58 replies to this topic

[Amin Khan]

Strategy: Relaxation in CGT Regime to Bolster the Market

• Finance Minister announced acceptance of all proposals made by the Securities and Exchange Commission of Pakistan (SECP) regarding the Capital Gains Tax (CGT) regime

• This decision will help rejuvenate turnover at the Karachi Stock Exchange (KSE)

• The proposals accepted are: 1) No questions on source of income till June 30, 2014, 2) Freeze on CGT rates till June 30, 2014, 3) Withholding tax on brokers’ commission to be abloished, 4) National Clearing Company to Pakistan Limited (NCCPL) to act as a withholding agent

• Individuals have been allowed to act as financers in the Margin Trading System (MTS) whereas cash margin requirement for financees has been reduced to 15%, with the remainder acceptable in eligible securities

• We expect a broad-based rally moving forward which will help the index move towards our Dec-11 target of 13,300. Furthermore, we reiterate exposure in our top picks: ENGRO, FFC, HUBC, PSO, APL, POL and OGDC

(BMA)

[Amin Khan]

Record 146 week high rally - is it justified?

The KSE-100 index rallied 6.9% during the last week, its highest weekly gain in 146 weeks (since April 03, 2009) despite a net foreign selling of US$3.7mn. The rally came with high average daily volume of 87mn shares, up 209%WoW. We believe the rally was driven on expectation of positive news of easing stringent Capital Gains Tax (CGT) rules in favor of stock investors. As predicted, the Finance Minister, Dr. Hafeez Shaikh, visited stock exchange on Saturday and accepted all recommendations of the SECP to renew investors’ interest in the stock market. The measures announced by Dr. Shaikh, in effect from April 01, 2012, are as follows:

• Investors will not be asked to divulge source of income till June 2014.
  
• Freeze on current rate of CGT till 2014 i.e. 10% on holdings less than six months and 8% on holdings between six to twelve months.
  
• Abolishment of Withholding Tax (WHT).
  
• NCCPL shall act as withholding agent to deduct CGT and deposit the CGT from investors’ transactions.
  
• Individuals will be allowed to act as financers.
  
• Cash requirements in the Margin Trading System have been reduced to 15% from 25%.
  
• Clearing of ~Rs50mn per member of KSE against a collateral of Rs10mn.

With the 6.9% rally at KSE last week the discount to the region has narrowed down to 48% which after incorporating today’s rally of 250pts has further narrowed down to 47% vs. historical discount of 33%. Currently, the KSE-100 is trading at FY12E PE of 6.32x compared to last five years’ average of 9.4x. So is the current rally justified?

Policy measures announced & whats next?
Already the government has announced an increase of 14-207% in gas prices and taken bulk of the subsidy away from the fertilizer sector. The decision will impact the most powerful lobby of the country i.e agriculture sector in shape of higher urea prices. Additionally, to resolve the grave liquidity situation in the country, ECC over the weekend approved the issue of Rs160bn TFC’s to banking companies in favor of power companies. Furthermore, to reduce the income-expenditure gap the government is all set to roll-out 3G licenses in March. On external flows front, the negotiations are on fast track with UAE telecom operator Etisalat for the recovery of US$800mn of PTCL privatization and long overdue payments of US$2bn under the Coalition Support Fund (CSF) from the USA.

Macro data moving in the right direction
The macro prints for December have showed a relative better picture of the country in comparison to November numbers, which in turn has helped building market expectations of another round of easing by the State Bank in the next monetary policy. Already, the SBP has reduced the policy rate by 200bps to 12 percent since July 2011. The provisional statistics of the month of December reported 1) inflation at 9.7% from 10.2% in November, 2) remittances at US$1.08bn up from US$925mn and 3) trade deficit at US$1.02bn down from US$1.2bn. Tax collection in 1HFY12 also came in at an impressive Rs841bn, up 27%YoY. At the margin, the current account deficit also turned surplus and stood at US$160mn in comparison to a deficit of US$688mn in November.



In summary, we believe the measures announced by Dr. Shaikh will renew investors’ interest. More so, if the country’s macros continue to replicate December’s performance along with an ease in global macro headwinds, we expect market to rally further narrowing down the gap between its historical average PE and discount to the region.
(JS)

[Amin Khan]

Relaxation in Tax Rules to bring old days back at KSE:

The Finance Minister, Mr. Abdul Hafeez Sheikh, on his visit to the Karachi Stock Exchange, has agreed to the proposals presented by the Securities and Exchange Commission Pakistan (SECP), in order to revive investor’s confidence in the country’s capital markets, which consequently would improve the trading volumes at KSE. The approved changes in tax rules would be made effective from April 1, 2012. The following proposals of SECP have been approved by the Finance Minister.

