revenue and exports target, which helped the index to
cross the 5300 mark comfortably on the first trading day of the new FY.
The bullish spells continued for the third consecutive day and the index
closed at 5,352.97 on Friday, thus increasing the WoW gain to 4.84% over
last week's close of 5,102.22.
OUTLOOK FOR THE FUTURE
Buying wave is likely to push the index up during the
next week while investors will look forward to the Centre for any news
flow on political side. Speculations in Oil and Gas Exploration sector
are likely to continue during the week owing to the news on oil
discoveries. We expect increase in institutional activity, as the
Institutions would be rebuilding their investment portfolio for the new
FY. Quarterly and half yearly results are also likely to start coming in
during the next couple of weeks, which is also likely increase activity.
Meanwhile retail investors will start sparing cash for PPL's Public
offering. We do not expect any major change in the market volume and
badla rates. On a net basis, the continuation of neutral to positive
consolidation is likely next week.
The major developments this week were:
•Business Recorder has revised the offering price
for PPL to PkR55/share
•Cement prices have increased by PkR5-15/bag in the
last 2 weeks.
•The Cabinet Committee on Privatization recently
met with Finance Minister to discuss privatization of KESC, Pak Arab
Fertilizer and Faisalabad Electric Supply Corporation by September 2004.
•World Bank has proposed the lowering of real
interest rates from 6 percent to 4 percent by 2006-7.
•The stage was set for a one to one contest between
Shujaat and Faheem for the PM slot on Tuesday.
•All modalities regarding the payment of the newly
imposed Capital Value Tax and Withholding Tax have been finalized.
•The State Bank carried out a four-week T-bills
repo at a yield of 3.05 percent on Monday.
•Pakistan Petroleum Limited's public offering price
was officially announced at PkR55/share. The government expects to raise
PkR3.77bn from this issue.
•National Assembly elected Shujaat as new Leader of
the house on Tuesday.
•The State Bank on Tuesday released its 3rd
Quarterly Report for FY04.
•Sui Southern Gas Company has announced that it has
signed an agreement to avail syndicate financing amount to PkR3bn.
•As per Finance Minister Shaukat Aziz, the CBR
provisionally collected PkR510.6bn during FY04, representing a jump of
•For the fourth consecutive fortnight, oil prices
have been remained unchanged.
•Local manufacturers of Polyester Staple Fibre met
on Wednesday and announced a PkR1.0/kg increase in prices of PSF to
PkR78.0/kg (ex-sales tax).
•The government has announced revised rates for the
various National Savings Schemes, wherein the rates on the Special
Savings Schemes were reduced by 32bps; the rates on the Regular Income
Certificates were reduced by 24bps from 7.08% to 6.84% and the rates on
the Defence Savings Certificates were raised by 19bps.
•The government has crossed the US$12.1bn export
target for FY04.
•Shaukat Aziz will test elections for National
Assembly from Attock and Tharparkar
•KSE has reduced Laga charges of PkR3.75 per
PkR100,000 value to PkR3.57 per PkR100,000 activity.
•The VSS preparation in PTCL appeared to be more
time consuming and the committee on this issue has sought more time to
finalize the arrangements.
POL — EXPLORING GROWTH
The renewed focus of Pakistan Oilfields Limited
towards exploration is a strategy that has already started paying off.
Oil and gas discovery has been made at Tal Block, which is expected to
start test production by the end of FY05. After underperforming the
market by 30% over the past six months, the stock is likely to show
strong performance with annual results announcement around the corner.
We recommend a BUY on POL with a 12-month price objective of
PkR261/share, suggesting a 25% upside from current levels
INEXPENSIVE ON VALUATIONS
POL is currently trading at 11.5x FY04E earnings, an
almost 10% discount to the KSE-100. With a 5.2% dividend yield for
FY04E, EPS CAGR of 8% till FY10, POL is attractive. We recommend a BUY
on POL with a 12-month price objective of PkR261/share.
AGGRESSIVE EXPLORATION FOCUS HAS ALREADY STARTED
The company's exploration focus has started to pay
off as oil and gas discovery has been made in Tal Block. Tal Block is
expected to start production towards the end of FY05. The commissioning
of Tal Field will add substantial reserves to the company, and improve
its reserves life. The breakdown of the consortium that bid for the
cellular license will also make POL divert more resources to E&P.
