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Tir 1396 No 5 KARDAN REVIEW 21 June 2017 / 20 July 2017
Tir
1396
No 5 KARDAN REVIEW
21 June 2017 / 20 July 2017
Contents
Content
Equity Market Review
Monthly Report
Sectors and Industries Performance Review
Trading Volumes and Values
Best and Worst Performing Large Cap Stocks
Equity Market Analysis
Market Insight
Next Month Expectations
Portfolio Suggestion
Sectors Review
Energy
Materials
Industrials
Consumer Discretionary
Telecommunication Services
Consumer Staples
Financials
Information Technology
Healthcare
Utilities
Selected Topic Review
This Month: Annual General Assemblies Review
Stock Coverage Rating Status
About Us
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K A R D A N R E V I E W
July 2017 – No 5
With the warming up of both annual reporting season and first quarter reports, investors finally came out of their conservatism shells and started to put more fait in equities. As stock prices adjusted lower post dividend days and first quarter results reconfirmed the increasing revenues and profitability of majority of large cap stocks, the fundamental potentials of equities prevailed no better investment opportunity than equities during July. Political tensions eased during the month and rising commodity prices in global markets wiped out concerns regarding the continuity of favorable profit margins in materials sector. The total index advanced 2.45% to 80670 reaching close to its 3 years resistance level. Surprising earnings of Oil refineries in energy sector along with better than expected first quarter earnings in Metals & Mining industry brought back optimism to the market boosting volumes and new cash injection into equities.
Equity Market Review
TEDPIX PERFORMANCE & DAILY TRADING VOLUME, July 2014 – July 2017
Oil moved higher during the month as Saudi Arabia pledged to curb exports and Libya signaled to join output cut along with other OPEC members. The US Dollar Index decreased 4% and reached 93.9 to its 13 months low. The federal reserve signaled possible continuation of Dollar devaluation as a policy to boost American exports. The central bank of Iran announced money supply of above 12640 Trillion Rials for Farvardin. The figures indicate an increase in money supply with decreasing growth rate. Considering the recent troubles of illegal financial institutions that went bankrupt, and caused part of money supply to vaporize, the decreasing rate signals partial success of government in extending inflation control to money supply growth. Tir, coincided with the annual reporting season of large cap companies as most released their annual performance results. Not surprisingly most of the reports were solid and confirmed the rising profitability, specially in Metals & Mining industry.
Monthly Report
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Source: Kardan Investment Bank
80,671
74,841 61,164
81,537
2014/08/02 2015/10/04 2016/04/22
78,875
K A R D A N R E V I E W
July 2017 – No 5
Sectors and Industries Performance Review
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During Tir, most industries experienced constructive advances and stocked mostly opened with a positive gap after closure for annual general meetings. Information technology and Transportation industries gained most as the government policies and sound management signaled attractive opportunities In those sectors.
Source: Kardan Investment Bank
With surprising earnings of 1395 for large cap companies and 75% dividend payout, the P/E ratio of ,market corrected considerably and left
room for advance in equities. Most market participants seized the opportunity by flowing new money into large cap stocks.
Market Trading Volume (Mn)
Market Trading Value (Bn IRR)
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Source: Kardan Investment Bank
Source: Kardan Investment Bank
K A R D A N R E V I E W
July 2017 – No 5
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200
400
600
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Best and Worst Performing Large Cap Stocks
The much anticipated earnings announcements proved analysts right and large cap stocks reported astonishing performance for 1395 and mostly beat their budgets by a considerable margin. The market prices quickly adjusted accordingly and some large cap companies in Metals & Mining industry experienced above 20% return within the month. Companies in this sector have been trading below their intrinsic values for months and the release of annual financial statements and P/E adjustment post dividend days left no reason for investors to ignore those attractive investments any more. On the broad side the ease of political tensions caused the investors’ focus to shift toward fundamentals and in the light of favorable global economic data Iran equity advanced by 2.5%.
