The market closed at 1856 this week, down 0.4% from last week's closing of 1864. Volumes were lower as the average daily volume declined to 114.79 mn shares, relative to last weeks ADV of 147.33mn shares. Badla rates also reflected lower investor appetite by declining to 10% for the week. With large caps PTCL, Hubco, Fauji Fertilizer and PSO releasing their quarterly results this week, along with a host of other companies including Engro Chemical, SSGC, ICI, PPTA, Shell, Adamjee Insurance, Tri-Pak Films, DGK Cement and Cherat Cement, the market has been driven by the exhilarations and the disappointments in company performance reports. On the whole, however, the market remained subdued during the week, on account of investors' tacit decision to wait it out until the referendum, which is scheduled to be held on April 30, 2002, i.e. Tuesday next week.

On Monday the market closed at 1863, i.e. only one point lower than the beginning Index level for the day. Even though the GoP announced that the bidding for PTCL has been delayed to August from April, the price of the stock remained unchanged during the day. This vindicates our belief that the market has not yet begun to price gains from privatization into the price of the stock.. PTCL, Engro and Cherat Cement released their results on Tuesday, and the market rose by 9 points. While PTCL's 3Q02 NPAT of PkR13,086 was below market consensus expectations of PkR13,453 this was only due to higher provision for taxation for the period. Consequently, PTCL's share price rose marginally from PkR18.70 to PkR18.85 by the end of the day. SSGC reported a marginal increase in NPAT for 3Q02 by 5% to PkR956mn, however, the share price declined during the week, which is not unheard of for the stock since its ADV is quite low. Engro Chemical on the other hand reported an NPAT of PkR140mn for lQ02, which was a reduction of PkR200mn from lQ01 earnings. Consequently, Engro Chemical's stock price has taken a fall during the week.

The market rose another 10 points and closed at 1882 on Wednesday. However, reports that the GoP is considering offloading another 5-10% of its stake in National Bank through the bourses put downward pressure on the stock price. Though the market rose late in the day on account of some institutional buying, the absence of speculators kept the rise in the Index contained. On Thursday, Fauji Fertilizer declared an NPAT of PkR762mn for lQ02 and a cash dividend of PkR2.50 per share and its share price increased by 3.5% by the end of the week from beginning levels. Packages dealt investors an earnings surprise when its gross margins improved drastically and its lQ02 NPAT rose 52% to PkR257mn. Further, Hubco also announced its NPAT of PkR4.7mn, which was higher than market consensus, however, its share price remained unaffected. The market closed 10 points lower on Thursday.

On the last day of the trading week, the Index level remained unchanged. Adamjee released its results, and according to our expectations earnings took a positive turn in lQ02, after the reported loss in FYO1. In spite of their lukewarm presence throughout the week, speculators could not resist from hiking up Adamjee's price up by 7.5% during the week. PSO's result drama is inexplicable. The company declared an NPAT of PkRl.7bn for the first nine months of FY02, and had the market reverberating from the earnings surprise, however the share price strangely enough began to decline on speculation. Half an hour before market closed, the rumor began to circulate that the company had sent the wrong results to the exchanges and would be sending a corrected result sheet. After the market closed it was clarified that there had been no inconsistency and the results that had been released were correct.

SECTOR REVIEW: SNGPL - STILL A BUY

We have been covering the gas sector on a regular basis for quite some time now especially focusing on the Government of Pakistan's (GoP) oil and gas sector deregulation activity. The formulation of Oil and Gas Regulatory Authority (OGRA), removal of natural gas subsidies, conversion of cement plants to coal and natural gas (and power plants in another 2-3 years) and a possible increase in the fixed RoA of the Transmission and Distribution (T&D) companies in Pakistan are some of the areas that we have looked at in the recent past to measure the future of the two domestic gas companies — namely Sui Northern Gas Pipeline (SNGPL) and Sui Southern Gas Company (SSGC).

The government has finally announced that it intends to increase the rate of return to both gas utilities and have planned to appoint an international independent consultant firm by end May 2002. This, in our opinion, would begin the exercise to privatize both entities within the next two years. The government has already announced the date of privatization of SNGPL to be around March 2003. We intend to keep the focus of this write-up on evaluating the performance of SNGPL in light of the remarks/announcement made by the government regarding the gas sector.

NEW DEVELOPMENTS

The news of the Privatization Commission being likely to announce appointment of an Financial Advisor (FA) to prepare the sell-off plan for SNGPL (and SSGC) is an indication of the efforts done by the current government to expedite the privatization of the government owned entities. According to the report, the FA would study the feasibility of breaking up the T& D units into smaller companies for speedy privatization.

The T&D companies, which are currently operating on a fixed return on net fixed assets could see a potential rise in their rate of return as decided by the GoP and the World Bank mutually.

SNGPL - A BRIEF OVERVIEW

Despite having been showered with so many positive signals from the GoP, we would want to look into the current performance and intermediate future prospects of SNGPL as the plans laid out by the GoP would take some time to be implemented completely.

EXPANSION PLANS - 23% JUMP IN CAPACITY

The expansion plan laid out by SNGPL would result in an increase of 23% in the total gas transmission capacity by 2004. According to company sources, it would have additional 525mmcfd gas available for supplies from new fields in south to distribute amongst its various consumers by 2004. With the current natural gas sales at 844mmcfd, the additional gas would result in a 62% rise in total gas available for supplies to SNGPL's various consumers.

BOTTOM LINE IMPACT

We expect that SNGPL would see a rise of over 20% and 12% for FY02F and FY03F respectively. We can attribute the reasons to the jump in NPAT to rising natural gas prices by 20-25% over the next two years (The increase in natural gas price for cement sector alone was around 30%). The removal of subsidies to domestic consumers as a drive for tariff rationalization for industrial consumers we expect to see further rebalancing going forward.

INVESTMENT PERSPECTIVE AND VALUATIONS

With the ongoing reforms in the gas sector, we might see a shift from the existing RoA formula to 21% RoE formula as recommended historically but these reforms will take time to be implemented. The minority shareholders, on the other hand are not only interested in the longer term restructuring of SNGPL but also in benefiting from the current plans which are going to affect the bottom line and thus dividend payout going forward.

On the basis of our DCF model with a WACC @ 16%, we believe that the fair value of the stock comes to around PkR18 per share. With the current market price at PkR14.20 per share, we believe that the stock is currently trading at a discount of over 26.7%. With a potential dividend of around PkR2.0/share and a dividend yield of over 14%, we thus maintain our intermediate term BUY recommendation on the stock.