THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Sept 13, 2003

 

The index grew slowly but consistently over the entire week. However, the slow growth did not prevent it from closing above the 4600 barrier on Friday. Furthermore, the market also broke its capitalization record when it touched PkR1.016tn. The market has been driven primarily by expectations with regards to the increased profitability of Pakistan Oilfields, DG Khan Cement, NBP and PTCL, whose results are expected to be announced next week, and the IMF's decision to release two installments worth $240mn together to Pakistan in December. However, rumors of a delay in announcing the bidding date for PSO, which was slated to take place in October, followed by a new Osama Bin Laden tape released on Sept. 11 created some concern for market participants.Market activity also increased during the week as indicated by average daily trade volumes which increased by nearly 4% WoW to 550mn shares.

 

 

 

OUTLOOK FOR THE FOLLOWING WEEK

Next week promises to be highly interesting, with the market closing above the 4600 barrier on Friday and with PTCL, DG Khan Cement, NBP and Pakistan Oil Fields due to announce their results in the next week or so. Pakistan Oilfields is expected to be the star, with its results due out on Monday and the market expecting a bonus issue. As has been seen in the past, failure to declare a market expected bonus tends to be quite painful for the company's stock price. However, on the whole the results to be announced are expected to be positive, which should create some excitement in the market. There is also however, a lot happening on the political and international front that may affect the market. The LFO issue still drags on along with the border dispute with Afghanistan and the WTO meeting currently seems to be floundering.

FUNDAMENTAL CHANGES

THE MAJOR DEVELOPMENTS THIS WEEK WERE:

•Sale of the two cement units was approved by the Cabinet Committee on Privatization.

•National Electric Power Regulatory Authority (NEPRA) issued licenses to 12 Independent Power Producers (IPPs). The issuance of license is part of the ongoing reform program in the energy sector. Among the listed IPPs, Hub Power Co. and Kohinoor Energy Limited were granted licenses by NEPRA. NEPRA is currently considering license applications of Southern Electric Power Co., Japan Power Generation Co. and Altern Energy.

•After formalizing procedures in the gas sector, Oil and Gas Regulatory Authority (OGRA) is expected to get power to regulate the oil sector as well. This would be again a part of the ongoing reform process in the energy sector, where all procedures are being finalized.

•The State Bank of Pakistan has announced its intention to launch a PkR5bn Islamic bond. The tenure of the product is likely to be three years and the SBP is planning to launch it within the next six months. Al Meezan Bank, the premier name in retail Islamic banking in Pakistan, will help the central bank in launching this product.

•The visiting team of IMF has raised its concerns over the country's stance of not going for another IMF program after the completion of the current PRGF.

•The task force for reduction in car prices is expected to pressurize the auto makers to: (I) substantially reduce prices, and (II) to streamline the delivery schedule. In case the auto makers resist, a ban on the import of re-conditioned cars may be lifted.

•The sugar mill owners have also formed a cartel. The first step, which was announced by the cartel, is an immediate 10% increase in the commodity price to PkR18.70 per kg.

 

 

•The visiting IMF team has shown satisfaction over the economic performance achieved by Pakistan in the recent times. They are also showing their confidence by changing the current quarterly assessment review to a bi-annual review along with an immediate released of two of the PRGF's tranches. However, the Fund has shown concerns over the continuation of poverty within the country.

•British Telecom (BT) has shown some interest in investing in fixed line telephony in Pakistan. For this purpose, BT officials have met some of the local companies and have also approached IT and Telecom Ministry.

•During a press conference arranged to mark Toyota's 10 year anniversary in Pakistan, the Chairman of IMCL, Mr. Ali S. Habib, hinted that the company is considering setting up a new assembly plant in Pakistan. The new plant if set up is expected to cost PkR4bn. The proposal however, is conditional upon the continuation of the government's existing auto policies.

•Pakistan's oil import bill fell by 7.6% to $467mn in July and August when compared to the same period last year as per statistics released by the Federal Bureau of Statistics. The import of petroleum products fell by 25.48% to $196mn whilst the import of crude oil increased by 11.75% to $271mn relative to the same period last year.

•In an effort to make people aware of the emerging opportunities in the telecom sector, another seminar was held by the Pakistan Telecommunication Authority. In the seminar, the regulator and the ministry officials tried to defend the deregulation policy claiming that it was likely to bring around US$5-7bn investment in the sector over the next five to ten years. Furthermore, it was also revealed that new licenses will be issued by the end of CY03.

