Updated February  21, 2004



The index experienced a marginal decline of 5.23 points WOW and stood at 4,869.93 as opposed to 4,874.12 last week, translating into a 0.11 percent WoW decline. The week started with a rumor about Dr. Abdul Qadeer Khan's death, which wiped away intra-day gains that reached a high of 52 points at one stage during the day. Despite confirmation after the trading session that this rumor was false, the negative sentiment continued to the next day and the index witnessed another small decline. Wednesday's session however recovered these losses on the back of renewed rumors regarding the sell-off of PSO. 





As usual, news that the Privatization Commission would announce a bidding date "soon" and that a delegation from Kuwait Petroleum would visit Pakistan in the near future boosted the confidence of investors, which in turn pushed the index up by 1.39 percent. Profit-taking by investors on Thursday clipped some of these gains and the negative trend continued to the last day of the week, primarily due to expectations of an announcement of poor results by Pakistan Oilfields.


With companies like POL, ODGC, SNGP and Bank of Punjab announcing results in the coming week, earning reports will continue to be the dominating determinant of the market's direction. The current week saw some surprises, which have important implications for the coming trading sessions. Maple Leaf reported results below general expectations. A key reason for this shortfall was the introduction of tax provisions. Previously the company was simply paying turnover tax, while improvements in operations have now led to the requirement of creating a full provision for taxation. It is expected that other cement companies, like D.G.Khan Cement, will be required to create similar provisions, thus pulling down forecasts for the sector. On the other hand, Pakistan Refinery Ltd. announced significantly better than expected results. Attock Refinery is now being projected to do the same. Last, but not least, the previous week's announcement by the Federal Cabinet regarding the import of used cars continues to weigh down the performance of the auto sector.


The major developments this week were:

•Privatization Minister, Dr. Hafeez Shaikh, indicated a plan to split PTCL into three entities before selling it off.

•LSM production jumped 13.6% YoY during 1HFY04, outstripping the 12.3% YoY growth recorded during the first four months of FY04. Of the 39 products, only motor tubes, buses and bicycles showed declines. Major growth was recorded in the production of cars and jeeps (70% YoY), motorcycles and tractors (63% YoY), sugar (23.5% YoY), mills sector cotton cloth (17.5% YoY) and cement (16.6% YoY).

•With power generation companies and cement manufacturers switching over to alternate fuels, oil consumption during Jul-Dec witnessed a decline of almost 20% YoY. During the six months, total oil consumption in the country dropped to 6.64mn tonnes as compared to 8.33mn tonnes during the same period last year. The decline in oil consumption was on the back of the decline in FO consumption, which declined to 1.652mn tonnes during the current FY as compared to 3.514mn tonnes last year, a 53% YoY decline. Mogas consumption registered an increase of 14% YoY, jet fuel was up by 7.6% and HSD consumption was up by 3.2%.

•Oil Companies Advisory Committee announced a reduction in the prices for petroleum products.

•The Finance Minister announced the government's intentions to swap the 6.75% fixed interest rate on the recent Eurobond issue with a floating rate expected to range between 4.5-4.75%. Reportedly, 12 banks expressed their willingness to take part in the open bidding for the swap.

•Lucky cement demanded an increase in its quota in line with a 800tpd capacity addition.

•The SECP set up an expert committee to formulate a strategy for the demutualization of the three stock exchanges. The committee is comprised of international and local experts.

•The SSGC's offer for sale got an overwhelming response as reportedly the issue has been oversubscribed by almost 12.6 times.

•SingTel President and CEO, Lee Hsien Yang, met President Musharaff and informed him that SingTel is keen to invest in Pakistan.

•Pakistan's textile industry decided to cancel import orders for machinery, dyes and chemicals from the EU in retaliation to the EU's decision to impose anti-dumping duty on Pakistani bedlinen and the removal of Pakistan from the General System of Preferences scheme. The exporters also expressed the opinion that the President should take up the anti-dumping issue with the high-ranking EC officials due to arrive in the country.

•Remittances for the period July-Jan 2004, fell 6% YoY to $2.26bn from $2.40bn last year. Remittances of $382mn received during January were only marginally lower YoY (2003: $383mn) primarily as a result of Eid.

•In line with the government's deregulation policy, Sui Southern Gas Company has filed a tariff petition with the Oil and Gas Regulatory Authority, seeking a PkR18.81/mmbtu (13%) increase in gas tariffs. The increase in tariff is being sought on the back of the rise in well head prices by PkR13.39/mmbtu, increase in operating costs by PkR3.19/mmbtu, and a PkR1.05/mmbtu increase to meet the guaranteed return on net assets as per ADB loan covenants.

•Reduction in gas supplies during the winter season have led to an increase in demand for Furnace Oil. Pakistan Refinery Limited announced that it is canceling its recent tender for export of 40,000 tons of Furnace Oil and expects it to be consumed within the country. Gas supplies are normally low during the winter season due to the contraction of gas in the pipelines due to the cold weather.



•The SBP held 3 and 12-month T-bills auction during the week. The bank sold about PkR39.55bn worth of 3-month and 12-month T-bills. The rates on these tenures rose by 4bps and 1bps to 1.5262% and 1.9838% for 3 months and 12 months respectively. The central bank received about PkR62.25bn worth of bids from various banks.

•Paktel has started testing switching facilities for its GSM based operations and is expected to begin its final test calls in March, with commercial operations to follow.

•The Dewan Mushtaq Group publicly announced its new association with Mitsubishi on Friday.

