Sunday, January 30, 2011
Sunday, January 23, 2011
Like it peers, FFC is also facing a gas curtailment issue. However, manufacturers are responding this issue by raising urea prices so no one is expecting any great impact on its earnings.
The company is expected to post its results for annual year 2010 (the companies in this sector present their financial statements on calendar year basis) somewhere between Feb-March. The expected EPS is PKR 16 with the cumulative dividend is expected to reach PKR 15. With the current price of around PKR 150, the company is trading at a P/E of 9.4 and a dividend yield of 10%. As you can see in the graph, the company has performed well in the last few days, it is due to this sudden upsurge the dividend yield and P/E is not looking as attractive (market is trading at a P/E of 8 – 8.5). However, investors should watch this share carefully and once they got an opportunity to buy it somewhere in the range of 130-140, they should buy it. The analysts are giving a target price of around PKR 160, which means an upside of 6.6% is achievable from current levels. 10% dividend yield and 6.6% upside means total expected return of 16.6%. Not that bad even at current levels. However, many analysts are expecting a correction in the market so if the price of the share goes down in future investor can get an expected return of more than 16.6%.
Tuesday, January 18, 2011
However, what I want to say is that in every monetary policy statement, the reason of restrictive monetary stance is mainly attributed to heavy government borrowing. However, we know very well that government has not responded at all, in fact, government borrowing has now reached PKR 459bn for this year, which is 100% higher than a previous year. The purpose for which restrictive monetary stance was adopted has not been fulfilled so why keep raising interest rates and slowing growth of “efficient private sector”? Surely, central bank needs to understand that discount rate as a tool has not been effective in curtailing government borrowing but it is certainly very effective in slowing economic growth so why keep using it and slowing our already weak economic growth. Central bank’s current stance is aggravating our economy.
In short, discount rate as a tool for curtailing government borrowing has not proved to be “useful” but it is certainly proving to be “harmful”.
There is one more way for central bank that if it really wants to make it hard for government to borrow than it should now increase the discount rate by 100-200bps. This will give a much stronger message to government. Increasing the discount rate by mere 50bps in every monetary is just not working and this is something that we all have seen, government is just not taking it seriously. So, if central bank is again thinking to increase discount rate in next monetary policy than it should increase it by 100-200 bps or either not increase it all because increase of 50bps will not serve anything as I have discussed above.
My Holdings as of January 14, 2011 are as follows:
You may be wondering why do the small cap stock like "Pace Pakistan" is the heavy weight item of my portfolio. The reason is that I am a young investor and can afford to invest in small cap stocks which if invested after due and dilligence can provide a huge returns over a long term. Secondly, I shared my portfolio holdings with you just to give you some idea. I am not suggesting at all that you should have a portfolio like mine since it depends on many factors like your age, income etc.
Wednesday, January 12, 2011
The fact is, it might be a “popular decision” but it is a very poor economic decision and will have negative consequences on the economy. To understand this point we need to see the 2008 crisis. Musharaf’s popularity was decreasing, elections were near and oil prices were recording new highs once reached around 147$ per barrel and Musharaf’s regime decided not to pass on the increase to consumers just to save their deteriorating reputation. Fx reserves depleted and this was the time when rupee started to depreciate from 60Rs/dollar, fiscal deficit rose, inflation rose and stock market crashed. What happened was that government just did not pass on the oil prices to consumers and it did not have enough finances to back this decision.
Now consider the current scenario, the popularity of PPP (and its allies) is decreasing, and when MQM decided to quit government mainly because of current increase in oil prices government lost its majority in the parliament. So far, government is not able to increase taxes, inflation is increasing so does the interest rates, fiscal deficit is increasing, and the last but not the least government borrowing is increasing at an alarming rate and it is the government borrowing which is the root cause of all issues. One thing is quite clear here, government is almost in the same scenario and ironically, government decided exactly what a Musharaf’s regime decided just to retain their majority in parliament. The question is how will government finance this subsidy? International oil prices are hovering around 90$ (at their 26 month high) and government had to pass on this increase in prices to consumers but they decided not to do so. Now they will need to borrow more (as they are already borrowing more causing high inflation and high interest rates) from SBP, which will increase already high inflation (around 15.8%) and we could see what we have seen in 2008. As per Mr. Naveed Qamar (Petroleum Minister) if oil prices remain at current level then government will now have to suffer a loss of PKR 5 billion per month. Given the fact that government has already borrowed 250 billion so far (increasing at an alarming rate of 100% YOY) this decision will now compel to borrow for this “Petroleum Subsidy”. I think this will also hurt Pakistan’s reputation in the eyes of foreign donors and foreign investors (especially sovereign debt investors) as well. Remember government has not been able to bring any tax reforms, this subsidy is just not bearable. SBP will now print more money because of increased borrowing from government, which will be more inflationary than the impact of increase in oil prices. Remember, our fiscal deficit is now expected to be around 6% for FY 11 but some analysts expect that it might end up much higher.
