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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 Sep 20, 1999

True to our expectations, the market continued to remain range bound. With investor interest largely on the sidelines, the Karachi Stock Exchange 100 index continued to remain in sideways movement, dropping only by 0.55% to close the week at 1155.63.

The absence of the foreign investors continued to keep the market under pressure. Local players were witnessed taking active participation. Primary interest by local players was witnessed in Hub power Co., driving the price up to PKR 18.90-unable to hold these levels Hubco once again succumbed to the market pressure to close the week at PKR 18.20.

For the coming week, the KSE 100 will continue to remain weak fundamentally. Investor interest is likely to remain diminished with investors unwilling to take on positions, with the current round of inactivity being witnessed by both international and institutional investors.

Sector Review

Pakistan State Oil: Sales Volumes Set To Recover

There has been serious comment on the likely impact of rising international oil prices. We are also of the view that oil prices consistently above US$20/barrel will play havoc with the official trade deficit target of US$800 million for FY00. However, the turnaround in oil prices has surprisingly been accompanied by a recovery in volumes as well, with the quantum of oil imports depicting a steady increase.

Although this trend is encouraging from an economic activity perspective, the outlook for currency weakness and consequent inflation is worrying. There are some clear beneficiaries of this trend as well, primarily Pakistan State Oil and Shell. PSO had to bear the brunt of investor confidence being shattered after the nuclear tests, and as a result started a dizzy fall from PKR220 at the start of 1998, to below PKR50 by July of the same year. The steep fall was precipitated by the IPPs dispute, which erupted after the government accused these companies of using unfair means to secure attractive agreements. PSO had been touted as a major beneficiary of the commissioning of IPPs, as it would be selling Furnace Oil and Lubricants to these companies under fixed contracts. The volume growth that had been envisioned for PSO suddenly disappeared, prompting a mass exodus of investors from the stock.

After the nuclear tests, concerns appeared about the fate of 'normal' sales of PSO as economic activity started grinding to a complete halt. As the graph shows, POL imports have only recently recovered to pre nuclear test levels. We believe this marks a return to trend for PSO, with volume growth expected to range between 2-2.5% for the next couple of years. Considering the nature of PSO's business, and with conditions returning to normal, current valuations are no longer justifiable.

Readers would notice that these forecasts are very conservative, and PSO is still trading at only 7.8x prospective earnings, yielding 7.7% and trading at only 4x cash flows. It does not go any better than this, we are convinced PSO is one of the feW companies at present which are set to outperform the market on a 2 year horizon-BUY @ PKR125.


PKR mn 1998 1999 % Chg y-o-y
Net Income (mn) 1,846 1,632 1,904
EPS 15.5 13.7 16.0
P/E (x) 8.1 9.1 7.8
EPS Change (%) -9.7 -11.6 16.7
Cash Flow/Share 17.2 13.7 30.3
P/CFPS (x) 7.2 9.1 4.1
EV/EBITDA (x) 4.5 5.1 4.5
Gross Dividend 6.7 8.0 9.6
Gross Yield (%) 5.3 6.4 7.7