, preferred plays include Banks (interest rate tightening, multiple re-rating – HBL, MCB, MEBL), Oil & Gas (valuations – OGDC), Cements (demand growth – LUCK, MLCF), OMCs (new policy, circular debt clearance – PSO), Textiles (valuations, export outlook – NML), Power (circular debt clearance – HUBC), Technology (valuations – TRG, SYS) and Autos (numbers outlook – INDU). We also like FFBL in Fertilizers (earnings outlook), THALL and GTYR in Auto & Allied and PSX on valuations.

 

AKD Research