push as well and closed 55 points, or 1.07 percent,
higher at 5,173.52 on Friday, as opposed to 5,118.52 last week. The
bulk of this increase was recorded in the last two days of the week on
the back of favorable news in the cement sector. Reports of capacity
expansion by D.G. Khan Cement helped in taking the sector, and the
index, higher on Thursday, while a statement by President Musharraf
that either Bhasha or Kalabagh dam would be constructed within a year
added further interest among the investors on Friday.
OUTLOOK FOR THE FUTURE
The decrease in military activity in Wana bodes
well for investors. Given that the brunt of the operation seems to be
over, the threat to the market from this front appears to have reduced
for now. Furthermore, the prophecy that the index would experience a
significant correction after testing 5000 points has not proven true
yet. On the contrary, the index seems to have formed a strong base
around the 5000-point mark. This is further aided by the fact that
liquidity remains strong, thus reducing the chances of an overly
aggressive slump in the market.
The major developments this week were:
•Privatization Commission is holding a pre-bid
conference on April 5 of four pre-qualified parties for the
privatization process of Pak Arab Fertilizer. These parties include
Nishat Chunian/Umar Fabrics, Fatima Group of Companies, Dawood
Hercules and Employees Group of Pak Arab Fertilizer.
•A group of US investors visiting Pakistan showed
interest in setting up an oil refinery in Karachi. This was disclosed
at a joint meeting of Pakistan American Business Council and officials
of Board of Investment. While the specifications of the refinery have
not been disclosed, according to the reports, it is estimated to cost
US$85mn. A Saudi Arabia based group had also expressed interest a few
months back in setting up a coastal refinery in Karachi. National
Refinery and Pakistan State Oil had expressed interest in
participating in this refinery as joint venture partners.
•Private sector off take grew to PkR230bn for the
period July-mid-February 2004. This figure is the highest ever
recorded for any year of Pakistan's history and is nearly 3 times
greater than the PkR78bn that was recorded during the same period last
year and 2.7 times greater than the government's target for FY04. This
growth has been caused by 4 main factors; (1)
low interest rates, (2)
increased industrial credit demand on the back of Pakistan's
accelerating economic growth, (3)
strong demand from both SME and consumer segments and, (4)
higher demand for housing finance.
•Sui Southern Gas Company Limited commenced work
on the supply of gas to Khangarh and adjoining areas. The total cost
of the project is estimated at PkR144mn out of which PkR113mn is to be
provided from the Prime Minister's Development Fund, while the
remaining amount is to be arranged by SSGC.
The project is estimated to provide gas supply to
29,000 customers over the next five years. The project envisages the
construction of 2 inch to 8-inch diameter 49 kms long supply mains and
distribution network of 29 kms of 1 inch to 4-inch diameter.
•TRG acquired the assets of A Alpha Answering
Services Inc. located in Temecula, California through another
investment of Central Voice, LLC. According to a company statement,
Central Voice's annual revenues are expected to increase by 30% to
US$4.2 with this acquisition.
•As per the SBP, government borrowing for the
period July-March 13, 2004 for budgetary support reached PkR70bn. This
figure is nearly 4.7 times the size of the target of PkR15bn that has
been set for FY04 and is larger than the PkR34bn that was attained
last year as the government retired a large amount of debt.
•The SBP released it 2QFY04 report in which it
revised its full year forecasts for GDP growth upwards from 5.3% to
5.5-5.8%. As per the SBP, this revision was necessary on the back of
stronger than expected growth in the manufacturing sector and
expectations that the agricultural sector would attain its full year
target based on the increased area under cultivation of wheat.
However, whilst the SBP revised most of its estimates positively, it
pointed out two potential problems, (i)
slow decline in unemployment, and (ii)
•As per HSBC, the financial advisor to Unilever
Pakistan on the sale of the Dalda business, the sale of Dalda will be
completed within the next 4 weeks. As per the bank, 6 parties are in
final negotiations for the purchase, which includes the Fauji
Foundation, Habib Oil Mills, Soya Supreme, Unilever Employees Welfare
Group, Savola Group (Saudi Arabia) and Candyland.
•The Supreme Court issued notices to the federal
government, the Privatization Commission and the Aga Khan Fund on a
petition challenging the transparency of the privatization of Habib
Bank Limited. The petition was filed by Dr. Akhtar Hassan Khan, a
former secretary of the Planning Commission.
•DG Khan Cement reportedly signed a deal with a
Danish company for supply of 4,000 tons per day cement plant in
Khairpur, Chakwal. The proposed project is expected to take DGK's
installed capacity to 3.32mn tons per annum.
