THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated July 31, 2004

 

 

 

The week started on a negative note with the index declining by 1.17% on Monday due to high badla rates. The bearish sentiment continued the next day and the index fell by another 0.59% on Tuesday. Wednesday, however, witnessed a reversal in some of these losses, primarily due to anticipation of a bonus issue by PSO, FFC, Askari Bank and BoP. The announcement of results by PSO, though in line with market expectations, disappointed investors due to the lack of 

 

 

declaration of a bonus. This proved to be the prime catalyst for a 0.89 percent decline in the index on Thursday. The bearish spell continued on Friday despite the announcement of a 47.5% cash and 15% bonus interim dividend by FFC, leading to a further 0.25 percent decline in the market. On the whole, the index lost 2.24 percent WoW and closed at 5,290.04 on Friday as opposed to 5,411.07 in the previous week.

OUTLOOK FOR THE FUTURE

We expect the market to continue its pattern of negative consolidation next week, as major corporate announcements failed to lift the investors' spirits. While the results were positive, they proved inadequate for triggering a spark in the market mainly due to the investors' illogical passion for a bonus issue. Furthermore, retailers are unlikely to play an active part in the market owing to fact that around PkR20bn are stuck in PPL subscriptions. Institutional investors too appear reluctant to participate in the market due to the prolonged bearish spell. We expect this trend to continue until the completion of the balloting process for PPL and the election to be held in mid-August. However, we do anticipate that trading volumes will pick up after the allocation of PPL shares to investors.

 

 

FUNDAMENTAL CHANGES

The major developments this week were:

•The Cabinet Committee on Privatization (CCoP) accepted the highest bid of PkR14.12bn from the Ibrahim Group, which won the bidding process held on last Friday.

•KSE's management has deposited PkR73.3mn with the CBR as CVT for 12 days.

•UBL is issuing PkR500mn worth of term finance certificates to the general public. This is the first tranche of a total issue of PkR2bn. The term of the issue is 8 years whereas the rate is fixed at 8.45% p.a.

•Warid has entered into an agreement with Ericsson for the supply of a GSM-based network.

•As per the Consumer Protection Forum, tea companies are making large windfall profits by not passing on the 10% reduction in tea import duties and the fall in international black tea prices to end consumers in the form of lower prices.

•As per our sources, Zaman Cement has commenced production early this month. Zaman's Plant is located at Khushab, Punjab with a production capacity of 4000tpd (while APCMA is reporting 2000tpd).

•As was reported to the National Assembly, only PkR60bn from the total PSDP allocation of PkR160bn was utilized during the first ten months of FY04.

•Ibrahim Fibre posted a 158% YoY improvement in its 3QFY04 results.

•Nishat Chunian posted a 131 percent rise in profits during 3QFY04.

•The ECNEC on Wednesday approved 17 projects worth PkR83bn in a number of different sectors. Of this amount, PkR51bn was allocated for the installation of the Chashma Nuclear Power Plant.

•Initial reports are indicating a massive subscription figure for PPL. About 690k+ applicants have been counted till now and the PC has yet to get the subscription record from some of the larger banks.

•KTML posted PAT of PkR32mn for 3QFY04, representing a 33 percent YoY drop and a 73 percent QoQ decline.

•HACL released its 1QFY05 report yesterday in which the company reported a 28% YoY decline in profits to PkR103.3mn (1QF04: PkR142.7mn) despite a 75% YoY increase in revenues to PkR3523.7mn.

•Nishat Mills posted a 19 percent YoY gain in its bottom line for 3QFY04.

•UBL intends to offer a PkR500mn TFC to the general public through an initial public offering on August 9 and 10.

•Mobilink slashed down its LD and roaming charges to zero while Ufone made the entire country as one region by withdrawing roaming charges.

•National Highway Authority (NHA) has reported that it would not renovate or redesign the portion of 463km of Karakoram Highway affected by the construction of Basha Dam. Rather, NHA considers it to be the responsibility of Wapda.

•OGDCL announced the initiation of operations in Chanda field and is expected to produce 10mn cubic feet of gas and 2000 barrels of oil per day.

•A sub-committee of the Senate deferred its decision on the new duty structure announced by CBR for import of cars under the gift, baggage and transfer of residence scheme.

A REVIEW OF TEXTILE SECTORS' RESULTS FOR 3QFY04

A comparison of four companies, namely Nishat Mills, Nishat Chunian, Kohinoor Textile Mills and Gul Ahmed Textile Mills reveals that the results for 3QFY04 can prove to be a good guide for investors. While all four companies witnessed higher sales and lower margins in 3QFY04 as compared to the corresponding period of the previous year, only Nishat Mills and Nishat Chunian managed to post higher YoY PAT. We feel this is a reflection of the aggressiveness and superior marketing capabilities of the companies' managements. Investors would be well advised to stick with such companies rather than making punts on more unreliable companies in the sector. Nishat Mills continues to be our favorite pick in the sector and based on our fair value of PkR61 for the stock, we recommend a BUY on the company.

