THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated November  15, 2003

 

MARKET THIS WEEK

For a change, the Index actually recorded a 2% rise on a WOW basis. Whilst the week started off positive enough, with a small rise in a market dominated by small investors, Tuesday brought even bigger gains on the back of the SBP's clarification with regards to the recently released Prudential Regulations.

 

 

 

According to the announcement, the exposure rules would not apply to development financial institutions and that banks would be given two years to bring their holdings within the required limits. Furthermore, during the day the SBP injected PkR11bn into the money supply and a few banks released strong 3rd quarter results.

Wednesday saw volumes jump as financial institutions began returning to the market after Tuesday's announcement. This coupled with the relatively low prices of healthy stocks, positive developments at the SAARC summit and excitement regarding the merger of FFC Jordon and Fauji Fertilizer looked set to boost the market but was offset to a large extent by the new corporate package announcement by PTCL. Thursday brought with it confusion over the SBP's clarification announced a few days before, wherein investors were unsure whether banks would have 1 or 2 years to meet the required exposure limits. This led to profit taking as investors left the market, a trend that continued into Friday. However, the index closed up on Friday on the back of rumors regarding the announcement of PSO's privatization date.

OUTLOOK FOR THE FUTURE

Once again we see PSO causing excitement in the market. Future market trends will be determined by whether this turns out to be a baseless rumor, as usual, or if something more substantive comes out of it. We may see higher volumes on the back of the new Prudential Regulations that give banks time to bring their portfolios with the required exposure limits and that exempt development financial institutions. Furthermore, we are beginning to see another thaw in Pakistan-India relations that may be taken as a positive signal.

CEMENT SECTOR PICKS

We are re-initiating our coverage for the cement sector scrips that include Maple leaf, DGK Cement, Cherat Cement and Lucky Cement. We are positive on all the major cement players like Maple Leaf, Lucky and Cherat. However, our top pick is Maple Leaf. While we have DGK on our Neutral list owing to its thin discount to its DCF-based fair value.

Maple Leaf: Promising a growth of 73%

We have a BUY rating for Maple Leaf owing to: (I) improved cost efficiency as a result of the gray cement producing plant conversion to coal firing system which will save almost 28% of the fuel cost on a per tonne basis; (II) Maple has also planned to convert its existing wet process line to a dry process line for manufacturing white cement by the end of FY05 which will also enhance its white cement production capacity to 500tpd from the current level of 100tpd; (III) The company recently re-profiled its expensive foreign exchange debt, which is likely to result in a reduction of 41% in its financial cost or pre-tax saving of PkR175mn in FY04 and (IV). The government's decision to build Kalabagh Dam will bring a major boost to Maple's cement sales due to its location near the project. While incorporating the above in our earnings model, we foresee an exceptional growth of 58.7% (5 year CAGR) in its bottom line over the period of next five years. Our DCF-based fair value of PkR40.2/share indicates a potential upside of 73% from its current level. We recommend a strong BUY for Maple Leaf.

DGK CEMENT: TRADING @ THIN DISCOUNT TO ITS VALUE

We are reinstating our coverage for DGK Cement with a Neutral stance. Located in the heart of Pakistan, our liking for this company is based on its relative attractiveness within the sector. Moreover, its advantages over the other cement manufacturers are vital and include cost efficiency, locational advantage, aggressive and experienced management and know-how about the regional markets. Though investors have already discounted a large portion of these positive developments, we feel that there is still some upside in this stock. Reasons for our liking for the stock at current prices are; (I) coal conversion, according to our estimates, has reduced 27% of the fuel cost on per tonne basis of the company which will be more visible in FY04; (II) reduction of almost 600bps in financial charges as a result of debt restructuring is likely to result in a pre-tax saving of about PkR230mn in FY04; (III) The company is planning to install a coal cooling system which will not only improve cost efficiency of the Plant I but will also increase its capacity by 600tpd (180,000tpa) in FY05 and (IV) the company is also planning to upgrade its total capacity by 1200tpd (360,000tpa) by FY07. We expect bottom line of DGK to witness a growth of 31.8% (5 year CAGR) over next 5 years. Our DCF model suggests a fair value of PkR46.5/share indicating a potential upside of 19.2% from current market value. Owing to a narrow discount to its DCF-based fair value we recommend a HOLD for the stock.

 

 

Cherat Cement: One time opportunity waiting to be exploited while utilizing almost 100% of its capacity, Cherat Cement is enjoying exceptional growth in local cement demand and is also the largest cement exporter to Afghanistan. At present Cherat should be considered a one time play, as the bottom line of the company is likely to improve by 43x in FY04 on the back of (I) cartel recovery, (II) 25% reduction in CED and (III) coal conversion. However, since Cherat is already running at almost full capacity where the company has not announced any expansion plans for the coming future, we expect this growth to be a one time phenomenon. According to our estimates, FY05 onwards Cherat may witness a marginal drop of 0.5% (next 4 year CAGR) in its bottom line. We advise investors to avail this one time opportunity and recommend a BUY for the stock at current prices. Our DCF based fair value indicates a potential upside of 23.7% where our target value is PkR57.4/share. BUY Cherat!

LUCKY: BUY LUCKY AND BE LUCKY!

Like any other cement sector stock, Lucky is also likely to witness tremendous growth in the coming future. With a change in quota limits, the ability to utilize more than 60% capacity is likely to bring impressive growth in Lucky's profits, going forward. Further, the company is also planning to increase its production capacity by more than 60% to 2.34mtpa. We are of the opinion that this is likely to impact positively on Lucky since; (I) this expansion is likely to make the company one of the largest cement producers within the country due to which it will gain pricing power, and (II) going forward Lucky will have enough capacity to meet the rising demand, which is expected to witness a growth of 11.3% over next 5 years. As per our DCF-based fair value, the stock offers a potential upside of 37.7% from its current level where our target value is PkR28.1/share. We recommend a BUY for Lucky at current price.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

13.97

14.37

2.86%

Avg. Dly T/O (mn. shares)

127.69

12

-3.82%

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

116.04

106.29

-8.40%

No. of Trading Sessions

5

5

 

KSE 100 Index

3763.15

3852.79

2.38%

KSE ALL Share Index

2387.90

2447.63

2.50%

 

 

Source: KSE, MSCI, KASB