THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Aug 23, 2003

 

Last week's correction was very short lived as the market rebounded with a big bang. The benchmark index crossed its recently recorded lifetime high and set a new record. On a WoW basis, the index moved up 6.7% to 4418. Investors' participation also widened with average daily turnover improving significantly to 613 mn shares, almost 10% higher than the corresponding figure last week.

 

 

 

None other than Pakistan Telecom, that appears to be awakening from years old slumber, caused the recovery in the market. The pre result hype after the board meeting date announcement coincided with the gradually heating up of privatization speculation. The other pivotals for this week were PSO and POL whereas the former recovered on the back of bidding date speculation whilst the latter continued to be the focus of those investors who were disappointed by the lack of bonus in PSO's announcement. On the other hand Shell avoided a PSO type fall by declaring an exorbitant cash payout while skipping the bonus. Those institutions who sold their holdings at 3200-3500 levels jumped into the market to exploit the 4%+ correction. Later on some of the smart institutional players who were the first to get out of the market at the 4300 level also re-entered the market. This exceptional money flow helped the market to rebound quickly thus causing most of the sideline players to keep waiting for a further fall to start accumulation. In particular retail investors could not make their entry back into the market as they were not very confident of the sustainability of the positive trend.

This week was important with regard to new result announcements wherein at least two main companies (PTCL & Hubco) have announced their respective board meeting dates. Moreover, the speculators kept speculating about the possibility of a board meeting date for POL.

OUTLOOK FOR THE FOLLOWING WEEK

Against general expectations, we do not expect next week to be the time of consolidation for the market. There are at least three factors namely quantum of Hubco's dividend, news flow on PTCL privatization and the bidding date for PSO which can still create vibrations in the market. Given the fact that all three factors are highly speculative in nature, one must note that next week is likely to exhibit extreme volatility. In our opinion the index may show wide fluctuations on an intra-day basis, in a more or less similar pattern to that which we were used to observing in the pre-announcement days of Hubco. Moreover, we are also of the opinion that retail investors who have been slightly late in this rebound will make their entry into the market. Thus a solid support from the second and third tiers is also expected in the coming week. We expect the market to cross its 4500 level, which in our view is not of any significance now. 5000 is the level which is presently on the horizon and one must expect the KSE 100 index to leap towards this magical figure when PSO privatization takes place.

PAKISTAN UPDATE 23 AUGUST 2003

FY03 A GOOD YEAR FOR OIL MARKETING COMPANIES

FY03 was a good year for OMCs. Both the Oil Marketing companies posted double digit growth in the bottom line which was primarily driven by high oil prices and increased margins. Comparatively speaking, PSO has shown a marked improvement over last year as its net margins have improved to 2.72% as compared to 2.39% last year, an improvement of almost 14%. Shell's gross margins have also improved, reaching 1.61% compared to 1.54% last year, an improvement of just under 5%. The stock prices have responded to these improvements and discounted them to a large extent. Shell's share price has moved up by 116% since 1 July 2002, while PSO's price has risen by 107% in the same period. Compared to Shell, PSO still offers some excitement in the medium term owing to developments on the privatization front. Going forward, we believe that the expected low oil prices in FY04 are likely to keep pressure on the profitability of both the companies. In addition, industry volume growth, which is under threat due to increased availability of gas and improved water availability, are going to be key factors affecting both the companies.

FY03 HIGH OIL PRICES

FY03 was marked with high oil prices throughout the year. The volatility in the oil prices, specifically during Jan-Apr 2003 was particularly high as oil prices surged by almost 20% during Jan-Mar 2003, and then plummetted by almost the same amount in Apr-03. The benchmark Arab Light Crude prices averaged US$24.67/bbl, 18% YoY higher. Oil marketing companies (OMCs) had their fair share of excitement in the current year as their profitability soared in FY03 on the back of I) high oil prices, and II) full realization of the increased margins. FY04 is unlikely to see the staggering growth witnessed in FY03 primarily as oil prices are expected to remain weak compared to last year.

DOMESTIC PETROLEUM PRICES

Prices of domestic petroleum products also rose in line with international oil prices. Prices of petroleum products rose in the range of 4-28%. The highest increase came in the prices of High Speed Diesel, price of which rose by 28% YoY. This phenomenol rise in HSD price can be attributed to two factors, i) the government raised its tax on HSD which was previously subsidized, and ii) the HSD business was completely deregulated in Sept-02, which resulted in Oil Marketing Companies passing on all incremental costs to end consumers.

Since HSD consumption accounts for an overally 30% of the total consumption of Petroleum and Oil Products, this had a positive impact on the OMCs whose margins are fixed as a percentage of selling price.Hence, higher the selling price, higher the margins for OMCs. And with huge volumes in this business, OMCs benefitted tremendously from this rise in HSD price.

PSO FARED BETTER THAN SHELL

A comparison of margins of both the companies suggest that PSO fared better in 2003. While PSO's net margins rose by 14% to 2.72% for FY03, Shell's net margins improved by only 4.7% to 1.4% for FY03. The comparatively higher improvement in PSO's margins is also due to that fact that the company has completely ammortized its cost for Voluntary Separation Scheme in 2002. Thus, an ammortization of around PkR800mn which was expensed in 2002 was not in FY03 accounts. As a result, PSO's operating expenses declined by 5% YoY. In Shell's case Operating expenses jumped by 15% YoY. We believe that the primary reason for this was the increased focus of the company towards its marketing activities in the wake of increased competition.

 

 

PRICE PERFORMANCE

It is interesting to note that the prices of both the stock have appreciated by almost the same percentage. While Shell Pakistan's share price has risen by 116% since Jul-02, PSO's stock price has risen by 107% in the same period.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

15.91

16.87

6.03

Avg. Dly T/O (mn. shares)

559.10

613.34

9.70

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

493.13

565.47

14.67

No. of Trading Sessions

4

5

 

KSE 100 Index

4142.46

4418.21

6.66

KSE ALL Share Index

2638.28

2806.10

6.36

Source: KSE, MSCI, KASB