Power Sector: Defensive plays may come into the limelight – AKD Research
By: Raza Hamdani, AKD Securities Limited
Power Sector: While high inflation readings, looming risks to the PkR/US$ parity and expected monetary tightening likely presenting a theme for subdued market performance in the near-term, defensive stocks in the power and fertilizer sectors could come into the limelight, in our view. In this regard, the top 5 dividend yielding stocks in the AKD Universe include FFBL (15.8%), FFC (14.6%), KAPCO (14.5%), HUBC (13.2%) and PTC (11.0%). Our top defensive picks remain KAPCO and HUBC where despite FY14F estimates revision following below expected 1QFY14 results, the two companies still offer very attractive dividend yield. Importantly, with an expected 50bps DR hike in the upcoming MPS, the average D/Y of KAPCO and HUBC would still remain above rates offered by risk-free instruments such as PIBs and Defence Savings Certificates of the National Savings Scheme (NSS). At current levels, KAPCO and HUBC also offer upsides of 11% and 25% to our respective TPs of PkR67/share and PkR78/share.
Macro Concerns: With concerns over the PkR/US$ parity viz upcoming IMF repayments of US$720mn scheduled for Nov’13, a consistent uptrend in inflation in FY14TD and an expected hike in DR, negative sentiment could result in weak market performance in the near-term, in our view. While we still consider any market correction following the upcoming MPS as an entry point, high dividend yielding defensive stocks could increasingly come in the limelight.
Defensive Plays: The top 5 dividend yielding stocks in the AKD Universe include FFBL (15.8%), FFC (14.6%), KAPCO (14.5%), HUBC (13.2%) and PTC (11.0%). Within this space, with consistently high payout ratios and hedged against currency depreciation, power sector companies (HUBC & KAPCO) remain our top defensive picks. In this regard, the average forward D/Y offered by the two stocks remains above the rates offered by risk-free instruments such as PIBs and Defence Savings Certificates of the National Savings Scheme (NSS) even after an expected 50bps hike in the DR.
Power Sector Estimates Revision: 1QFY14 results of KAPCO and HUBC fell below expectations largely on account of scheduled as well as unscheduled outages, where we have downward revised our FY14F earnings and payout estimates for the two companies. In this regard, we downward revise our EPS and DPS estimates for KAPCO by ~5% and for HUBC by 7%. That said, FY14F D/Y for KAPCO and HUBC still remain highly attractive at 14.5% and 13.2%, respectively.