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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 fumbling to find a bottom

Updated on Nov 06, 2000

Smart rebound in the market during last two days of the week finally broke a long spell of a declining trend. Market started the week on a sluggish note and remained directionless for the most part in the absence of any significant breaking news in earlier half of the week. With positive noises again emanating from Islamabad regarding Hubco - WAPDA resolution and improving prospect for the IMF Funding, a snap rally ensued on Thursday and gained momentum on Friday to reverse earlier losses. This helped the KSE - 100 Index break through the important psychological barrier of 1500 and the index closed at 1519.59 versus l486.06, up a marginal 2.26% wow.

Trading for the week commenced at a slow pace initially, with the Index remaining biased towards 1450 levels. The decline was complimented with erratic volumes that decayed to a low of 74.68mn shares. But this behavior provided underlying support to the market and the Index turned around from 1469.11 levels. ADV was recorded at 93.90 mn shares against 103.39 mn shares last week.

Jobbers, who in the recent past were hammering selected blue chips, were caught off-guard by sustained buying from a few heavy weight quarters in a couple of targeted scrips. The buyers' strategy worked apparently as the weak holders rushed to cover their short positions. This resulted in a snap midweek rally from the prevailing previous lower levels. Institutions also participated in picking value and technically oversold bargains. Finally retailers, having remained on the sidelines for sometime, threw caution to the wind and decided to join the bandwagon.

Hubco remained the volume leader with choppy price behavior. The market sharply responded to the Kapco-Wapda settlement, hoping it would pave the way for a similar understanding with Hubco. However, the company soon clarified that the two issues were fundamentally different, as Hubco was answerable to its 17,000 shareholders as against Kapco's two. This pushed Hubco down to its intra week low of 17.50 which however sustained the downward pressure, reconfirming this level as a strong base.

PSO, investors' favorite pick for the week, played the key role in turning around the market. Although, it fell through initial support of 155 early in the week and traded to a low of 153.30, the scrip recovered and demonstrated strength later in the week to post an intra week high of 166.50 Engro, our technical favorite, continued to demonstrate stable price behavior and posted a gain of almost 10% again this week. The textile and synthetic sectors were lackluster as major activity and volume remained concentrated towards blue chips.

The negative trend seems to have turned mixed. However, risk is still defined to 1450 levels. If additional strength to 1540 materializes in the early days of next week, exposure should be reduced. Mixed news expectations on the Hubco and IMF front will continue to keep the KSE 100 Index volatile. Accumulation based on values is recommended in the band of 1450-1480.

Sector outlook

Philips' de-listing

The consumer durables sector is particularly sensitive to the economic environment and is a good indicator of near term demand dynamics in the economy. In Pakistan, the consumer durables sector is also highly dependent on imported components whether it be the auto segment or the industrial, electronics and domestic appliances segment. Changes in exchange rates/interest rates have an immediate and direct impact both on gross margins, net margins, and consequently, the bottom line earnings growth.

The lack of growth in the consumer durables sector in the second half of the nineties decade is generally well known. The key reasons include below trend economic growth, sudden changes in macro economic and regulatory policies, as well as lack of government action on the twin evils of smuggling and informal sector counterfeit productions.

In the above context, the decision by the holding company of Philips Electrical Industry of Pakistan Limited (Philips) highlights the depressed state of consumer goods sector in Pakistan. This is despite the fact that the country does have significant potential for consumer goods as urbanization increases and information technology driven awareness of the general population rises. Some of the reasons given by the holding company, KPENV, for its decision seeking the delisting of its Pakistan subsidiary are:

l) There is low probability that the business environment would improve drastically within next two -three years

2) The competition from cheaper, low quality products is unlikely to abate, and counterfeit manufacturers too are likely to remain in the market

3) Financial charges would remain high; the company has currently accumulated debts of more than Rs l billion and these would rise further due to the ongoing losses.

The financial health of Philips Pakistan has been deteriorating over the last five years as evidenced from the drop in ROE from over 30% in l995 to 21% in 1998, to a large loss of Rs 437 million in l999, which effectively resulted in the company's equity turning negative excluding a surplus of revaluation on fixed assets. Gross margin went down from 26% in l995 to 15% l999 but has rebounded back to 22% in 1H00. Operating margin collapsed from 12.6% to 5.5% during the same period, while the net margin went down from 4.5% to negative 17% at the end of last year and continued to remain in negative territory for half year ending June 2000. In line with the above, Philips faced a continued reduction in operating cash flows, which effectively turned negative FY99.

We believe that the causes of Philips' problems in Pakistan have to do both with a poor business and regulatory environment as well as slow responsiveness by the local management to reengineer operations to counter poor business dynamics. We suspect that once it is de-listed, Philips Pakistan is likely to turn into a purveyor of (almost) imported consumer electronics with the lights business quietly becoming marginal. Sad as it is that a famous brand name gets diminished, it is also an example of shareholder value destruction due to lack of government effort to curb the unabated growth of the informal sector.

If Pakistan is to develop a consumer goods industry, it is imperative that the government should focus on providing a level playing field for businesses and investors in this sector. Here, we believe that tinkering with tariffs or concessions is not the answer. A more permanent and healthier solution is to strictly crackdown on smuggling electronic goods as well as force the informal sector into the documented economy so that the unfair advantage they enjoy is eliminated. We can not hope to attract either investment or technology in this important light industrial and electronics segment if veteran players like Philips are forced on the defensive due to unchecked growth of the undocumented sector. As an aside, while some argue that the informal sector actually is positive as it generates considerable employment, we feel that unless it is brought under documentation, it will not be able to contribute to longer term sustainable GDP growth and technology transfer that is actually needed by the country at this juncture.

Investment Perspective

While we are currently underweight the consumer durables sector, with respect to the specific share buyback option announced by Philips, we feel that this is too low a price to pay to remaining minority shareholders as the last major block trade in Philips shares was done at a considerably higher price. In valuation terms too, the sheer franchise value that the Philips name has, commands a high premium, in our view. If a strategic sale-purchase of current operations were in the works, the valuations would undoubtedly have been higher.

We therefore think that minority shareholders should rather do their homework before contemplating any sale of Philips' stock in a hurry.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US$ bn)

6.89

7.01

1.74

KSE 100 Index

1486.06

1519.59

2.26

Total Turnover (mn shares)

516.97

469.52

-9.18

Value Traded (US$ mn.)

672.65

457.46

-31.99

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. shares)

103.39

93.90

-9.18

Avg. Dly T/O (US$ mn)

134.53

91.49

-31.99

MSCI Pakistan Index:

     

Pak Rs.

102.20

103.63

1.39

US $

46.60

46.96

0.77

.Source: KSE, MSCI, KASB


 
ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

3935.7

+59.91

1.55%

Hong Kong

Hang Seng

15594.12

+302.58

1.98%

Singapore

Straits Times

2061.5

+21.07

1.03%

Sydney

S&P ASX 200

3321.9

+32.60

0.99%

Tokyo

Nikkei

14837.78

-34.61

-0.23%

.


 
EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

7128.27

+39.63

0.56%

London

FTSE

6385.4

-6.60

-0.1%

Paris

CAC

6398.92

-1.39

-0.02%

Dow Jones

Industrial

10817.95

-62.56

 

NASDAQ

Composite

3451.58

22.56