Karachi, Mar 15, 2012 (PPI): CGT amendments shall bring back interest in Tier 1 stocks
SRO likely to materialize soon
Elixir Securities Limited believes finance ministry and tax authorities are ahead of schedule in deliberations for implementation of investment window to allow investors to invest their undocumented gains in the stock market.
According to Elixir Securities Limited, finance minister accepted SECP’s proposal for amending Capital Gain Tax regulations in Jan‐12, allowing investors a vehicle to document their undocumented wealth earned from the capital markets. The proposed amendments shall also relieve the investor’s from facing FBR while filing returns for CGT on stock market gains as NCCPL would deduct and deposit capital gain with the FBR on investor’s behalf. Elixir Securities Limited believes SECP’s proposal enjoys strong support of the government, finance ministry and the tax authorities. Elixir Securities Limited sees high likelihood of issuance of SRO well ahead of April 1st deadline.
Market valuations and volumes have so far been led by second tier stocks
KSE‐100 index has rallied by 17% during CY12 driven by Finance Minister’s announcement of revamp of CGT rules. Broader market volumes have recovered to an average of 240mn shares during February and March 2012, up 100% from CY11 average. However, index gains and volumes have been led by second tier and penny stocks. As such, value traded during February and March 2012 is up a mere 27% from CY11 average. While top 30 heavy weights in KSE‐100 have posted a return of 16%, the bottom 70 have far outperformed, with returns clocking a healthy average of 23%.
Top tier would likely lead the rally post issuance of SRO
Proposed draft of the amendment to the income tax ordinance suggests that tax authorities would refrain from asking questions regarding source of income only if a certain sum of money remains invested in the stock market for a minimum of 120 days during each of the next two years, and 45 days during the current tax year. Hence, while trading in anticipation of the SRO has largely been speculative, the minimum investment period requirement would attract much larger interest in tier one stocks, due to stable business models, stellar yields and attractive valuations.
Tax year 2012 should be the litmus test
Elixir Securities Limited believes interest shall build-up only gradually as conviction regarding usefulness of the amnesty shall remain low amongst investors in the beginning. As such market shall use tax filings for 2012 as litmus test. Smooth implementation of the proposed amnesty would help build-up investor confidence. As a result greater investor conviction on the amnesty scheme would likely bring in much greater flows into the stock market in the coming years.
Elixir Securities Limited raises Elixir Securities Limited’s Dec‐12 index target to 14,800 recent rally has snapped 17% gain in the first two and a half months of CY12; however, Elixir Securities Limited believes there is more to come due to latent returns. KSE‐100 corrected by 6% during CY11 despite earnings growth of 21%. As a result, market PER de‐rated from 6.8x in Dec‐10 to 5.7x in Dec‐11. The recent rally has lifted forward PER to 6.7x, while the dividend yield is still robust at 7.3%. Elixir Securities Limited’s Dec‐12 index target of 14,800 is still conservative as it is based on FY13 exit PER of 7.1x and offers a further upside of 11%. Elixir Securities Limited likes PPL, POL, HUBC, FATIMA, FFC, Engro, KAPCO and NCPL amongst the main board items. Amongst the second tiers, Elixir Securities Limited believes TREET, SITC, SAZEW are worth a look.