THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated October 18, 2003

 

MARKET THIS WEEK

The index declined by 4.2% WOW primarily due to a delay in privatization of PSO. While last week ended with positive news on PSO, jitters about the privatization process led to a fall in the index on the first day of the week. The fears of the investors were confirmed after the trading session on Monday when the Minister for Privatization, Dr. Abdul Hafiz Sheikh, stated that the bidding of PSO might be held around the first week of December instead of this month. This led to a large decline of 3.4% in the index on Tuesday. The effects of this negative news were partly reversed in the middle of the week by the scraping of a six-month treasury bills auction by the State Bank. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banks had hoped for a rise in interest rates and had placed an opening bid for a yield of 1.7397%, as compared to the last weighted average of 1.6072%.By rejecting all bids, the State Bank sent a clear message that it would not allow the rates to rise. However this news was not able to carry the bullish trend for long and trading at the end of the week was dominated once again by rumors about PSO, leading to a further drop in the index.

OUTLOOK FOR THE FOLLOWING WEEK

The negative effects of PSO's news are likely to be the main driver of the first one or two trading sessions of next week. However, as the week moves forward, the focus of the investors will shift towards the announcement of results by a number of important companies. This list of companies includes Nestle, Shell, PSO, Colgate, ICI, PTA, Unilever, Engro Chemicals, Pakistan Oilfields, KESC, D.G. Khan Cement, Bank AL Habib and Hubco. We feel that the results of most companies will be in line with the expectations of the market, while we might see some negative surprise in PSO. Thus, while pre-result anticipation might initially drive the market higher, we do not expect any significant movements in the market. On a net basis, a bearish sentiment is likely to prevail in the market.

FUNDAMENTAL CHANGES

The major developments this week were:

•IMF approved two tranches under PRGF. The IMF board is scheduled to meet on the 27th of this month whereas Pakistan is likely to sign the required LOI before that.

•National Bank offered 3.2% of its shares in the market. The issue was oversubscribed.

•The Meezan Islamic Fund (MIF) was also offered to the public this week. MIF is an open-ended mutual fund that aims to invest in investments that conform to Islamic principles.

•KSE decided not to de-list PIA for non-payment of dividends after its management assured KSE that it would announce a dividend with 1QFY04 results.

•The Sindh Assembly indicated that it would be willing to accept Kalabagh Dam as a carryover Dam.

•The Government issued notices to the World Bank and Asian Development Bank for prepayments of around US $1.078bn. This debt is carrying relatively higher interest rates and the Government wants to repay these loans under its strategy to improve its debt profile.

•A road show for the divestment of Oil and Gas Development Ltd. (OGDCL) was held earlier this week. On this occasion, the Minister for Privatization, Dr. Hafeez Sheikh spoke about on-going strategic sale transactions, including PSO and Habib Bank. He revealed that the privatization of PSO is likely to be delayed from this month to December.

•Cotton prices touched an all time high of PkR3,200 per maund. Textile manufacturers asked for an immediate ban on export of cotton but Karachi Cotton Exchange asked the Government to reject the request, particularly if the official cotton production targets will be met.

MAPLE LEAF CEMENT: POST RESULT REVIEW

Maple Leaf announced its quarterly results, which were close to our expectations. The company posted a net profit of PkR201mn (EPS: PkR1.12) for 1QFY04 as against PkR26mn (EPS: PkR0.14) in 1QFY03. The main reasons behind this increase were (i) 26% growth in revenues on the back of (a) 13% increase in grey cement volumetric sales, and (b) reduction of 25% in excise duty, impact of which was not passed on to the end consumer, (ii) almost 60% coal conversion of the grey cement manufacturing plant due to which fuel cost has reduced, resulting in considerable improvement in gross margins to 36% from 21% in 1QFY03 and (iii) 19% decline in financial and other charges. We are of the opinion, that the company is likely to witness exceptional growth during the current fiscal year due to the above reasons where we expect company to post a net profit of PkR861mn (EPS: PkR4.8) for the full year. We recommend a BUY on Maple Leaf at current prices.

RESULT REVIEW

Maple Leaf announced net profit of PkR201mn (EPS: PkR1.12) for 1QFY04 as against PkR26mn (EPS: PkR0.14) in 1QFY03. The results were in line with our expectations. The following table shows the financial results of the company for the quarter:

REASONS BEHIND THE SCENE

•Revenue increased by almost 26% during the quarter under review as compared to the corresponding period last year. The reasons behind this increase were:

 

 

1. Sales of gray cement increased by 13% to 279,094t during the period under review in 1QFY04 as compared to 246,946t in 1QFY03.

2. Impact of 25% reduction in the excise duty also improved the revenues of the company, in our opinion, since prices remained stable at last year's level of PkR225/bag during the quarter and the manufacturers did not passed on the impact of reduction to the end consumer.

•Almost 60% conversion of the grey cement manufacturing plant to coal firing system resulted in YoY reduction of almost 14% in per tonne cost of production, in our opinion. Due to this gross margins improved considerably to 36% in 1QFY04 as compared to 21% in 1QFY03.

•At the end of FY03, the company restructured most of its expensive loans by replacing them with cheaper loans from the local banks. As per our estimates the financial cost of the company has declined by around 293bps to 8.6% from 11.5% last year. This in our opinion is the major reason behind reduction of 29% in the financial charges during 1QFY04 as compared to 1QFY03.

•Compounding the above, net profits witnessed an exceptional YoY growth of 673% during the quarter under review where the company booked profits of PkR201.8mn.

INVESTMENT PERSPECTIVE:

We are of opinion that FY04 is likely to bring exceptional growth for the cement sector, where Maple will be one of the top gainers in the cement sector due to the above-mentioned developments. We expect company to book net profits of PkR861mn (EPS: PkR4.8) for the full year. At current prices the stock is trading 5x to its earnings, which is quite lower than the sector PE. We recommend a BUY on Maple Leaf. BUY!

 

 

MARKET ROUNDUP

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LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

15.75

15.01

-4.70%

Avg. Dly T/O (mn. shares)

290.71

184.90

-36.40%

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

328.63

204.04

-37.91%

No. of Trading Sessions

5

5

 

KSE 100 Index

4143.30

3969.48

-4.20%

KSE ALL Share Index

2634.70

2524.16

-4.20%

 

 

Source: KSE, MSCI, KASB