Equity Market Analysis
Market Insight
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Source: Kardan Investment Bank
Steel producers such as Arfa, Foodal and Fakhooz well among best performers as the result of surprising earnings and increasing steel prices in IME. Kegol also performed well as the result of rise in Khozestal Steel bellet and global iron ore price.
Urea producers such as Shiraz and Shapdis were among worst performers due to weak quarterly reports and low global urea price.
K A R D A N R E V I E W
July 2017 – No 5
Next Month Expectations
The Inauguration of Dr. Rowhani as president and the introduction of new cabinet members are at the center of political focus during next month. The market perception regarding the ministers of Industry and economy may have greatest impact on market atmosphere specifically for Automobile industry.
Considering the continuation of rise in commodity prices, we expect sound reports for second quarter as well. The copper price stabilized above $6000 and back sea Steal price for Hot rolled steal reached $500 and Billet reached to $445. In energy sector the crack spread for fuel oil reached $-3, the highest since 2012. As the result, we expect the rally in energy and materials sectors continue and any correction in prices provide investment opportunities. The market as general may move higher during August before selling pressure of settling credits in September starts to push prices lover.
The continuation of decreasing US Dollar index is another indicator that the commodity prices may continue to appreciate in value. With more than 60% of TSE market value in Materials and Energy Sector, Iran equity market will reap the benefits of weak Dollar.
Among internal economic indicators the high interest rate has limited investment activity and flow of money. If the central bank succeed in controlling illegal financial institutions and homogenize the banking system not to deviate 15% provisional deposit rates, we can hope increasing cash flow toward investment activities in general.
The next long term rally in the market may be on the way during the second term of Dr. Rowhani presidency and potential drivers of this rally can be decreasing interest rates, increasing IRR/USD exchange rate and foreign direct investments that lead to joint production of Iranian companies with foreign partners.
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K A R D A N R E V I E W
May 2017 – No 4
K A R D A N R E V I E W
July 2017 – No 5
Portfolio Suggestion
Energy Materials Consumer Discretionary Consumer Staples
Industrials Financials Telecommunication Services Information Technology
Healthcare Utilities
Sectors Review
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Source: Kardan Investment Bank
K A R D A N R E V I E W
July 2017 – No 5
Brent oil price increased 12 percent from $ 44.5 to $ 50 a barrel as Saudi Arabia signaled further production decrease and Libya announced its willingness to join supply control of other OPEC members. The trading symbols of oil refineries in TSE closed due to material earnings announcement that had increased more that 20% compared to their budget. Among them Shabriz and Shavan announced 188% and 174% increase in their 1395 EPS. Other refineries also surpassed their budgets by a considerable margin. The increasing profitability in this industry was two fold. Increasing crack spread specially in fuel oil contributed a lot to their earnings increase and the NIORDC changed its approach toward billing refineries from subjective rates to rates based on platts publication and real Persian Gulf FOB rates. The market awaits for reopening of oil refineries as they may open with considerable gaps after these earnings announcements. Our observation of crack spread during the past few months indicates the crack spread has continues to increase in favor of oil refineries and their first half results may be even better that their previous quarters.
Energy
Steel Billet price reached IRR 16000 and Hot Rolled Coil reached IRR 20000. These figures are 15% higher than the budgets of steel producers. As the result, investors started pumping fresh money into Metals & Mining industry. As the Annual reports of these companies published and their symbols were closed for trading until after the annual general meetings, investors were impatient to buy more and caused them to reopen approx. 10% higher. Large cap companies such as Foolad, Kegol, Fameli and Fakhooz recorded 15% to 25% return within a month and filled their price gap with intrinsic values to a considerable extent. All of them also increased their EPS projection for current year based on better than expected sales in first quarter. In Petrochemicals industry things went normal with low trading volumes in lack of any development in global markets. Padis petrochemical co lowered its current year earnings forecast as phase 3 plant has not become operational yet due to technical difficulties. With the freedom of Iraq from ISIS some analysts debate that export of cement to Iraq may increase and consider current time as suitable opportunity to invest in Cement industry. Considering the continuation of increase in metal prices globally and probable increase in IRR/USD exchange rate in second half of the year, we believe materials sector, specially metals & Mining industry should remain a considerable part of portfolios as the market price has yet room to grow based on newly adjusted intrinsic values.
