THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated May 17, 2003

 

MARKET THIS WEEK

After over a week or so of attempting to break the coveted 3000 barrier, the market finally succeeded on the last trading day of the week. This week, the KSE-100 Index reached a new all time high of 3008 and closed the week at 3003 up by 1.04% from last week's close of 2973. Overall volatility during the week 

 

 

 

was high and the volumes thinned out at high levels indicating that this is a weak bull run. Higher levels saw aggressive profit taking by large players while retailers were seen entering the market at high levels.
The average daily volume declined by a massive 44% during the week from 286mn to 162mn shares. This decline is in contrast to volumes during the previous all time high where volumes were also very high. This further corroborates our view that this is a weak bull trend.

OUTLOOK FOR THE FOLLOWING WEEK

We continue to advice our investors to be cautious at current levels and book profits as low volumes indicate an inherent weakness in this bull trend. Though we expect the market to move further towards its short term expected high of 3050-3060, one should be prepared for a correction after that. A correction is very much overdue after around 700 points rally. Two factors can stretch the market further towards 3100; (I) any increase in volumes and (II) any further development on India Pakistan front. Hopefully, things will become clear by the end of next week.

FUNDAMENTAL CHANGES

Fundamentally, this week was all about fuel and power and news about WAPDA, KESC, PSO and the gas companies were inundated in the newspapers.

•The Oil and Gas Regulatory Authority raised gas tariff for the gas distribution companies by 7.5% in order to meet their cash requirements. According to returns formula for the gas distribution companies, which is based on return on assets, the bottom lines of the companies are not expected to be affected. However, cash situation can improve. Hence, impact on the stock price was not really expected and it did not occur. Though SNGPL continued its upward thrust owing to reasons best known to the "punters".

•National Electric Power Regulatory Authority (NEPRA) approved a 14.35 paisa/unit and 20 paisa/unit tariff hike for WAPDA and KESC. This increase came under the Automatic Fuel Adjustment Formula under which the power companies are able to pass on the rise in fuel costs to the final consumer. A reader would wonder that why is this old news in this week's fundamental changes. This week the government approved this increase, however, the effective increase for the domestic consumers was limited to 7p while the government decided to bear the burden of the differential on itself. We believe that encouraged by its current somewhat easy cash situation, the government is filling in the shortfall. Although the general public will obviously cheer the magnanimous policies of the current government, we believe that these are not sustainable polices and are likely to be criticized by the international donor agencies.

 

 

•The much awaited, much debated and much speculated upon privatization of the oil giant i.e. Pakistan State Oil has been delayed yet again. According to officials in the Privatization Commission, the transaction is expected to take place in 1QFY04, about 11 weeks from now. This news did put a dampner on the stock which predictably took a hit. We believe that investors should not despair, as the privatization is likely to take place and should weather the delay.

•Another interesting development in the fuel sector this week was a proposal by WAPDA that the Independent Power Producers should be allowed to directly import their fuel oil requirements. This proposal was given in order to reduce WAPDA's liabilities in this regard. However, by the end of the week, the Ministry of Finance and Ministry of Petroleum both protested strongly against revising the Implementation Agreements. We believe that this change is unlikely to have any positive impact on the profits of the IPPs, however, this will definitely have an adverse impact on PSO's revenues and hence will effect the privatization of the company.

•Getting out of the oil sector, this week's Treasury Bill auction saw the one-year T-bill rates being almost stagnant with the cut off declining by a marginal 2bps to 2.67%. This indicates that the interest rates have bottomed out after continuous rate cuts during the last few months. As the decline in interest rates was marginal, the market was not influenced by this decline.

TECHNICAL OUTLOOK

Breaking key psychological barrier at 3000, the index's weekly range remained narrow. With key short-term risk below 2900, an expansion in market breadth is now required to sustain above 3000 and head towards 3190-3300. Among the core stocks; Hubco, Fauji & Engro are expected to strengthen this week while among second tier stocks, Shell Pakistan is seen gaining. Immediate support is placed around 2991 while further congestion is from 2977-2940.

THIS WEEK'S TOP STORIES

MERGER OF ALL THREE EXCHANGES

Although the news carried in one of the newspapers about the possible merger among the three exchanges seems to be less credible, it does give us a fruit for thought on this topic. The possibility has the potential to become a reality if all three exchanges take this issue from a realistic perspective. The former Chairman SECP by his controversial decision on PEX, has set the founding stone for a possible merger and a possible de-mutualization. We hope that current wave of reforms coupled with the ADB's pressure to change the basics of the capital markets will eventually eliminate the last signs of brokers' dominance over the exchanges. It's good for the market in the long run, though a short-term perspective may be a bit painful.

9 MONTHS ECONOMIC PERFORMANCE — A REVIEW

Although the data released by the Ministry of Finance is more or less in line with general expectations, we are of the opinion that investors need to take a close look at these numbers. We believe that the rupee economy looks well, with a reasonable fiscal deficit of 3.3% coupled with higher mfg growth, lower inflation, and a reduction in the domestic debt as a % of GDP. We also believe that the 43.5% expansion in the trade deficit is misleading, as it needs to be looked in the perspective of massive volatility in the oil prices and an improvement in the exports. Although things are looking fine, we believe that the government needs to be extra careful while making popular decisions. For example we do have some reservations on govt. decision of absorbing the partial impact of recent tariff hike. It's a real test for Shaukat Aziz, which depends on how long will he take dictates from Jamali and harsh comments from IMF!

PSO — PRIVATIZATION IN 1QFY04

Privatization of PSO in 1QFY04 should not be viewed as a news to panic on in our opinion. We believe that bidding for 51% government stake in PSO in 1QFY04 is as per the time line hinted at by the Minister for Privatization last week. We are optimistic about PSO's privatization in 1QFY04. Also what has to be understood here is that the stock market is more sensitive to the timing of PSO's privatization. From the perspective of bidders and PC, an extension by 4-6 weeks is not a big concern as long as they are committed to the privatization process of PSO. We advise long-term investors to view any weakness in PSO's stock price as an opportunity to accumulate.

 

 

POL PRICES — FALL CONTINUES

POL prices continued their downward spiral for the 4th consecutive fortnight. The latest revision in POL prices has resulted in a decline within the range of 1.5-5.2%. We are of the opinion that oil prices are in their bottoming out phase and we do not expect any substantial decline in POL prices over the coming months. Government taxes on POL products are also at their lower levels as the government had reduced these in November to provide a cushion against rising oil prices during the Iraq war. Our calculations suggest a pre-tax inventory loss of PkR157mn for PSO and PkR49mn for Shell as result of the latest price revision. We prefer PSO over Shell as PSO is currently trading at 37% discount to our DCF based value of PkR283/share.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

11.35

11.49

1.23

Total Turnover (mn shares)

1,134.36

647.69

-42.90

Value Traded (US$mn.)

719.00

392.11

-45.46

No. of Trading Sessions

5

4

Avg. Dly T/O (mn. Shares)

226.87

129.54

-42.90

Avg. Dly T/O (US$ mn)

143.80

78.42

-45.46

KSE 100 Index

2972.42

3003.35

1.04

KSE All Shares Index

1867.31

1891.07

1.27

 

 

Source: KSE, MSCI, KASB