According to the data published by the Tehran Stock Exchange during the 20 business days between Jun 22—July 22 the value of transactions in comparison with that of the previous month demonstrated a noticeable increase of 111 percent and reached $1,165 billion comparing to $553 billion last month. Plus, the volume transacted peaked 109 percent and arrived at 19475 million shares this month from that of 9297.5 the month before. This is while the average daily volume and value of trading was 861 million and $49.18 million respectively.
The number of transactions went up by 62 percent in this period and increased from 782,000 times to 1,270,000 times in the current period. The overall benchmark, with 6 percent hike, stood at 67,644 points with 3,834 points more than the last period. Market value rose about 5 in percentage or $4,192 billion to reach $2,932,205 billion at the end of July 22.
In the industries sector the chemicals, banking and base metals ranked first, second and third from the market value point of view and their value was 20,732, 12,378, and 7,929 in billion dollars respectively.
Speaking about the P/E of the listed companies on TSE, excluding those of 16 investment companies as they are not required to provide projections on theirs and considering this fact that 35 out of the 282 companies reported zero or negative profit. Thus, they were not included in the computation of P/E. Putting all this together, this indicator was 5.88 for the current period.
Regarding the income statement adaptations of the companies and their comparison with that of previous month shows that out of 301 listed companies 30 of them recorded increase in their profits, 67 with negative return and the rest of them did not realize any change in this element.
Also, the dividend distributed among stockholders from the start of the year according to different categories on TSE equaled $4267billion being 71 percent of actual income of the enterprises. Nevertheless, the average cash dividend paid to shareholders was 1.2 Cent.
The general climate of the market did not improve much after the historical and landmark nuclear agreement although the most prominent systematic risk was removed from the prolonged recession-stricken stock exchange that dragged the market nearly to free fall. The analysts and market informants mention three major obstacles in the way to realize the projected profits in the financial statements as this issue was also stressed out in the AGMs of the companies through July’s General Assemblies which was the latest due time to hold shareholders’ meetings. What comes first is the full warehouse of the companies and having their inventories with no potential customer to sell to. Next is cash flow problems as one of direct outcomes of low or poor sales. This scarce in capital encounters the enterprises with better conditions in the market to challenge with deficit in supporting their production line because if they wish to get financed through banking system to get paralyzed since they do not receive enough cash to meet their ends. Last but not least is the difficulty in sales faced by some of them as the demand is not as high as the supply. Therefore this dissymmetry results in poor cash inflow and attaining the forecast targets in profitability.
In addition to what went earlier, we can name three vital elements, contributing to considerable rise in share prices in previous periods in fiscal years before, especially during the ex- president’s tenure. These are namely; upward fluctuations in currency rate most specifically in dollar and euro, ballooning inflation and global rise in the commodities and oil prices which altogether lifted the earning per share and profit of the respected companies in different sectors.
Now, at the present, the high interest rate in the banking sector impacts the profitability of the companies in other categories in three particular areas:
- It decreases the future cash flows discounted rates and consequently reduces P/E ratio dramatically. Due to high interest factor, the resulting DCF does not seem to be attractive.
- Another noticeable and direct effect of the issue in question is tangible reduction in liquidity in the market as the opportunity cost of this element is extremely high and thus the practitioners prefer to deposit their cash in the banking system rather than being encountered with unreasonable risk in the stock market. In other words, there is proportionate and meaningful relationship between hike in interest rates and fall in risk-taking of the individuals in the market.
- Most importantly this element puts its undeniable pressure on the financial costs of the respective enterprises and as a result drags down the projected profitability expected to be attained by them.
Regarding what was said in the above, it is expected that with the lift of sanctions and access to SWIFT network, it would ease the LC opening for the concerned companies and lead to convenience in foreign financing and consequently obviate the need for financing thorough domestic banking system in a meaningful way and it is needless to say that it will culminate in the subsequent reduction in interest rates.
Now let us have a look at some key sectors in the TSE:
The aftermath of the nuclear deal sets out the path for a brighter horizon in Iran’s international relations and economic climate betterment that would finally end in improvement in quality and more competitiveness in the banking industry. To realize this ambition, the underlying obstacle at the beginning to overcome is the price war that exist among the financial institutions in the sector. This is an unfortunate incident as the endeavor to obtain more share of the market has led to low coverage of earning ability in the industry. As of today, many banks in the category, namely 16 of them, are struggling so hard to award interest rates way above the current inflation rate to attract and absorb interested depositors but the outcome of their policies has been absolutely worrisome as the banking spreads devalued to touch bottom line negative. When we scrutinize the financial statements of the banks, we find out that G&A’s (General and administrative expense) share in ratio to overall income of banks is extremely high and it is even higher than the income in some banks. Another subject matter that deserves due diligence is the high ratio of non-current loans coupled with growing cost of doubtful receivables not balancing the granted collaterals and reserves taken from the respective clients with the corresponding received loans by these individuals. It is noteworthy to underline that the operational performance of the related banks is negatively-inclined for the difference between annual inflation rate and cost of money is driving the banking structure into turmoil and turbulence.
In contrast to above-mentioned analysis, we can be quite hopeful that the future is pregnant with good news regarding this sector as the removing of the sanctions puts this industry on the way to profit-making after a long time of stress and distress over this sector. The banking sector has enjoyed the lowest SD in the past four years as it equaled around 7.6 one month ago provided that we consider price fluctuations as the benchmark for stock risk. The fact that all macro-economic and political decisions impose their own exertion on all industries in the market, it is a living proof that banks stood against this overwhelming and exhausting thrust exerted over them. As you might know, the financial structure of Iran is heavily bank-oriented and more that 80 percent of the production is financed through this method. Furthermore, the capital market itself and the existing listed companies in it rely on the financial support of the banking system. Also, the return to risk ratio around 0.42 and from this respect takes the 8th place among pioneer exchange industries and it is projected that with the current opening in international relations investment in shares of the banks with high capabilities and sufficient capacities is a wise decision to be made in virtue of the reasonable fundamental underlying condition of them by the spell of time.
