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AKD Quotidian about — KSE-100: Going place!

Karachi, October 03, 2012 (PPI-OT): The KSE-100 Index closed at 15,648 points yesterday, less than 0.5% below the Apr 1808 closing of 15,676 points with media reports claiming the Index is now trading close to an all-time high.

According to AKD Securities, in fact, the KSE-100 Index, on several metrics, is significantly below the Apr 1808 high – current market capitalization of PKR 3.9tn is 18% lower than the market cap of PKR 4.8tn in 2008 while forward P/E of 6.7x at present is much lower compared to forward PIE of more than 10x prevailing across early CY08. This is partly because the KSE-100 is a total returns Index adjusted for dividends – in contrast the KSE-30 Index is still more than 30% below its all-time high level of 18,996 points recorded on Apr 17’08. Considering monetary easing is likely to continue in the near-term (AKD Securities expects a rate cut of at least 100bps in the upcoming MPS), AKD Securities retains AKD Securities’ Jun’13 Index target of 17,000 points where our top picks are PTC, FATIMA, NCL, KAPCO and ENGRO. Within Banks, AKD Securities retains a selective preference for UBL, BAFL and NBP, where AKD Securities believes margin compression concerns have largely been priced in and that recent correction in share prices provides an excellent opportunity to build fresh positions.

Index not close to all-time high: The KSE-100 Index closed at 15,648 points on Oct 2’12, very near the high of 15,676 points achieved on Apr 18’08. In terms of various metrics however, the market is nowhere close to its all-time high. In fact, current market capitalization of PKR 3.9tn is 18% lower than the market cap of PKR 48tn recorded on Apr 18’08. The difference is even more striking in US$ terms where the current market cap of US$41 billion is a staggering 45% lower than the Apr 18’08 market cap of US$75 billion. This is partly because the KSE-100 is a total returns Index adjusted for dividends. In contrast, the KSE-30 where no adjustment is made for cash dividends still trades at a 32% discount to its all-time high of 18,996 points on Apr 1708.

Valuations drive home the point! At current levels, forward P/B, P/E and D/Y for the AKD Universe are 1.5x, 6.7x and 8.3%, respectively. These are highly attractive valuations relative to precedence where forward PIB, PIE and D/Y on Apr 18’08 stood at 2.6x, 105x and 4.9%, respectively. Importantly, the Pakistan Market has gone from trading at a premium to the region in early 2008 (regional markets had started to fall earlier than the KSE) to nearly a 45% discount to regional valuations at present. Attractive valuations amidst strong corporate earnings growth underpins our Jun’13 Index target of 17,000 points.

Shift to free-float weight methodology: In terms of emergent dynamics, the KSE-100 Index will be shifted onto free-float weighted methodology from Oct 15’12 onwards. This will lead to 1) change in Index components and 2) change in individual stock weights. Regarding the former, 16 new stocks will make it to the KSE-100 including NCL, BIPL and CHCC while outgoing stocks include EPCL, SILK and BYCO. Due to migration to free- float methodology, stocks that will lose Index weight include OGDC, PPL, ULEVER and HBL while FEC, MCB, POL, HUBC, ENGRO and PSO will gain Index weight.

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