BoP. This pushed the index up by 0.48%. Friday was
again positive on the back of earning speculations on Energy, Banking
and Cement sectors. On the whole, the index lost 0.28 percent WoW and
closed at 5,393.99 on Friday as opposed to 5,409.05 in the previous
OUTLOOK FOR THE FUTURE
Shaukat Aziz will take the oath as Prime Minister in
NA on Saturday, which should have a neutral to a slight positive impact
on the investor sentiment. However, we are of the opinion that this
development has been largely discounted by the market. Speculation in
cement sector is likely to continue during the week owing to the
continuous news flow on construction of dams and extraordinary earnings
expectations for FY04.
Hubco, ARL, Atlas Honda, NBP, MCB results are
expected next week, which in our opinion is likely to trigger
stock-specific activity. Politics will remain a net positive factor for
the market owing to the market's liking for Shaukat Aziz. On a net
basis, the continuation of a neutral trend in the market is likely next
The major developments this week were:
•Unilever Pakistan reported a 24.6% YoY drop in
profits to PkR643mn (1HFY03: PkR854mn) on the back of an 8% YoY drop in
revenues to PkR9,747mn (1HFY03: PkR10,636mn) for 1HFY04.
•President Musharraf inaugrated the National
Programme for improvement of 29,000 water courses in Sindh on Saturday.
•The government has dropped the idea of importing
urea after getting a positive response from the manufacturers for
improving their production levels.
•Indus Motor Company increased the prices of
selected models of its Toyota and Daihatsu cars by PkR6,000-20,000.
•The ministry's assurance to Fauji Fertiliser Bin
Qasim regarding additional gas supply for its BMR plan.
•According to an official of the Privatization
Commission, KAPCO's IPO is likely to come by mid-October.
•The Indian Synthetic and Rayon Export Promotion
Council has expressed the desire to export manmade fibre to Pakistan.
•PC has asked the prospective bidders to submit a
comprehensive investment plan post privatization of KESC.
•Most of these captive power units are located in
Punjab and have asked SNGPL to supply them with additional gas.
•The Economic Coordination Committee (ECC) of the
Cabinet agreed in principle to re-allocate 110mmcfd gas to a private
Multan-based fertilizer company at cheaper rates.
•As per the SBP, net foreign investment rose 166%
YoY in July 2004 to US$67.9mn.
•The SBP's latest circular regarding raising the
minimum paid up capital requirements for banks is likely to pace up the
consolidation within the banking sector.
•Reportedly, most of the fertilizer units could not
avail the additional gas supply offer from the government.
•As per the SBP, net investment in the National
Savings Schemes declined to PkR247mn during FY04, from PkR136bn in FY03.
•Pakistan International Airlines declared a 130%
YoY jump in profit after taxes to PkR1.4bn on the back of a 13% jump in
revenues to PkR26.5bn in 1HFY04.
•BoP announced 20% bonus for 1HFY04.
•PPL posted a 58% increase in profits driven by a
45% increase in the topline.
FERTILIZER SECTOR — REVIEW
As per the data released by NFDC, cumulative nutrient
offtake during the four months of Kharif season improved by 5.4% at
about 1.02mt as opposed to 0.97mt last year. DAP offtake rose up by 100%
in July (YoY basis) owing to a 4.4% reduction in DAP prices and
aggressive marketing strategies by the Fertilizer companies. Ministry of
Agriculture and Food is expecting a 250k tons gap in urea demand and
supply during the next season. We are of the opinion that the government
has to import nearly 200ktons+ of urea towards the end of the current
year. Pakistan has received less than expected monsoon rainfall this
year but farmers are likely to overcome this problem through the use of
tube wells, thanks to availability of cheap agri-credit. We remain with
our liking for FFC.
FERTLIZER DATA FOR KHARIF SEASON RELEASED
As per the data released by National Development
Fertilizer Center (NFDC), cumulative nutrient offtake during the four
months of Kharif season improved by 5.4% at about 1.02mt as opposed to
0.97mt last year. Urea offtake during the period recorded an increase of
1.4% to 1.61mt from 1.59mt whereas DAP offtake during the same period
rose by 46.71%. Urea consumption during the Kharif season has improved
owing to (I) satisfactory water availability despite lower occurrences
of rains in the monsoon; and (II) cheaper credit availability; and (III)
Improved purchasing power of farmers from good cotton and wheat prices
during the last season. DAP offtake rose up by 100% in July (YoY basis)
owing to a 4.4% reduction in DAP prices and aggressive marketing
strategies by the Fertilizer companies.
