THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Feb 08, 2003

 

MARKET REVIEW: IN CONSOLIDATION PHASE!

After almost 400 points fall, the market entered into a consolidation phase where the KSE-100 Index stayed within a narrow range of 2,531 - 2,437. 

 

 

 

Average volume shrank further to only 176m shares,  almost 36% lower WoW. The most affected segment of investors was the retail, where day traders were sitting on the side lines, while long-term investors kept selling some of their holdings on the fear of (I) further decline in the market and (II) uncertainties with regards to a possible war on Iraq. The local institutions, on the other hand were quite active at lower levels where we saw an accumulation strategy by most of them. The in-fashion stocks were defensives like Fauji Fertilizer, Packages and Unilever. The oil price revision could not generate any interest among the OMCs, which were marred by negative sentiment in PSO.

OUTLOOK FOR THE FOLLOWING WEEK

With just one trading day in whole week, we do not expect large and serious players to be active in the market next week. In our opinion, the investors would try to minimize their exposure to the equity market before going for holidays. Continuous news flows on possible US action against Iraq will set the tone. As far the badla related panic among the retail investors is concerned, we feel that initial fears are over as indicated by the normalization of badla rates and a significant decline in the volume of the badla transactions. Although 2-3 important results are expected over the weekend and on Monday, we feel that market is likely to remain aloof to these. We maintain our earlier defensive stance on the market, where we have a positive outlook for the long term while short-term picture is expected to remain shrouded with various fears. Our picks for next week are MCB (owing to its results) and Pakistan Oilfield (owing to its status of a hedge against possible Iraq war).

FUNDAMENTAL CHANGES

The major fundamental factors affecting the market this week were:

The result announcement from Hubco was not really a big surprise for the market, though the initial reaction from investors was negative. Despite a decline in top line, the stable bottom line clearly shows that Hubco is a different stock all together. With a clear indication from the management regarding a dividend payout in March, the investors have already started building up their hopes.

Pakistan's decision of retiring some of its expensive IMF debt was taken positively by the market whereas the general understanding is that the government is trying to reduce its debt servicing burden on one hand and increasing its forex reserves on the other.

Though a 24% expansion in trade deficit is a negative development, the market took this as a positive omen for the expansion in the trade activity in the country.

ICP SEMF result announcement was a clear indication that how radically a change in accounting policy can change the earnings of any company. However, market showed a very matured reaction towards these results whereas it has overlooked a 11x improvement in fund's earnings owing to revaluation of its portfolio on market basis.

LUCKY CEMENT: WILL BE LUCKY TO HAVE 39% YOY GROWTH IN 1H03

According to our estimates, Lucky is likely to announce a net profit of PkR120.8mn in 1HFY03 as against PkR86.8mn in 1H02. The growth of 39.2% in the bottom line is mainly attributable to 1) upsurge in cement dispatches in 1Q03, which translated into a jump of 4% in the revenue during the period under review; and 2) improvement in gross margins from 15.5% in 1H02 to 18.6% in

1H03, due to the coal conversion of the plant. At current price the scrip is trading near its DCF based fair value of PkR12/share and thus we recommend a HOLD for Lucky.

REVENUE GROWTH: VOLUME INCREASE AS A RESULT OF SHARP PRICE DECLINE

Despite of a 12% growth in demand of cement during 1HFY03, we are expecting a marginal 4% growth in the revenues of the company during 1H03. We believe that this is likely to be because of a price war between the two cement companies, which reportedly have converted their plants from fuel oil to coal, resulting in cement prices have declining by over 15% during 2Q03. This is likely to impact negatively on Lucky's sales, which are expected to witness a 17% QoQ drop in 2Q03.

GROSS MARGINS: IMPROVING SIGNIFICANTLY

Plant conversion paid high returns to the company in terms of significant improvement in the gross profit margins, which increased from an average of 11-15% to a high of 18-20% in 1H03. The sharp drop in the prices marginalized the full impact of the conversion in our opinion. Combining above, we expect gross profits to increase by 24% YoY during 1H03.

BOTTOM LINE: 39% UP YOY

In addition to rising gross margins, decline of more than 14% YoY in the financial charges is expected to help the bottom line to improve by 39% YoY. We do not expect company to announce any interim dividend.

RECOMMENDATIONS:

With impressive profit growth in 1H03, Lucky may looks quite attractive for long term investment. However, we do not expect this growth to continue in 2H03. We believe that in order to increase demand, the cement industry will eventually start passing on the cost declines to the final customer. In result prices are likely to remain under pressure while volumes will grow. However, significant improvement in profit margins seen in 1H03 is expected to normalize. At present Lucky is trading near our DCF based fair value of PkR12/share due to which we maintain our HOLD stance for the company.

 

 

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

9.67

9.47

-2.07

Total Turnover (mn shares)

1370.94

705

-48.58

Value Traded (US$ mn.)

1169.97

521.12

-55.46

No. of Trading Sessions

5

4

 

Avg. Dly T/O (mn. Shares)

274.19

176.25

-35.72

Avg. Dly T/O (US$ mn)

233.99

130.28

-44.32

KSE 100 Index

2545.07

2481.44

-2.50

KSE All Shares Index

1577.99

1543.29

-2.15

Source: KSE, MSCI, KASB