The erosion in share market clearly hints at an excellent opportunity to build a portfolio where heavyweights were slashed by 16 percent to 59 percent, but drastic measures taken by the Exchange to end the sagging trend helped the equities to recover by 10 percent.
Pakistan''''s stock market is passing through one of the major corrections as the KSE Index has been down by 24 percent from its peak seen two months ago.
Moreover, the market has also slipped down from its level at the beginning of the year 2006 and even to 12-month average. "Whatever the reasons may be behind this heavy fall, this correction should be taken as an excellent opportunity to purchase stocks at bargain levels," an analyst said.
The decline in share prices between April 17 and June 14 has been one the worst nightmares for stocks investors. The index made a high of 12,273 points on April 17 and saw the low of 8766.98 points on June 14. The "zoom and doom" for the market players were vicious, but after the ''''avalanche'''', the equity prices appeared to be lucrative as the depression ranged from 59 percent to 16 percent during this period.
The biggest decline was heralded in Pakistan Oilfields, going down by 59 percent, and Fauji Fertiliser by 15 percent, to Rs 289.55 a share for the former and Rs 116 a share for the latter. Several other entities, which had been the universe of most of the investors, recorded big trimmings. Bank of Punjab was down 29 percent, Bank Alfalah 43 percent, D G Khan Cement 46 percent, National Bank of Pakistan 38 percent, PTCL 44 percent, OGDC 32 percent, PPL 42 percent, Nishat Mills 40 percent, Admajee 44 percent and Muslim Commercial Bank 39 percent, and recovered only 10 percent in the last two sessions.
Thanks to the recent erosion in share prices, the market now trades at a sharp discount to its historic average prospective PE of 11 multiplies. "We believe that if investors take positions at current levels they can earn a handsome return in medium to long term", the same analyst said. "The earnings of market drivers are expected to grow by 26 percent and 15 percent in 2006 and 2007, respectively," he added.
Furthermore, the earnings of the companies are likely to grow by 13 percent annually for the next 4 years.
On PE, the market is trading at 9 times, based on 2006 E-earnings and on the basis of 2007 F earnings the PE of market arrives at 7.8x.
Similarly, on the basis of PBV, the 2006E and 2007F multiples of the market are 2.6x and 2.2x, respectively. "These PBV even get more attractive when we compare it with return on equity (ROE). The 2006E and 2007F ROE of the Pakistan market is 29 percent and 28 percent."
Dividend yield of the market, which is among the highest in Asia, is 6.3 percent and 7.3 percent on 2006E and 2007F payouts of companies usually looked for investment purposes. Interestingly, some companies are offering double-digit dividend yield--up to 13 percent--like Hubco & Kapco.
"Another important comparison indicator is the earning yield. 2006E and 2007F earning yield of the market arrived at 11 percent & 13 percent, while for our top picks, the earnings yield is more than 14 percent, on the basis of 2007F earnings, ever better than the yield of high rated corporate bonds.
Arif Hasan Mustafa, research analyst at Alfalah Securities, said that now the million-dollar question is: Has the market bottomed out? Should the investors jump in and buy the stocks? "The answer to above two question is almost ''''yes''''. We do not rule out a little downside, but are quite convinced on valuations. Hence, we recommend staggered buying."
THE KSE BOARD LAST WEEK REVIEWED THE MARKET SITUATION AND DECIDED TO TAKE FOLLOWING MEASURES: holding lower circuit breaker at 5 percent instead of 20 percent. It was decided that short selling is taking place heavily in the market, so they decided to put a ban on short selling in futures contract for the remainder of June Futures Contract.
Deposit of 100 percent margin in the form of approved securities in Futures Contract in place of existing requirement of depositing 50 percent margin in the form of cash and 50 percent in the form of securities shall be allowed.
It was decided that under CFS, the investors would have the opportunity to borrow funds in 30 companies against the previous ceiling of 14 scrips. It would help the investors to get funds in more companies, but the limit of Rs 24.5 billion remains intact. It has also been decided to extend CFS facility for securities already held by the potential finances for previous purchases. However, it would be worth mentioning that according to the actual CFS figures released on the KSE website, CFS trading took place in 31 scrips.
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