THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated July 26, 2003

 

MARKET THIS WEEK

Market sentiments remained strong for yet another week. Positive news flow on privatization of PSO, and positive expectations of quarterly result announcements were the main feature of the market this week. The KSE-100 Index gained 56 points (1.5%) to close the week at 3807.67. Average daily trading volumes however declined by 29% for this week at 402mn shares. The market took minor corrections during the week, mainly in second tier stocks.

 

 

 

Four developments that fueled the market bull rally were: (I) expectation of announcement of the bidding date for PSO, (II) SBP's effort to maintain the current monetary situation intact whereby yield on 6-month T-bill declined by 35 basis points to 1.35%, (III) the government's drive to reach consensus with the Opposition parties on the issue of Legal Framework Order; and (IV) notice issued by Fauji Jordan Fertilizer Company Limited that it would be resuming production of DAP fertilizer in collaboration with a Moroccan based company.

OUTLOOK FOR THE FOLLOWING WEEK

Expectation of a possible announcement of the bidding date for PSO by the Privatization Commission is likely to be the biggest feature in the market for the coming week. The Privatization Commission is reportedly in the final stages for resolving all issues in PSO's privatization and it is expected that the bidding date would be announced during the coming week. In addition, companies are also expected to announce their quarterly results which is likely to keep investors' interest alive. However, we believe that the prices of some of the second tier stocks might see some correction, as the financial results of some of these companies are likely

to be below market expectations. We advise investors to maintain their focus on to tiers while gradually book profits in second tier stocks.

FUNDAMENTAL CHANGES

THE MAJOR DEVELOPMENTS THIS WEEK WERE:

•Sui Northern Gas Pipelines Co. announced that is working on a proposal to spend PkR7bn to increase its gas distribution network over the next two years. The company has sent the expansion plan to the Ministry of Petroleum & Natural Resources for approval. The ongoing PkR12.4bn expansion plan of the company is expected to complete in Feb-04

•PSF producers announced a price increase of PkR2/kg. The price increase was mainly on the back of increase in raw material costs. However, Ibrahim Fibre Limited, the second largest PSF producer in Pakistan announced that it was maintaining the price of its product at the previous level of PkR60/kg (ex- sales tax).

•The Ministry of Housing and Works decided to take action against the cement manufacturers, which are reluctant to cut cement prices even after the reduction in government levies in the recent budget. Monopoly Control Authority (MPA) is already planning to issue show cause notices to the managements of the cement manufacturers.

•The Privatization Commission is inviting fresh Expressions of Interest (EOIs) from strategic investors for the strategic sale of KESC. Two international power companies have already filed their interests with the PC. However, owing to continuous erosion in the financial health of the utility one of these companies withdrew the interest earlier. Industry sources are indicating that a Saudi Arabian company, Kunnoz Group has recently shown a keen interest in buying this company.

•The management of Fauji Jordan Fertilizer Company (FJFC) informed the Karachi Stock Exchange that it has entered into an agreement with a Moroccan company, Office Cherifien des Phosphates (OCP). According to the agreement, OCP will supply phosphoric acid to FJFC, and FJFC will start its commercial operations in mid September. According to industry sources, this contract is regarding a lease arrangement whereby FJFC will be offering its DAP manufacturing facilities to the Moroccan Pakistan Update - 26 July 2003 company. Accordingly the Moroccan company will manufacture DAP at the FJFC site and will sell it in the local market through FJFC's distribution network..

•Yield on 6-month T-Bill fell by 32bps in the latest auction held by the State Bank of Pakistan (SBP). The SBP accepted bids worth PkR26.937bn against total offers of PkR41.299bn. The cut off rate also came down to 1.35% from 1.67%.

UNILEVER PAKISTAN - 1H03 POST-RESULT REVIEW

Contrary to our expectations, Unilever Pakistan posted an 11% YoY decline in earnings. The company posted a net profit of PkR853mn (EPS: PkR63.8/share) for 1HFY03 as against PkR958.9mn (EPS: PkR71.6/share) in 1HFY02. This decline is mainly due to an 8.6% drop in revenues in 2QFY03 as compared to 1QFY03. In our opinion this drop is due partly to a drop in the volumetric sales of edible oil and to a fall in the market share for tea due to increased tea smuggling. The drop in profits however, was cushioned by a 13.5% reduction in financial charges in 1HFY03 as compared to the corresponding period last year. However, a drop in the company's Other Income served to offset this cushioning effect. Thus, the company's effective tax rate dropped by 200bps as compared to last year, which led the company to post a net profit of PkR853mn for 1HFY03. Unilever Pakistan also declared a dividend of PkR58/share, which is around PkR12 below our payout expectations. We maintain our Buy stance for Unilever Pakistan.

 

 

OUR COMMENTS

•Unilever Pakistan witnessed an 8.5% fall in revenues during 2QFY03. This drop in our opinion is linked to the fall in Dalda sales as a result of the increased share of cheaper edible oils available in the market. As per industry sources, relatively high levels of competition in the market are also partly to blame for this fall in sales. Previously we were under the impression that the company would be able to sustain its market share owing to its high marketing costs, however results show otherwise. Having said this, we expect the next quarter to be better for the company.

•Unilever Pakistan is now marketing its products quite aggressively due to increased market competition. This resulted in a sharp increase of 15% in operating expenses during 1HFY03 as compared to the corresponding period last year, which in turn resulted in a drop in operating margins to 13.6% from 15% in 1HFY02.

•Thanks to the lower interest rate environment and a lower loan balance during 1HFY03, financial charges dropped by 13%. However the drop in Other Income served to offset this impact.

•Lastly, the 200bps drop in the company's effective tax rate helped it to post a net profit of PkR854mn. The company has also announced a dividend of PkR58/share, which is around PkR12 lower than our earlier expectations. However, we still stick to our previous dividend expectations of PkR140 per share for the full year. At current prices, Unilever Pakistan offers a dividend yield of 9.3% and the scrip is currently trading at a 15% discount to our DCF based fair value of PkR1755/share. We therefore maintain our BUY stance for Unilever Pakistan.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

14.44

14.67

1.62%

Avg. Dly T/O (mn. shares)

567.69

402.49

-29.10%

Avg. Dly T/O (US$ mn.)

422.57

276.91

-34.47%

No. of Trading Sessions

5

5

 

KSE 100 Index

3751.71

3807.67

1.49%

KSE ALL Share Index

2398.31

2441.37

1.80%

 

 

Source: KSE, MSCI, KASB