58 replies to this topic

[Amin Khan]

Securities Update On Capital Gains Tax

Pakistan Taxes - Wishes Granted

Finance minister on Saturday announced measures to rid Capital market of the current lull and boredom. Stock broker and investor's wishes and demands on tax related concerns are now well addressed as govt accepts regulator's proposal on change in CGT modalities and we see significant increase in volumes going forward.

While details of some promises will be announced after deliberations, key measures that will become effective April 01, 2012 are listed below:
Ø No questions on source of funds invested in equities to 2014
Ø CGT deduction by clearing House (NCCPL) at source
Ø CGT rate frozen till June 2014 at 10% and 8% for holding period of less than six months and six to twelve months respectively
Ø Withholding Tax currently at 1bps of Value trade on SELL trades abolished
(Elixir)

[Amin Khan]

Karachi Stcok Exchnage ( KSE ) : Positive regulatory developments

In a major positive development, Finance Minister has accepted all the proposals of Securities and Exchange Commission of Pakistan (SECP) with respect to relaxing rules for capital gains tax (CGT) on shares transactions. According to a press statement issued by SECP, the announcement was made during Finance Minister’s visit to the Karachi Stock Exchange on Saturday. The SECP had been in dialogue with the Ministry of Finance and the FBR on the rationalization of CGT with an objective to improve market activity. The following solutions have been agreed upon for a more balanced and investment friendly CGT approach:

• In view of the official but undocumented gains accrued prior to the imposition of CGT an investment window will be provided till June 30, 2014 whereby investors will be able to invest in the stock market such undocumented gains. This will allow investors to invest in the stock market. Legal and operational changes to give effect to this would be made by April 01, 2012.
  
• Rate of CGT shall be frozen at the existing 10% on securities held for six months and 8% on securities held for a year till June 2014.
  
• Subject to certain minimum holding period, which will be worked out between FBR and SECP, highest value of an investor’s portfolio till June 2014 shall be treated as income generated from the capital markets.
  
• To provide ease of calculation and documentation to individual investors, the National Clearing Company shall act as a withholding agent to deduct and deposit the CGT from investors’ transactions. SECP and FBR, along with other capital market service providers, would work out exact details so that necessary legal and operational changes are made by the target date of April 01, 2012.
  
• Withholding tax (WHT) under Section 233A will be abolished to rectify double tax anomaly.

Impact
With strong valuations pegged with Pakistan equities, these positive regulatory changes would be responsible for the gradual re-rating of the market and pickup in trading activity. We feel that investors’ strategies should be based on a combination of growth and value stocks. E&P and IPPs are our favorite sectors. Quality of earnings, stability of cash flows and sustainability of dividend payouts should be the main consideration in stock selection. In addition, we also like stocks that benefit from declining interest rates. Our model portfolio consists of OGDC, PPL, Hubco, Engro, MCB and DG Khan Cement. In our opinion, exposures in these sectors would outperform returns on the KSE 100 Index.
(FCEL)

[Amin Khan]

Ballay Ballay at KSE .............SCSTRADE analytics......

They say ‘buy on rumor and sell on news’. As anticipated Pakistan market is responding to Abdul Hafeez Sheikh maneuvers, such as

expected freezing Capital Gains Tax at 10% till 2014;

Deduction of CGT through NCCPL and not dreaded FBR;

Not asking sources of income till 2014 @ treating that amount as white;

Abolishing withholding;

Government side may finally submits before burly brokers relentless effort not to come in the ambit of Not asking sources of income for some time…

Many benami investors were shy not to invest at KSE at all, since the implementation of Capital Gains Tax and taxation authority’s quizzes about their sources of income, kept them away from the market. There are many benami investors in commodity bazaars such as Lahore based
Akbari mandi & Karachi based Jodia Bazaar where thousands of commodity traders buy‐sell goods without any inquisition from tax authorities. Before 2008, investors at KSE were also giving massive volumes thus making bread n butter for stock brokers.

However, when PPP government was installed in 2008, authorities started quizzing about sources of income of many mega traders thus forcing them to abandon investing at KSE. Thus this market was devoid of frenzied volumes instigated by speculators and large investor groups.
Since Jan 2009, KSE was witnessing genuine volumes yet the quantity shrank to such an extent that brokers started feeling the pinch of low commissions due to shrinking volumes amid lack of interest from these aforesaid investor groups.

Now when government in Islamabad is bracing for re‐election bid in and around 2012 or 2013, Mr. Hafeez Sheikh might caved into some historic measures to appease brokers and large investor groups of bringing more volumes. Authorities such as FBR are set to gain in 2HFY12, if
more investors trade at KSE.

Investors such as mutual funds will be happy since they would see inflow of funds from risk averse investors and we may see fund sizes increasing from current base of Rs 300bn. We will see many new equity funds coming on to the scene.

Good news for investors; INDEX LEVELS may increase….

