THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Mar 22, 2003

 

MARKET THIS WEEK

The performance of the KSE-100 Index during the first few days of trading was similar to that during the previous weeks i.e. range bound. However, market became bullish during the last two days of trading and closed positive on both these days. During the week the Index rose by 4.39% (111 points) from 2,540 points last week to 2,651 points this week. 

 

 

 

 

Average daily stock turnover also increased from 120.67mn shares last week to 156.92mn shares this week. Although this by no means compares with the levels witnessed in December 2002 and early January 2003, it definitely indicates that the market is preparing to move out of this range.

Stock of the week was PTCL rising by 13.65% during the week out performing the market. Hubco and SNGPL also reflected strong performance rising by 6.17% and 12.56% respectively.

OUTLOOK FOR THE FOLLOWING WEEK

We expect the market to consolidate its current position during the following week. Movements are likely to be within a range until the conflict in Iraq is over. We stand by our stance that the war is likely to be short. In case there is retaliatory measure by Mr. Hussein, the war could stretch. In such a situation, we may see some panic in the market. However, once the war is over, we believe that the bullish sentiment could become strong again.

FUNDAMENTAL CHANGES

• The week commenced with the POL prices recording the sixth consecutive upward price revision in the current calendar year. The oil marketing companies increased prices by a 2 to 4% due to rising prices in the international market. As a result of the revision, OMCs recorded inventory gains which had a positive impact on the stock prices of these companies. On the flip side, we are of the opinion that higher the oil prices rise the greater they will fall once the uncertainty about oil supply is over. Consequently, all these companies will face considerable inventory losses. Its certainly not party time for the OMCs.

• The feature of the week was the war on Iraq. At last the speculation was over and the US, predictably for some and shockingly for others, by-passed the UN and gave Saddam Hussein an ultimatum to leave his country or face war. As expected, Saddam refused and Gulf War part II has begun. Since the market had already discounted the war there was no negative impact on the stock market. We take this opportunity to gloat.

• The State Bank of Pakistan cut the interest rates of the 3 and 12 months Treasury Bills by 119bps and 85bps respectively. Interest rates are now at their historic lows at 2% on the 3-month paper and 3.19% on the 12-month paper. Following these cuts, it is expected that rates of PIBs as well as NSS will be cut. These declines gave another boost to the stock market, as valuations get increasingly attractive.

• Cement prices increased by 300 per ton in north Pakistan largely due to increased demand. The sector, which has been in doldrums for a while due to rising costs and breakdown of the cartel, is finally reviving slightly. Stocks of companies, which have converted to coal, hence enjoying cost efficiencies, are expected to benefit significantly from the increase in prices.

 

 

TECHNICAL OUTLOOK

Breakout at 2550 was successful, as the market corrected its fall from 2991 to 2338 by 50% at 2665. The breakout is a positive move for further gains towards 2742. Immediate support is placed around 2600/20 with any major pullbacks retesting 2588-2550. Risk sets in below 2500. Market breadth indicators have also moved up, reflecting positive flows.

POL PRICES CONTINUE THEIR UPWARD MARCH

With the inventory of the Oil Marketing Companies, specially PSO, at their highest level, we are of the opinion that the latest price increase is likely to result in windfall gains for both PSO and Shell. While we estimate these gains at PkR240mn for PSO and 118mn for Shell, we believe that our estimates are conservative. With the international crude oil price remaining firm, the OMCs are continuing to pass on the buck to the end consumer. We expect the upcoming results for both the OMCs to be considerably better compared to the 1Q03 mainly on the back of rising domestic POL prices. While OMCs continue to benefit from the recent increase in prices, and hence profits, we expect 4Q03 to be the period where these abnormal gains are likely to be normalized as oil prices spiral down post Iraq dispute resolution. We maintain our positive stance on both the OMCs.

FAUJI FERTILIZER: MEETING WITH THE MANAGEMENT

Fauji Fertilizer Company is expected to face declines in the margins in FY03 as the feedstock price on the expanded unit is expected to increase from a fixed rate to a floating rate (increase of 360%). However, as this increase is only on approximately 34% of the installed capacity, the overall cost of feedstock is expected to increase by 60% YoY. Obviously margins are expected to be squeezed and the recent talks about a PkR10 per bag further hit on margins do not bode well for the urea manufacturers. In spite of all these negatives, FFC's fuel efficiency, expansion plans as well as overall operational efficiency are still very important positives for the stock. We maintain a BUY on FFC at current prices as it is trading at a discount of close to 20% from our fair value of PkR97 per share.

ENGRO— INVESTMENT PLANS

Engro is in the planning stage of expanding operations in Oman and has already bought controlling interest in an Information Technology company based in Lahore. What we like best about the management of Engro is its foresight. Although investments, especially for a green field nature, take some time to bear fruit, they are usually valuable opportunities. According to our estimates the investment in Oman is expected to add nearly PkR3bn in debt, and even though there will be added pressure on margins in the short term, we expect significant returns from the investment going forward. With these well thought out investments, we expect Engro to become a lucrative long-term play. However, at present we maintain our Neutral stance on Engro.

CONFERENCE CALL WITH DGK

In our conference call with DGK management, we confirmed the rumor regarding sharp recovery of cement prices in the upper regions of the country. According to the management, after 9th March, cement prices rallied up by PkR300/ tonne in the north, while demand growth remained high at 15-16% YoY due to 1) the anticipation of price cartel recovery and 2) seasonal demand, where the cement demand remains particularly high during summer. The management also confirmed the complete conversion of unit 1 operations from furnace oil to coal after which DGK plant is fully running on coal fire system. This, in our opinion, will bring further strength in the financial performance of the company, which has already out performed the sector as a whole during 1 H03.

Consequently, we expect more than 25% growth in the profitability of the company during FY03 YoY. Currently, DGK is trading at a discount of 17% from our DCF based value of PkR13.5/share based on which we recommend a BUY on DGK.

MARKET — LIQUIDITY IS STILL THE KEY!

Wednesday's unprecedented offers for the government paper and a further 86 bps and around 100 bps reduction in 3-month and 12-month instruments may have hyped the hopes of the institutional investors about a possible rate cut in the DR in near term. While we also tend to agree with this popular speculation, we feel that pushing the stock market on this news alone is somewhat not good at this moment. We reiterate our earlier view that investors should try to construct their require rate of return from the stock market by adding a substantial equity risk premium to the DR and then compare these possible yields with the dividend returns the major stocks can offer to them. As for capital gains, we believe that investors should currently overlook them as our market is bound to show roller coaster rides no matter what happens. We maintain our Buy on FFC, PTCL and Unilever.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

10.00

10.00

3.73

Total Turnover (mn shares)

362.00

784.60

116.74

Value Traded (US$ mn.)

402.55

638.69

58.66

No. of Trading Sessions

3

5

 

Avg. Dly T/O (mn. Shares)

120.67

156.92

30.04

Avg. Dly T/O (US$ mn)

134.18

127.74

4.80

KSE 100 Index

2540.25

2651.71

4.39

KSE All Shares Index

1576.49

1636.52

3.80

 

 

Source: KSE, MSCI, KASB