World’s newest emerging market offering an opportunity
The world’s newest emerging market (EEM) (VWO) has been witnessing an outflow of funds recently. Soon after the MSCI included Pakistan (PAK) stocks into its emerging market index constituents, a sell-off has led to hot money leaving this Asian (AAXJ) (VPL) economy. Political volatility, on account of the financial probe and subsequent disqualification of its former Prime Minister, Nawaz Sharif, further added to the slide (chart below) in the Pakistan stock market.
The Pakistan stock market slide is, however, expected to change course under the new Prime Minister, Shahid Khaqan Abbasi, as fundamentals of the economy remain strong. So, the latest political volatility could be seen as a buying opportunity for long-term investors. Our analysis revealed stocks from two industries within the materials sectors that are currently down but should hold promise from a medium to long-term perspective.
Pakistan stock market: material sector stocks look attractive
The materials sector in Pakistan is one of the leading sectors in the country in terms of corporate governance, Thomas Hugger, chief executive officer and founder of Hong Kong-based Asia Frontier Capital (AFC), told Frontera. Screening through the sector reveals a a few select companies that seem fundamentally strong, but whose stocks have recently deflated.
2 stock picks from the Fertilizer Industry
Data released by the National Fertilizer Development Centre indicates that fertilizer sales have been rising at a good pace. For instance, for the first half of the year, urea sales increased by 51% YoY whereas di-ammonium phosphate sales rose by 21% YoY. Mainstream industry players such as Fatima Fertilizer and Engro Fertilizer witnessed a rise in exports. Moreover, the current market dynamics indicate continued demand for Pakistani fertilizers.
Fatima and Engro are both attractively priced currently at a P/E of 6.2 and 8.6, respectively. Stocks of these companies are down 8% and 6.4%, respectively, on the Karachi stock exchange over the past 3 months (as of July 24). Analyst recommendations on these stocks stand close to BUY with a 4.6/5 consensus rating estimate for Fatima Fertilizer and 4.8/5 for Engro Fertilizer.
3 bargain stocks from the Cement Industry
Cement companies in Pakistan are poised for growth, as elaborated in our earlier article. Thomas Hugger, chief executive officer and founder of Hong Kong-based Asia Frontier Capital (AFC) told Frontera he’s bullish on Lucky Cement (PSX: LUCK) and DG Khan Cement (KSX: DGKH). Pakistan’s construction industry is currently thriving, serving as a tailwind to cement producers such as Kohat Cement (PSX: KOHC), Pioneer Cement (PSX: PIOC), and DG Khan Cement (PSX: DGKC). These material sector companies are currently trading at attractive price valuations (P/E ratio) of 7, 8.8, and 9.8, respectively. Stocks are down over the past 3 months to the extent of 28.2%, 24.1%, and 17.4%, respectively. Analysts hold a consensus 4.6- 4.8/5 rating on these stocks from a buying perspective.
Kohat Cement is in the process of constructing a new production line which should boost its market share by 9.2% (from 5.2%). The company’s focus on cutting down costs by adopting alternative energy measures such as waste heat has helped the company record impressive growth margins. Pioneer Cement is working on a contract with Sinoma-Chengdu of China for procurement of its new cement works. The company also has plans to undertake brownfield expansion in the light of the expected rise in demand for cement from Pakistan’s material sector. Similarly, DG Khan’s new Balochistan cement plant is scheduled to commission in 2018.
Firm expansion plans by these sector picks, coupled with the opportunity that lies ahead for the cement industry in Pakistan, may bode well for investors in these stocks.