Updated on Mar
THE KSE OVERVIEW: BEAR
For the week ending March 29, 2002, the KSE 100
Index closed 26 points down from last week at 1,868 level with a 10%
increase in average daily volume (ADV). The trading days were limited
to 4 during the week on account of holiday on the 10th of Moharim
falling on Monday.
The market on Tuesday opened on a lower note with
stocks undergoing a technical correction as a result of sporadic
profit taking from various counters. Institution of the "Ultra
Trading System" by the KSE to initiate on-line trading, caused
the investors to shy away from active participation, for the day. The
market closed 28 points down to 1865 levels.
On Wednesday, the market opened with the news that
Adamjee Insurance Co. and some of its shareholders had filed a suit in
the Sindh High Court against MCB and others sought remedy against what
it said a possible hostile takeover attempt. The marked was poised for
lower levels and the sell side impetus directed the market 37 points
downwards to 1,828 levels, with volumes slightly improving as the
investors were overcoming their shyness towards the new trading
system. Adamjee's price decreased from PkR38.95 per share to PkR36.50,
reflecting a decline of 6.2%.
On Thursday, it was a different story altogether
where the KSE-100 Index gained 23 points to close at 1,852. Even
though there was some sporadic selling in the market, the index staged
a smart rally mainly led by scrips like PTCL and Hubco. The upbeat
sentiment continued on Friday, where the market notched up 16 points
to close at 1,868 levels. Hubco remained the most active stock of the
week with a turnover of almost 200mn shares, on the back of news
regarding WAPDA paying their dues to Hubco on the coming Monday.
IBRAHIM FIBERS COMPANY
The Ibrahim group continues to demonstrate its
leadership skills in the country's corporate sector in terms of
superior management quality, vision and forward planning, besides
being one of the very few local sponsor groups who take along their
minority shareholders with them in a fair and transparent manner.
Recently, we visited the company to discuss the impact of recent
developments and further updates on the PSF sector. Following is the
information, which we received from the company along with our company
analysis, which might be of some interest to investors.
Fiber Company Limited, with a production capacity of 70ktpa is the
second largest Polyester Staple Fiber producer in Pakistan. With the
recent merger company also possesses 134,170 spindles, which mainly
produce Polyester Viscose Yarn. These spinning units utilize almost
25-26% of the PSF produced in IFL, and the remaining is sold in the
domestic market. Lurgi Zimmer AG in 1997 constructed the PSF plant for
IFL. Zimmer is the global leader in manufacturing systems for polymer
and synthetic. This gives IFL an advantage in operating efficiency
over other domestic PSF manufacturers and reduces the wastage ratio of
the plant to 0.5% against an average sector ratio of 2%.
Fibers imports raw materials, PTA and MEG, on 100% contract basis from
Mitsui Chemicals and Dow Chemicals to maintain the quality of the
product they produce and ensure regular supply. The company maintains
the lowest average stock levels compared with the rest of the industry
domestically. Currently the company is producing three types of
polyester namely, Bright, Semi Dull and Clear.
3. According to
the company they had started working on the amalgamation of the four
companies before undertaking the legal requirements. They believe that
it will help them save on general sales tax on intra-company sales and
purchase, along with management synergies.
Fibers is currently in the process of enhancing its production
capacity after which it will become the largest PSF producer in
Pakistan with a total production capacity of 208.6ktpa. The expansion
project comprises a continuous poly-condensation plant with a capacity
of 138.6ktpa polymer, three staple fiber lines as well as all
ancillary facilities. Lurgi Zimmer has supplied the technology,
complete engineering and equipment. The value of this contract was
around Euro71mn. This expansion is likely to commence production at
the end of April 2002.
5. With this
expansion coming online, IFL will introduce two new PSF products,
hollow fiber and dyed fiber. The company is planning to export these
products in the international market, where they are in demand and
usually enjoy relatively higher margins. Also, the company is quite
optimistic regarding the additional production of PSF, which is likely
to create an oversupply situation in the domestic market. According to
the company, due to the better quality of their product there is high
demand for their yarn and PSF and so they should easily be able to
sell their additional production.
prospect of the company: they are also planning to increase their yarn
producing capacity for the export market and they may increase it by
50,000 spindles in coming years.
IFL is the lowest cost producer of PSF in Pakistan.
A state-of-the-art plant, ISO-9002 certified management practices and
a strong bottom line orientation have all contributed to this.
Additionally, a low debt to equity ratio of IFL as compared to the
sector means relatively lower financial charges. The IFL's financing
structure for the PkR5.6bn expansion project neutralizes both risks,
currency devaluation risk and capital control risk, allowing investors
to assess value addition in local currency terms.
The company recently released its detailed accounts
for FY01 where the merged accounts of the four companies were also
given. We have find that the consolidated sales of the combined
entity, increased by 3% from PkR7.71bn in FY00 to PkR7.97bn in FY01.
The PSF production increased marginally by 1% to 70.429kt in FY01,
while the capacity utilization of textile units remained as high as
120% during the year in review. The consolidated gross margins
declined to 16% in FY01 from 21% in FY00. According to the half yearly
results of the companies, IFL's stand-alone gross margin was of 22.2%
in 1H01 versus 25.9% in 1H00. Superficially, this indicates that the
non-synthetic units had taken a bigger hit this year at gross margin
levels then IFL itself. The real drag on earnings of the consolidated
entity, in our opinion, would have been Ibrahim Energy where gross
margins fell from 31.9% in 1H00 to 6.4% in 1H01. A massive jump in
international petroleum price and hence domestic furnace oil price was
likely to be the cause for it.
Looking at consolidated operating margin, it
declined from 20% in FY00 to 14% in FY01. The reason appears to be the
same as above. The combined total assets for FY01 were PkRPkR11.2bn
out of which approximately PkR8.7bn or 78% are related to IFL. Going
forward, of course IFL's share would increase substantially next year,
as Capex for the expanded capacity will come on line.
INVESTMENT PERSPECTIVE AND
With the additional PSF capacity coming on line,
the future profitability of the PSF sector looks to be in doldrums.
However, an upturn for the sector in the international market is
likely to take place in FY03, where the demand is likely to be drived
mainly by the Chinese textile industry boom and also from the global
economic recovery. But this may take some time to reflect on
Pakistan's synthetic industry. We maintain our Overweight stance for
the sector at the moment.
Compared to the sector, Ibrahim Fibers is likely to
outshine other PSF manufacturers. Profitability growth after expansion
is likely increase drastically. As we are in process of rebuilding our
financial model for the company, it is too early to give estimated
growth rates along with numerical forecasts for the years to come.
However, we are very positive regarding IFL's earning growth during
FY02 and are changing our Intermediate -Long term stance of BUY to
Mkt. Cap (US $ bn)
Total Turnover (mn shares)
Value Traded (US$ mn.)
No. of Trading Sessions
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn)
KSE 100 Index
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