OUTLOOK FOR RABI SEASON 2004
SUPPLY SITUATION — Ministry of Agriculture and Food is
foreseeing a 250k tons gap in urea demand and supply during the next
season however, the manufacturers have assured the government to produce
an additional 245k tons of urea in the short term through
de-bottlenecking subject to the uninterrupted gas supply in winter. We
are of the view that manufacturers will take time to increase their
existing capacities while the government has to import nearly 200ktons+
of urea towards the end of the current year.
REDUCTION — Fertilizer consumption is likely to improve
from the government's recent announcement about PkR18/bag reduction in
urea prices through adjustment of sales tax and cooperation by the
CREDIT — The purchasing power of farmers is likely to
enhance further from availability of cheap and easy agricultural credit
facilities as announced by ZTBL, Punjab Provincial Cooperative Bank, BoP
and Union Bank, which will eventually increase the fertilizer
consumption in the country.
SHORTAGES — Pakistan has received less than expected
monsoon rainfall this year, which may result in up to 50-60% water
shortage if there are no flood-generating rains during the remaining
monsoon season. This is likely to hit the wheat crop during the next
season, which is likely to be sown in the mid-November. But, farmers are
likely to overcome this problem through the use of tube wells, thanks to
availability of cheap agri-credit.
We maintain our liking for the urea sector where FFC
is our top pick. We also like Engro, however, the stock appears to us to
be fairly valued.
THE CEMENT HOOPLA!
The general opinion of researchers regarding the
outlook of the cement sector appears to be divided. However, a clear
tilt is visible on the positive side since most analysts are only
getting support from the demand side. On the other hand, APCMA's data
releases are misleading and tend to impress punters with (I)
inflated capacity utilization numbers, and (II)
low priced stocks hysteria. Similarly, medium to long-term investors are
not paying significant attention to the exceptionally higher valuation
multiples of the sector, whereas this sector needs to be valued at a
multiple lower than that of the market. The so-called
"futuristic" earnings growth appears to be overriding all
other valuation tools. At the same time, investors are also under the
impression that the higher earnings will translate into higher
dividends, even though history has a totally different message for
UNILEVER PAKISTAN — 1HFY04 RESULTS REVIEW
Unilever Pakistan Limited announced its 1HFY04
results, wherein it reported a 25% YoY drop in profits to PkR643.4mn on
the back of an 8% YoY drop in revenues to PkR9,747.3mn. Profits however,
were boosted by a substantial jump in Other Income. The company declared
an interim cash dividend of PkR55/share on earnings of PkR48.4/share. We
are in the process of reviewing our stance on Unilever and will be back
with more comments shortly.
PAKISTAN PETROLEUM LTD — FY04 RESULTS PREVIEW
We expect Pakistan Petroleum Limited to post after
tax profits of PkR5,641mn (EPS: PkR8.23) for FY04. The company is
scheduled to announce its results on Aug 26. We also expect the company
to announce a final dividend of PkR2.0/share along with the results. Our
dividend expectation is based on last year's payout level of 50%. An
almost 34% increase in the average gas selling price of PPL is likely to
be the major driver behind the improved profitability of the company. At
the current price of PkR105.95, the stock is trading at almost 12.9x
FY04E earnings. We maintain our Neutral recommendation on the stock.
ADB — PAKISTAN ECONOMIC UPDATE, AUGUST 04
The Asian Development Bank released it Pakistan
Economic Update recently, wherein it projected that the Pakistani
economy would grow by 6.5% during FY05 on the back of 3.5% growth in the
agricultural sector and 11% growth in manufacturing. At the same time,
the Bank predicted that inflation would reach 5.5% during the year and
that the rupee would come under pressure due to an expected Balance of
Payments deficit. The Bank also identified high oil prices, low water
availability and potential terrorist actions as risk factors that may
cause it to revise its projections.
PAK SUZUKI — 1HFY04 RESULTS PREVIEW
Pak Suzuki Motors Limited is expected to release its
1HFY04 results today. We expect the company to declare a 30% YoY jump in
revenues to PkR11.2bn on the back of a 32% YoY jump in unit sales. At
the same time however, we expect the company to report an 18% YoY drop
in profits to PkR666mn (EPS: PkR13.6) as a result of declining margins.
With the stock trading near our fair value of PkR138.9/share, we
recommend a HOLD on the stock.
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