Like many other businesses in Iran, the pharmaceuticals industry has suffered under sanctions from lack of investment, corruption, smuggling, and government distortions, indicating significant potential for investment and rapid growth in a post-sanctions world. The health ministry claims that between 90% and 97% of the country’s finished medicinal product requirements are produced locally, as well as around 50% of the raw materials needed as inputs. However, the country remains dependent on imports for certain specialized medicines and key raw materials. The sector also is very inefficient owing to the heavy involvement of state companies, with the government historically subsidizing drugs to ensure broader affordability with the unfortunate side effect of over-prescription and over-consumption. As a result, the government is hoping to implement an ambitious plan to dramatically increase self-sufficiency and overall efficiency in the sector over the next 4 years. Owing to the critical importance of affordability and local production growth to meet domestic needs, we expect the government to continue to reach out to international companies in the near- to- mid-term for heavy investment in domestic production, whether through local partners or Greenfield investments. We expect generic medicines, currently accounting for about 97% of industry volume, to continue to be the focus, offering targeted investment opportunities to discerning investors, now that the sanctions are lifted.
In parallel with what we put earlier, it is believed that the boom in this category will be further boosted with the advent of the nuclear deal. Those factors enhancing this prediction are as follows:
- R&D schemes; as pharmaceuticals are closely knitted with knowledge-based companies and as the production of novel medicines continuously requires the development of the company provided that the government sponsor and support these kind of projects, this would lead to the profitability of them.
- Rise in medicines prices and reforming its prices; in the years before there was a pressure on these companies not to add up to their prices and therefore they were not able to realize high profit margins, but recently the government passed a legislation to allow new higher prices and this in turn will end in growth in earnings in the sub-groups of the industry.
- Increase in exports to neighboring countries; Iran used to be a major importer of drugs in recent times but due to the investments made in previous years has changed into production and export hub of medicines in the Middle East and after exporting to countries like Iraq and Afghanistan has found some new markets in Russia and some European countries and this fact means this sector has the potential to stand third in exports after Oil and Petrochemical sales abroad.
- Another point of importance is the availability of opening LCs with less financial costs, namely 10% compared to that of unbelievable 130% before the sanctions that will enable the accessibility to cheaper and easier financial resources and ultimately will contribute to more production and better vision for the involved companies.
The problems which are inherent with these producers of medicine are their low liquidity when there is high demand for their shares in the market and the slow movement in the price upward or when there is selling-off, there is no support to remove the queue since they are controlled by some semi-governmental institutions such as Social Security Organization that follow their own policies and strategies in the exchange market.
All in all we believe that the future is endowed with very good news for this industry and we can project that in 2015 they might deliver 20-30 percent return averagely.
This sector is one of the most suffered industries in the market because of so many factors domestic and global that brought about their decline in prices in the market. Some of these numerous elements can be categorized as:
- Economic Recession
- Reduction in the sales prices internationally
- Lack of transparency in internal information
- Uncertainty of the gas feedstock prices for petrochemicals
- Not favorable 1Q2015 reports
In recent weeks their products experienced fall in the prices in the global market and that has been describes as an alarming call for their meeting their targeted profits as Methanol was traded under 300 dollars along with the decline in other group’s products. This has raised concern over the 2Q2015 reports to be announced later months aggravated with the presumed price of 8 cents for feedstock, seemingly not true as it is being said it will be risen to 13 cents, with the official currency rate of 28,500 rials for each dollar, not being confirmed to be the calculating rate for the feedstock price. The companies in the category were able to cover their projections and the main reason for that was the higher selling prices than expected.
In order to recapture the old markets and seize the new ones, the related authorities shall not suffice themselves to Indian and Chinese markets but rather look for some new ones in Africa and Latin Americas since these countries are still making use of traditional mechanisms for cereals production while the population is growing up. Moreover, they should focus their export on urea and ammonium as Iran has competitive advantage on these products.
The companies in this category were accustomed to pressurize the National Iranian Oil Refining & Distribution Company (NIORDC) to always succumb to the calculated formula for the price of their produced petroleum products on the basis of Persian Gulf FOB. These refineries had succeeded in the last three or four years to resist against the oil ministry’s own computed formulas to determine a pricing system relying on elements like matching quality of the products with appropriate price and consequently this indifference to the ministry’s necessary criteria always led to realize noticeable profits near their annual AGMs. Nevertheless, the reaction from the NIORDC this year was that of rigidness and inflexibility and the decision makers were not authorized to step back in their demands and this forced the refining companies to announce their financial reports as requested and imposed by NIORDC. An evident example in this group is “Shiraz refining company” which realized just about 1 cent net profit per share in FY2014 compared with that of 10 cents in FY2013. This is bad news for the future prices of these companies in the exchange market and if due decisions are not made in advance we would witness heavier downbeat in their prices.
Our analytical team hopefully intends to provide a full analysis of these sectors in the coming future. We would be very pleased if you share your comments and views with us as our team has just recently constituted and we are looking forward to receive your suggestions to improve our job for the better.
*Market spot exchange rate 1USD = 33,140 IRR (at 16:30,2nd Aug 2015)
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.