week also remained low at 158.33mn, though showed a
marginal improvement of 1.14% over last week. Disturbance in Waziristan
where the army carried out an operation, and lack of any major
development on the Kashmir issue in the recently held Pak-India talks
also served to depress market sentiments.
OUTLOOK FOR THE FUTURE
The market has witnessed a substantial decline over
the past couple of weeks. We believe that lack of any positive news
flow, and depressed sentiments are two factors that can further affect
the market in the near term. Trading volumes have also dried down which
is another indicator of low participation in the market. We believe that
the market is likely to further edge downwards. Pakistan Oilfields
Limited will be announcing its FY04 results on Monday, which could
provide some support to the market. However, if results and dividend
announced by the company falls below market expectations, we expect some
further pressure on the stock price of the company. The two market heavy
weights, OGDCL and PTCL are due to announce their FY04 results towards
the end of this month, which can generate some renewed buying interest
in these stocks.
The major developments this week were:
•The Punjab Chief Minister's extension of 5 years
for the Presidential uniform.
•Badla will be phased out from October 08.
•After witnessing an almost 47% decline last year,
it is being expected that FO demand will rise by around 20% in FY05.
•Shell Pakistan launched the "Shell Card"
•The third GSM player, Paktel, is likely to start
its business in the next few weeks. The pending issue of the US$38.8mn
pay ment to the regulator was resolved last week.
•The Privatization Minister hinted that the new PM
has sent a strong signal to the business community about the
government's resolve to raise the level of investments in the country
from the BoI meeting.
•Dewan Salman Fibre Limited (DSFL) has announced
that it has acquired a 49% stake in Rally Energy Pakistan Limited.
•Pakistan's trade deficit jumped 361% YoY to
US$489mn in July-August from the US$106mn reported during the same
period last year.
•PTCL is considering free local calls.
•Exporters feared outbreak of price war in Textiles
in a quota free regime.
•The Initial Public Offering of Kot Addu Power
Company is now being targeted to be held in mid October.
•CBR has confirmed to the IMF's visiting mission
that it will collect PkR590bn in taxes in FY05, 2% more than the target
of PkR580bn that was set for the year.
•PTA chief hinted further reduction in telecom
tariffs in an interview in the daily Jang.
•The Ministry of Commerce (MoC) has voiced its
opposition to the proposed import of diesel from India and has also
refused to give a "No Objection Certificate" to the Ministry
of Petroleum for the import of diesel from India.
•As per the Minister of Water and Power, the
present government has no intention of holding a referendum on the
Kalabagh dam, but will finalize its large dam decision soon with the
consensus of all the provinces.
•50 killed in air raid in Wana while the
independent newspapers have not confirmed government claims of killing
foreign terrorists in this attack.
•Pakistan State Oil (PSO) is seeking approval from
the government to enter into long term contracts for the import of High
Sulphur Furnace Oil (HSFO).
•Presiding over a meeting to review the supply of
electricity and gas in the country, the Prime Minister (PM) has asked
for a proactive power policy to meet the rising electricity demand in
THE CEMENT HYPE — BEGINNING OF THE END!
FY04 is likely to be the best earning year for the
Cement Sector but the hype in the sector is leading towards the
beginning of the end owing to: (I)
lower than expected sales revenue by cement companies; (II)
loss of potential benefits from coal conversion; (III)
increasing interest rates in the country; (IV)
manipulation of earning numbers from realization of deferred tax asset;
and (V) poor
payouts. Market sentiments for the cement sector are getting matured
over the period while investors have started realizing the riskiness of
investment in the cement sector as compared to the market.
We maintain our Underweight stance on the Cement
Sector. Maple Leaf Cement is the only stock we recommend for investors
wanting to take exposure in the sector.
FY04 - THE BEST EARNING YEAR
FY04 is expected to be the Best Earning Year for the
entire Cement sector but the Cement Hype is leading towards the
Beginning of the end owing to the following reasons:
•20% Volumetric Growth in Sales Not Reflected. A
20% jump in sales volume is not truly reflected in the net sales revenue
reported by the cement companies in our opinion. This has disappointed
high expectations of the investors, which were based on: (I) 20%
volumetric growth in sales; (II) increasing cement prices, and (III) a
25% reduction in CED announced by the government for FY04.
•Loss of Potential Benefits from Coal Conversion.
Most of the cement companies converted their cement plants from furnace
oil to coal firing system by the end of FY03, which was expected to
result in reducing fuel cost per ton by 45-60% for the industry
depending upon the plant technology. However, an almost 100% increase in
coal prices during FY04 gradually wiped off the net advantage expected
from the conversion, which is evident from declining margins (QoQ).
