Karachi, January 20, 2022 (PPI-OT): Year Ahead CY22 – Takeaways from investor meetings
With release of our report ‘Pakistan Strategy 2022: A rebounding asset at sub 5x PE’ we have been conducting a series of meetings with domestic and foreign money managers for their feedback and views. While we laid out the thesis behind our KSE-100 target of 62,000 points, some key feedback takeaways based on meetings to date include:
From the investors’ perspective – re-rating is imminent but the road to re-rating is hazy; lack of a visible trigger is a pain point and is keeping sentiments in check. On macros, while there seems to be comfort that interest rates are nearing their peak; currency sentiments are still mixed, due to recent current account readings and prevailing oil prices.
Sector wise, banks seem to be a somewhat consensus call but investors want to see concrete steps on circular debt before turning outright positive on energy stocks. This also reflects in divided opinions over whether index heavy-weights will regain their glory and drive the index or we are in for another year of secular themes and side board stocks.
No denying of the valuation argument
The most common feedback was the agreement on current levels being extremely lucrative and a scenario of our Index target of 62,000 being plausible for CY22. On the other hand, the pressing concern was largely the event/s of triggers that would unlock these valuations. The money makers enquired on probability of increase in liquidity, alongside foreign flows this year. The concern emerged from the local equity market’s consistent discount expansion over the years, in addition to evaporating liquidity.
As highlighted in our report, while we admitted that troubles are still there, we re-iterated that we do not expect complete but partial rerating to a PE of 6.7x which is at a discount to its 10 year average PE of 9.6x (2x times the current levels of 4.8x). Our explanation to this was backed by expected improvement on the macro front and stability in policy measures, in addition to absence of similar foreign outflow in CY22 as were registered in the previous years.
Moreover, potential inclusion of Pakistan to MSCI FM 100 Index and MSCI Frontier Markets 15% Country Capped Index scheduled in Feb-2022 would likely be a key trigger for attention of frontier funds to be diverted to Pak equity markets, where we also highlighted that foreign investors have been observing undervalued Pak stocks on a bottom-up approach.
CAD seems to be the trouble child
Clients remained relatively comfortable on interest rate outlook as we eye two 50bps increase in Policy Rate, where it would peak at 10.75%. Money managers however remained inquisitive on the forecast of Current Account Deficit to clock in at US$14.5bn for FY22, given 5MFY22 CAD is at US$7.1bn already, leading to queries on support to PKR against the US$ this year.
We discussed our assumptions that incorporate the commodity prices reverse cycle to start to gain momentum in the 2QCY22, in addition to our anticipation of rising interest rates as indicated by the US FED meetings leading to further cut in spending that would contribute towards a reduction in the import bill.
Our assumption regarding remittances was discussed in detail, in light of various COVID related travel scenarios, where we highlighted that we that we expect remittances growth to taper off to 9% YoY going forward as growth during last year was largely due to impact of COVID-19 imposed restrictions. We further discussed in detail as to how remittances in Pakistan have fared as compared to countries with similar demographics.
Heavy-weights remain favourites
Liking for the heavy-weights Banks was seen by almost all segments of the buy- side, as all concurred of the sector’s prevailing multiples not justifying the current and prospective ROEs of respective banking stocks, in addition to opportunity of attractive D/Y in most banks.
On the energy chain front, clients showed keen interest in the dividend story of OGDC and PPL – and also Hub Power and how we expect it to play out. Concerns on resolution of circular debt, amid recurring practise of dividends in the same emerged from many quarters. Moreover, another circular debt hit stock – PSO, also emerged as a key point of discussion in many meetings, given its eye-catching multiples at current levels. Clients held analytical discussions over various segments of PSO, alongside its fate in various scenarios of circular debt resolution. Mari Petroleum however stood out as a preferred candidate in the energy chain given its very low exposure to circular debt and enhanced dividend prospects after removal of the cap.
On the construction front, a bag of mixed opinion was found. Some segments shared our view of growth potential in the cement sector backed by fiscal stimulus before elections and kick start of mega infrastructure project, dam constructions and resumption of interest in Naya Pakistan housing scheme. On the other hand, some clients remained sceptical towards demand growth during FY22 as reflected by the sectors 1HFY22 performance and were concerned about any potential PSDP cuts going forward.
Some flavour of side boards yet wanted
Other defensive players such as Fertilizers remained obvious picks with high D/Ys at current levels. Moreover, despite blue chips trading at low multiples, clients also seemed to have a keen interest towards side board items. While we highlighted AICL and INDU among side board items that made to our top buys for CY22, we emphasized over our view of CY22 being the year of main boards over the low multiples and sectors under foreign investor radar.