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
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.
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 @
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