•Net investment in National Savings Schemes continued its downward trend in line with the returns offered. For 1HFY04, net investments in Defence Savings Certificates (DSC) dropped 68% YOY to PkR3.15bn (1HFY03= PkR9.99bn) whilst net investment in Special Savings Certificates (SSC) dropped 122% to -PkR6.63bn (1HFY03= PkR29.57bn). It may be prudent for us to mention here that the 1HFY04 SSC figures mentioned above are based on our calculations and on SBP data and so differ from the -PkR4.93bn reported in the press.


Pakistan Refinery Limited announced its 1H04 results, posting after tax profits of PkR539mn (EPS: PkR17.94). While the half yearly results show an almost 14% decline in the profits of the company as compared to last year, the company's profits have surged by almost 514% over 1Q04. PRL had posted after tax profits of PkR50mn in 1Q04. The surge in profitability of the company is mainly on account of higher oil prices, which resulted in, improved refining margins. The 11% drop in revenue and the corresponding drop in cost of sale, in our opinion, is mainly on account of reduced volumetric sales, mainly of Furnace Oil. PRL also announced an interim cash dividend of PkR2.50/share. The payout is in line with the government policy that restricts refineries to payout a maximum of PkR5.0/share annual cash dividend. We will be back with a more detailed analysis of the results after the publication of 1H04 report.


Pakistan Refinery Limited announced its 1H04 results, posting after tax profits of PkR359mn (EPS: PkR17.94). While the results shows an almost 14% decline as compared to the same period last year, PRL's profitability during 2Q04 has shown a surge of 514% over 1Q04. The major factor leading to this surge in profitability are the rising oil prices and improved refining margins. PRL also announced a cash dividend of PkR2.50/share for 1H04, which is the same as last year.


Below is an analysis of the major accounts:

Sales: PRL sales declined by 11.1% YoY in 1H04. While oil prices have remained high during 1H04, the major factor leading to a decline in sales revenue is a volumetric decline in sales owing to sharp drop in consumption of Furnace Oil in the country. As a result, the refineries were forced to maintain high inventories of Furnace Oil.

Operating costs: In line with a decline in sales revenue, operating costs of the company also decline by almost 11% YoY.

Other Income: Other income, which mainly consists of interest income on bank deposits, have declined by 15% YoY. The decline in other income is mainly on account of low interest rates being offered by banks on deposits. We therefore expect other income of the company to show a similar trend throughout the year. Financial Charges. With the declining interest rates, the company has been able to reduce its borrowing costs. Almost all corporates have capitalized on declining interest rates and reduced their borrowing costs. The 69% decline in financial charges is therefore not surprising and we expect this trend to continue. Dividend Payout. PRL announced an interim dividend of PkR2.50/share along with 1H04 results. This payout is in line with the government policy according to which dividend payouts by refineries are restricted to 50% of their paid up capital, which is PkR5.0/share for the year.



MCB is expected to report PAT of PkR2,328mn (EPS of 7.60) for FY03, a 33.97% jump over the previous year's profits in its board meeting today. Capital gains have played a significant role in boosting MCB's bottom line. However, we assume zero capital gains for the fourth quarter, given their diminishing role in each subsequent quarter and the difficulty in predicting such gains, since they are completely at the discretion of the management. We also expect the bank to announce a cash dividend of PkR2.25 per share in addition to the PkR2.75 dividend interim dividend it announced during the year. An analysis of the P/E and P/B ratios of the bank indicates that the share is priced relatively more expensively than other banks. Investors are thus advised to book gains once the bank announces its results.


MCB posted PAT of PkR2,230mn (EPS of PkR7.27) for FY03, inline with our expectations of PkR2,328mn

(EPS of PkR7.60). This represents a 28.23 percent jump over the previous year's profits. As indicated earlier, capital gains played a significant role in boosting MCB's bottom line. While net mark-up income witnessed a 20.13 percent decrease, non mark-up income increased by almost 75 percent, more than making up for the decline in the former. Contrary to our expectations, the bank did not payout any cash dividend and chose to give out a 10 percent bonus dividend instead. An analysis of the P/E and P/B ratios of the bank indicates that the share is still priced relatively more expensively than other banks despite yesterday's fall.


With all the government related excitement in the auto sector, stock values have been dropping sharply in total ignorance to the underlying strength of the companies' earnings. For 1HFY04, we expect Indus Motors to report a doubling of its EPS to PkR10.7 from the PkR5.3 reported last year. Since the stock is currently trading at nearly a 24% discount to our fair value and at a projected PER of 4.9x, we issue a BUY on the stock.


The Indus Motor Company Limited declared excellent 1HFY04 results yesterday. The company declared after tax profits of PkR778mn (EPS=PkR9.9/share) on sales of PkR10,108mn and also declared an interim cash dividend of PkR4/share. Whilst profits came in marginally below our expectations, we are still positive on the company and its future. Given that the stock is trading at a slight discount to the sector PER and at a significant discount to our DCF based fair value, we maintain our BUY recommendation.


Pakistan Refinery Limited and Attock Refinery Limited are expected to announce their results today. We expect PRL to post after tax profits of PkR133mn and ARL to post after tax profits of PkR48mn for 1H04.

One factor that is likely to have an effect on their bottom line is the excess stock of Furnace Oil maintained by refineries on account of low demand. However, investors should keep in mind that even if the refineries are able to post good profits, the annual payouts are likely to remain restricted to 50% of their paid up capital, or in other words, PkR5.0/share for the year. We advise investors to book profits in PRL and ARL.








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