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THE KASB REVIEW

  1. The KASB review
  2. Finex week

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

Updated on Feb 28, 2000

Tread with Caution

Ever since after crossing the 2000 mark, the KSE 100 has been very fragile. Due to the inherent weakness in the market, the KSE remained susceptible to volatility. Despite a drop of almost 42 points, the market touched an intraday high on the last trading day touching 2035 in the process.

As the market continues to regain a footing, we expect it to remain between 1950 and 2050 during the near term. Volatility is likely to be significant as the market continue to remain in uncharted territories of 1950 levels and above.

Engro has announced legal proceedings against a certain group of investors for violation of provisions of law during a substantial acquisition of Engro shares. These legal proceedings could set a benchmark as to the future resolution of such developments.

Fundamentally the outlook remains positive. The government continues to announce various policy guidelines aimed at streamlining the various sectors. As we had mentioned in our last publication, after the oil and gas sector, the government has announced guidelines for investment banks pertaining to their Cash Management Accounts. We have also revised our economic forecasts in view of the encouraging performance by the economy.

We believe that in the event of a break of 1950 we might witness the KSE 100 breaking through the 1950 levels and entering a new trading range of 1850-1950. This would provide an excellent entry point to aggressively start accumulating.

ICI Pakistan: In the RED

• As expected ICI continued to remain in the red for the second year running.

• Significant development remained restricted to the commercial start up of their PTA plant. With 400,000 tons production capacity, even in the best of times. they could only account for 62% of the total PSF producers, a possibility quite unlikely to happen in the near future.

• Operating profit net of PTA business was PKR 1112.3 mn which after incorporation of PTA losses of 2092.34 mn translated into a loss of 980.04 mn for the company.

• Operating scenario for the company remains bleak. With such a huge dependence on one single product line ICI can ill afford to operate in a cycle where PTA prices continue to remain under pressure. Based on weak demand of PSF and the lag time involved, we expect regional PTA prices to remain weak till 1Q00.

• As regional prices remain under pressure for the near term, the possibility of any increase in ICI PTA remains elusive.

Operating troubles continue to linger

Caught during the downturn of the chemical cycle, ICI continues to grapple with the difficult operating scenario in the chemicals sector. Though the operating cycle was profitable till the inclusion of PTA, still the huge operating loss was quite substantial given the fact that paraxylene prices only moved up 46%, in view of the rising oil prices which rose 162% yoy during FY 99. Robust in-house consumption of PTA and bouts of contracting margins in the lHFY00 and attractive margins in 4QFY 00 were witnessed by ICI.

Looking at the numbers it would be appropriate to notice that despite the efforts by the management, they have been unable to minimize losses. It points out the fact that being involved in a downturn in the chemical cycle has hurt ICI's cash-flows, given the tight margins. Now as margins improve, the main focus of the company should be directed towards achieving better volumes growth coupled with improving industry margins. It seems that given the industry scenario, operating conditions are likely to persist for the lH00.

Going forward

After falling 25% since the strong showing in October, product prices of PSF and PTA are likely to firm up starting 4Q00. the inventory stockpiling being expected never materialized due to increased demand and better margins (in fact the best in 2 years).

Recent company visits have revealed that inventory levels are low which is likely to drive the demand pressure in the near term. This could provide some support to weak domestic prices but again the main impetus for removing the pricing pressure is likely to result from firming up international prices. As oil prices continue to remain high and there remains an absence of new capacities coming on line any demand side pressure will allow the PTA producers to pass the feedstock rise in price to the end user, otherwise margins are again going to remain constricted.

For ICI although supply and demand will determine the operating conditions, the cyclical nature of the industry is likely to cause operating problems for the company. We expect local demand for ICI PTA to increase at a marginal rate of 3 % annually. This is based on the absence of any new capacities coming on line, whereby they are restricted to catering to around 300000 tonnes of installed PSF capacity (in the absence of Ibrahim which wholly imports its PTA requirements). This points to a total domestic target between 210000-250000 tonnes per annum roughly accounting for 62% of installed capacity, which is a very optimistic assumptions keeping in mind the alleged shutdowns reported at ICI in their PTA plant.

Conclusively it seems due to the apparent size of their division, ICI will need to rethink its strategy in terms of its PTA plant, in the absence of which it will continue to drive down company profits. As sector fundamentals are set to improve by 4Q00, ICI should have ample time to work out a strategy to climb aboard the chemical cycle.

Till then we maintain our intermediate term (SELL) recommendations

PKR mn 1999 1998 Y-o-Y
Net Sales 13,594.88 9,232.76 47.25%
Cost of Good Sold 13,102.00 9,172.91 42.83%
Gross Profit 492.88 59.85 723.55%
Gross Margins 3.6% 0.6% .
Operating Expenses . . ..
Admin and Marketing 1,225.71 1,039.89 17.87%
Operating Loss (732.83) (980.04) -25.22%
Operating Margins -5.4% -10.6% .
Other Income 211.69 234.48 -9.72%
Financial and Other Charges 3,215.10 1,723.58 86.54%
Loss Before Tax (3,736.24) (2,469.14) 51.32%
Provision for Tax . . ..
Current (74.00) (54.50) 35.78%
Deferred 0.00 379.35 .
Loss After Taxation (3,810.24) (2,144.29) 77.69%
Net Margins -28% -23% .
(Loss) Unappropriated . . .
Profit brought forward 1,820.47) 323.82 -662.18%
Accumulated Loss (5,630.70) (1,820.47) 209.30%