Small investors remained at the receiving end since market remained under the cloud of bad political situation in Islamabad. Since lot of politics is coming out of uncertainity, we may see increased investor interest with market may brace for 14500 at the pretext of variables such as 15% ‐ 20% earning increase from major corporate such as OGDC, PTC, MCB, PSO, POL, PPL, NBP etc plus there handsome payouts {keeping in view of dividend payout of Pakistan market exceeding above 7%}. Moreover, another variable to give boost to the intrinsic level of index is falling interest rates from present level of 12%. Hence our calculation of 14500 arrives.

Stocks recommended on earnings MCB, ABL, BAFL, POL, PPL, NRL, PSO, KAPCO, NCPL etc.
(SCS)

[Amin Khan]

Pakistan Market: Headed for 14,000 points

The KSE-100's stellar 6.9% rise last week, punctuated by a 4.7xWoW increase in average daily volumes, was vindicated by GoP acceptance of all the proposals suggested by SECP and KSE in connection with the revival of local equity markets. These include 1) no probe into source of income until Jun'14, 2) no WHT on turnover, 3) CGT rates frozen until Jun'14 and 4) at-source deduction of CGT by NCCPL. These measures will reportedly come into effect from Apr'12 and stand to drive valuation rerating coupled with sustained higher volumes. In this regard, our Dec'12-end target for the KSE-100 Index, based on target price mapping, is 14,000 points which implies upside of 19%. Assuming Pakistan's discount to regional PER contracts to its historical average of 35%, the KSE-100 should reach 14,250 points - upside of 21% from current levels. Impetus to bullish momentum may also arise from potential monetary easing where recent set of good macro data twines with improved chances of 3G auction proceeds. High beta stocks (e.g. MCB, LUCK, DGKC, ENGRO, PSO and POL) could potentially outperform while risks stem from non-materialization of foreign flows leading to BoP deterioration.
.
Lower liquidity risk = Improved price discovery: If last week's 6.9% market rise coupled with a 4.7xWoW increase in average daily volumes to 118mn shares is anything to go by, the KSE-100 Index should be in for further upside amidst higher volumes. Since imposition of CGT in FY11, average daily volumes have contracted to 82mn shares vs. Dec’08-FY10 average daily volume of 161mn shares. While CGT remains in place, recent GoP concessions could see sustained uplift in volumes, on stronger domestic retail participation alongside potential pickup in FPI inflow (FYTD net outflow: US$168mn).

3G Update: PTA held a conference over the weekend regarding the upcoming 3G license auction, scheduled for Mar 29'12. To recall, PTA intends to auction three 3G licenses at a base price of US$210mn each. Encouraging prospects for the aforementioned auction (we believe PTC will likely opt for 3G, necessitating competition to follow suit) would gel with the recent set of good macro data (on-target 1HFY12 tax collection, single-digit CPI/CA surplus in Dec'11) and encourage the SBP to resume monetary easing. Our base-case expectation for the next MPS is a cut of 50bps in the DR while, going by projected FY12 average CPI of 10.8%, we believe there is room even for a 100bps cut. This could provide further fundamental impetus to anticipated bullish momentum.

KSE headed for 14,000 points! Concessions on CGT should encourage stronger domestic retail participation coupled with improved FPI prospects, leading to improved price discovery. Based on target price mapping, our end-Dec'12 KSE-100 Index target comes to 14,000 points, implying upside of 19%. Furthermore, improved market liquidity should lower the liquidity risk premium and in turn lead to a compression of valuation discount vs. the region (46% on PER). Should discount to region contract to the historical average of 35%, the KSE-100 stands to reach a level of 14,250 points.

Top Picks: Bullish momentum should be broad-based where high beta stocks could potentially outperform. These are categorized as follows:

• Banks: In our view outperformers could include MCB, UBL and BAFL (all with 3yr betas > 1). We like MCB based on its strong business model and high D/Y (CY12F: 8.8%), UBL due to double-digit EPS CAGR and geographical diversification (Dubai exposure balanced by presence in fast-growing Qatar) and BAFL on attractive valuations (CY12F P/B: 0.56x) coupled with a strong turnaround in operating performance.

• Oil & Gas: Our top E&P picks include OGDC and POL (both with 3yr betas of ~1.2) on strong development catalysts and firm oil price outlook (estimated GCC breakeven oil price is US$85/bbl). PSO may also outperform given attractive valuations (FY12F PER: 4.1x) and GoP focus on resolving the circular debt issue which should improve near-term payouts.

• Fertilizers: Hitherto underperforming ENGRO (3yr beta: 1.2) now stands to beat the market while urea play FFC still remains a preferred play on attractive dividend yield (CY12F 15.5%) and stable gas supply.

• Cements: Top picks are LUCK and DGKC on margin improvement, improving demand prospects and cost savings on waste heat recovery projects.

