FLASHNEWS:

JS Securities Limited – JS Research (January 05, 2022)

Karachi, January 05, 2022 (PPI-OT): Pakistan Strategy 2022: A rebounding asset at sub 5x PE

A rebounding asset at sub 5x PE

Going into 2022 with a PE 4.8x, earnings growth over FY18-21 has been abysmally ignored; also evident from market cap-to-GDP that has halved to 14% since FY18. Looking ahead, incrementally better macro prints, sustained policy measures, renewed relevance for Frontier Market investors and continued earnings growth, should lead to a return of focus to blue-chips. We eye 40% return; a KSE100 index target of 62,000 points.

62,000 target – Still way short of mean reversion

PSX earnings yield at 20%+ towers about bond yield (11.8%). PSX’s 10-year average PE is 9.6x, i.e. 2x of current levels. Valuation discount to MSCI FM stands at a staggering 65%. Our buy call is not premised on mean reversion but a cyclical rebound from the lows, where mapping the index to target prices and justified PE yields a target multiple of 6.7x.

And is driven by views of a cyclical rebound

We believe 2022 will deliver a rebound in the form of incrementally better macro data points (refer table) and nascent structural improvements. With regulators reigning in both imports and inflation; currency and interest rates are expected to stabilize. Early signs of int’l community acting to normalize Afghanistan bodes well for geopolitics. Most important however is the expected IMF program resumption, which unlocks flows from IMF and other sources and also ensures structural discipline in the form of PDL collection, circular debt resolution and addressing other imbalances.

Blue chips to lead the charge in 2022

The 14% 3-year earnings CAGR over FY18-21 in Banks, E and Ps, OMCs, Cements and Fertilizers has largely been ignored, with significant PE contraction. We reckon frontier focused investors could rekindle interest in blue chips. Our preferred plays for 2022 are:

Banks: Sector boasts array of low-cost deposit franchises amidst rising rates with limited infection risk. Our top picks are UBL, MEBL and BAFL.

E and Ps: Revenues linked to USD and int’l oil prices. MARI stands out tall with production growth to boost. Investment case of OGDC and PPL expected to rejuvenate on back of circular debt reforms.

OMCs and Power: Direct plays on circular debt resolution, mix of yield and growth plays to pick from this space. HUBC and PSO are our top picks.

Fertilizer: Strong and consistent yields with low downside risk to yields. FFC and ENGRO make our list.

Cement and Steels: Govt’s focus on construction and infrastructure bodes well but we remain selective. We highlight LUCK, MLCF and MUGHAL.

COVID and international relations remain the wild card

Resurgence of COVID and the magnitude of policy actions in response, remains a wild card, as a more than proportionate response could actually be rejoiced by markets. Given the importance of foreign flows in balancing the macro equation, geopolitical relations with neighbouring countries, Gulf and US all remain important. Closer to home, a smooth run up to 2023 election cycle (unlike 2018) will be key to keep political sensitivity in check.