7.28% during the week to close at 2452 on
Friday. Recovered volumes indicated the eagerness of investors for
relatively better yields after a sharp fall of 150bps in the interest
rates on the government instruments. While on the other hand, new
hopes regarding continuity of previous government's policies,
including privatisation, and improvement in Pakistan credit rating in
S&P index, added fuel to fire. Some of the dead ducks, such as
PTCL and SNGPL, surprisingly started performing providing another tool
for Index to move ahead. In our opinion, coming week has many risks
and concerns to be considered before entering the market at current
levels. In our opinion with PTCL and Hubco now in move Index may test
2500 levels in the near term however, any negative news from political
front may distract the rally for a sharp fall. We advise investors to
remain cautious and wait for dips to invest. Be Cautious and play
safe!
MARKET THIS WEEK
Positive development on the political front, made
this week quite happening for the market as a whole, where the Index
witnessed an increase of 166 points close at 2452 levels. With PTCL
coming back to life (due to the dividend date is coming near), Hubco
intact with its charm and SNGPL becoming active on its fundamental
grounds bases, Index average daily volumes soared up to 292mn shares,
testing two years high after March 2000. This positive development is
largely due to political developments, which gave investors a heart to
enter the market, which led Index to test its nine years high.
OUTLOOK
FOR THE FOLLOWING WEEK
Although our technical analyst says that the market
momentum is pointing towards the high of 2500, in our opinion there is
some space for a correction of 50-60 points in coming week. We believe
that the political deadlock in the province of Sindh may provide a
reason for this correction. Moreover, the expected negative reaction
from IFIs towards the recent government decision of power tariff cut
may also send some negative signals to the market. We advise investors
to wait for a dip to reinvest or for fresh investments, where market
looks a bit heavy on current levels. Play safe!
DAILY DRAMA
After Eid, Index soared by almost 55.23 points
testing 2400 levels after 8 1/2 years, where positive news from
political front, during Eid vacations, attracted investors back into
the field on Monday. Adamjee and Nishat remained under the limelight
where the speculative buying led these two scrips to close at their
upper circuit breaker limit. Institutional buying was witnessed in
blue chips, i.e. HUBCO, PTCL and PSO.
A correction of 10.72 points was witnessed in the
market on Tuesday. The blue chips were the major losers while Adamjee
hit the upper circuit breaker after the reaffirmation of the
management for the take over of the company by MCB. Another dead duck,
Telecard came on the screen with fresh interest on the back of
reported accumulation by big players. At the end of the day, Index
failed to sustain above 2400 levels and slipped down to close at 2389.
Financial institutions entered the market on
Wednesday and supported the dropping market. Moreover, fresh
speculation over PSO privatisation cushioned dropping market and led
it to close 13 points up at 2402 level for the day.
With the rise in Pakistan's credit rating in
S&P rating, the KSE-100 Index soared up 26.7 points with high
volumes of 265mn shares. Second tier stocks like DGK, SNGPL and
Telecard came under the lime light and led the Index to close at 2429
level on Thursday.
With foreign and institutional buying interest in
Hubco and PTCL led the Index to gain 23 points on Friday. On the start
of the day speculation over PSO also was one of the reason for the
rally however, after the announcement regarding its privatisation
being delayed up till March next year the scrip came down from a high
of PkR188 to PkR183.40 and the market came down from a high of 2462 to
close at 2452 for the week.
SECTOR REVIEW: UNION BANK- ANOTHER RIGHTS ISSUE
Union Bank is undertaking a second rights issue
this year. The shareholders will have a right to buy 2 shares for
every 3 shares held at par. The share is currently trading at PkR9.95
per share and at a P/E of 35x and a PBV of 0.71x. The company is
currently in an aggressive growth phase with the management aiming to
grow and diversify by purchasing other financial institutions. High
operating costs and significant levels of infection currently burden
the bank. Consequently, we do not expect any significant returns for
the investors in the medium term.
HISTORY
The Saigol Group incorporated Union Bank Limited in
1991. In 1999, a Middle Eastern group bought controlling interest in
the bank and the new management launched an aggressive expansion
strategy.
During the last three years the management has
continued to make, what we believe to be fairly expensive,
acquisitions. In 2000 Union Bank purchased the banking operations of
Bank of America in Pakistan, in 2001 a strategic alliance took place
with American Express for its credit card business and during the
current year it purchased Emirates Bank. At the same time the
management continued to expand the branch network which rose from 25
branches in 1999 to 42 branches at present (a number of these branches
came through the acquisition of Emirates Bank).
In order to meet the State Bank of Pakistan Capital
requirements Union Bank increased its paid capital from PkR570mn in
FY99 to 1,091mn at June 30, 2002 through bonus shares and rights
issue. The management is undertaking a second rights issue in this
year whereby a shareholder will have the right to purchase 2 shares
for every 3 shares owned. The rights issue will raise Union Banks paid
up capital to 1,819mn. The rights issue is at par i.e. PkR10 per
share.
Although we believe that diversified growth is one
of the best growth strategies for the Pakistani banking sector, we
remain skeptical about the high profile purchases made by the
management. Higher costs will take a longer time to break even
especially in the current scenario of the larger banks wisening up to
competition.
FINANCIAL
ANALYSIS
Net markup income rose by 25% from PkR253mn in FY00
to PkR316mn in FY01 in line with increase in loans. By actively
pursuing lending the management of the bank has been successful in
raising spreads in a declining interest rate environment to
approximately 5% in FY01 from approximately 3% in FY00.
Although total revenue has been rising
progressively since 1999 in line with an increasing asset base, PBT
has declined steadily largely due to rising operating expenses.
Operating expenses have grown at a CAGR of 34% since 1998 and amounted
to PkR1,109mn at YTD3Q02, comprising 90% of total revenue. As a
result, ROE of the bank has remained low historically and was only
2.89% in FY01.
Due to almost constant expansion, total assets of
Union Bank have been rising at a CAGR of 38% since 1999. Total assets
amounted to PkR53.06bn at 3Q02 and comprised largely of advances,
which constituted 45% of assets. Advances have grown in line with
assets, increasing at a CAGR of 31% since 1999. The level of overall
infection in the balance sheet is high with NPLs comprising 16% of
gross loans. Although the bank is fairly liquid, consistent low
profitability and continuous expansion has placed pressure on the
bank's capital adequacy. We believe that meeting the SBP's capital
adequacy requirements is likely to be one of the main reasons for the
current rights issue.
MARKET ROUNDUP |
| .. |
LAST WEEK |
THIS WEEK |
% CHANGE |
|
Mkt. Cap (US $
bn) |
8.90 |
9.50 |
6.47 |
|
Total Turnover
(mn shares) |
668.02 |
1461.91 |
118.84 |
|
Value Traded (US$
mn.) |
452.01 |
890.78 |
97.07 |
|
No. of Trading Sessions |
5 |
5 |
|
|
Avg. Dly T/O (mn. Shares) |
133.60 |
292.38 |
118.84 |
|
Avg. Dly T/O (US$
mn) |
90.40 |
178.16 |
97.07 |
|
KSE 100 Index |
2285.87 |
2452.24 |
7.28 |
|
KSE All Shares Index |
1427.59 |
1528.58 |
7.07 |
