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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: Opportunities Peeking Through Valuations

Updated on Mar 12, 2001

The market slipped by 23.43 points and 1.65% this week to close at the 1396.29 level. Year to date, the KSE-100 Index has declined by over 7%. This is in line with carnage witnessed over the last few weeks in the global markets right from NYC to Tokyo. From January to date, the US Nasdaq is down 20%, the broader Index S&P is down 11% and Hong Kong is down 10%. Closer to home, India is down 6%, Indonesia 7%, and the only markets holding up so far are the Taiwanese and Korean ones along with Thai.

There has been a lot of talk in the recent weeks about selling foreign funds and these appear to be fairly valid. Latest global asset allocation trends indicate that fund managers are reducing exposure in emerging markets in general, while within this universe, Asia is currently being recommended as Underweight and Latin America as Neutral to Overweight. This decision seems to be based on the premise that since US and Europe are major export destinations for most of Asian economies, the sharp slowdown in the US and the expected slowdown in Europe is bound to negatively impact the Asian Economies over the coming 12 months. It appears that Pakistan too has been caught in this route.

We believe, however, that selling in Pakistan by foreign funds at this point in time is a mistake. In our opinion, because the export sector is a fairly small segment of the Pakistan economy, the impact of US and Europe slowdown will be relatively much less for Pakistan unlike the case in the rest of Asia. Further, in view of our forecast of stabilization in the economy in FY02, next year's earnings momentum should improve for domestic corporates. At the same time, there are several triggers on the political and macro-economic front that we believe can lead to positive sentiment in the local market near or after the budget in June. These include clarity regarding a civilian administration, positive response for Pakistan's request for long term concessional funding by the G-7 countries and possibility of signing the CTBT by the end of this year.

In view of the above potential dynamics, we believe that while the market may slip down to 1350-1375 levels in the near term, the extremely attractive dividend yields should attract investors back over time, regardless of the exit of foreign funds.

Textile: Buying Opportunity in Nishat Mills

When a premier company, in the most important export sector in the country announces record earnings and the stock price falls over by over 5% after the results are announced, it indicates one of two things: Either the future earnings outlook is bleak or the market is obsessed with something other than valuations. A case in point is Nishat Mills Limited (NML). In our opinion, it is the second factor that seems to be at work here.

NML showed a NPAT growth of 84% to PkR700mn in FY00, a record for the company. This means an EPS of 6.29 and at PkR 19.5, a historic P/E ratio of 3.1x against the market historic P/E ratio of 8.5x, a discount of 64% or two-thirds.

So why did the market respond the way it did — hammering the stock price by almost 5.8% within a week from the FY00 results announcement date. We believe several factors have played a role in this market behaviour:

•Market expectations were of a higher net profit figure. In fact, consensus view was for a profit of PkR850mn based on the general profit margin improvement and the prevailing cotton prices in FY00. Thus, although the company posted record earnings, the market expectations were not met.

•Dividend payout of PkR2.25 per share was again below market expectation. This represents a payout ratio of 36% whereas the average for the textile sector, particularly the larger companies, has been significantly higher for FY00.

•There has been continual selling pressure by foreign funds in NML's stock which has put local punters on the back foot, at least temporarily.

•There is a feeling in the market that will cotton prices now sharply higher, FY01 results are likely to show a large earnings decline so there is no growth story here and in the sector as a whole for the time being.

In our view, while these are market concerns and as such must be respected, the market seems to have overreacted and is being ultra risk averse due to the overall weak demand conditions in the economy.

Basing our view firmly on fundamental analysis and valuations driven by our own future forecasts, we believe NML is significantly undervalued relative to its potential fair value.

Efforts at diversifying buyer base plus stringent quality controls and continual up gradation paid off well, and NML's FY00 results recorded a 7% improvement in sales despite higher cotton prices in the second half of the year. With only a 3% rise in cost of goods sold, gross profit shot up by 27%, while gross margin was at a healthy 21% compared to 18% a year ago.

Operating profit came out at PkR545.72mn, a good 34% higher than PkR497.04mn reported in last FY99 results, with operating margins at 16% versus 13% last year. A 4% increase in profit on fixed deposit accounts, in addition to a PkR12.15mn dividend from DGK Electric resulted in a generous increase in income from non-operating sources by 50% yoy, from PkR68.48 to PkR102.43mn.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

5.95

5.82

-2.18%

KSE 100 Index

1419.72

1396.29

-1.65%

Total Turnover (mn shares)

118.77

463.34

290.12%

Value Traded (US$ mn.)

44.54

267.11

499.71%

No. of Trading Sessions

1

5

 

Avg. Dly T/O (mn. shares)

118.77

92.67

-21.98%

Avg. Dly T/O (US$ mn)

44.54

53.42

19.94%

MSCI Pakistan Index:

Pak Rs.

92.99

91.07

-2.06%

US $

39.78

38.84

-2.35%

.Source: KSE, MSCI, KASB



ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

3745.74

-74.12

-1.94%

Hong Kong

Hang Seng

13522.04

+17.87

0.13%

Singapore

Straits Times

1772.1

-21.74

-1.21%

Sydney

S&P ASX 200

3252.4

+9.50

0.29%

Tokyo

Nikkei

12232.98

+80.15

0.66%

.



EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

5734.49

-155.46

-2.64%

London

FTSE

5562.8

-166.40

-2.90%

Paris

CAC

5104.77

-72.89

-1.41%

Dow Jones

Industrial

9823.41

-207.87

 

NASDAQ

Composite

1890.91

-49.80