Risks: These primarily stem from the macroeconomic front. While recent set of macro data is highly encouraging, question marks remain as to sustainability while non-materialization of foreign flows (particularly the earmarked ~US$2.5bn from release of CSF/Etisalat payments and 3G auction proceeds) will likely accelerate pressure on Balance of Payments. Ensuing PkR depreciation could thwart FPI inflows, thereby impeding the valuation rerating process..
(AKD)

[Amin Khan]

Pakistan Equities

Regulatory respite to bolster trading activity

Event

• The Finance Minister has approved following SECP-proposed amendments to capital gains tax (CGT) regime to revive investor interest at the volume-starved local bourses. The changes will be implemented w.e.f. 1st April, 2012.

Impact

• Application of Section 111 regarding unexplained income and assets deferred till June 30, 2014. Since the capital gain income had remained tax exempt for 36 years (1974-2010), it had created an anomaly in the form of legitimate yet undocumented gains accumulated by investors through stock market transactions during the exempted period. Introduction of CGT regime without addressing the aforesaid discrepancy has forced retail investors to withdraw funds from the stock market. As per the recent amendments, the stock market investors will not be asked to divulge source of income till 2014. Post- June 2014, highest or peak value of an investor’s portfolio between now and June 2014, subject to certain minimum holding period to be worked out between Federal Board of Revenue (FBR) and SECP, will be treated as income generated from the capital market and part of investor’s wealth.

• NCCPL to act as the withholding agent. To simplify calculation, minimize interaction between investors and FBR and ensure timely deposit of tax, the National Clearing Company (NCCPL) will act as the withholding agent to deduct CGT from investors’ transactions. NCCPL will deposit the net tax (adjusted for capital losses) collected with FBR at the end of each month and the broker’s liability in this regard will stand abolished. The NCCPL will also provide investor wise monthly report of CGT deducted and deposited for each investor to FBR and issue a certificate to the investor (at year end) of the amount deducted. The investor will file tax return, including the CGT deposited, based on the certificate provided by NCCPL and will be exempt from CGT record maintenance requirements under CGT Rules. SECP and FBR, along with KSE, will work out details of the above before April 01, 2012.

• The rate of CGT will be frozen at the existing 10% on securities held for up to six months and 8% on securities held for a period over six months and less than a year till June 2014.

• To rectify double taxation, withholding tax (WHT) on brokers’ commission will be abolished.

• SECP has also amended regulations for the margin trading system, which will be implemented from today. The new regulations allow individuals to become financers in the system. While cash margins have been lowered to 15% from 25% with eligible securities making up for the balance of 10%.

• To enhance brokers’ capacity to execute business, SECP has allowed each member of the three stock exchanges to do additional business against a specified collateral amount from the respective clearing house protection funds.

Action and recommendation
The aforesaid changes, coupled with the robust financial announcements, should lead to strong market performance in the coming weeks. We also expect a healthy pick-up in trading volumes as retail investors come back to the market. At current levels, our top picks are MCB, POL, APL, FFC, Engro and Hubco.
(FS)

[Amin Khan]

Relaxation awarded in CGT

Minister of Finance Dr Abdul Hafeez Sheikh announce major incentives to the investors of stock exchanges including new procedure on collection of the capital gains tax (CGT) and exemption from probing source of investment made in stocks and shares during past. He announced that this decision will be effective from April 1.

Declaration of source of income exempted
Declaration of source of income for funds invested in the stock exchanges of Pakistan would be deferred from April 1, 2012 till June 30, 2014, so past investment in the stocks and shares during the last five years will not be probed under section 111 of the Income Tax Ordinance 2001.
Post-June 2014, highest or peak value of an investor's portfolio between now till then should be treated as income generated from the capital market and part of investor's wealth.

CGT rate freeze
Government has freeze the CGT rate at existing levels for 2011-12 as per Income Tax Ordinance 2001. For FY12, it requires investors to pay a 10% levy if stocks are held for less than six months and 8% if held for six to 12 months. While For securities held for more then a year will remain
exempted.



NCCPL would deduct CGT
To facilitate to investors, National Clearing of Pakistan (NCCPL) would deduct CGT and deposited to FBR. NCCPL shall act as a withholding agent to deduct and deposit the CGT from investors' transactions and also give a report on monthly basis, for every investor as per UIN basis to FBR, amount deducted and deposited under CGT regime. However, individuals' would require filing tax return on annual basis.

Withholding tax abolished
Finance minister abolish withholding tax on sale of share under section 233A to rectify double taxation anomaly. Continuation of withholding tax after CGT is double taxation i.e. taxing both turnover and net income.

Bottom Line
We believe that this would enhance the confidence of the investors in the market and KSE would exhibit positive reaction with increasing turnover. The average daily turnover has squeezed to only 52 million shares in CY12TD compared to 133 million in CY10. E&P, OMCs, Fertilizer and electricity are the sectors that are expected to remain in focus. As per AZEE Equity Market Report 2012, we maintain our positive stance on POL, PPL, APL, PSO, FFC & ENGRO.
(AZEE)