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THE KASB REVIEW

  1. The KASB review
  2. Finex week

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

Updated on August 01, 1999

Market Update

With the return of relative normality on the LOC, investors were seen reentering the market. Buoyant by the increase in investor interest, the KSE 100 climbed ahead with a 60.76 points surge translating into a w-o-w change of 5.11 %. As mentioned last week, the market continued to wrestle free of the negative sentiments and continued to consolidate recording extended gains across the board, closing at 1251.79.

Hubco once again came into the limelight with investors showing increased interest. This sudden change in confidence was largely on the back of hopes of a settlement to the ongoing feud between the government and Hubco. Also, providing much needed confidence to the investors was the news of positive developments between the government and IMF in Washington over the disbursal of the next tranche of US$ 280mn. The announcement by our Finance Minister regarding the apparent approval from the London Club on rescheduling Pakistan's debt also helped in edging the market upwards amidst growing optimism.

The KSE 100 is likely to continue its upward rally for the week. However with no concrete fundamental change largely visible over the preceding weeks, any further upward movement of the KSE 100 should be seen as an exit point. With the market already in the 1250 level range, 1280/1300 level should be seen as an opportunity to book gains and reduce exposure.

Sector Review

Askari Commercial Bank: HY 99 Results

The one big beneficiary (in our opinion) of the crisis following nuclear tests last May has been the banking sector in Pakistan. We believe this is so as increased competition is healthy for any area of economic activity, and banking is no exception. Hence it will be interesting to see how various banks perform in response to this dramatically changed environment. Askari's interim results would have made great reading in this very context, and are they interesting!

For us, the most alarming aspect here is a fall in revenues. This was expected, as government-borrowing costs have collapsed, and show up in lower yields available on assets.

We expect yields on assets to fall further (as lower returns are earned throughout the period compared to the effect of falling returns in the period under review) before stabilizing, followed closely by cost of funds as well. Hence we will not be surprised if gross spreads shrink marginally before stabilizing/expanding. The best a bank can do in such an environment is to remain conservative (as evident by flat advances y-o-y) and control costs (ok again as operating costs fall). Our only concern here is with provisions, which are absent. This can be due to one of 2 reasons — either the bank is adequately provided (quite likely), or the urge to maintain the bottom line is at work here (possible). Considering that lower provisions fly in the face of conservative banking, we are forced to maintain our negative stance for the sector, and hence the stock as well. We continue to favour bigger banks, where only one listed player (MCB) is available. Maintain NEUTRAL for Askari.

Market update

Dispelling the spiraling downward movement witnessed over the last weeks, the KSE 100 was given a much-needed breather in the shape of a 4.96% increase over the week. With the apparent climb down in hostilities in the region, investors were seen cautiously entering the market. Augmenting the recent climb the KSE 100 is hovering near the 1200 level. Keeping the facts in place we continue to hold our decisions to consolidate. In our earlier comment we had singled out the 1140 levels as crucial, which proved quite correct as evident from the upward movement over the week.

Over the week the KSE 100 went up by 56.24 points to close the week up by 4.6%. Noticeable scrips included Hubco, which witnessed increased investor interest which culminated into a recent high touching 17.60 in the process.

For the coming week, the psychological barrier of 1200-1220 is likely to be decisive for the market. With investor interest on the increase, the market is most likely to move upward however with short patches of consolidation accompanying the climb.

Sector Review

Hub Power Co. Changing IRR

There have been news reports suggesting that Hub Co has submitted a proposal for reducing the project IRR to 15.76%, and WAPDA is considering the merits or otherwise of this proposal. Initial reactions to these reports have been mixed, with most investors interested in trying to figure out if these reports are correct or not. We believe it is better to assess the impact of any such move to reduce the IRR on the NPV of Hub Co., as this is the most important variable at the end of the day. There are 2 basic situations that can result if IRR is to be reduced.

1. IRR over the entire project life (inception through to 2027) falls to 15.76%, or

2. IRR over the remaining project life falls to 15.76%

In order to estimate the impact on NPV in both situations, we adjust expected dividends going forward. Our calculations are summarized below:

1. IRR over entire project life falls:

In this case, the single dividend of PKR7/share already paid also comes into play, and remaining dividends have to be adjusted accordingly. Assuming a dividend for 1999 (something we are not too bullish on) yields the following estimates of NPV (with dividends being reduced by 23.8%).

Assuming no dividends for 1999 results in a slightly less comfortable situation (with dividends being reduced by 11.3%).

In such a situation, NPV falls to PKR15.8 per share using our base rate of 25%, which is at a premium of 8% to market price. We believe this premium is not material for the primary reason that we have used a simplistic across the board reduction in dividends. In reality, it is likely that the company would have offered a higher reduction in later years, when debt servicing would have ceased. This would reduce the negative impact on NPV.

2. IRR falls over remaining life of Project

This situation is not meaningful, as only a 2% dividend reduction is possible, leaving NPV estimates almost intact.

Conclusion: Share price has rallied 29% since our recommendation, but valuations are not stretched even now. We see no reason to change our view, and continue to recommend an Accumulate.

 Discount Rate NPV Prem/(Discount)

to NPV

21%

21.5

(25.15)

23%

19.4

(13.36)

25%

17.8

(3.65)

27%

16.4

4.45

29%

15.2

11.31

31%

14.2

17.19

 

Discount Rate N PV Prem/(Discount)

to NPV

21 %

20.0

(16.7)

23%

17.7

(3.1)

25%

15.8

8.2

27%

14.2

17.5

29%

12.8

25.3

31 %

11.7

32.0