THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Feb 01, 2003

 

MARKET REVIEW: DOWNWARD TREND CONTINUES
MARKET THIS WEEK

The KSE-100 Index maintained its downward movement this week, when the Index dropped 7.3% to 2,545. The volumes were also declined significantly to

 

 

 

274mn shares, almost 29% down WoW. The much-hyped up earning season was lost somewhere between the fights of badla providers and the retail investors. The panic that started, after SECP's warnings to the large brokers, was continued where the retail investors were sellers at all levels. This time too, the brokers that have been involved in badla funding are the actual gainers, while the losses to the retailers are so significant that, in our opinion, they are likely stay out of the market for quite some time. If we look at the performance of key pivotal, only defensives performed above expectations whereas Nestle, Unilever, Packages and Shell were the performers on relative grounds.

OUTLOOK FOR THE FOLLOWING WEEK

With looming war threats on Iraq and poor state of the retail investors, we do not expect any meaningful recovery in the market next week. Although there has been a shift in the stock ownership from the retailers to the large punters at lower rates, we are of the opinion that volumes should shrink further as institutions will wait for further decline, while retailers would wait for any major fundamental development to re-enter into the market. Though there are still a few important results yet to come, we believe the usual pre-result rallies are unlikely to appear owing to lower interest from the retailers. As far any interest from foreign investors after this 400 points fall, we do not expect any significant flows owing to regional security reasons.

FUNDAMENTAL CHANGES

The major fundamental factors affecting the market this week were:

•The delay in the pre-bid meeting for PSO was the major market mover this week. Although the meeting has just been delayed against the popular perception of a cancellation, this negative development also had its impacts over other stocks as well. Reportedly, the PC is expecting this transaction to complete within this quarter, however, we term this target as ambitious and are of the opinion that PSO is likely to be privatized within this FY.

•FFC's results were disappointing owing to a 4% YoY decline in profitability. Similarly the market's unrealistic expectations from the 100th board meeting of the company could not be materialized. The payout was normal, thus has resulted into price erosion.

•Although Engro met most of the expectations of the investors in terms of profitability and payout, a below expectation bonus issue triggered a negative rally in the stock.

•Though Unilever came up with a big positive surprise on the dividend side, the decline in its 4Q earning was alarming.

TECHNICAL OUTLOOK

The market has corrected 23.6% of its gains at 2,538 for the total bull-run from 1,070 to 2,991. Expect this level to remain a short-term support as the index regains to test the next two big figures of 2700 & 2800. Current gains would strongly be based on all core stocks, while second and third tier stocks would follow in sympathy. To continue the primary bull trend levels should overcome the 3000 barrier within the next couple of weeks with volume flows expanding over the broad market and not just restricted to a set of shares. Risk re-enters as 2500 fails to hold.

SECTOR REVIEW: NISHAT MILLS

In this review we have analyzed the financial results of Nishat Mills Limited (NML) for the financial year ended September 30, 2002 as well as the quarter ended December 31, 2002. Further, we have provided the details of the preference share issue announced.

Being the largest and the most diverse textile company in Pakistan, NML has always been a source of investor interest. However, dismal performance of the textile sector in the late 1990s as well other stocks coming into the forefront, resulted in the switch of investor interest from the textile sector to other sectors namely oil, gas and power.

Although the textile sector's importance in the economy as a whole has not declined, poor profits, under reporting and low dividends have definitely resulted in it being a very unexciting sector in the stock market.

The textile sector has undertaken considerable amount of BMR in the recent past. Furthermore, with it gearing up for open market competition from 2005, we believe that the sector is likely to become increasingly progressive and hopefully more profitable. Thus, in our opinion, investor interest in this sector is likely to increase going forward, especially since we believe that the investors will be looking for new stocks to invest in order to diversify their investment portfolios.

 

 

In spite of concerns shown by exporters that the appreciation in the Pak Rupee would have a detrimental impact on textile exports, most textile companies succeeded in increasing quantity exported largely due to concessions provided by the European Union. As a result, total textile exports increased, which is reflected in rising sales of most textile companies in the country. NML is no exception to this, and the company recorded an over 2% growth in sales during the year. This is indeed a positive development as export sales during 1H02 were very low immediately following 9/11.

The rise in sales completely offset by the 3.28% increase in cost of goods sold during the year. We believe that the major reasons for the rise in costs can be linked to rising cost of imported raw materials, higher fuel and power charges and higher transportation costs due to rise in insurance rates as well as war risk premium charged. As a result, gross profit of NML declined by 1.43% in FY02.

A 12.11% rise in administrative expenses and decline in other income further exacerbated decline in gross profit and consequently NPAT for FY02 declined significantly by 36% over FY01, from PkR315mn in FY01 to PkR202mn in FY02. In our opinion, the performance of NML in the difficult circumstances that existed in FY01 shows the intrinsic strength of the company.

The trying operating environment had a negative impact on the margins of the company.

1Q03: STELLAR PERFORMANCE

Financial Results of 1Q03, show significant improvement over the same period last year, with sales rising by 20% YoY. Although the 9/11 incidents did have an immediate impact on Pakistan exports, the impact was much greater in 2Q02. Thus, although it can be said that the growth is partially due to lower sales in 1Q02, we believe that higher exports in 1Q03, largely bed-linen etc has also contributed considerably to the sales growth.

In spite of sales growth gross profit declined by 14% YoY. Due to the lack of details we are unable to determine precisely the factors that caused the 27% increase in cost of goods sold. However, we believe that power charges are likely to be the major determinants.

Operating profit declined in line with gross profit, however, rise in other income and decline in financial charges more than offset the entire decline and NPAT increased by 215% from PkR19mn in FY01 to PkR61mn FY02.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

9.89

9.67

-2.22

Total Turnover (mn shares)

1926.00

1370.94

-28.82

Value Traded (US$ mn.)

1423.00

1169.97

-17.78

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. Shares)

385.20

274.19

-28.82

Avg. Dly T/O (US$ mn)

284.60

233.99

-17.78

KSE 100 Index

2609.45

2545.07

-2.47

KSE All Shares Index

1614.52

1577.99

-2.26

Source: KSE, MSCI, KASB