HIGH SUSTAINED OIL PRICES
We are of the opinion that the surge in oil prices is
not a temporary phenomenon. While the general consensus is that geo
political situation has been the major factor behind this surge, we
believe that a tighter demand-supply balance, along with OPEC's intent
to manage oil supply has played a major role. Lack of significant growth
in non-OPEC production will also ensure that OPEC maintains its
stronghold on the oil supply balance.
A HIGHLY DEREGULATED INDUSTRY
Government's desire to promote private sector
investment has been a major factor behind the investor friendly policies
of the sector, which currently stands as one of the most deregulated
AUTO SECTOR — FROM SPRINTER TO LONG DISTANCE RUNNER
Auto industry stocks have underperformed the KSE-100
Index over the past year on the back of fears regarding possible
government intervention in the sector. Budget '05 brought with it
customs duty reductions on Completely Built Up Units and tariff
adjustments on the vendor industry, which is expected to increase
competition and squeeze margins. The NTN requirement coupled with a
strengthening Yen and increased steel prices are likely to have a
negative impact on the auto industry. We recommend Hold on the sector
except BUY on Pak Suzuki for short-term investors.
•Auto industry stocks have underperformed the
KSE-100 Index over the past year on the back of fears regarding possible
government intervention in the sector.
•Budget '05 brought with it customs duty reductions
on Completely Built Up Units and tariff adjustments on the vendor
industry, which is expected to increase competition and squeeze margins.
•The NTN requirement coupled with a strengthening
Yen and increased steel prices are likely to have a negative impact on
the auto industry.
•With its concentration on small cars and CNG
variants, high deletion levels and its capacity expansion, Pak Suzuki is
expected to be the least affected of the assemblers. The stock currently
trades at a projected PER of 3.6x versus a sector PER of 6.7x, leading
us to suggest some growth potential in the stock for long-term
investors. BUY! For short term investors however, we recommend a HOLD.
•Indus Motors is expected to gain the most among
the assemblers from trading activities. The company is in the process of
expanding capacity. We expect the Corolla to be affected by the
increased competition from imports. With the stock trading at near our
DCF fair value of PkR102.4, we issue a HOLD.
•Honda's strong global portfolio and continuous
upgrades in the local market have positioned the company very strongly.
However, we expect it to face great competition from imports. We issue a
HOLD on the sto ck, which trades near our DCF based fair value of
•Indications of portfolio rationalization and a
increased focus on its more successful products coupled with a
possibility of CNG products and Hyundai and Kia imports suggest growth
in the company's profits. We issue a HOLD since the stock trades close
to our DCF based fair value of PkR25.8.
THIS WEEK'S TOP STORIES
JAMALI OUT; SHUJAAT IN! MUSHARRAF RULES PAKISTAN!!
Despite his last time clarifications regarding
"no resignation", Jamali bowed to his boss by tendering his
resignation without stating any reason. Shujaat made another clever move
by stepping in and shutting the doors on the establishment candidate,
thus safeguarding his vast interests in the province of Punjab.
General Musharraf is the largest gainer of this
political change — saving his uniform and installing his own man on
the top slot eventually. Pakistani politics and the democracy are the
biggest losers in yet another mechanical crash and external intrusion.
Market is likely to come up with a strong positive reaction owing to its
liking for Shaukat Aziz. The long-term implications of this change are
OIL PRICE REVISION — WHAT WILL HAPPEN THIS TIME?
A fortnight has passed and prices of POL products are
likely to be revised tomorrow. For the past three fortnights, the
government has been able to maintain end consumer prices through
reduction in the Petroleum Development Levy. However, with average price
of the Arab Light Crude has not changed, the government might not have
to incur another reduction in PDL. Thus we might see oil prices to
remain unchanged in the current price revision. With falling
international prices, we believe that the government would initially
lower domestic prices, and then the decline in international prices
would be mitigated through increase in PDL. We maintain our Neutral
stance on Oil Marketing Companies.
UPSTREAM OIL & GAS
Investors need a definite line of action at this
juncture. In continuation of our story from yesterday, we feel that the
current weakness in the market should be used to exploit relatively
favorable valuations. First, investors should not wait for the bottom,
as they will never be able to fully invest at the lowest levels; thus
they should inject the first 25% of their existing cash position.
Second, some of the valuations of the first tiers are exceptionally
attractive, thus the focus should be on the cheaper stocks in the first
tier. We like E&P, Telecom and Fertilizer. Auto also offers
selective plays while SNGPL is our top pick in the GDCs sector. We have
a disliking for OMCs while Maple Leaf is the only company in the cement
sector that we suggest for cement exposure.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
No. of Trading Sessions
KSE 100 Index
KSE ALL Share Index