Updated on Sep 12, 1999
True to expectations the
Karachi Stock Exchange 100 index continued to remain adrift for this week running as well.
With the ominous absence of real investor interest the KSE 100 slipped by 0.88% over the
week to close at 1156.18.
During the week Hubco witnessed renewed investor interest largely on
the back of domestic institutions. Certain rumors pertaining to Hub Power Co. circulating
in the market also lead to an increased turnover.
Shell announced its FY 99 earnings results, which were greatly welcomed
by the market leading to an increased rally during the week, which however subsided during
the course of the week.
For the coming week we remain with our earlier stance of entering the
market at lower levels as due to excess liquidity the KSE 100 is going to remain range
bound, without any bout of out-performance expected anywhere in the near future.
Shell Pakistan FY 99 Result Preview
Shell announced its results for the year ended June 30. Overall
performance has improved considerably y-o-y, with a 49% jump in earnings. A brief summary
Starting with net sales, revenues were down in line with lower average
prices (net of surcharges), as government levies rose to 54% of gross sales, up from 42% a
year earlier. As cost of product also declined in step with revenues, gross margins rose
400 bps, with gross profits also jumping 32%. Operating expenses were higher, up 29%
y-o-y-we suspect this is due to aggressive marketing, details are not available as yet.
The result announcement seems to vindicate earlier suggestions that Shell has slowed down
its capex plans in Pakistan. We draw attention to lower financial charges, which dropped
63% to only PKR34 mn. This clearly points to a more healthy cash position, which we
believe is a result of lower capital expenditure. Also in line with this theory is the
figure for net other income, which also rose 24% y-o-y, again pointing to an easier
liquidity position during the year.
We have been extremely bullish on the Oil Marketing Sector in Pakistan,
and believe that our view is being vindicated by these results-PSO's announcement later
should also show healthy growth. Despite strong fundamentals, valuations are still
attractive, Shell trades at only 7.9x historical earnings while yielding over 6%
(dividends)both measures at discount to the market and regional peers. With the
government desperate to protect its revenues from surcharge on POL products, we suspect
prices of petroleum products will start rising fairly soon. This augurs well for earnings
growth. The argument for a quasi currency hedge existing for these oil marketing companies
is still intact, more so when international petroleum prices are firm. We remain extremely
bullish on the sector-OVERWEIGHT. BUY Shell, PSO.
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