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THE KASB REVIEW
STOCK MARKET AT A GLANCE

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

An exclusive weekly Stock Market report bt Khadim Ali Shah Bukhari & Co.

Updated on Dec 04, 2000

As expected, the market's negative momentum continued last week with the KSE -100 Index starting the week at 1355.87 and ending 5.6% lower at 1280.00. In the month of November the market has declined by 15.7%. Even the most optimistic investors appear to have taken to the sidelines and decided to let the market go wherever it wants rather than be caught under its steam rolling negative momentum. Institutional investors are looking greedily at the low valuations of some of the fundamentally strong blue chips and hoping that they can still get their hands on these after the financial close of December 31. They may be too late. We feel that the market is now entering the last leg of its current bear run and although our technical analysts maintain the major support at around 1170 levels, we believe that the time has arrived for "gradual" accumulation of selected quality scrips that have underperformed most in the present downturn.

The market is also negotiating with new trading rules and it will take sometime before the trading activity normalizes to the new parameters recently introduced. Thus, investors should continue to expect high volatility but at the same time lowering volumes as market participants make adjustments to their investment behavior.

We had been advocating raising cash and defensives' weight for the last few weeks. That strategy has paid off handsomely and for those investors who focused on such a strategy out-performance versus the market was likely achieved. While the asset allocation decision should still emphasize cash and fixed income instrument for the time being, we feel that certain sectors do offer interesting upside opportunities as we believe that the market may have overshot on the down side in the fundamentally strong stocks in these sectors. Our sectors of interest on fundamental basis include, synthetics, telecom, banking and chemicals for the time being.

In terms of individual stock performance last week, PTCL was the fall guy in view of a major negative earnings surprise both above and below the line. The high effective tax rate was unexpected and so was the over Rs 7.0 billion adjustment to after tax earnings in order to conform to IAS - 19 accounting regulations. In the event, PTCL lost over 13% value last week to close at 19.25 versus 22.25 the previous Friday. PSO was also hit and once it fell below the psychological level of 140, it dropped further to close the week at 136. Improving sector fundamentals in the light of the expected fertilizer policy helped stocks in this sector to weather the storm. Engro slipped by 2.7% to close at 54.20 while Fauji Fertilizer actually gained a percentage point to end the week at 37.90. ICI continued to lose ground with news of poor showing at the PTA business line dampening investor spirits. The scrip lost almost 10% to close the week at 8.95

Going forward, we would recommend that investors now begin to think about bottom fishing as another 50-60 points loss would make the market achieve an earnings gap viz a viz the risk free rate that has historically signalled a bottoming out.

Cement Sector: Better than last year but still.......

1QFY00 saw a slight pick up in dispatches after a lull during the summer months. We estimate that industry capacity utilization has risen to approximately 65% in 1QFY01 from around 62% average for FY00. While a welcome development, we do not believe this signifies any change in the overall sector dynamics. The cement industry continues to be burdened with massive over capacity while demand is being held back by low GDP growth, estimated at 4% this year, compared to original government projections of 4.6% and is significantly lower than 4.8% recorded last year.

Top line growth is being affected not just by low demand, but also slippage in prices caused by intense competition from several large cement producers whose sales tax exemption has been reinstated by the government up to 2001. Current cement prices are around 195/bag compared to ranging between 220-230/bag around this time last year.

As they say, "when it rains, it pours" the cement sector is currently in such a predicament. As if the above factors were not enough to delay the long awaited turnaround in sector dynamics, the massive rise in international oil prices has played havoc with gross margins this year. According to industry sources, the cost of fuel, which is a major component of COGS, has risen more than 40% to PkR14,3503/tonne compared to Rs 10,000/tonne last year.

New complications arose within the industry last month when out of the blue, several cement plants (including 1.0mtpa Bestway) obtained permission to switch over to gas from furnace oil and promptly managed to get gas connection pipelines. Considering that the current differential between gas and furnace oil comes to around PkR600/tonne, it came as no surprise to see the rest of the industry up in arms. Selective pemmission, which placed some producers in such a competitive position, was unacceptable to other players (e.g. DGK and Maple Leaf) who had applied for the switchover in 1994 and 1996 respectively and were still awaiting approval. The hue and cry has forced the government to withdraw selective gas connections pending review with the industry.

Thus, Lucky, Fecto and Cherat came out strongly in the black compared to last year's generally negative showing. DGK, on the other hand, saddled with a huge depreciation charge related to its expansion and massive debt causing high financial charges, was hit despite respectable top line growth.

Investment Perspective

FY01 is going to be important for the cement sector as it will determine whether the turnaround experienced last year can be manufactured. While we are expecting lower GDP and lower agricultural growth this year, expected increase in infrastructure spending even if by only a small margin should help stabilize sector earnings.

Based on FY00 results and our view of medium term developments, we believe that Cherat continues to be the best defense play in the cement sector along with its high dividend yield (25% payout in FY00) characteristic.

We believe that if switchover to gas were allowed across the board, it would result in considerable cost saving to the industry, and efficient producers like DGK (D-3- 1 -9, PkR 7.35) would leverage their production to maximize benefits from the switchover.

As we have already accounted for a substantial increase in fuel cost, and have a conservative assumption for capacity utilization (62%) as well as ex-factory price increases for FY01, we are continuing to stick to our forecast of an earnings turnaround this year, with an expected FY01 EPS of PkR 1.2, putting the FY01 PER at 5.7x, which is close to the market valuation.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US$ bn)

6.21

5.93

-4.51

KSE 100 Index

1355.86

1280.08

-5.59

Total Turnover (mn shares)

727.69

546.56

-24.89

Value Traded (US$ mn.)

449.55

178.27

-60.34

No. of Trading Sessions

5

5

 

Avg. DlyT/O (mn. shares)

145.54

109.31

-24.89

Avg. DlyT/O (US$ mn)

89.91

35.65

-60.34

MSCI Pakistan Index:

Pak Rs.

91.05

84.56

-7.13

US $

40.58

37.69

-7.12

.Source: KSE, MSCI, KASB



ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

4031.96

+33.97

0.85%

Hong Kong

Hang Seng

14441.43

+457.04

3.27%

Singapore

Straits Times

1955

+2.77

0.14%

Sydney

S&P ASX 200

3284.1

+9.50

0.29%

Tokyo

Nikkei

14835.33

+186.82

1.28%

.



EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

6512.91

+140.58

2.21%

London

FTSE

6170.4

+28.20

0.46

Paris

CAC

5928.5

+0.42

0.01 %

Dow Jones

Industrial

10373.54

-40.95

 

NASDAQ

Composite

2645.29

47.36