The KSE - Overview: Making a U-Turn

The KSE-100 closed at 1381 levels falling slightly by 0.14% from last week's closure at 1383, which was in continuation of the downward trend demonstrated in the last two weeks. The ADV during the week rose by 24.42% from 104.17mn to 129.60mn shares. There was less activity in the two large cap stocks — PTCL and HUBCO — as they both had experienced their share of volatility when their annual results were announced last week. SNGPL, SSGC, DGK, Lucky and Dewan Salman, on the other hand, displayed major activity for the current week.

On Monday it seemed like the news on the US aid package of US$1bn did not trigger any enthusiasm among the investors as institutional traders leaped into massive selling in prime stocks like HUBCO and ICI, which was so assertive that the KSE authorities had to apply the circuit breaker rule to forestall further decline in ICI's share value. Additionally, dividend announcements from Millat tractors, ICP Mutual Funds and Pakistan Paper Products did not trigger any aggressive movement in the stocks. The news about the New York air crash killing 246 people onboard, exacerbated selling in line with the world bourses along with some foreign funds selling on Tuesday. The KSE-100 Index touched an intraday low at 1336 level and rebounded to close at 1338 from its opening of 1369 level, thus experiencing an erosion of 31 points or 2.27%.

Surprisingly, the market seemed to have responded well to the news of Afghan sovereignty changing hands, with Northern Alliance advancing towards Kabul and Talibans retreating to Kandahar. On Wednesday the relatively improved trend of KSE-100 Index that spiraled up 13 points at 1351 level on the back of a vague perception of peace in Afghanistan after the fall of Kabul. Further, as a result of the EU withdrawing duties on most Pakistani products and allowing an increase of 15% in textile quota, there was active buying in the textile sector mainly in Fazal Textile, Nishat Mills and Bhanero Textiles.

The turnaround at the KSE-100 Index consolidated the gains with another 21 points or a 2% rise, closing at 1372 points, most likely caused by the news about the IMF-led bilateral and multilateral creditors willing to bridge Pakistan's US$3.2bn financing gap. All large cap volume scrips posted gains, but the ADV bottomed out to 98mn shares on Thursday from 140mn shares on Wednesday and 122mn shares on Tuesday. During the week Sui Southern and Sui Northern declared a cash dividends after ages! - with dividends of 15% and 17% respectively.

The stocks continued to climb at the KSE where PTCL and HUBCO surged forward and enabled the market to breach 1375 key level on Friday. The positive sentiments were sparked off by the signing of agreement with Washington for US$600mn budgetary support as part of the US$1bn aid package for Pakistan and the reduction in prices of all petroleum products including Furnace Oil led to activity in DGK and Lucky cement as decline in the furnace oil prices — a major component of cement manufacturing is expected to lower the manufacturing cost of the cement sector going forward.

Sector outlook

Kohinoor Energy Limited: Allaying Investor Concerns

What's NAB got to do with it?

It all started when a news item was published in one of the daily newspaper regarding Kohinoor Energy Limited (KEL). It said that the Ad-hoc Public Accounts Committee (PAC) recommended the case of KEL be investigated by the National Accountability Bureau (NAB) for alleged irregularities. However, the senior management of KEL, in our recent meeting in Lahore, has stated that all the outstanding issues with WAPDA (in this case it was regarding some pre-operational payments by WPADA and not any irregularities by KEL) stand clear. Furthermore, the arguments given by the WAPDA's audit committee to PAC regarding KEL have been successfully settled between the two organizations. Before we discuss KEL's future outlook under the current scenario amidst these rumors, we lightly touch upon the recent developments in the power sector.

The Power Sector Restructuring - Current Issues

According to the Ministry of Water and Power, the World Bank's (WB) visiting mission has expressed its satisfaction regarding the current power sector reforms in Pakistan. In our opinion, even though the pace of the reforms is slow, the recent invitation by the Government of Pakistan for Expressions of Interest (EoIs) from qualified financial advisory consortiums to assist the government in privatizing two thermal power units of Genco-l, Jamshoro Power Company Limited, has assured the WB of the GoP's desire to restructure the power sector. GoP has divided WAPDA into 12 independent entities, including three power generation companies, eight distribution companies, and one transmission company as part of its corporatisation plan. According to government sources, the successful sale of Jamshoro Power Company Limited would set the tone for privatization of other government owned power generation companies going forward. We believe that the power sector reform process is likely to continue as International Financial Institutions have linked future funding with these power sector reforms and the GoP would be inclined to service its tariff agreements with various Independent Power Producers (IPPs). Further, the GoP is planning to announce a new power policy focused on Hydel generation to attract long-term investment into the sector.

Kohinoor Energy Limited - A stock to take stock of

The settlement of all issues between Hubco, WAPDA and the Government of Pakistan has resulted in a positive outlook for the power sector in Pakistan, in our opinion. Kohinoor Energy Limited (KEL), another listed power producer on the Karachi Stock Exchange, with consistent progress over the years has proven itself as a success story in the power sector. The denial, of any proceedings against KEL by any of the government agencies, by its senior management has given us even more reason to take this company seriously.

Net sales increased by over 4% in IH01 to PkR792mn from PkR760mn in 1H00. COGS rose by 3% to PkR333mn in 1H01. As a result, gross profit increased by over 5% in 1H01 to PkR459mn from PkR436mn in 1H00. Its administrative and marketing expense increased by over 89% in 1H01 to PkR26mn from PkR14mn in 1H01. This sharp rise in expense, which is not a pass through item, resulted in a shrinking operating profit in 1H01 to PkR433mn from PkR422mn in 1H00.

The rise of 8% in net other income resulted in a 3% increase in EBIT to PkR458mn in IH01. However, financial charges grew by over 7% to PkR221mn in 1H01, causing a decline of 1% in EBT in 1H01. EAT, as a result fell by 1% to PkR228mn in 1H01.

Going forward, we expect net sales to increase by over 7% in FY01 to PkR1,804mn from PkRI,693mn in FY00. We believe higher demand for thermal power by WAPDA, due to low hydel energy generation during last fiscal year, is likely to result in increased sales for KEL in FY01. As expected, higher power generation by KEL would result in an increase of 11% in COGS in FY01 to PkR895mn from PkR807mn in FY00.

In FY01, operating expense is likely to be reduced by over 47% to PkR64mn (last year's rise of operating expense was due to a one time non recuning charge - provision for doubtful debts of around PkR77.326mn). As a result, the operating profit is likely to grow by over 10% in FY01 to PkR845mn.

KEL, in our opinion, has over PkR1.0bn in cash and is only constrained by its lender's restrictions on dividend payout. As a result of this rising cash reserve, we expect its other income to grow by over 48% in FY01 to PkR79mn from PkR53mn in FY00. We estimate a growth of 5% in financial charges to PkR430mn in FY01 fiom PkR409mn in FY00, resulting in a 21% rise in EBT and EAT in F01 to PkR494mn and PkR476mn respectively.