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THE KASB REVIEW
STOCK MARKET AT A GLANCE

  1. FINEX WEEK
  2. STOCK WATCH
  3. STOCK MARKET AT A GLANCE

The KSE Overview: Market Swings to the Hubco Tune

Updated on Oct 23, 2000

This is the question investors are left asking at the close of this week with the KSE-100 Index ending the final session at 1502.47 down-2.86% from its weekly opening level of 1545.43. Volumes remained erratic throughout the week with the ADV coming out at 109.26 mn shares this week versus 109.6 mn shares last week.

Trading for the week commenced on a negative note and with failure of the index to recover above the technically important 1550 level, a wave of selling was activated. With the confirmation of negative trend, any strength that emerged on short covering turned out to be short lived as "sell-on-strength" mentality gripped the market.

Some quarters suggest that the near melt down in global equity markets, led by Wall Street and NASDAQ during the week depressed sentiments in the local bourses. On the other hand, another viewpoint is that a rise in political uncertainty due to cabinet ministers resigning prompted weak holders to square their positions.

The almost 100 point loss suffered in the two weeks since the large rupee depreciation is more likely to be reflection of the tougher economic scenario over the next few months which is being discounted in stock prices. In purely valuation terms, a rise of over 200 basis points in the risk-free rate was bound to depress market valuations and that is happening. Less quantifiable is the impact of macro-level developments, such as the Finance Minister observing that IMF funding difficulty is more due to strategic political reasons rather than lack of economic policy implementation.

As far as individual stocks are concerned, the sell-off in Hubco, PSO and Fauji Fertilizer are notable. Hubco took the lead to set the pace of the market as the market returned to the reality that the resolution of the WAPDA-Hubco is still not in sight. PSO lost Rs 3.15, to close the week at Rs 162.50. There are reports of a fall in furnace oil sales volumes and even diesel in the oil-marketing sector. Further, PSO's FY00 results are likely to show a decline in NPAT due not only the tax impact (last year it took a tax write back) but also tighter operating margins. Similarly, FFC's earnings outlook continue to remain weak and reports suggest that if FFC is forced to support its sister concern Fauji-Jordan, then FFC's own finances might be adversely affected. These concerns weighed heavily on the investor's mind and took their toll on FFC's share price, which breached the sensitive support level of 38.50. The weakness spilled over to other scrips in general.

Textile sector turned mixed and behaved with the market showing easier bias. The star performers of previous week MCB, Nishat, Ibrahim and Adamjee also lost momentum and showed slight easing in prices. Jobbers were this week supported by both retail and institutional investors on the selling side.

Looking towards the coming week, macro level developments are likely to determine market direction. We feel that downside risk has risen somewhat and the recent trading range of 1500-1600 has most likely extended on the downside to 1400-1550 range, at last in the near terms. Investors would do well to maintain a cautious stand. Sometimes it is better to remain on the sidelines until the market direction become clear.

Sector outlook

Fertilizer- No light at the end of the tunnel

Investment Highlights: The combined interest rate and rupee depreciation shock could not have come at a more inopportune time for the fertilizer sector. Fertilizer companies were already facing depressed demand and rising raw material cost (due to higher oil and gas price) in IHY00. Half-year results of the two bell weather companies in the sector, Fauji Fertilizer Co. and Engro Chemicals Ltd., depict a picture of collapsing operating and net margins, rising debt levels and contracting ROEs along with cash flows.

Engro's IHY00 NPAT collapsed by 5 times from Rs 385 million to 73 million, while Fauji Fertilizer's NPAT fell by 39% to Rs 917 million. Raw materials as a percentage of cost of good sold rose from 12% to 21% between IHY99 and IHY00 for Engro while for Fauji the rise was from 28% to 35%.

With cash flows under pressure, short-term borrowing for both companies rose sharply. Engro's short term borrowing rose from Rs 429 millions to Rs 1.2 billion causing the short and long term debt to equity ratio to rise from 35% to 42%. In the case of Fauji, short term borrowing went from zero to Rs 1.75 billion, raising the short and long term debt / equity ratio to jump from 15% to 33%.

In such a scenario, a rise of 200 - 250 bp in borrowing costs is sure to hit the bottom lines of fertilizer companies going forward. Further, with interest rates rising across the board, farmers are likely to face higher financing costs that would dampen urea demand in the next sowing season.

Finally, as natural gas makes up a large chunk of feed stock and fuel costs, continued firmness in international oil prices are likely to keep COGM high and the squeeze on margins at gross and operating levels would continue.

With ROE's for Engro and Fauji already down from 41% to 22% and 51 % to 35% respectively in FY99; we are forecasting further shrinkage over the next twelve months. Fertilizer stocks have massively under performed the market during the past 12 months (e.g. Engro by 63.6 % and FFC by 34.8%) and we expect this trend to continue in the foreseeable future.

Stock Recommendations and Valuations

Based on the above dynamics, we continue to maintain under weight recommendation on the Fertilizer sector.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US$ bn)

6.93

6.96

0.43

KSE 100 Index

1545.43

1502.47

-2.78

Total Turnover(mn shares)

546.32

600.59

9.93

Value Traded (US$ mn.)

396.98

458.91

15.60

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. shares)

109.26

120.12

9.93

Avg. Dly T/O (US$ mn)

79.40

91.78

15.60

MSCI Pakistan Index:

     

Pak Rs.

106.69

103.48

-3.00

US $

46.90

46.98

0.16

.Source: KSE, MSCI, KASB


 
ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

3692.75

-10.08

-0.27%

Hong Kong

Hang Seng

15044.53

+622.01

4.31%

Singapore

Straits Times

1923.67

+39.62

2.1 %

Sydney

S&P ASX 200

3235.8

+43.10

1.35%

Tokyo

Nikkei

15198.73

+387.65

2.62%

.


 
EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

6618.43

-1.00

-0.02%

London

FTSE

6276.3

+57.40

0.92%

Paris

CAC

6149.44

+82.96

1.37%

Dow Jones

Industrial

10226.59

83.61

 

NASDAQ

Composite

3483.14

64.54