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  1. The KASB review
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An exclusive weekly Stock Market report for PAGE by Khadim Ali Shah Bukhari & Co.

Updated on Feb 07, 2000

The KSE 100 Overview: The Correction Continues

This was a week for consolidation for the KSE 100, which continued to form base at 1750. Though it was comfortably able to cross the 1780 levels, but major resistance was witnessed at the 1800 levels, which caused the market to slump below the 1800 levels.

During the week, the KSE 100 continued to hold its ground moving up by 2.88% points to close the week at 1799.73.

Major thrust for the upside consolidation were the encouraging six monthly results by PTCL. We focus on the 52% growth in pre-tax earnings. This impressive growth is exactly in line with our estimates, which were based on the back of rapid expansion in the subscriber base. Going forward, we expect the customer count to keep rising rapidly for PTCL, which sets up the company nicely for operating in a fully competitive environment by the time its monopoly ends in 3 more years.

With the announcement of Engro's results, the anticipated earnings decline is now in the open. The previous uncertainty regarding the share price has subsided as the share price has discounted the earnings drop. Now consolidation has started at 102 levels.

The fate of the Hubco issue continues to hang in the balance. We feel that the prospects of the KSE 100 staying above the 1800 levels would require a positive clarification regarding Hubco, in the absence of which we might see current investor hesitance to continue with this stock.

The rise in tension on the LoC continues to be contained by the inherent liquidity in the market. For the coming week, we believe that the band of 1650-1750 is likely to hold causing the market to remain range bound within these boundaries.

Earnings growth continues

Earnings growth continued at 5% despite dwindling economic condition. With Primary sector growth at 0.35% for the last year, the ensuing effects of the drop in demand has been felt in the limited earnings growth. However with government efforts aimed at stimulating demand through fiscal discipline and by reducing interest rates to invigorate supply, we foresee a 2.4% growth in the primary sector, whereby the paper and board industry would be able to take advantage of increase in demand.

During 1HY 00, we saw a marginal drop in the production of paper and board dropping to 31005 tons as against 31593 tons produced in the corresponding six months of last year. However on the flip side, conversion activities continued to be robust increasing to 89% of total paper being utilized for conversion activities as opposed to 82.5% witnessed during the same period of last year.

Imported raw material prices strengthen

Though almost 80% of the current raw material demand is met through local means, the imported raw material i.e wood pulp prices has strengthened considerably by almost 30%. Due to the favourable exchange rate, major imports of wood pulp have been restricted to the Far East Asian region. With strong demand continuing from China and South Korea, spot prices of wood pulp rose from $475/tonne levels in June 99 to $610/tonne in December 99. Hardwood pulp, which is normally priced at a discount to the softwood variety, is being priced at parity, reflecting the tightness in supplies.

Lower Interest Rates

With a dramatic reduction in real interest rates over the past 12 months we believe the government is looking forward to initiate an economic revival. This is being done to stimulate private and public spending. Any increase in consumer spending directly affects the sales growth of Packages. With private consumption set to start inching upwards, we see Packages sales growth of 5-6%.

Imported Paper prices have also increased

Prices in general have started to move upwards, main reason being

• Drop in production in Dec-99 for millennium preparations

• Increase in demand for paper as companies increase paper and printing advertising expenditures as Southeast Asian economies start to make a turnaround.

Paper prices in China remain under pressure as more capacities come online

We believe that with the price consolidation continuing in the near future, Packages is likely to benefit in terms of margins growth. Demand is likely to remain robust with capacity utilization expected to increase in the foreseeable future due to a government driven effort to stimulate economic activity. Due to its economies of scale and wide product line up, any increase in industrial activity will result in volumes growth as well.

Packages performance has been largely inline with the KSE 100

As evident packages has been slightly lagging the KSE 100. With strong fundamentals and robust demand, Packages has under performed the market by only 5% during the last six months. With the recent change in economic ground realities and operating conditions we foresee Packages to continue its strong foray in to further value added service, adding to the shareholder value, both in terms of capital gains and hefty dividends as well. Remain OVERWEIGHT

. HY 98 HY 99 % Change
Sales 1,807,309 1,890,665 4.6
Cost of Good Sold 1,418,821 1,522,984 7
Trading Profit 388,488 367,681 -5
Gross Margins 21% 19%
Soiling, Ad. & General Exp. 131,907 166,589 26
Operating Profit 256,581 201,092 -22
Operating Margins 14% 11%
Dividend Income 87,598 99,376 13
Income on Foreign Currency Deposits 56,957 58,122 2
Rental & Other Income 25,263 27,972 11
EBIT 426,399 386,562 -9
Financial Charges 239,439 153,932 -36
Charity & Donations 844 911 8
Workers Profit Participation Fund 9,300 11,600 25
249,583 166,443 -33
PET 176,816 220,119 24
Provision for Taxation - Current 8,000 9,000 13
Deferred 39,000 28,000 -28
. 47,000 37,000 -21
Profit after taxation 129,816 183,119 41