Materials
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Mapna Group held its annual general meeting and based on the CEO comments, the company has had several technical achievements in increasing efficiency of its turbines and production of new turbines with foreign partners. The major obstacle of the company lies in low rate of electricity sales inside Iran that left the ministry bankrupt and unable to finance new projects and pay its debts to subcontractors such as Mapna. We believe these low rates of electricity can not last much longer and sooner of later the prices will rise and Mapna Group will benefit substantially from these changes.
Industrials
Saipa Gourp held a very controversial annual general meeting as it distributed dividends based on net income that had been recognized in main company as the result of loss in subsidiaries in transactions between the main company and its subsidiaries. Pars Khodro is increasing its market share as the public acceptance of Renault Sandero and Brilliance are increasing rapidly. Sounds like the company will succeed to cover its retained losses rapidly and start paying dividend in the coming years. Automobile stocks experienced a gradual decrease during the month as the long closure of Saipa symbol brought pessimism on the group in general and ambiguities of new Industry minister and its unknown approach toward Automobile industry left investors caution.
Consumer Discretionary
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By receiving permission from Communication Regulatory Authority of Iran Virtual operators started their advertisements and SIM Card sales. These new major customers of Telecommunication services may boost sales of Operators and MCI is anticipated to gain most. Despite expectations regarding the decreasing market share of MCI compared to Irancell as the result of Mobile Network Portability services, things went side ways and statistics show MCI is attracting more customers. With new investments in its network infrastructure and increasing quality of 4G services MCI may continue to increase its profitability YOY.
Telecommunication Services
K A R D A N R E V I E W
July 2017 – No 5
This sector moved higher this month by 7.8% return and trading volume increased in comparison with last month. The better atmosphere in general market helped stocks in consumer sector to advance in prices and cover losses of previous month. Considering most of the stocks in this sector are small or mid cap, speculators are quit active and the volatility of shares can not be always attributed to fundamentals. Many swings are technical based and result of short term speculations.
Consumer Staples
The most controversial industry of these days for the economy and among the people is the Banking Industry. A big portion of almost all of the banks is illiquid asset and even sometimes with unrealistic book values, which are the result of trades between banks themselves for making delusive profits. The semi governmental banks of Tejarat and Mellat held their annual general meetings which ambiguous financial statements without allowing investors to question the financial results. Their annual meetings were completely symbolic just to pass over rules and regulations and hide their shaky inner side. Some banks have not yet received the approval of central bank n their statements and were not able to hold general meetings till now. The problems of illegal institutions and their inability to meet their obligations toward depositors remain at latge.
Financials
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July 2017 – No 5
This sector with -1.8% gains during this month was one of the groups with the lack of attention of market participants. Iran Argham with -14.06%, Kharazmi IT Development with -11.8%, and Dadeh Pardazi Iran with -11.29% had given investors the least return. It was while that Iran Argham lost 26 Rials per share in the first six of its financial year. In this group Hamkaran System and Iran Kish Credit Card hold their annual general meeting and approved with 300 from 640 Rials and 550 from 645 Rials dividend per share respectively.
Information Technology
Asaluyeh power plant held its annual general meeting with optimism on its combined cycle project come into production from 1397. There are different opinions among investors regarding the financial treatment of cost of development plan, due to be payed by Oil ministry though free gasoil by the amount of 300 million Euros. As the result speculative activities on its stock has increased. Mobin and Fajr are trading at their fundamentally bottom prices and represent suitable investment opportunities. The rumors of possible increase in electricity price have increase and Minister of Energy has recently confirmed the necessity of this rate increase.
