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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 Oct 25, 1999

Market Update

On closing basis, the KSE 100 remained range bound, market movement being restricted between the levels of 1120 and 1180. Subsequently the market closed up by 22.04 points at 1151.21.

After the recent spate of tumultuous events of the past fortnight, the KSE 100 has finally entered the consolidation phase after being witness to some quite volatile movements.

Two developments during the week were of primary investor interest:

1. The sudden indefinite delay in PTCLs Board Meeting

2. International Court of Arbitration seeks Hubco presence on hearing dates

It seems that the sudden delay in PTCLs Board meeting resulted primarily due to the absence of a clear signal from the concerned ministry, as there seems to be a power vacuum after the change in government. This apprehension may have compelled the senior management to seek clarifications from the relevant ministry prior to actually holding the meeting.

The KSE 100 is likely to remain in the consolidation phase for the next week with market sentiments continuing to influence sideways movement. For the coming week, the KSE 100 is likely to witness initial support around the 1140 levels while major support is likely to appear around the 1120 levels. Initial resistance is likely to felt around the 1180 levels while major resistance will be met at the 1200 levels.

Sector Review

The State Bank announced new rules for bank financing against shares yesterday/Power Sector Update

The State Bank announced new rules

In a major move aimed at reducing the level of speculation in the stock market, the State Bank announced sweeping changes to prudential regulations addressing the issue of financing against shares. The salient features of the amended regulations are as follows:

•The minimum margin requirement for lending against shares has been raised to 50% from 20%, with security valuation now equal to average market value for the preceding 12 months

•Banks may no longer lend against shares of non-listed companies, and companies not registered with the Central Depository Company

•Banks have been prohibited from lending against sponsor/director shares of banks

•Maximum lending to any single party against pledge of shares of a bank cannot exceed 5% of the paid up capital of the bank, according to the new rules

•Financing to a company against the pledge of its own shares has been disallowed with immediate effect

•The new regulations become effective immediately.

Starting with the most significant change—addressing the margin requirement for lending against shares—the Central Bank has dealt a deadly one-two combination to imprudent lending. First, the theoretical maximum loanable amount against shares has been reduced by 37.5%, from 80% of collateral to 50% of collateral. Second, the Central Bank has now introduced a uniform method of valuing shares as security, i.e., the average market value over the preceding 12 months. Our understanding is that various methods were used to calculate security value, including the previous year's closing price. With the new rule in place, banks will probably either be looking for additional security from borrowers, or calling in loans to comply with the new regulations. Some panic selling today cannot be ruled out solely in response to this particular amendment, in our opinion.

Next, by disallowing lending against companies not listed on the stock exchange, or not registered with the CDC deals a deathblow to the ongoing dispute between textile companies and the CDC, in our view. Banks have high exposures to textile company shares via loan collateral. With a host of these companies outside of the CDC system, the next few weeks should prove to be interesting for both borrowers and lenders. The decision to stop all lending against shares of companies not listed on the stock exchange is also a welcome move, which should serve the twin purposes of encouraging new corporate listings and discouraging "shady" inter-group borrowing by companies against shares of unlisted sister concerns. In summary, we view the above measures as extremely positive — both from a banking perspective as well as from a capital market viewpoint. We believe any weakness (which may materialize) as a result of these steps should be temporary, and investors should avoid selling out at distress levels. While we continue to advise investors to stay on the sidelines, the current move by the State Bank is positive for capital markets.

Power Sector Update

Supreme Court Defers action on Hub Co Appeal:

Hub Co suffered a minor reversal when the Supreme Court referred its appeal back to the Chief Justice for being heard by a new bench of the court. The appeal was made against a restraining order preventing the company from proceeding with international arbitration and preventing the company from encashing the sovereign guarantee of the Government of Pakistan. The reason behind the request for a new bench is the absence of one of the judges, who is on leave. The Chief justice is now expected to constitute a new bench for hearing the case. We maintain that the government is likely to use all delaying tactics to prolong the legal battle in domestic courts. All delays in reaching a final settlement continue to eat into the final IRR that is likely to be available to investors.

Tenaga Says Pakistan Plant Likely To Start Production in January 2000

Tenaga has said its power project, Liberty Power, is set to commence commercial production in January next year. The project was initially expected to start production sometime in 1997, but has been delayed due to disputes with the government. Cost over runs due to delay in project implementation at one time threatened to make the project a non-starter, but Tenaga's announcement indicates there has been some progress in resolving disputes with the government. The company expects to finalize the PPA soon, and is also looking forward to a gas supply agreement to follow shortly. If such an agreement has indeed been reached, it marks a big step forward for all IPPs. We strongly believe that Liberty Power is one of the more likely candidates to survive and actually start production — primarily on the back of the advanced stages of project implementation. It is still too early to speculate on the final shape of the agreement with the government, however a revised IRR and Capacity payment is likely. Liberty Power is one of the larger IPPs, with 235 MW generation capacity.