THE KSE OVERVIEW: 499 ... REALITY BITES!!!

KSE 100 Index closed 7 points up last week at 1894 level with a 32% decline in average daily volume (ADV) at 152mn shares. The market opened on Monday on a higher note with stocks ultimately coming under pressure on account of the terrorist attack in Islamabad on a church. The market closed 26 points down to 1,861 level for the day.

On Tuesday, however, it was a different story altogether where the KSE-100 Index gained 23 points to close at 1,884. Even though there was some sporadic selling in the market, strong rumors on PSO's privatization kept the investor's interest alive and led the market upwards. On Thursday, the upbeat impetus continued and the KSE-100 gained another 10 points to close at 1,884 level. The SBP issued their second quarter report revealing a historical surplus of US$1.2bn on the balance of payments during IH02. However, it was speculative trading in Hubco by local investors that actually drove the rally to higher levels.

Came Friday and Adamjee's board meeting revealed the extent of damage in their full year results - PkR499mn loss for FY01. The market has been unsure about Adamjee's FY01 results regarding a loss. Reason being twofold 1) Adamjee showed a loss of PkR212mn in their lH01 performance for the first time since its inception 2) technically an insurance company can, to an extent, cover its damage in its balance sheet. However, Adamjee's share price has been on the decline on account of the 1H01A results since July 2001. After the full year result announcement the intra-day low of AIC was PkR38.25, mainly because the market had already discounted the FY01 result last week when the scrip declined 17% from PkR47.45 to PkR39.55.

Finally, the rumors about Mansha Group (principle owners of the largest private sector bank in the country and the largest textile and cement units) hold near controlling stake in AIC gives upside potential for the scrip due to management changes at AIC over the next few years. However, until there is serious indication of such a move, we feel the scrip has the potential to experience lower levels, which would bring good opportunity for long-term investment.

Going forward, we believe that March 23, 2002 would be crucial in determining the future tone of the market, as a set of constitutional reforms would most likely be announced including the formation of NSC and a possible referendum within the third week of March. We believe that any move regarding the strengthening of the current government's grip through constitutional amendments would be taken as a positive sign by the local and international investors on account of continuity of the reform process initiated by the current government.

SECTOR REVIEW:

PAKISTAN TELECOMMUNICATIONS

PTCL has lagged other blue chips in the recent market rally, providing a good entry opportunity to longer-term value investors, in our opinion.

Based on the strong positive earnings surprise in FY01, we have revised our fair value estimate upwards from PkR27 to PkR29.

The company is trading at a steep discount of 70% to its fixed-line regional peers, primarily due to the perception of high country risk. Going forward, we expect country risk to continue to diminish, creating the potential for a re-rating.

PTCL continues to enjoy strong fundamentals with EBITDA margins forecasted to remain in the range of 65-67% over the next three year, ROE at the 25-27% level and long-term liability to capital employed, averaging 18%.

PTCL has demonstrated success in curtailing costs, keeping line expansion steady and rebalancing domestic tariffs, allowing it to reduce revenue dependence on international calls from 41% in 1998 to about 31% by FY01.

Though PTCL's monopoly ends in 2002, we feel that real competition is still 24-36 months away. The initial success of PTML, its cellular subsidiary, should significantly mitigate the impact of competition in the fixed-line segment.

HUB POWER CO LTD

Hubco announced its half-yearly results recently. EPS declined by 34% solely due to the fall in fixed capacity purchase price of the total tariff. The IRR, as mentioned in the Settlement Agreement (SA), was reduced from the original 17% to 12% after the amendment.

According to information provided, the turnover variance (from 1H01A to 1H02A) was around PkR5.8bn with a PkR4.2bn variance in the residual fuel oil component of the total operating costs. The difference between the two figures translates into PkR1.6bn, which is the actual fall in gross profit during lH02A.

As the energy purchase price (EPP) of the total tariff component is a pass-through item and the EPP comprises fuel and a variable component (any change in furnace oil (FO) price is regarded as a pass- through item), the difference of PkRl.6bn is due to the change in capacity purchase price or a fixed reduction in the total tariff.

The company also announced a 40% interim dividend for lH02, with a potential final dividend of PkR2.5-3.0/share going forward. Based on its dividend yield only, which comes to around 28% on the current price of PkR25.05/share, the stock has seen a surge in demand over the last month. On a DCF basis, with a required rate of return at 17% and a 3% long-term growth rate, the fair value comes in at around PkR27.8/share.