THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Aug 28, 2004

 

The market remained range bound throughout the first trading session of the week owing to higher badla rates. Selling pressure continued on Tuesday on the back of rumors of depressed earnings in the banking sector, which pulled the index down by 0.61%. The market remained dull for the third consecutive day on account of lack of interest shown by investors. The market recovered sharply on Thursday owing to the above expectations results announced by PPL and

 

 

 

 

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 week.

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 week.

FUNDAMENTAL CHANGES

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

DEMAND 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.

PRICE 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 fertilizer industry.

AGRICULTURAL 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.

WATER 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.

SECTOR STRATEGY

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.

TOP STORY

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 investors.

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.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

24.92

24.81

-0.44%

Avg. Dly T/O (mn. shares)

201.96

169.94

-15.85%

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

180.28

156.89

-12.97%

No. of Trading Sessions

5

5

 

KSE 100 Index

5409.23

5393.94

-0.29%

KSE ALL Share Index

3549.57

3542.72

-0.19%