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THE KASB REVIEW

STOCK MARKET AT A GLANCE

Updated on Oct 13, 2001

The KSE - Overview: Let's remain cautious for a bit

The first trading day of the week on Monday saw the market fall over 3%, albeit on weak volumes, as uncertainty crept into the market on the back on the start of air strikes against Al Qaeda and the Taliban, and the uncertainty about the backlash by domestic religious groups. But Tuesday saw a smart recovery as foreign buying interest began to take shape, and buoyed by this interest domestic investors also began to take positions leading to a rise in the broad market of 6.4%. Overall, the market climbed 4.82% over the week to close at 1193.65, with average daily turnover in shares and US Dollars 149% and 140% respectively.

With regard to our portfolio, last week's decision to reduce our defensive dividend weight to 70% and replacing them with the top 4 B stocks paid off handsomely as portfolio performance improved dramatically was brought to almost to par at PkR1mn. All in all, the portfolio has outperformed the KSE Index by 4.74%, against previous week's performance of just under 3%.

While we continue to remain confident of an upward trend in the market, we are of the view that unless substantial foreign buying comes into the market, the market is likely to consolidate and correct before going further. Hence, we are making our portfolio perhaps slighting more defensive, reducing the weight of BoP to 6%, and increasing PTCL's weight to 10.75% of the total portfolio.

Sector Review: Large Cap Update

PTCL Highlights

•In view of the tragic events in the US on 11 September, the Privatization Commission extended the deadline for the submission of status of qualification (SOQ) for Pakistan Telecommunications Co Ltd (PTCL). However, in our opinion, PTCL has decent revenue growth potential over the next two to three years even without taking into account any privatization.

•Although FY01E results are unlikely to be spectacular, we expect NPAT to grow by 21% in FY02 and 23% in FY03

•Over a two- to three-month period, we feel that Pakistan's country risk will likely be revised downwards, hence PTCL's discount to regional valuations should narrow over a 12-month period to 25-40%

Hubco Highlights

•According to industry sources, the third-party court case — the sole reason for the delay in payouts by Hub Power Co Ltd (Hubco) — has been withdrawn.

•Hubco is currently trading at a 80% discount to the FY01E regional PER and at a 49% discount to the FY01E regional EV/EBITDA valuations with the discount on P/B at 34% below the regional average.

Pakistan Telecommunications

In view of the tragic events in the US on 11 September, the Privatization Commission extended the deadline for the submission of status of qualification (SOQ) for privatization for PTCL until 1 November 2001. Further, the commission has also delayed partial divestments in PTCL until January 2002.

However, in our opinion, PTCL has decent revenue growth potential over the next two to three years even without taking into account any privatization. Our CAGR estimates for total revenue and domestic revenue alone, between FY00 and FY03, are 10.7% and 12.7%, respectively.

Although FY01E results are unlikely to be spectacular, we expect NPAT to grow by 21% in FY02E and by 23% in FY03E.

In FY02, PTCL is targeting an increase of 534,600 ALI, which could potentially increase our base case EPS forecast by about 2.5% in FY01 and 7.9% in FY02.

It is not unusual for PTCL to be trading at a discount to the regional average for full service telecom operators despite offering an equivalent five-year CAGR (%) on EBITDA and EPS, besides offering one of the highest yields in the region.

We believe that the discount is attached to PTCL on the basis of Pakistan's country risk. Over a two- to three-month period, we feel that Pakistan's country risk will likely be revised down discount to regional valuations should narrow over a 12-month period to 25-40%.

Hub Power Company Limited

According to industry sources, the third-party court case against Hubco — the sole reason for the delay in payouts by Hubco — has been withdrawn

This clears the way for an announcement regarding the payout by the lenders in the next two weeks, at the earliest.

In our opinion, the risk of WAPDA's inability to service Hubco's bills going forward is tremendously reduced, as under the current regional political scenario, donor countries have extended economic support to the government of Pakistan (GoP).

The sharp fall in stock valuations on the Karachi Stock Exchange has driven the price of Hubco close to its one-year low of PkR12.25/share.

As a result, Hubco is currently trading at an 80% discount to the FY01E regional PER and at a 49% discount to FY01E regional EV/EBITDA valuations.

As there is also a likelihood of a final dividend of around PkR1.6/share (1H01interim dividend was PkR1.7/share) for FY01, we feel that with the current weakness, investors should accumulate the stock in the intermediate term.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

4.56

4.78

4.82

Total Turnover (mn shares)

230.65

573.59

148.68

Value Traded (US$ mn.)

85.25

201.43

136.28

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. shares)

46.13

114.72

148.68

Avg. Dly T/O (US$ mn)

17.05

40.29

136.28

KSE 100 Index

1141.20

1193.65

4.60

KSE All Share Index

742.48

772.45

4.03

.Source: KSE, MSCI, KASB