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Updated on Mar 02, 2002

The KSE Overview: Reforms to direct future

KSE 100 Index closed 20 points up last week at 1,723 level with a 27% decline in average daily volume (ADV). The market was poised for a lower level but an unexpected dividend announcement of 40% interim dividend by Hubco led to a jump in buying interest by individuals and institutions alike and thus resulted in a higher close for the KSE Index.

For the week ending March 1, 2002, the Index moved 52 points up to close at 1775 with a 23% rise in ADV. The trading days were again limited to 4 during the week on account of extended Eid holiday on Monday. The market opened on Tuesday on a higher note with stocks ultimately coming under pressure on account of sporadic profit taking from various counters. The market closed 5 points down to 1,718 level for the day. On Wednesday, however, it was a different story altogether where the KSE-100 Index gained 41 points to close at 1759. Even though there was some sporadic selling in the market, the rumor of a Distribution Margin (DM) revision for OMC's kept investor interest alive in Pakistan State Oil (PSO). PSO's share price has been on the rise on account of the privatization issue since late January 2002. The confirmation of any rise in OMCs DM could spark further buying interest in the scrips of OMCs, in our opinion (as mentioned in our Pakistan Strategy Report).

The issue of an unexpectedly high interim dividend of PkR4.0/share led to a buying spree in Hubco shares. Being one of the large caps and with the prospects of a high dividend yield as a result of the PkR4.0/Share dividend, investors remained bullish on Hubco throughout this week also. And rightly so, as the Hubco management, during their presentation on Thursday evening, hinted towards a closer, if not equal, payout again for 2H02 and 1H03. This, in our opinion, could push the stock price up further as the dividend yield at the current price of PkR29.5 per share and at a potential final dividend of PkR3.0/share translates into roughly 24%. Fundamentally speaking, this yield structure is attractive enough for further price appreciation within the coming weeks, in our opinion.

Furthermore, the gas sector reforms announced by the government this week are also aimed at attracting foreign investor interest in both upstream and downstream gas companies. These reforms, in our opinion, would prove beneficial in the longer term. As for the shorter term, the gas infrastructure investment by the government and removal of subsidies on the domestic natural gas consumers is bound to increase the bottom line of the two gas companies (SSGC and SNGPL), in our opinion.

Finally, we believe that the successful privatization process of government owned entities such as KESC, PSO, PTCL is vital to creating depth in KSE-100 Index. This would help create a solid foundation, which could trigger a 100-150 point rally thus resulting in higher investor confidence on the reforms taking place in Pakistan. On the other hand, the failure of the privatization process could lead to a correction in KSE, in our opinion.

Technical Outlook

The KSE-100 Index closed at 1775 level on Friday for this week, with rising volumes. The Index remained quite choppy above 1700 levels during the week. With 14-days RSI at around 68, the market still has the potential to test 1800-1825 levels again in the coming week. The question of sustainability, however, still remains unanswered.

Technically, we are very bullish regarding the Index's expected trend in the intermediate and long-term. However, we are concerned regarding its short-term trend where we expect some correction in Hubco that may lead Index down by 50-60 points. If the Index succeeds in sustaining above 1725-1700 levels, then short-term positive trend will be confirmed. This may lead the Index to breach its resistance at 1800 in a hurry and to test 1875 levels. On the other hand, risk extends to 1650 levels. We expect PSO to lead the rally where if it succeeds in breaching resistances at 151.35-153.60 levels, it may test 170 levels going forward. PTCL is likely to follow the course, while we are not very positive, technically speaking, regarding Hubco, in the short term.

Sector outlook

Atlas Investment Bank

The merged entity has a paid-up capital of PkR319mn, though short of around PkR181mn to qualify for the paid-up requirement of PkR500mn, we feel, based on the company's favorable track record (swap ratio of 1:1) it should be able to achieve this target by Dec FY02.

Though we have not performed an in-depth analysis as the performance has been relatively flat over the last six months, however, going forward we feel, that transition of the leasing company into an investment bank should assist the management to have better access to external funds at relatively competitive rates. The larger size of equity would provide more comfort to the potential creditors and in return provide the company access to greater resources.

The merged entity would also be in a position to offer varied financial products, thus giving it the opportunity of one-window operations to its clients and have a competitive edge over its competitors. Further, the larger size of the company would increase its risk absorption capacity thus enhancing the capacity to manage the potential risks arising out of the adverse and uncertain operating environment. Lastly, the merged entity should be in a position to carry out the operations of a leasing company and an investment bank through a single management, resulting in workforce synergies and consequently optimizing their operating margins.


We maintain our positive outlook on the company and recommend an intermediate and a long term BUY on Atlas Investment Bank Limited.






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.Source: KSE, MSCI, KASB