Propped up by the historic elections and five percent reduction in the discount rate during the last 24 months, the country’s equity market provided a return of 24 percent during first half of FY13 (1H2013).
“Based on analysis of stocks in Topline Universe we found out that cement companies remained top performers during the aforementioned period where all three cement companies in Topline universe outperformed the benchmark index,” said Topline analyst Asad I Siddiqui in a report issued on Wednesday.
On the contrary, he said, the fertilizer shares remained under stress while E&P stocks return also failed to match the benchmark index gain.
The outgoing 1H2013 was good for cements, as falling coal prices coupled with declining interest rate environment spurred the profitability of the sector. Furthermore, being the election year, domestic demand of the commodity also improved, up by 4% to 24.9mn tons in FY13. “These developments have kept investors interested in the cement shares,” said Asad.
Amongst Topline universe companies, the FCCL with a gain of 103% has been the top yielding stock, outperforming the benchmark KSE100 index by 4.0x.
High operating leverage coupled with new capacity coming online at the right time has been the key behind FCCL’s performance in addition to the overall favorable change in sector dynamic.
“In our detailed report titled ‘FCCL: Expansion at the right time’ released on April 8, 2013, we flagged FCCL as the best amongst cement companies,” the analyst said. The stock has appreciated by 54% since the report was released. The FCCL was followed by DGKC and LUCK, as they provided return of 53% and 38% respectively. Although, local fertilizer sales grew by approximately 18% to 3 million tonnes in 1H2013, but gas supply and gas price risk has kept investors away from the fertilizer stocks. Further, rapidly diminishing gap between local and imported urea prices has raised questions about the sector’s once famous pricing power. With talks circulating in the media regarding removing the gas (feed) price subsidy on fertilizer and supply of gas to efficient plants, fortune of fertilizer manufacturers have been under stress. With so much uncertainty, stock performance of FFC and FFBL remained dismal with formal being the only negative yielding stock amongst Topline universe while latter providing return of mere 3%. Engro Corporation, however, posted a gain of 32% as the company operated its more efficient EnVen plant utilizing gas from the base plant. With gas production down 1% and oil production up by 11% in 1H2013, E&P sector of Pakistan failed to beat the market return, as PPL, OGDC and POL yielded returns of 23%, 21% and 18% respectively.
“Due to their combined weight of 24% in the index it is always difficult to deviate from the benchmark index performance,” said Asad.
Lower than expected earnings kept POL price under pressure while OGDC and PPL moved with the index.