Utilities
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Healthcare stocks were completely on the sides with low trading volume and lack of specific news. The sector return was -2.8%. This industry have been a safe heaven for long term investors and current market prices offer opportunities for those type of investment but short term speculators may be disappointed for now.
Healthcare
Why a Giant Blue Lake Turned Blood-Red
Total Dividend Payout In fiscal year of 1395 total net income generated by listed companies was approx. 380000 billion Rials and 280000 billion Rials, equivalent to 74% has been paid out as dividends in annual general meetings. Payout Ratio and Appropriate P/E payout ratio of 74% with the assumption of 28% discount rate for equities and earnings growth rate of 15% (12% long-term inflation and 3% long term real growth rate of economy) would bring us to the P/E ratio of 5.7 as the average fundamental P/E ratio of the market. This ratio may be used in terminal value approximation or average stock multiple valuation. Major Topics and News in annual Meetings Our investment research team has attended the annual meeting of most of large cap companies and has provided comprehensive reports of each meeting. Represented here, is a brief review of the most important announcements and news in 1395 annual general assemblies of large cap companies in Iran Capital Market.
Selected Topic Review
This Month: Annual General Assemblies Review
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Mapna Group
K A R D A N R E V I E W
July 2017 – No 5
• Increasing performance of class E gas turbines by 5% making it the highest
performing turbine in its own class in the world.
• Receiving the pre-approval of the board members for 1 to 2 stock split.
• Entering the healthcare equipment industry with MRI machines.
• Development and technology transfer of class F turbines has started.
• Setting the agenda for going international
• 157 IRR dividends per share was approved. (25% dividend ratio)
Ballast
• Total subcontracts on hand has reached 8000 Billion Rials
• Projecting a considerable market share from Qom-Isfahan high-speed rail project the
total value of 1.2 Billion Dollars
• Renovation of wagon fleet and purchasing 1500 new wagons.
• Development plan to build a traverse factory by the end of current year.
• 100 IRR dividends per share was approved. (10.3% dividend ratio)
Mapna Assaluyeh Power Generation
• Termination of 10 year ECA contract at the end of current year and probable drop in sales price due to lower rate of power in free market.
• Negotiation with Mellat Bank to transform foreign currency loan into Rial based loan and possible elimination of exchange rate fluctuation losses from the income statement in the following years.
• The construction of combined cycle development plan continues and is projected to finish in 1398. The production capacity will increase from 1000 MWH to 1450 MWH and the efficiency will increase from 36% to 44%.
• 900 IRR dividends per share was approved. (38% dividend ratio)
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GolGohar Mining and Industrial
• No.2 Pelletizing development plan with capacity of 5 million tons per year has become operational and will reach maximum capacity by year end.
• No. 7 concentrate development plan with capacity of 2 million tons will become operational by year end.
• Gohar Zamin Iron Ore has become operational with 4 million concentrate capacity. • The gas turbines of 500 MWH power plant have become operational with 333
MWH capacity. The combined cycle will complete in 1397. • 280 IRR dividends per share was approved. (83% dividend ratio)
Fajr Petrochemical
• Power plant is working with 50% capacity. The management is setting target to increase power generation by 300 MWH through direct contracts with end users.
• Fajr 2 tax exemption can be used in conjunction with fajr 1 production to decrease tax costs.
• 180 Million Euro finance is imposing currency exchange rate fluctuation losses. The company plans to convert the finance loan to Rial based loan ad avoid further foreign currency loss reorganization.
• The management focus is on maximizing capacity utilization and filling un used capacity with direct sell contracts.
• 750 IRR dividends per share was approved. (76% dividend ratio)
Iran Transfo
• The joint cooperation with Siemens is at its final steps and are processing the legal procedure t start the formal cooperation.
