Four developments that fueled the market bull rally
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.
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
•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.
•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
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