THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated July 03, 2004

 

The week started with a positive note owing to the investors' liking for Shaukat Aziz as the Prime Minster with the expectation of stronger economic reforms and political stability, which pushed the index up by 3.4% on the first trading day of the week. The market underwent minor correction due to the year-end factor on Tuesday. Bullish sentiments continued on Wednesday and the index recovered by 0.3%. The buying waves got support from news of achieving

 

 

 

 

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.

FUNDAMENTAL CHANGES

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 10.9% YoY.

•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 PAYING OFF

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 sector.

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 PkR77.4.

•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 however, Negative.

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.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

23.70

24.80

4.64%

Avg. Dly T/O (mn. shares)

256.21

364.38

42.22%

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

210.71

322.57

53.09%

No. of Trading Sessions

5

5

 

KSE 100 Index

5105.70

5352.70

4.84%

KSE ALL Share Index

3367.55

3526.04

4.71%