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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 Sep 06, 1999

Stock Market

The market continued to drift sideways in the absence of any real investor interest. The KSE 100 struggled to avert a major downside falling by 56 points to close the week down by 4.63 percent at 1166.40 levels.

True to our expectations investors were largely seen on the sidelines waiting a positive response from the market. No fundamental changes coupled with the strike call added to the recent hesitation by the market players. Market sentiments have primarily resulted in putting a cap on the upside as selling is always witnessed whenever the market seems to edge up.

For the coming week the KSE 100 is likely to continue to flounder at the current levels and further weakness would be witnessed. Any direction is likely to surface at the end of the coming week, if it actually does.

 

Sector Review

PTCL: Road Show Ahead.

Tripack: Two year EPS CAGR expected at 35%

PTCL: News sources are suggesting that Goldman Sachs (GS), financial advisor to the government for privatization of Pakistan Telecom, has submitted its schedule to the Privatization Commission (PC). This schedule envisages road shows beginning in the first week of October. Strategic buyers will be sought in Middle East, Europe, America and Far East.

It will be important for any strategic investor to own not only an indigenous network, but also hold a presence in the global information net. Expression of interest by strategic investors should invigorate interest in the stock. We continue to retain a Buy rating for the intermediate-term on grounds of PTCL being among the cheapest Telcos in the region, FY 00 EV/EBITDA is at a 71% discount to the region.

We believe the future of Telcos is integration, development of seamless networks, adoption of wireless technology, expansion of fiber optic nets, in short, the goal is to lower cost of service sufficiently to take advantage of the ongoing information revolution and growth of cyberspace. The goal would be to move away from revenue generation through archaic means such as fixed line rental metered call charges, etc. and to ride the consumption wave of e-commerce and growing internet junkyism.

Where does Pakistan Telecom (PTCL) fit within the greater scheme of things. Presently, without JVs or strategic partners, pretty much nowhere. That was the bad news. The good news is that the demand for information access has become a global phenomenon and PTCL holds a monopoly over basic telecommunication services till 2003. This monopoly status in conjunction with strategic partnerships can allow PTCL to lower its rates thereby increasing availability of information flow.

The recent 15.5% weighted average increase in rates has helped PTCL absorb the shock of corporate taxation in FY 00 (exemption ended on 30th June 1999) though negative elasticity is likely in case of further rate hikes. This should mean that future growth has become more a function of volume than rates, and on its own, PTCL may not be able to generate the volume gains that it could otherwise do in a strategic partnership.

PTCL has been pushed as a privatization play for a long time. We agree over a longer-term horizon, though over the next 12 months, we think there is, at best a 30 - 40% probability of privatization. Also, the interested party would need to be an established telecom for the efficiency gains to flow through.

 

Tripack: We believe the company will not be required to expand capacity for another 2 years given that it is running at utilization levels of 80%. This should allow Tripack to hand out healthy dividends, we expect FY 00 yields at 16.4%. Assigning a prospective PE of 8x, we anticipate fair value at Rs 44 per share, Buy.

The following table displays recent performance:

Whereas this huge jump in earnings is unlikely to repeat itself, we nevertheless believe that Tripack should post a 2 year EPS CAGR at 35%. Our assertion is based on a declining debt burden and volume growth at between 10--11% per year.

While maintaining gross margins at 27%, operating margins improved to 21% from 20%. We believe this is sustainable given that one of that main competitors Net margins improved to 16% from 11%.

Change
(%)

FY 99
(Rs mn)

FY 98
(Rs mn)

Sales

12%

606

543

COGS

11%

440

396

Gross Profit

13%

166

147

Gross Margins

0%

27%

27%

Admin & Selling

3%

39

38

% of Sales

-1%

6%

7%

Other Income

408%

3

1

Operating Profit

18%

130

110

Oper. Margins

1%

21%

20%

Fin. & Other Charges

-29%

34

48

PBT

55%

96

62

Tax

na

0

0

PAT

55%

96

62