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  1. The KASB review
  2. Finex week

An exclusive weekly Stock Market report for PAGE by Khadim Ali Shah Bukhari & Co.

Updated on 19th July, 1999

Market Update

The market moved largely on the back of PTCL and Hubco, which registered gains of 7.4% and 12.2% respectively. We are maintaining a Buy on both these stocks. The Index closed up 4.58% at 1134.78 points, just below its technical resistance of 1140 on a volume that was 16.4% lower than the previous week. The buying this week, we believe, was more on fundamental grounds and is creating a base for the market. The increase in feed rates of gas for fertilizers resulted in Fauji and Engro under performing the week's rally. Whereas the market is making a base for itself, certain concerns around the horizon may mar any sustained rally to our fair value for the market at 1350. The critical uncertainty being the recent LoC crisis with India. Whereas India is talking about a deadline date for removal of the guerillas from the Indian side of held Kashmir, Pakistan fails to recognize any such date. This potential flash point could result in cross-border tension resurfacing subsequently taking its toll on the market. We recommend investors accumulate at current levels.


Sector Review

Fauji Fertilizer

Rising input costs are certain when an environment of subsidized production becomes unsustainable, or after such an environment has served its purpose. This is the case with subsidized gas for fertilizer producers. The main objective of this policy was to encourage domestic production of fertilizer in order to reduce dependence on imported fertilizer, and to ensure better availability of the product throughout the cropping seasons. This end has been achieved with tremendous success, with the added benefit of cheap urea being available for a long period of time, at prices that were at times 50% below international prices. Urea producers were also able to earn handsome returns, while making efficient use of the natural gas made available to them. However, the situation at present is such that domestic capacity is sufficient to meet domestic demand comfortably, international prices are weak, and it has been a long time since the last gas price hike. Bingo, ideal timing for a price increase. The timing of the current increase of roughly 70% is ideal from the government's point of view, in that it comes at a time when producers are not in a position to freely pass on the cost increase.

The other aspect to evaluate is how does profitability change as a result of the increase. We take a look at Fauji to gauge the affect. The net result is a roughly 19% increase in Raw Material costs/ ton. Although this sounds high, it represents only a 5% increase in total cost of producing a ton, excluding depreciation. Holding everything else constant, this would suggest that EBITDA margins would go down by a similar proportion. Another factor working in Fauji's favor is that other income makes up close to 16% of pre tax earnings, reducing the overall impact of higher gas prices on earnings. We are in the process of reviewing our estimates, but preliminary calculations suggest the following forecasts:

Since our sell call in April, Fauji has under-performed the market by 24%. Now, we are much more comfortable with the stock, mainly as we believe the immediate threat of the gas price issue is out of the way. Trading at 3x CY99 earnings, we are beginning to like the stock again. Although the temptation to hold back in anticipation of some price weakness is very strong, we are upgrading to a HOLD immediately. Stay tuned for further updates.

  FY 95 FY 96 FY 97 FY 98 FY 99
RM/ton-PKR 464 490 568 582 693
Chg.-% 26 6 16 2 19