THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Dec 14, 2002

 

MARKET REVIEW: HIGHER YOU GO HIGHER THE RISK TO FALL

Political stability to a certain extent, provided enough relaxation for the investors to enter the market for a shopping spree. This led the Index to shoot up by 

 

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

Source: KSE, MSCI, KASB