•The State Bank raised the cut-off yield on
6-month T-bills by 6 basis points from 1.78 percent to 1.84 percent.
The Bank had to accept bids worth PkR20.68bn against a target of
PkR15bn to achieve this target.
•The State Bank established a US$920mn sinking
fund. Out of this fund, US$810mn has been invested abroad, while
US$110mn has been placed with the commercial banks of the country.
•As per the Chairman of the Mutual Funds
Association of Pakistan (MUFAP), Indian mutual funds have expressed an
interest in investing in Pakistan. This interest is based on the
premise that the Pakistani stock market with a PER of 11x is
undervalued relative to the Indian stock market that trades at a PER
of 17x and that Indian mutual funds, unlike their Pakistani
counterparts are allowed to invest up to 20% of their portfolio or
US$50mn overseas. It has apparently been proposed that initial
investments be made through the other country's mutual funds. The
Chairman also pointed out that he had received a query from Bajaj
Capital Management with regards to setting up a distributing company
for mutual funds investment.
•A news report indicated that PSO is planning to
import 220,000 tons of Furnace Oil during April-June of the current FY
to supply oil to Hubco
•National Refinery Limited announced that it will
be exporting 13,000 tons of Lube Base Oil. NRL hopes to earn US$5.2mn
through the export of LBO.
•In a meeting of the Cabinet Committee on
Privatization, the Privatization Minister directed the Privatization
Commission to complete the public offering of PIA and PPL by the end
of April and May respectively.
•As per a CBR official, provisional tax
collections for the period July-March 2004 of PkR351.7bn met the
target for the period. For the month of March however, collections of
PkR38.3bn fell short of the target of PkR44bn.
•PICT officially launched full-scale operations
at its targeted date of April 01, 2004.
RECKITT BENCKISER — HIDDEN GROWTH IN FY03
Reckitt Benckiser Pakistan Limited released its
annual results for FY03 on March 31, wherein it declared profits of
PkR124mn on the back of revenues of PkR2.89bn for FY03. Whilst
performance was better than expected, results were substantially lower
than the profits of PkR166mn that were recorded last year due to the
Korangi factory redundancy costs that were incurred in 2QFY03. With
the stock trading at a marginal discount to our DCF based fair value
and at a PER of 9x, we issue a HOLD on the stock.
Reckitt Benckiser Pakistan Limited reported profits
of PkR124mn on sales of PkR2.89bn for FY03. The company did not
declare any dividend on its earnings of PkR3.88/share, whereas last
year it paid out a 25% cash dividend on earnings of PkR5.18/share.
The household products segment of the company
denoted strong sales revenue increase during the year. However, gross
margins in this sector dropped sharply as the company had to incur a
one-time redundancy charge related to the closure of its Korangi plant
where Ultramarine Blue was produced. As per the company, this had
become necessary on the back of rising costs of production and the
availability of cheaper imports. This was coupled with a sharp
increase in operating expenses during the year as the company spent
more on marketing its existing and new products in an increasingly
competitive environment. This resulted in a drop in the segment's
operating margins, which recovered during the latter half of the year.
The pharmaceutical division continued growing
during the year backed up by steady gross margins. In line with strict
cost controls especially in 2HFY03, the company was also able to
improve its operating margins during the year.
On an overall basis therefore, the company saw a
strong 15% growth in revenues for the year. However, this growth in
revenues was offset by the faster (18%) growth in cost of sales as a
result of the Korangi plant redundancy charge that was booked in
2QFY03. Thus the company's gross margin fell from 37% to 36% during
FY03. At the same time, in line with increased competition and the
launch of new products during the year the company increased its
marketing activities, that paid off in terms of higher revenues, but
also resulted in a 34% increase in operating costs during the year,
which in turn caused the company's operating margins to slip from 11%
to 5% during the year. However, this fall in the company's operating
margin was offset by the increase in the company's other income
especially during 4QFY03 and resulted in a rise in the company's net
margins to 7% from the 4% that was attained during FY02.
As is evident, the 25% YoY fall in Reckitt
Benckiser's profits was due to the one time expense relating to the
Korangi plant, which the company has announced will be sold for
PkR255mn. Had this expense not been incurred, we calculate that the
company would have declared profits of about PkR195mn (EPS: PkR6.07)
instead of the PkR124mn (EPS: PkR3.9) that it did declare. This
projected figure represents a profit jump of 17% YoY. With the stock
trading at a slight discount to out DCF based fair value of
PkR96.7/share and at 9x
Mkt. Cap (US $ bn)
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