• Exempting investors in the stock market from declaring/disclosing their source of income till June 30, 2014.
  
• Fixing the current rate of Capital Gain Tax (CGT) on capital gains at 10% for investors holding shares less than 6 months while 8% for securities held for a period between 6 months and 1 year which was earlier subjected to increase per year as per the schedule approved in the budget.
  
• Deduction of CGT by the National Clearing Company of Pakistan (NCCPL) from shares transaction, who would act as a withholding agent in collecting and depositing tax to the Federal Board of Revenue while eliminating the liability of brokers in this regard. It would do away the hassle of facing the tax authorities directly.
  
• Abolishment of withholding tax (WHT) on broker’s commission as the investors incurred double taxation first in the form of WHT on share’s purchase and further in the form of CGT on capital gains earned. The WHT of 0.01% on sale of shares has also been abolished, which therefore would benefit the investors.
  
• Furthermore, individual investors would now be allowed to participate in the Margin Financing System for which they would be required to deposit 15% cash margins instead of 25% earlier.

The above changes would be taken as a big positive for the stock market by the participants resulting in sharp jump in trading activity and rise index level. However, the KSE 100 index has already surged by 7% in the outgoing week on the back of rumors of positive announcement on CGT issue. Therefore we may see some correction at an upside of 2-3% from the current index level before another positive rally takes index higher. Investors should also wait for a Notification to be issued by FBR in this regard as no formal orders/statements have been issued so far. Moreover, it is yet to be seen how NCCPL would act as a tax collection authority for the collection of CGT.

25% Levy on Low BTU Gas sale to third parties:
The government has decided to impose 25% Levy on the sale of Low BTU gas to third parties other than the government under the Low BTU Gas Pricing Policy 2012. The government possesses the first right to purchase 90% of Low BTU gas converted into pipeline quality gas by the producer whereas, the producer would be allowed to sell 10% of the remaining gas to its own choice of customers for which a 25% levy would be charged by gas distribution companies, for utilizing their transmission pipelines. Hence, we believe the tax collection from 25% levy on Low BTU gas would be insignificant for the government.
(AF)

[Amin Khan]

Welcoming relief measures!

The Finance Minister, Dr. Abdul Hafeez Shiekh visited the KSE on Jan 21’12 to address members about acceptance of all proposals put forward by SECP last week. Moreover, the SECP Chairman also announced that amendments to the Margin Trading System have also been accepted to make the product more attractive for potential investors which will come into effect from Jan 23’12. The proposals are aimed at restoring investor confidence in capital markets and will come into effect from Apr 01’12. The crux of the accepted proposals regarding CGT includes:

• No questioning of the source of funds invested in capital markets.
• Freezing rate of capital gains tax on securities at current levels.
• Tax collection to be undertaken by NCCPL to minimize investor’s interaction with FBR.
• Withdrawal of withholding tax to avoid double taxation.

Relief extended to MTS
Recall that the SECP put forward proposed amendments late in Dec11 which sought to relax rules for MTS and MFS. The proposals included lowering cash margin requirement where eligible securities would also be acceptable, allowing individuals to act as financiers and increase the number of eligible securities. The amendments were confirmed by Chairman SECP on Jan 21’12 where margin requirements have been relaxed to comprise 15% cash and 10% eligible securities and the relaxed rules will be effective from Jan 23’12.

Outlook
The acceptance of SECP’s proposals by the government is welcome news which is likely to translate into much needed liquidity which had been impeding efficient price discovery. Market turnover on Jan 19’12 stood at 178mn shares against 27mn shares at the start of the last trading week where the announcement of the Finance Minister’s visit to the KSE had raised optimism. We further believe that sustainable liquidity is also imperative for unlocking valuations where a re-rating of multiples could be witnessed. Similarly, the return of retail investors could also mean that the influence of foreign investors on market direction could be countered with the market better poised to absorb sell offs.
(GLOBAL)

[Amin Khan]

Withholding tax abolished; CGT Rates frozen till FY14

• Finance Minister Mr. Abdul Hafiz Shaikh declared on Saturday, Jan21’12 that the following SECP proposals had been accepted: i) Deferment of applicability of Section 111 of Income tax Ordinance 2001, requiring unexplained income or assets may be deferred for funds invested in capital markets till June 30, 2014, ii) withholding tax on sale to be abolished iii) rates of capital gains tax (CGT) to be frozen at 10.0% (if gains realized within 6mo) till Jun14 and 8.0% for investments of up to one year.

• Moreover, it was decided that National Clearing Company of Pakistan Limited (NCCPL) will deduct CGT, so as to avoid direct filing of the Income Tax Returns by individual investors. All these measures announced will come into effect from Apr1’12.