•Telecard has signed an agreement with Ericsson for the supply of WLL equipment. The company is planning to extend its WLL service to 150 cities from its existing coverage of 50 cities.

•IMF has shown its frustration over the slower progress on the reform implementation. Moreover, in case of the implementation, the required results are not there. Specifically talking about areas like tax policy, tax administration, wage bill, social sector reforms, social sector spending, public enterprises reforms, privatization and the transparency in governance, the Fund has criticized the government.

SECTOR OUTLOOK

KOHINOOR ENERGY LIMITED — FY03 RESULTS REVIEW

Kohinoor Energy Limited announced its FY03 results, posting after tax profits of PkR701mn (EPS: PkR4.13). Net Profits of the company have declined by 15% YoY in FY03. In our opinon, the average load factor of KEL's plant for FY03 was comparatively higher than last year's 12%. However, higher furnace oil costs, which were almost 13% YoY higher have resulted in a 40% increase in operating costs of the company. Other income, primarily comprising of interest income, was predictably lower as deposit rates have generally declined over the year. With KEL initiating repayment of its loans last year, financial charges have declined as outstanding loans of the company are now on a declining trend. The company announced a final dividend of PkR1.50/share, which is in addition to the PkR1.50/share interim dividend announced by the company earlier this year. This translates into an annualized dividend yield of 9%, which is almost at par to the yields of other major dividend plays in the market. Although KEL's cash balance at almost PkR1bn is substantially high, we believe that these reserves are being maintained as per the requirements of the lenders. We expect KEL's payout to range between PkR3.0-3.5/share per annum going forward. Dispatches: Growth is evident Kohinoor Energy Limited (KEL) announced its FY03 results, reporting after tax profits of PkR701mn (EPS: PkR4.13). The results show a 15% YoY decline in net earnings of the company. KEL also announced a final dividend of PkR1.50/share forFY03, which is in addition to an interim dividend of PkR1.50/share announced earlier.

Kohinoor Energy Limited

FY03 Results Review (PkRmn)

  FY03A FY02A  D%

Sales

2,397

2,129 1

3%

Cost of Sales

1,358

972

40%

Gross Profit

1,039

1,157

-10%

SGA

111

64

74%

Operating Profit

928

1,093

-15%

Other Income

39

85

-54%

EBIT

967

1,178

-18%

Financial charges

254

331

-23%

EBT

713

847

-16%

Provision for taxation

13

18

-31%

EAT

701

829

-15%

Source: Company Announcemen

 

 

RESULT ANALYSIS

BELOW IS AN ANALYSIS OF RESULTS.

13% YOY INCREASE IN REVENUES: Sales have primarily increased as a result of a relatively higher load factor compared to last year. KEL's load factor in FY02 was towards its lowest at 12%. We believe that the load factor has slightly increased over last year, which has resulted in an increase in revenues.

COST OF SALES UP BY 40%: Higher furnace oil cost has been the major reason for the 40% increase in cost of sales in FY03. Average furnace oil prices during FY03 were almost 13% higher compared to FY02, which in our opinion has resulted in an increase in cost of sales of the company.

74% INCREASE IN ADMINISTRATIVE COSTS: KEL revised its tariff with WAPDA during the current year. As per the revision, KEL's levelized tariff has been adjusted downwards to US5.1cents/kwh from the previous levelized tariff of US5.5cents/kwh. We believe that legal costs related to redrafting of the Power Purchase Agreement have been the major factor responsible for this 74% increase in administrative costs.

54% DECLINE IN OTHER INCOME: KEL's Other Income primarily constitutes interest income earned by the company on its cash deposits. With the over all decline in bank deposit rates, a 54% decline in interest income was predictable.

23% DECLINE IN FINANCIAL CHARGES: KEL initiated repayment of its loans from last year. With a decline in the outstanding loans of the company, financial charges have also declined.

TAXATION: All Independent Power Producers (IPPs) that came under the Power Policy 1994 are exempt from corporate taxes. The provision in taxation appearing in the financial accounts of the company primarily related to withholding tax on return on investments made by the company, mainly interest income.

