Arif Habib Limited (AHL), a leading brokerage and investment banking firm, expects the Pakistan Stock Exchange’s benchmark KSE-100 index to reach the level of 81,000 by December 2024.
In its report titled “Targeting 81,000; Resilience and Redefined”, the firm says that fueled by robust earnings growth, enticing valuation, substantial domestic liquidity, and comparatively steady economic growth, it expects KSE-100 index will yield an attractive total return of 32 percent in 2024.
AHL also conducted survey on anticipations of key stakeholders with respect to some of Pakistan’s focal macroeconomic indicators and capital market for the forthcoming year 2024. 61 percent of the participants expect the KSE-100 index to close above 70,000 points by the end of December 2024, 36 percent expect it to close between 65,000-70,000 points, while the remaining 4 percent expect it to close below the 57,000 level.
According to the report, the major themes that would come into play during 2024 include compelling valuations, substantial domestic liquidity and improving macros and monetary easing.
AHL anticipates robust growth across all the sectors, projecting double-digit earnings growth for the majority. Its outlook for KSE-100 indicates an expected 17.2 percent earnings growth in 2024.
“The heavyweight banking sector is poised for a 18.8 percent jump, driven by higher average interest rates, increased non-market income (capital gains and fee income), and prudent provisioning. In the Cement (+43.8 percent) and Steel (+13.5 percent) sectors, we foresee substantial gains fueled by rising demand, stable product prices, and the initiation of a monetary easing cycle. The fertilizer sector is geared for a +15.6 percent earnings growth, benefiting from improved margins and pricing power, coupled with increased phosphate offtake.
Within the energy chain, E&Ps (excluding OGDC Uch one-off; +19 percent), OMCs (71.5 percent), and the Power sector (+18.5 percent) are set to benefit from gas and electricity tariff hikes, promising enhanced cash flows. The textile sector is expected to be driven by anticipated higher utilization and increased export orders, while the refinery sector stands to gain from the implementation of the brownfield refinery policy, alongside better GRMs,” the AHL report says.
The report notes that the KSE00 index is currently presenting an intriguing investment opportunity with PE multiple of 4.1x, notably lower than its 5-year and 10-year average of 6x and 8x respectively. Furthermore, the PB multiple for the KSE100 index is at an all-time low of 0.7x, suggesting that stocks are priced well below their book values.
Additionally, the current dividend yield stands at an impressive 11 percent, significantly higher than the five-year average of 6 percent. In light of these metrics, the KSE-100 index appears to offer a compelling investment opportunity, supported by a combination of low valuation multiples and an attractive dividend yield.
Bond Equity Earnings Yield Ratio
Currently, Pakistan BEER is at 0.63, which is one of the lowest in the last 10 years with KSE-100 index EY of 23.8 percent and secondary market yields (10-yr PIBs) at 15.0 percent. Comparing it with the BEER averages of the last 5 years, 10 years, and 15 years of 0.70, 0.81, and 0.83 respectively, assuming BEER reverts to its mean average, the expected re-rating of the market would be with the potential upside of 12 percent, 28 percent, and 32 percent, respectively from current levels.
Market Capitalization to GDP Ratio
Pakistan’s equity market has the greatest room for expansion of its market capitalization to GDP ratio, which currently stands at 16 percent, exceptionally lower by 9ppts than the historical average market capitalization to GDP. This suggests that potential reversion to the mean ratio would result in incremental market cap, with for every 1 percent change in market cap to GDP ratio, the market cap is expected to increase by PKR 946bn or 10.4 percent upside potential from current levels.
Moreover, assuming the market cap to GDP reverted to its mean (5-year; 11.2 percent) will result in an incremental market cap of Rs. 1,818 billion implying an upside potential of 20.9 percent from current levels.
The report says that in the current high-interest-rate environment, companies are strategically opting for share buybacks over expensive growth initiatives due to the advantageous low Price-to-Book (PB) ratio. Companies buying back their own shares at a lower price will enhance shareholder value and signal confidence in their stock, leveraging the price inefficiency to their advantage.
In a climate where borrowing costs are elevated alongside the country’s low forex reserves restricting machinery imports, opting for share buybacks allows companies to allocate capital efficiently, prioritizing the reduction of outstanding shares over potentially costly expansion projects.
Since 2022, twelve (12) companies announced buybacks with a cumulative value of around Rs. 59 billion. Moreover, from 2022 (since the buy-back spree), the companies purchased shares worth Rs. 45.5 billion with LUCK being the largest buy-back of Rs. 15.6 billion followed by ENGRO with a cumulative value of Rs. 11.6 billion (dividend-adjusted: Rs. 10 billion).
On the last closing basis, the remaining buy-backs are expected to be Rs. 4.1 billion which is expected to provide liquidity in the market. Moreover, we also do foresee more buy-backs coming, as, despite 48.8 percent rally since FY24TD, the valuation is still very attractive and can easily outperform the new projects IRR in the mid to long term.
Outlook for IPOs
In the year, as anticipated monetary easing and improved valuation multiples come into play, we foresee a surge in IPO activity in 2024. The report expects the launch of around 5-6 new IPOs in sectors such as Cable and Electrical Goods, Textiles, Consumer, Pharma, Technology, and Logistics, with an estimated capital raising of approximately Rs. 8-12 billion.