The only thing that is different from 2008 crisis is strong exports, low imports, increasing remittances and IMF support. In other, words our current account is not as bad as it was in 2008 because of above mentioned issue.
I believe this decision in just not sustainable and government will not be able to keep this subsidy and will pass on it to consumers in future in a more efficient manner i.e. it will not remove it suddenly but incrementally.
Monday, January 10, 2011
The company payout all what it earns, however due to circular debt issue, it is not expected to continue this 100% payout for the next year but still the payout is expected to be much better than most of the stocks in KSE 100. Its next year expected EPS is 7.5 - 8, and dividend is expected to be PKR 5.5 - 6 which means payout of around 75%. The current price of share is around PKR 44 and the target price is expected to be PKR 52, so the P/E of share is 5.9 (market has a P/E of around 8), dividend yield is around 12.5% and an upside of 20%. I think it is a good share to buy right now.
Friday, January 7, 2011
POTENTIAL OF MARKET:
If one considers a FY 12 earnings then P/E of market is just around 7-8 range and if you exclude OGDC from index it comes in 5-6 range whereas regional level is around 12-13. However, economy of Pakistan has some fundamental problems like low tax to GDP ratio, high fiscal deficit that causes high inflation, high interest rates, poor law and order situation, and political instability. Because of these reasons, Pakistani market is expected to be trading at a discount from regional P/E. However, given the low interest rates environment in West, and flooding of this “cheap money” to emerging and frontier markets and given the profitability growth of main blue chip companies, there is still a lot of upside. This year market range is expected to be 10,600-13,700, which means an upside of around 15% is still present from current level. That off course excludes dividends. Therefore, you can certainly make more than 15% if you choose your stocks carefully and pick dividend-yielding stocks, the point that I am going to discuss below.
What are the stocks to be picked? Make it simple; just pick good dividend yielding and fundamental stocks. Are there any? Yes, there are and I will be informing about them very soon. I have already discussed two stocks in my previous posts namely ENGRO and Attock Cement, both although don’t have a high dividend yield but are fundamentally strong and I expect them to provide more than 15% (Please read my previous post for further detail about them).
RISKS OF MARKET:
The biggest threat is tightening monetary stance. With expected GDP of just 2-3%, tightening monetary stance of State Bank is just looking as horrible as it can be. CPI inflation is now hovering around 15% and there is a very strong change of further upsurge if Government is not able to reduce its borrowing (fiscal deficit is now expected to reach 6% of GDP, and this is with tax to GDP ration of just 8%), and it also needs to improve the supply side to manage food prices. Our import bill is around 40% composed of oil and if oil maintains its upsurge (currently at 26-month high of 92-94$) we would be facing an “imported inflation” in future as well. The rise in interest rates in response of rising inflation is by far the greatest threat to market since it can hurt corporate sector profitability and growth through its effect on Finance Cost.
Another threat is law and order. Recently, Governor of Punjab Salman Taseer was assassinated and this assassination has created a tense situation not only in Pakistan but also in International community as this assassination is linked to ‘religious matter” (regarding blasphemy laws).
As I stated many times political instability is a rule than an exception here in Pakistan, however one needs to cautious of what is happening out there.
The market range for CY 2011 is expected to be 10,600-13,700. It is important now to concentrate more on individual stocks rather than an Index level. I would be discussing more individual stocks very soon.
Sunday, January 2, 2011
Saturday, January 1, 2011
Given the fact that foreigners are now leading the market, they usually have a long-term view, and they usually invest in blue chips like ENGRO, I believe ENGRO can give you much more return than expected in the market. It is currently trading at around PKR 192 with P/E of around 10.6. I would recommend a buy.