•Increasing Interest Rates. Taking advantage of the
declining interest rates, cement companies restructured their expensive
foreign currency loans with cheap local credit available during FY04,
resulting in a reduction of financial cost from 15-17% to 5-7% depending
upon the credibility of the company. With the increase in interest
rates, the potential benefit expected from the financial restructuring
exercise is vanishing owing to the floating nature of interest rates on
these local currency loans.
•Bottom line Manipulated by Realization of Deferred
Tax As set. Taking advantage of the best operating year, the cement
companies have manipulated their bottom line through the realization of
deferred tax asset with the hope of improving profitability in future
years. Meanwhile these non-cash transactions are creating confusions for
the general investors.
•Poor Payouts. Repeating their track record of poor
payouts, cement companies are not likely to share their profits with the
investors. Thus, the entire sector fares poorly on dividend yields.
Market sentiments for the cement sector are getting
matured over the period while investors have started realizing the
riskiness of investment in the cement sector as compared to the market.
Moreover investors can no longer rule out the short sightedness of these
cement companies over the deteriorating demand supply situation in the
long term with the implementation of their announced expansion plans.
We maintain our Underweight stance on the Cement
sector. Though we are not very bullish on the Cement sector but Maple
Leaf Cement is our only recommended stock if investors want to take
exposure in the sector.
THIS WEEK'S TOP STORIES
FAUJI CEMENT — FY04 RESULTS PREVIEW
Fauji Cement is due to announce its results for FY04
tomorrow. We expect FCCL to post after tax profits of PkR886mn (EPS:
PkR2.39) for the period. However, we do not rule out a positive surprise
in earnings owing to a relatively better 4QFY04. We do not expect the
company to announce any dividend for the said period. The turnaround in
FCCL's earnings came from: (I)
a 30% increase in sales volume; (II)
relatively higher margins during FY04 owing to cost savings from reduced
dependence on furnace oil, (III)
a 46% decline in financial charges in FY04 from loan restructuring and (IV)
PkR710mn deferred tax asset realization by FCCL during 3QFY04. We
maintain our SELL recommendation on the stock with a price objective of
PkR14/share while the stock is currently trading at a PER of 33x based
on its expected EPS for FY04 (excluding the impact of Deferred Tax).
UNIFORM ISSUE — A RISK THAT CANNOT BE IGNORED!
The controversy over the Presidential uniform appears
to be heating up. Various factions within the ruling alliance have
already started issuing statements supporting the continuation of the
Presidential uniform. The opposition's anger is also understandable
given the fact that the issue of the Presidential uniform has been
covered through a constitutional amendment. Though the market is
overlooking this development at this juncture, we believe that this has
the ability to become a bigger political risk in the long run.
PAKISTAN OILFIELDS LTD — FY04 RESULTS PREVIEW
Pakistan Oilfields has announced that the board of
directors of the company will be meeting on Sept. 11 to announce its
FY04 results. We expect the company to post after tax profits of
PkR2,384mn (EPS; PkR18.14) for FY04 and announce a cash dividend in the
range of PkR10.50-11.00/share. We believe that high oil prices and
increased production rates are two factors that are likely to result in
the rising profits of the company going forward. We maintain our Buy
recommendation on POL, with our 12-month price objective of
FAUJI CEMENT — FY04 RESULTS REVIEW
Fauji Cement (FCCL) announced its results for FY04
yesterday. The company has posted after tax profits of PkR314mn (EPS:
PkR0.85) for the period as compared to the net loss of PkR531mn for the
last year. The announced results came in far below market expectations
as well as our forecasts mainly due to: (I)
the write-off of Deferred Cost and (II)
Taxation. We recommend Hold for FCCL owing to a narrow premium to out
DCF based fair value of PkR14/share however, we don't expect the stock
to perform in line with the market in medium to long term.
PAKISTAN ECONOMICS — FY05 TARGETS RE-EVALUATED
The government set a number of targets for FY05,
which in our opinion, will need to be revised. Against a GDP growth
target of 6.6% and an inflation rate of 5% for FY05, we expect growth of
6.4-6.5% on the back of a 5.5-6% inflation rate as a result of
underperformance by the agricultural sector and rising core inflation.
At the same time, we also expect the government's fiscal deficit to come
in at 4.5% versus a target of 4% as a result of revenue pressures, which
coupled with increased administration expenses will likely offset the
expected increase in the CBR's collections. Finally, Pakistan's trade
deficit is likely to come in US$1bn above target as a result of the
faster than projected growth in imports, which will continue to put
downward pressure on the Rupee.
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