FUTURE OUTLOOK

Higher hydel generation capability owing to more than average rainfall during the year, and higher allocation of gas to the power sector is likely to reduce WAPDA's reliance on thermal IPPs in the current year, as well as going forward. We therefore expect KEL's load factor to remain lower in FY04. A strong rupee is also likely to keep a cap on growth in the earnings of the company, which had been increasing in the past as a result of the continuous devaluation of the Pak Rupee. On dividends, we expect KEL's payout to range between PkR3.0-3.5/share per annum in the medium term. This translates in to an annual dividend yield of around 9.5-10.0%, almost at par to other dividend plays in the market. Although KEL's cash balance at almost PkR1bn is substantially high, our discussion with the management lead us to believe that majority of this cash balance is being held as reserve. According to requirement imposed by lenders, KEL has to build up its reserves for an overhaul of the plant after a few years.

THIS WEEK'S TOP STORIES

HUBCO — FY03 RESULTS REVIEW

Hubco announced net earning of PkR6,102mn (EPS: PkR5.27) for FY03, 16% YoY decline. Last year's profits were mainly higher on account of a few one off income recognized by the company, which were, i) Hubco recorded approximately PkR300mn in revenues on account of release of money from escrow account after settlement of dispute with WAPDA, and ii) Hubco reccorded a PkR469mn reduction in expenses realized as a result of revision in Operations and Maintenance fee. Together, these two items resulted in a reduction of PkR769mn in FY03 net profits compared to FY02. A 54% decline in interest income was mainly on account of i) lower interest rates, ii) declining cash deposits, and iii) last year's other income was higher as the company received interest on arrears receivable from WAPDA. Dividend payout fell a little short of market expectations as the company announced a final dividend of PkR2.1/share, taking the full year's payout to PkR5.4/share. Hubco has stated that it will be spending US$12mn (PkR690mn or PkR0.60/share) over the next three years for procuring spares. This could put a pressure of PkR0.20/share annually on Hubco's payout, however, the amount in our opinion is not very significant. We maintain our Neutral recommendation on Hubco.

INDUS MOTOR COMPANY LTD — BREAKING INTO STYLE!!

The Pakistan auto sector has witnessed marked growth (49%) in the fiscal year ended June 2003. One of the main beneficiaries from this growth has been Indus Motors, whose Toyota Corolla, Daihatsu Cuore and Toyota Hilux brands have sold quite well. This growth in unit sales should lead to a 92% jump in net sales that in turn, should cause net profits to increase by nearly 237% for FY03. The company has announced a 20% interim cash dividend for the first time this year. Given an expected final dividend of 50%, a projected EPS of PkR 15.4 and a PER of 7.5x vs. the market PER of 11.5x, we assign a BUY call on the share. Our target fair value is Pkr132 per share. Offering a 14.5% upside at current levels. Final results to be announced at the company's AGM later.

INDUS MOTOR COMPANY LTD — PREDICTABLY STYLISH!!

As predicted, Indus Motor Company Limited had a very good year. The company followed up its excellent results with a 50% final cash dividend, which was in addition to the 20% interim dividend declared earlier. The company recorded a 95% jump in sales to PkR15.8bn, which resulted in a 249% jump in profits to 1.26bn, i.e. EPS of PkR16. The main reasons for this increase in profitability were the increased unit sales for the year along with lower than expected costs.

 

 

WTO & THE TEXTILE SECTOR

What will the future hold for the textile sector in the post 2005 scenario? Will open competition devastate the industry or will it be able to not only cope with, but also thrive in such an environment? One is likely to get as many different answers to these questions as the number of people they are posed to. A recent chat with a representative of APTMA reveals that the blame for this confusion lies as much with the private sector as with the public sector. Government officials have repeatedly stated that among all the business sectors in Pakistan, the textile industry is most adequately gearing up to compete effectively in a quota-free environment. However, even a casual observation indicates that a large number of participants in the industry are completely oblivious to the changes that need to be made for WTO compliance.

COMMENTING ON KAMRAN KHAN'S STORY:

The writer of the story has highlighted some of the changing ground realities of privatization in Pakistan. We are of the opinion that any further delay on this privatization either on the name of the delays triggered by KPC or renewed interests from some of the Pakistani groups would cause a significant damage to the entire privatization process. Though the PC has been over-ruling its own rules in the past, any such action by the PC can challenge the sanity of the process in the country. The way things are moving on privatization front, investors need to revisit their investment cases for the privatization plays like PSO. We maintain our Neutral recommendation on the stock.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

17.28

17.70

2.43%

Avg. Dly T/O (mn. shares)

530.46

550.03

3.69%

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

545.34

718.31

31.72%

No. of Trading Sessions

5

5

 

KSE 100 Index

4463.10

4604.28

3.16%

KSE ALL Share Index

2851.61

2947.01

3.35%

 

 

Source: KSE, MSCI, KASB