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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: Dances of the Wolves

Updated on Jan 22, 2001

"Beware, O'Unwary investors," is our theme for this week. The market is on a slipping slope and the bulls and bears are locked in a fatalistic last dance. Intelligent investors are standing rightly, in our opinion on the sidelines and waiting for the dust to settle before making their next move. We also feel that smart money is gradually raising cash. At the same time, unwary investors are susceptible of getting entrapped in enticements offered by a few opportunities touted by seasoned players. Our advice: "Be cautious, focus on fundamentals, avoid participating in short term plays and please do not allow greed for quick gains outweigh basic investment considerations."

There is a reason why we are being cautious at this stage of the market cycle. The KSE-100 Index slipped from 1470 the previous week to close at 1452 last week just above the psychologically important support level of 1450. More important however, is the fact that on Friday, the Index was pushed up above 1450 in the last 10-15 MINUTES before the market closed by a spurt of buying in a few Index heavyweights including fertilizers, insurance and telecom. This to us appears more like an attempt to keep the Index above 1450 rather than a general market move. The overall market trend throughout the week remained negatively slanted. In our view, nothing materially changed in the second half of Friday to warrant a sudden upsurge in sentiments. This is why we are skeptical regarding the ability of the Index to move significantly upwards in the near term.

Let us see what is happening over the next two weeks. PTCL is having a board meeting with likelihood of quarterly earnings announcement. That could move the market. The IMF team is coming over for assessing performance. That would generate headlines about target shortfalls and implications for next IMF tranche. The bilateral debt restructuring talks are set to be held in Islamabad again with implications for investor sentiment.

Thus, on pure sentiments, the market is sitting at a crucial inflexion point with potential to break in either plus or minus direction in the near term. Technically, if the market receives positive news flow, the bulls may attempt to push the Index to 1470 or higher. On the other hand if the news flow were negative, the bears would try to test the 1428 support level. Thus, there is a +25 to -25 point potential play in the Index in our opinion.

Our investment view is that if the market moves in the negative territory toward 1420's gradual accumulation on our earlier identified scrips should commence. On the other hand, if the market moves to 1470 levels, reduction in weight should be considered for those scrips that have fared relatively better over the last two weeks.

In this respect, we are noting below the two week and one month relative performance of selected key Index stocks. As can be seen there is poor performance almost throughout this universe with ICI and Adamjee leading the downside pack. As usual, the fertilizer stocks performed better on a relative basis. However, if the market turns around, these are likely to lag on relative basis too. We would refer investors to our sector recommendation highlighted last week and at present keep our focus on entry-exit timings on the sectors selected on fundamental basis.

Cement

Signs of a turnaround in FY00 for cement sector earnings have now been confirmed with all full year results having been announced. After three years of losses, the sector as a whole posted a profit of PkR430mn in FY00. This compares favorably with a loss of PkR1.2bn in FY99 and PkR848mn in FY98.

Three key factors contributed to the turnaround. (1) An increase in capacity utilization from 60% levels to 65% in FY00, helping volumes growth (2) An increase in net retention price for producers, as the GoP agreed to a fixed excise duty on the industry and a loose cartel helped raise ex-factor prices (3) Sharp fall in fuel oil prices in the last fiscal year (June end) significantly contained growth in COGS, while sales revenue shot by 23%. As a result, gross profit margin for the sector expanded to 18% in FY00 against 6% in FY99. With interest rates helping the financial expense for the sector decline slightly by 6%, the full benefit of top line growth flowed to the bottom line. ROE thus moved into the black, but at 3.8% was not anything to write home about.

1H01 Developments

First 3 months of the current fiscal year started off well for the cement sector. Capacity utilization rose to 68% from around 64-65% for FY00, ex-factory prices were stable at PKR 200/ bag and gross margins were matching the previous six months improvements. Then things began going downhill.

It all began with a selected number of cement plants obtaining sales tax exemption until June 2001. Although these plants have higher transportation costs, being located at the farther end of the northern marketing zone, the sales tax exemption did give them an advantage in terms of pricing and therefore competition intensified. Next, international oil prices hit record highs causing the domestic furnace oil prices to shoot up to over PKR 14,000/tonne in October 1999.

As a result, gross margins came under tremendous pressure.

Finally, there was an outcry in the cement industry when a few manufacturers were able to get gas connections while several others who had applied much earlier, were still waiting for approval. With a price differential of about PKR 600 / mmcf between furnace oil and gas equivalent, "the gas have-nots" cried foul and pressed the government to either provide gas to all cement plants or bring the gas tariff in line with furnace oil i.e., raise it from PKR566/mmcf to PKR 1200/mmcf. With margins already under pressure, there was an all out effort by northern zone cement producers to increase market share so that capacity utilization rates could be maintained. However, with the overall demand in doldrums due to slower GDP growth (4.0% in FY01F versus 4.8% in FY00), and construction activity very slow, demand was simply not there despite a near price war. The full impact on the overall industry profitability was felt in December 2000 which, according to industry sources, was an unmitigated disaster. In view of above, we expect half-year results for the sector to fall below consensus expectations.

However, it is important for investors to look ahead and attempt to discern what the medium term outlook for the sector is like.

Outlook for 2H01

With international crude oil prices stabilizing and likely to be headed somewhat lower, aided by slower economic growth in the US, domestic furnace oil prices have also come down. At present, Furnace Oil is at 9,500/tonne compared to PKR 14,000/tonne three month ago. This will provide much needed relief to the cement industry in terms of gross margins and cash flows.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

6.35

6.26

-1.42

KSE 100 Index

1470.73

1452.32

-1.25

Total Turnover (mn shares)

806.74

603.04

-25.25

Value Traded (US$ mn.)

446.87

338.86

-24.17

No. of Trading Sessions

5

5

.

Avg. Dly T/O (mn. shares)

161.35

120.61

-25.25

Avg. Dly T/O (US$ mn)

89.37

67.77

-24.17

MSCI Pakistan Index:

Pak Rs.

94.78

96.84

2.18

US $

41.32

42.36

2.53

.Source: KSE, MSCI, KASB



ASIA PACIFIC & AUSTRALIA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Bombay

BSE

4194.46

+81.25

1.98%

Hong Kong

Hang Seng

15933.55

+404.8

2.61%

Singapore

Straits Times

1906.89

+19.3

1.02%

Sydney

S&P ASX 200

3311.6

+21.7

0.66%

Tokyo

Nikkei

13989.12

+115.20

0.83%

.



EUROPE & UNITED STATE OF AMERICA
EXCHANGE INDEX LEVEL CHANGE EXCHANGE

Frankfurt

DAX

6734.1

+98.34

1.48%

London

FTSE

6240.8

+30.9

0.50%

Paris

CAC

5945.88

+85.72

1.46%

Dow Jones

Industrial

10587.59

-90.69

 

NASDAQ

2770.38

1.89