Updated on June 09, 2001

The KSE Overview: What goes up...comes down?

The KSE 100 Index gave up 50% of its last week's gain to close down by 14 points for the week at 1367.30, thus confirming our skepticism regarding the sustainability of the so called pre budget rally. Nevertheless, the smaller telecom players did sustain most of their gains for the week led by Worldcall which is up 10% for the week and a huge 51 % over two weeks. There are rumors that one of the large players has aggressively built up a huge position in Worldcall. Telecard on the other hand, has managed an 8% rise over two weeks despite being on the T+3 rolling settlement system. Over the intermediates term, we like Telecard on fundamental basis and believe there is still some steam left in the stock to more up some more.

Fauji — A hard hit?

The biggest loser over both the one week as well as 2-week basis has been Fauji Fertilizer, which has seen a loss of 16% and 15% respectively. Here the market players explain this behavior by saying that Fauji's stock price is adjusting for its dividend payout and more important, news that it will be pumping upto Rs. 3.0 billion into its loss making sister concern, Fauji Jordan Fertilizer Company (FJFC). Market players say that this will drain Fauji's large cash reserves, force it to liquidate its short term investments and thus significantly reduce other income. Moreover, with subsidies on feed stock gas now certain to come down and likely end by 2003, the high return era for the Fertilizer sector will end soon and so will Fauji's dividend paying ability.

Over the longer term (2-3 years) we agree that uncertainty for the sector as a whole is rising. But for FY01 and upto FY02, we believe the dividend paying capability of Fauji is still reasonably secure. We dealt with the specific numbers of Fauji in our Monday Morning Shout last week. Even if we assume that the FY01 dividend falls by, say 25%, to Rs. 6/Share this still implies a 16% dividend yield. Thus we believe that for a 12 month horizon Fauji remain a Buy on Weakness.

Hubco — a victim of arbitage.

Hubco was another scrip seen taking a hit last week (falling by just under Rs.4) to close at Rs. 19.45 on Friday. Initial rumors suggested there was foreign selling which depressed Hubco's stock price. Our investigation reveals however that the real culprits were more likely than not arbitrageurs between Hubco's GDR and local price. A pricing anomaly gave then an opportunity to hit the local price. We are still expecting a total dividend payout for FY01, ending June 2001 (payout expected by Sept/Oct-2001) of between Rs. 3.25 to Rs. 3.50. That translates into a dividend yield of 16.7% - 17.9% . If annualized, that would be even higher. We therefore believe that the technical weakness in Hubco's should be used as an opportunity to Accumulate. Even on Technicals basis, with the RSI for Hubco moving towards oversold region, we believe Hubco is a Buy on Weakness.

Waiting for the Budget — Limited options

Turning towards the forthcoming federal budget (expected on 16 or 17the of June 2001). we believe that on a broad strategic level, the government has extremely limited financial options left on its own. At present, this means continued extremely high dependence on multinational and bilateral lenders for FY01-02. We estimate a funding gap of anywhere between US$ 3.5-4.0 billion meaning that it is imperative that Pakistan gets its external debt restructured as soon as practicable. In our view, unless there is a comprehensive, large scale (US$ 9.0- US$ 11.0 billion) long term external debt restructuring, there is no way for a growth oriented environment to be created in the economy Of course, such a massive debt restructuring would come at a heavy price for the existing fiscal revenue and expenditure structure and would likely have major political strings attached to it. We believe however, that a point comes in a nation's life when only very bold decisions can ensure a nation's future destiny. In our view, Pakistan is rapidly approaching that point and the broader leadership wheter military, political, intellectual and business (also lets throw in feudeal for good measure) - must decide whether it is ready to face the challenge of emancipating Pakistan from the massive debilitating effects of the debt trap. We strongly believe that the time for tinkering at the edges of the core issue has effectively ended. The bull must be taken by the horn, a spade must be called a spade and the suffering of our nation must come to an end. History has shown, again and again, that time waits for no one. We must decide whether we want to go it alone, and face the consequences or let others gradually whittle us down to a marginal & irrelevant country!

Sector outlook

Investment Banks: A Good First Innings in 2001

The "investment banking" sector has shown a healthy earnings growth in 1H01 on a YoY basis. We looked at a sample of FIVE investment banks which we believe are representatives of the overall sectoral trends. These five are:

Al-Faysal Investment Bank (Al-Faysal)

Al-Meezan Investment Bank (Al-Meezan)

First International Investment Bank (Interbank)

Jehangir Siddiqui Investment Bank (JSIB)

Orix Investment Bank (Orix)

We have excluded Cresent Investment Bank from our analysis because its year-end is December while the rest have a June year-end, so comparison would have been distorted. Going forward, it should be noted that Al-Faysal is a giant in the investment-banking sector (its asset-base constituted 74% of the total assets of our 5-bank sample as at December 30, 2001). Thus, consolidated figures for our sample are greatly influenced by Al-Faysal's numbers. We have however, given various figures with and without Al-Faysal for better comparison.

Sharp Rise in 1 H01 Profits

All in all, NPAT for the investment banking sector's selected sample rose by 75% on YoY basis between lH00 and lH01, from PkR 311 million to PkR544million. Excluding Al-Faysal, the rise was much more dramatic at 128%, from PkR131million to PkR298million YoY.

MARKET ROUNDUP
..	LAST WEEK	THIS WEEK	% CHANGE
Mkt. Cap (US$bn)	5.44	5.46	0.37
Total Turnover (mn shares)	318.01	531.72	67.20
Value Traded (US$ mn.)	177.12	275.75	55.69
No. of Trading Sessions	5	5
Avg. Dly T/O (mn. shares)	63.60	132.93	109.00
Avg. Dly T/O (US$ mn)	35.42	68.94	94.61
KSE 100 Index	1381.84	1367.30	-1.05
KSE All Share Index	876.59	869.99	-0.75

.Source: KSE, MSCI, KASB

ASIA PACIFIC & AUSTRALIA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Bombay BSE 3495.84 +38.60 1.12% Hong Kong Hang Seng 13808.89 +105.46 0.77% Singapore Straits Times 1707.46 +23.69 1.41 % Sydney S&P ASX 200 3434.4 -2.20 -0.06% Tokyo Nikkei 13430.22 +152.71 1.15%

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EUROPE & UNITED STATE OF AMERICA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Frankfurt DAX 6187.21 +2.96 0.05% London FTSE 5950.6 +2.30 0.04% Paris CAC 5439.93 -13.46 -0.25% Dow Jones Industrial 10977.00 -113.74   NASDAQ 2215.10 -48.90