RESULTS FOR 3QFY04: A GOOD GUIDE FOR INVESTORS

As we indicated in one of our earlier articles, the tough environment posed by high cotton prices during the current year presents a unique opportunity for investors to separate good investment candidates from the rest of the sector. This assertion holds particularly true for 3QFY04. A comparison of four companies, namely Nishat Mills, Nishat Chunian, Kohinoor Textile Mills and Gul Ahmed Textile Mills reveals that the results for the quarter can prove to be a good guide for investors. As highlighted in the tables below, all four companies witnessed higher sales and lower margins in 3QFY04 as compared to the corresponding period of the previous year. However, only Nishat Mills and Nishat Chunian managed to convert increased sales into higher profits. In fact, Gul Ahmed Textiles recorded a larger rise in sales of 35 percent against a 23.5 percent gain for Nishat Mills, yet the former still could not post a YoY gain in PAT. In our opinion, these results are a reflection of the aggressiveness and superior marketing capabilities of Nishat Mills and Nishat Chunian.

Thus, investors would be well advised to stick with companies such as these two companies Nishat Mills & Nishat Chunian.

KOHINOOR TEXTILE MILLS: PECULIAR RESULTS FOR 3QFY04

The results posted by KTML were not only below those posted in the corresponding period of last year, but they were out of synch with the results for the first two quarters of the year as well. After reporting healthy sales of PkR1,461mn in 2QFY04, the company posted a substantial 13 percent QoQ drop. Moreover, the company's gross margins witnessed a tremendous drop from 15.95 percent in 2QFY04 to 11.83 percent in 3QFY04. Given that our sources in the industry have indicated that end product prices have generally risen to compensate for higher raw material costs, this drastic decline in margins comes as a particular surprise. Consequently, due to the erratic nature of its performance, we feel KTML should be traded at a discount to its peers, particularly Nishat Mills.

 

 

INVESTMENT ADVICE

Given recent price levels, Nishat Mills continues to be our favorite pick in the sector. Our analysis suggests that the fair value of the company's stock stands at PkR61 per share. BUY Nishat Mills.

THIS WEEK'S TOP STORIES

RESULT EXPECTATIONS

We issue a HOLD call on Honda Atlas Cars with the stock trading at a 10% discount to our DCF based fair value of PkR77.4.

We expect KTML to post a 132% YoY rise in PAT. This growth is likely to be achieved on the back of strong sales and a healthy gross margin. We maintain our HOLD call on the stock.

Engro is likely to come up with an 5-8% YoY growth in its earnings. At current price levels the stock does not offer much upside. Hold

We expect NML to post a 26% YoY rise in PAT. This growth is likely to be achieved on the back of strong sales and reduced financial charges. We advise investors to BUY Nishat Mills.

The sentiment driver, Pakistan State Oil, is due to announce its results today. The board of directors of the company is scheduled to meet at 10am to approve and announce the results for FY04. We expect PSO to post after tax profits of PkR3,918mn (EPS: PkR22.84) for the period. However, we do not rule out a minor positive surprise in earnings owing to a relatively better 4Q. The company has already announced two interim dividends, totaling PkR10/share and we expect a final dividend in the range of PkR6-7/share. This year, although margins on retail products have been relatively higher especially during 4Q04, a decline in the consumption of Furnace Oil is likely to result in relatively flat earnings. Another sentiment driver for the stock, privatization of PSO, is also in the news. There are rumors that the Privatization Commission might restart the privatization process of the company by re-inviting Expressions of interest. We maintain our neutral recommendation on the stock with a price objective of PkR264/share.

PSO — FY04 RESULT

The sentiment driver, Pakistan State Oil, is due to announce its results today. The board of directors of the company is scheduled to meet at 10am to approve and announce the results for FY04. We expect PSO to post after tax profits of PkR3,918mn (EPS: PkR22.84) for the period. However, we do not rule out a minor positive surprise in earnings owing to a relatively better 4Q. The company has already announced two interim dividends, totaling PkR10/share and we expect a final dividend in the range of PkR6-7/share. This year, although margins on retail products have been relatively higher especially during 4Q04, a decline in the consumption of Furnace Oil is likely to result in relatively flat earnings. Another sentiment driver for the stock, privatization of PSO, is also in the news. There are rumors that the Privatization Commission might restart the privatization process of the company by re-inviting Expressions of Interest. We maintain our neutral recommendation on the stock with a price objective of PkR264/share.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

25.09

24.51

-2.31%

Avg. Dly T/O (mn. shares)

183.31

186.19

1.57%

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

196.24

183.16

-6.67%

No. of Trading Sessions

5

5

 

KSE 100 Index

5409.40

5289.92

-2.21%

KSE ALL Share Index

3554.77

3476.65

-2.20%