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THE KASB REVIEW

STOCK MARKET AT A GLANCE

Updated on Apr 06, 2002

THE KSE OVERVIEW: CORRECTION MODE

The market has been giving clear indications of entering the correction mode over the last two weeks from the 1,894 level closing on March 22, 2002. This week confirmed the unenthusiastic sentiments, when the market declined by over 18 points to close at 1,850 relative to a week ago, when it closed at 1,868. The average daily volume (ADV) during the current week rose to 217 million shares, which showed 63% higher turnover than last week's ADV of 133 million shares.

THE DAILY DRAMA

The market opened on Monday on a lower note with stocks like PTCL and PSO undergoing technical correction because of heavy selling by institutional investors who liquidated part of their long positions. The market closed 21 points down to 1,847 levels. On Tuesday, the rejuvenated market gained 14 points when the investors returned to the playground with news that President Pervez Musharraf is to announce a referendum.

On Wednesday the market opened with the news that the Privatization Commission plans to hold the bidding for the sale of UBL, 12 funds of Investment Corporation of Pakistan and nine oil fields during April. In the same context the PC was said to hold a road show the next day at the KSE auditorium to market the divestment of management rights of ICPs 12 Mutual Funds with a total net asset value of PkR1.4bn. The market notched up another 10 points to close at 1,870 levels with major activity felt in ICP SEMF's shares that experienced a turnover of 3.3 million shares to close at PkR 23.90 per share.

On Thursday, it was a different story altogether where the KSE-100 Index lost 17 points to close at 1,853. The index staged a downward rally with heavy selling felt in FFC-Jordan. The selling impetus continued on Friday, where the market fell another 3 points to close at 1,850 levels. PTCL, as usual, remained the most active stock of the week with a turnover of more than 168mn shares.

TECHNICAL OUTLOOK

The KSE-100 Index is not looking good in the near term, where on Thursday it closed at 1853 levels with a volume of 158mn shares. On the weekly closing basis, 14-weeks RSI is at 72. This indicates further correction down the line, which may lead the index to test 1800-1785 levels in the near- term. Further, during the last three trading days, the index remained choppy and failed to breach the resistance at 1885. This further confirms our view regarding the market weakness in the near-term. In our opinion, major weakness is likely to flow from PSO, which is likely to test 150 - 148 levels before continuing on its longer-term positive trend. We believe that the rest of the market is likely to follow in PSOs footsteps. At this point in time, we advice long-term investors to stay on the sidelines and gradually start accumulating fundamentally strong scrips at 1830-1800 levels. As for short-term traders, the best strategy will be to Sell on strength.

SECTOR REVIEW:

NATURAL GAS UPDATE & SSGC

The government finally promulgated the Oil and Gas Regulatory Authority Ordinance last month. This we believe is the first step towards completely deregulating the oil and gas sector in order to remove subsidies currently availed by various consumers (except domestic consumers). The government has recently decided to remove subsidy of over PkR5.0 bn (out of the total PkR6.0 bn) given to domestic consumers, which use over 18% of total natural gas produced in Pakistan. The use of natural gas by cement plants has also been on the decline drop of 18.5% over 2000 as the government has increased the natural gas prices by over 4.5% during December 2001 with a next planned price increase of 10% in July 2002.

The consumption of natural gas by the transport and power sectors increased by over 82.3% and 25% respectively during 2001, as compared to the consumption levels in 2000, which is in line with the government's plan to substitute motor gasoline and furnace oil with natural gas and CNG.

The production of natural gas has increased by over 7.3% during 2001 which is expected to rise even further once the government starts harvesting natural gas from Bhit and Sawan gas fields during 2002 and 2003. The reforms, we believe are aimed at attracting further international oil and gas exploration companies to invest in the domestic natural gas sector. With OGRA operating as an independent regulatory authority, we believe that many hurdles would be reduced if not removed in opening the sector to local and international investors.

SUI SOUTHERN GAS EXPANSION PLANS AND FUTURE OUTLOOK

Sui Southern Gas Company Limited has already initiated its Gas Infrastructure Rehabilitation and Expansion Project (GIREP), which is estimated to cost around PkR 4.635 bn. The project would result in an approximate 9%-10% jump in capacity during 2002 for integration of Zamzama gas field. The transmission and distribution capacity would further increase by over 50% as the company nears completion of its expansion plan by December 2003 to accommodate new gas supplies from Bhit and Sawan gas fields.

We believe that the above system capacity would be sufficient to utilize the 460-500 mmcfd of new gas supplies by end 2002 as gas supplies from older gas fields, especially Sui gas field, is likely to go down in the future.

HALF YEARLY PERFORMANCE

The company has been able to maintain a decent rise in its bottom line of over 19.8% to PkR683mn in lH02 from PkR570mn during lH01. The rise in sales resulted not only due to higher gas supplies from newly discovered gas fields but also because of rising natural gas prices during lH02. Financial charges declined by over 27% during lH02 from lH01 as a result of declining debt over the last year. With the fixed RoA of 17% for SSGC, the drop in financial charges adds to the bottom line. Going forward, with the rise in debt due to the GIREP, the company will face rising financial charges in the future. But, with the drop in domestic interest rates, the timing for the company's expansion plan could not have been better due to its fixed return of 17% on any incremental expansion.

FUTURE OUTLOOK

The capacity expansion of over 9%-10% during 2002 and a jump of over 25-35% in natural gas prices to various consumers due to a rise in wellhead gas prices and removal of subsidies by the government would, in our opinion, result in a 6.4% rise in the bottom line. The rise in bottom line is not very impressive if we look at it without adjusting the profit from sale of LPG during 2001.

The over all rise in the bottom line, however, without taking into account the profit on sale of LPG business during 2001 comes to over 41% (adjusting for taxes on the profit) which, by any standard for a natural gas company, is impressive. We believe the expansion plan of SSGC would result in a shift in the bottom line to a higher level during 2002 and 2003. We maintain our intermediate and long-term BUY recommendation on SSGC (Fair Value: PkR17.5) as the government moves forward with its deregulation drive of the natural gas sector. With the rising natural gas prices, sector reforms and thus an improved bottom line, we believe that SSGC would be in position for a dividend payout (PkR1.5- PkR1.7 per share) during 2002.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

7.18

7.13

-0.70

Total Turnover (mn shares)

664.63

868.03

30.60

Value Traded (US$ mn.)

353.85

447.06

26.34

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. shares)

132.93

173.61

30.60

Avg. Dly T/O (US$ mn)

70.77

89.41

26.34

KSE 100 Index

1868.19

1850.30

-0.96

KSE All Shares Index

1168.66

1159.77

-0.76

.Source: KSE, MSCI, KASB