Lahore - Bearish sentiment prevailed at the KSE during the outgoing week, as investors remained concerned ahead of a key political gathering on the weekend in the capital city. Meanwhile, heavy-weight oil sector took a battering on tumbling international oil prices as OPEC decided not to cut their oil output. Hence, the benchmark KSE-100 index closed down 0.9% WoW at 31,198, with average trading volumes clocking in 19% WoW lower at 209mn shares/day. That said, Pakistan reentered the international Sukuk market after a gap of nine years, accepting bids of US$1.0bn (vs. bids amounting to US$2.3bn), for an issue initially placed at US$500mn. Other key highlights of the outgoing week were: (1) CCoP approving transaction structure for divestment in Allied Bank Limited (ABL), (2) textile exports clocking in 2% YoY lower in 4MFY15, (3) urea sales dropping by 14% YoY and 2% MoM in Oct-2014 and (4) T-bills cut-off yields declining by 47-50bps.

According to experts, Pakistan successfully returned to the international Sukuk market after a gap of nine years, accepting bids of US$1.0bn (vs. bids amounting to US$2.3bn) for an issue initially placed at US$500mn. The pricing terms are also favorable with a profit rate of 6.75%, priced lower than the (1) 5-year Eurobond issue in April-2014 by 50bp and (2) initial guidelines of 6.9%. Meanwhile details of the investors are encouraging, with investors well distributed across the globe.

Experts believe successful Sukuk issue comes as another positive for Pakistan external account, which coupled with (1) the expected US$1.1bn from the IMF in mid-Dec and (2) declining oil prices should help Pakistan foreign exchange reserves to reach US$15bn or ~4 months of import cover by end Dec-2015. They also flag (1) US$700mn (70% of the expected amount) from government’s share sales in Habib Bank Limited and Allied Bank Limited, (2) US$350mn under the Coalition Support Fund from the US in 1Q2015 and (3) next IMF tranche of $550mn can lift Pakistan FX reserves to $16b by end Mar-2015. Note that Pakistan has to make repayments of only $400m to the IMF during this period. They believe currency is yet to respond to these developments on the external account, with PKR/USD parity consistently hovering around PKR101-102/USD mark.

Experts reiterate re-rating theme for Pakistan equity markets on growing optimism over country’s macros and higher liquidity, where in the backdrop of improving macros we also continue to see likely upgrade of Pakistan sovereign rating. Note that Pakistan’s CDS has dropped to 686bp from 760bp in Oct-2014. Meanwhile, they expect State Bank of Pakistan’s (SBP) confidence to further build up in its monetary easing on the back of (1) materialization of USD inflows and (2) refusal by the Prime Minster to hike gas tariff. They expect SBP to cut policy rate by another 50bp in Jan-2015 policy review. They highlighted that unfavorable developments on the political front can create significant nuisance value particularly with a major political gathering planned on Nov 30th in the capital city. They reiterate conservative Jun-2015 index target of 35,000. KSE still trades at an undemanding 2015E P/E of 8.4x, which is at a discount of 44% to its regional peers. Preferred sectors are Banking and Cements, with UBL, DGKC, MLCF, ENGRO, POL, PSO and KAPCO our top picks across the board. During the week, the Cabinet Committee on Privatization (CCoP) on Wednesday approved the transaction structure for the divestment of government’s residual shares (10.1% of outstanding shares) in ABL as recommended by the Privatisation Commission.

As per key features of the recommended structure, the strike price will be determined via the ‘Dutch auction method’ as envisaged in the KSE book building system and the floor price, as approved by the CCoP and the PC Board, will be notified prior to the book-building exercise, planned for Dec 11 and 12.