• The KSE100 appears ripe for re-rating, as we believe the market participants are likely to rejoice the recently announced positive measures related to the CGT and its implementation. KSE100 Index currently trades at an attractive FY12 PE of 5.9x, which is at a discount of 45% to regional average PE of 10.9x.

• We anticipate the P/E multiples to remain low and conservatively target a CY12 PE of 6.7x, which takes our CY12 Index target to 13,100, an upside of 12% from current levels. Our top picks still present an upside of 15 - 40% and include PPL, POL, HUBC, ENGRO, FFC, NML, DGKC, LUCK, PTC and PSO.

(IGI)

[Amin Khan]

CGT relief measures - finally some action for equities

we present our take on the acceptance of SECP proposals by the Ministry of Finance and the impact it would have on the capital markets.

Relief on the fearing income source, finally!
After long and jointly-concerted efforts from the capital market stakeholders and the SECP, the much-awaited and needed action on the lingering Capital Gains Tax (CGT) issues has finally taken place with the Finance Ministry accepting all the SECP-suggested proposals to revitalize country's almost dead capital market.

To recall, the SECP had proposed earlier a number of immediate reforms for the revival of the equity market, listed corporate sector as well as making other investment avenues productive for the economy. Specifically, the proposals included 1) income-based CGT on stock market at fixed 10% for less than 6M gains (8% on gains between 6M and 12M period) against the existing transaction-based annually-rising rate of CGT, with no investigation on source of income till 2014, and elimination of WHT on equities, 2) major reduction in the corporate tax rate for the listed sector compared to non-listed one, and 3) increase in the tax rates on the National Saving Schemes (NSS). CGT’s calculation was also agreed upon to be done by the NCCPL, barring brokers' liability. Amnesty in the form of no scrutiny of equity investor’s income till 2014 while considering total wealth as white from 2014 onwards, has also been reported as accepted.

With ease-off on CGT, MTS margin criteria also lowered as desired
Few more proposals related to capital markets were also accepted including 1) relaxation on the cash margin requirements with respect to the equity financing product (MTS) from 25% cash to 15% cash and 10% eligible securities (to be effective from today) while allowing individuals to participate as financiers, and 2) providing stock brokers with enhanced capacity to execute business (SECP would allow additional business limit and clearing of ~Rs50mn/member of KSE against collateral of Rs10mn/member from the Clearing House Protection Fund (better liquidity for the market).

Proposals accepted need clarity, to be included in next Finance Bill
The proposed measures specifically related to the capital markets i.e. CGT rate, calculations and income source concerns with no WHT have been verbally accepted by the Ministry of Finance. However, acceptance of other proposals related to the tax incentives for the listed corporate sector and additional tax on national saving schemes have yet to be announced or accepted by the Ministry of Finance.

It is reported that CGT-related proposals would take place from Apr-12 onwards. This however seems a distant possibility for two reasons: 1) NCCPL would need some time to build the additional CGT calculation mechanism at least for individual investors, and 2) all the proposed changes in the CGT-WHT, listed corporate and saving schemes’ taxes need to be fully approved and incorporated into the Finance Bill. Thus, we believe, the effective implementation of the accepted proposals, along with the ones related to corporate tax rate and higher taxation on saving schemes would take place with their inclusion in the next Finance Bill in the budget FY13 (from Jun-12 onwards).

In addition, it is still unclear whether there would be any consideration/adjustment of capital losses that investors’ portfolio may entail in future, as income-based CGT means only tax on income. Furthermore, a clarity is also needed whether the CGT calculation by NCCPL would be retrospect from Jun-11 onwards or from its effective date i.e. Apr-12. With regards to the MTS income for financiers, it is still yet to be clear whether the income from financing equity trading would come under the ambit of CGT or other income (as tax rates are different on the two encouraging tax arbitrage available to financiers).

A swift clearance on these pending issues would make the proposals’ acceptance a worthwhile action to provide sustainable support to equities.

Better volumes = increased price discovery = more attraction for Pak equities
Though the implementation of the mentioned proposals would not directly affect foreign investors, its effects in the form of increased volumes/activity at the equity bourses would attract foreign as well as previously sidelined local investors back to Pak equities. As a result of increased liquidity, Pakistan market may also be reconsidered going forward by the benchmark index providers i.e. MSCI, FTSE, for potential upgradation to indices that global investors prefer. In this case, an already deep-discounted market such as Pakistan could attract bigger share in foreign fund placements.

As mentioned in our Investment Strategy piece for 2012, released on 02’Jan-12, better activity is expected to unlock index growth potential that was squeezed earlier due to dead-low activity despite improved fundamentals such as higher corporate earnings growth, better payouts and ROE. Amongst regional peers, with equity and cashflow multiples being at their deepest discounts at the moment, we expect Pak equities to touch new highs much before 2014.
(InvstCap)