• The Land that previously Iran Transfo Rey was located at, will be sold to Melli bank as a method of payment for payable DPS of previous years.
• The company is very sensitive to construction budget and with current oil price any major change in level of demand is unlikely.
• 620 IRR dividends per share was approved. (75% dividend ratio)
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Asan Pardakht Persian
• Development of mobile App is in focus and many subsystems and features will be added to boost revenues.
• Management is confident that their market share will continue to increase. • 1000 IRR dividends per share was approved. (50% dividend ratio)
Rail Pardaz Seir
• 10% equity block transfer to Austrian investor is finalizing legal procedures. • The company plans to add 1700 wagons and 10 locomotives. • Financing for wagon purchase has started by Russian counter part • 5 IRR dividends per share was approved. (10% dividend ratio)
Dadeh Pardazi Iran
• Healthcare cards will replace Social Security booklets and Dade Pardazi Iran is likely to have the major market share in this multi-million Dollar project. However, the quantitative figures of increasing revenue and profits cannot be estimated as no agreement has been singed yet.
• 200 IRR dividends per share was approved. (65% dividend ratio)
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Saipa
• The profit recognized in annual financial statements was the result of loss reorganization in subsidiaries that provide raw material and auto components to main company. As the result, both the auditor and SEO representatives casted doubts on the quality of financial statements and were opposed any dividend payment.
• The contract with Citroen has been finalized and joint production will start by the end of current year.
• The company plans to increase the production volume and gain more market share in Iran.
• 8 IRR dividends per share was approved. (3% dividend ratio)
Stock Coverage Rating Status*
* For access to investment research reports, you may contact Kardan Investment Bank Asset Management Department
IMPORTANT DISCLOSURE: Kardan Investment Bank occasionally does and seeks to do business with companies covered in its research reports. Also may have positions in its assets under management. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Source: Kardan Investment Bank
Energy
Materials
Mobarakeh Steel Co. Golgohar Mining & Industry Co. National Iran Copper Co. Zagros Petrochemical Co. Bama Co. Kharg Petrochemical Co. Parsian Oil & Gas Development Co. Pardis Petrochemical Co. Khorasan Petrochemical Co. Kermanshah Petrochemical Co. Hegmatan Cement Co. Gharb Cement Co. Khouzestan Cement Co. Razi Glass Group Hamedan Glass Co. Tose-e Melli Investment Group Atieh Damavand Investment Ardakan Industrial Ceramics
Sepahan Oil Co. Iran oil Co. Behran Oil Co. North Drilling Co. Isfahan Oil Refining Bandar Abbas Oil Refining Tabriz Oil Refining
Consumer Discretionary
Sell
Un
der
per
form
Ho
ld
Bu
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Stro
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Bu
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Barez Tire Co. Bahman Group
May. Rating
June. Rating
Information Technology
Iran Kish Credit Card Asan Pardakht Persian Parsian electronic Commerce Beh Pardakht Mellat
Industrials Rail Pardaz Seir Pump Iran Co. Rail Seir Kowsar
Utilities Fajr Petrochemical Co.
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About Us
Kardan is a fully-fledged investment bank operating from Tehran-Iran. We have business relationships with clients, investors, advisers, and other stakeholders in several key regions and financial centers of the world.
Kardan’s main shareholders are two licensed commercial banks, Bank Tejarat and Saman Bank. Benefiting from the strength of its shareholders and an extensive regional and international network of partner organizations, Kardan Investment Bank has a formidable footing in domestic and international financial markets.
Our business covers investment banking and investment management. Investment banking services include M&A, VC, PE, block trading and IPO’s and our investment management services include private and institutional wealth management, funds, discretionary portfolios, asset management advisory services, research, and analysis.
Telephone: +98 21 9662 11 11 | Fax: +98 21 9662 11 33 | www.kardan.ir 3rd floor, No. 114, KajAbadi St., Nelson Mandela Blvd.,Tehran, 1966913187, Iran
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