Updated on Nov 29, 1999
The market was yet again
on the move. Shrugging of the initial hesitancy, the KSE 100 breached the 1220 levels,
nearing our initial resistance level of 1250 during the week. However the rally could not
be sustained and the KSE 100 closed the week at 1220.71 levels translating into a climb of
1.38% over the week.
Despite the initial strong showing the KSE 100 lacked the follow
through required to sustain the rally. Investor interest exhausted midway, which resulted
in the KSE being yet again range bound.
We believe the initial resistance level is likely to appear around the
1250 levels if the market is able to sustain substantial upward movement. We feel that
investors should utilize these rallies to reduce exposure in specific stocks when and if
the option arises.
On the economic front all eyes are focused on the planned announcement
by the Chief Executive of an economic package. This announcement is unlikely to result in
confidence building rather the main onus is going to fall on the actual implementation of
the said package. With respect to Hubco, the inaction on the part of the government to
achieve a quick resolution continues to shroud any increased activity in Hubco. For the
market to achieve a sustainable rally, all these factors need to be addressed quite
thoroughly.
Sector review
Ibrahim Fibre: FY 00 earnings: Phenomenal earnings growth
imminent
The turnaround has taken place. With the gradual return to relative
normalcy in the economies of Southeast Asia, the volatility witnessed in the Polyester
Staple Fibre sector has finally subsided. Though it would be premature to say that the
ride onwards is going to be smooth, a luxury not available to the local players of the PSF
sector.
We believe that the shares have been undervalued by the market, largely
due to the poor operating conditions that were exhibited over the past 24 months. We
believe that is in the process of changing. Main reason for this is
• Regional petrochemical-polyester cycle turnaround
• Industry consolidation
• Strong domestic demand
• Impressive capacity utilization
In order to achieve a better perspective of the local PSF industry, we
must keep in mind the elasticity between international PSF prices and local prices. Global
demand and supply tends to have direct affect on the price of this commodity, even
locally,
In terms of earnings growth, all the players of the PSF sector are
already operating at 96% capacity utilization. To tap on additional earnings the most
viable option available is healthier margins. Increasing installed capacity is also
another option available but due to the turbulent socio-economic conditions, this does not
remain viable for every present producer at this time.
We believe that PSF demand is likely to continue to grow at 15%. This
optimistic assumption is taken keeping in mind the fact
• Increase in cotton yield has encouraged the production of cotton
yarn.
• However due to the global bumper crop, the prices of cotton yarn
have also declined considerably
• In order to add value to their product, blended yarn production
could see increased growth as it commands better prices then blended yarn, resulting
volume growth for PSF as well.
Cotton is an important variable in the polyester industry. PSF can be
substituted for Cotton and as cotton production declines, the demand for PSF improves and
vice versa. On the flip side, especially for Pakistan we need to look at this from a
different angle as well. With the raw material decline in price, we might see some
additional yarn-producing units coming back on line in view of cheap raw materials. This
could to some extent stimulate the demand of PSF in order for local players to restart
operations.
Another point to highlight is the fact the cotton is also a cyclical
commodity, with peaks and troughs. Though we are experiencing a bumper crop it does not
necessarily translate into continues high yields, a fact very much undisputed by
historical trends.
With Ibrahim Fibre locates in the heart of the textile producing belt,
the immediate affect of any turnaround in the fortunes of the local textile industry are
felt most aptly by this PSF producing concern.
Accounting for 20% of total production, Ibrahim is one of three largest
PSF producers in Pakistan, who account for 71% of total production.
One of the main reasons for Ibrahim Fibre is their smart buying
technique. During the recent crisis, they were able to post quite attractive margins.
These were made possible by procuring the raw material PTA and MEG at very attractive
prices. With Mitsui being the main supplier of PTA, Ibrahim through effective negotiations
over two month periods were able to extract the most cost effective prices.
Taking advantage of the recent change in operating conditions, We
believe Ibrahim Fibre will be able to post sales growth of 4% y-o-y. This has been largely
on the back of considerable change in pricing structure. Over the FY 98-99 PSF prices
consolidated by 18%. In the same period capacity utilization increased from 94% to 96% in
FY 99.
With operating conditions continuing to become more attractive i.e.
better capacity utilization, operating margins are also likely to increase substantially,
moving to 22% as opposed to 18% witnessed in the past.
With financial charges continuing to be on the minimal side, we feel
that Ibrahim Fibre will be able to post a net earnings growth of 305% y-o-y. This drastic
jump profits to PKR 428.63 further confirms our belief that the imminent turnaround is
likely to be across the board meaning other players are also likely to come up with better
then expected results, at least to where the operating conditions are concerned. We
continue with our earlier recommendation of BUY for this stock. Ibrahim Fibre continues to
trade at a 31% discount to our target market of PKR 11.30
