Updated Oct 02, 2004


The market continued its upward journey throughout the week. The KSE-100 Index gained 165 points (3.3%) during the week to close the week at an index level of 5245. The highlight of the week was the announcement by PTCL of its annual results for FY04. The company announced a PkR5.0/share cash dividend, which was beyond market expectations. PTCL's results were the key trigger for the market,





after which buying interest was seen in all core stocks. Friday's activity was mainly led by energy stocks where OGDCL and POL were major gainers. There were rumors in the market that the government is considering to do away with the US$36/bbl oil price ceiling used for the calculation of gas prices.


The KSE-100 Index has recovered majority of the losses witnessed during the first three weeks of Sep-04 and continues to remain strong. Market volumes have also improved, though a continued bull run from here would require further buildup in volumes. The KSE-100 Index has risen by 7.3% (356 points) from its low of 4890 recorded on 22-Sep-04. We there fore are of the opinion that the market is likely to take some breather during the coming week. On an overall basis, we expect the market to remain in a consolidation phase during the next week. We advise investors to stick to the core stocks of the Index, which include OGDCL, PTCL, PSO, FFC and SNGPL.


The major developments this week were:

•As per a source in the Ministry of Finance, the government is unlikely to make the previously announced US$500mn prepayment on its expensive foreign debt in Dec-04.

•President Musharraf is likely to make a final decision on the construction of the mega dams on his return from the US.

•According to the statement issued, India and Pakistan agreed to explore the prospects of the proposed US$3.5bn gas pipeline from Iran.

•The government has refused to provide a subsidy amounting to PkR14.09bn per annum to 3 power units.

•The government claims of a truce in Wana appears to be misleading after Monday's attack on the law enforcement agencies..

•As per data released by the NFDC, overall DAP offtake reported a 203% jump to 106k tonnes in August as opposed to 35k tonnes during the same period last year, while the urea offtake registered a 13.5% rise to 449k tonnes as opposed to 396k tonnes during last year.

•The Asian Development Bank's Board of Directors approved Pakistan's Country Strategy and Uplift Program (CSP) under which it is to offer Pakistan US$1.96bn over 2 years for infrastructure development.

•The SBP would sell PkR60bn worth of 6month and 1 year T-Bills on Tuesday-Wednesday to offset the PkR86bn inflow expected on Thursday.

•In the 21-year history of NYMEX, for the first time the price of US Light Crude crossed the US$50/bbl mark.

•Bestway Cement announced after tax profit of PkR679mn (EPS: 3.51) for FY04 compared to PkR113mn (EPS: 0.58) for last year.

•Sui Southern Gas Company Limited (SSGC) plans to re-submit a review petition with Oil and Gas Regulatory Authority (OGRA) for an increase in gas tariffs for FY04.

•As per a source in the Finance Ministry, remittances are expected to cross US$4bn during FY05 based on the strong growth in remittances witnessed during Jul-Aug 2004.

•Central Board of Revenue is forecasting a PkR10bn increase in revenue collection on oil imports.

•The KSE management announced PTCL results with 10 minute delay

•The Federal Cabinet enhanced the wheat support price for the forthcoming Rabi season to PkR400 per 40kg bag from PkR350 per 40kg bag.

•The SBP in Wednesday's auction, deferred the purchase of 1year T-Bills and picked up PkR17.45bn worth of 3 month T-Bills. The cut off yield on the 3month T-Bills was raised by just over 31bps to 2.975%.

•SBP will pay PARCO US$100mn in order to allow the company to make its US$100mn payment due on October 4 without putting pressure on the rupee in the interbank market.

•SSGC reported after tax profits of PkR996.7mn (EPS: PkR1.49), showing a decline of 31% YoY. The company also announced a cash dividend of PkR1.50/share.

•For yet another fortnight, domestic petroleum prices remains unchanged.

•Domestic prices of PSF, which are primarily driven by PSF prices in international markets, were raised by PkR4/kg to PkR88/kg for Oct-04.

•As per the recently released provisional collection figures, the CBR collected PkR111.5bn in 1QFY04, 18.5% YoY more than the PkR94.1bn that was collected during the same period last year.

•Reportedly, the KSE has issued a show cause notice to PTCL for failing to provide its FY04 financial results in the prescribed format.


SSGC announced its FY04 results, posting after tax profits of PkR997mn (EPS: PkR1.49). The company also announced a PkR1.50/share cash dividend. The profits of the company have declined by almost 31% as compared to last year. While revenues of the company increased by 29%, inadmissibility of certain expenditure by OGRA resulted in a decline in profits. SSGC has announced that it will be re-submitting a petition with OGRA for determination of its revenues for FY04. We believe that this is the worst that could happen to the company, and the stock price has already reacted to it. We expect substantial growth in the profitability of the company going forward and maintain our Buy recommendation on SSGC.

Sui Southern Gas Company Limited announced its FY04 results earlier in the week. The company reported after tax profits of PkR997mn (EPS: PkR1.49) for the year, a decline of 31% as compared to last year. The company also announced a PkR1.50/share cash dividend for the year, which is also lower compared to the cash dividend of PkR1.80/share announced in FY03.


SSGCs profitability crashed to PkR69mn (EPS: PkR0.10/share) in 1Q04 as against an average of almost PkR309mn per quarter during the first 3 quarters of the year. The decline is visible at the gross profit level of the company. According to news reports, the Oil and Gas Regulatory Authority has penalized SSGC for not meeting the line losses target of 6.5%. Hence, the company has not been allowed the adjustment of line loss in excess of the target. The following adjustments were made to the accounts of SSGC:


Additions to fixed assets (vehicles) disallowed


Reduction in depreciation expense


Increase in operating income


Reduction on account of Unaccounted for Gas 227 Reduction in T&D Expenses


Reduction in other charges





We are of the opinion that this is the worst that could have happened, and the stock price has already reacted to it. SSGC has also announced that it has re-submitted its petition for increase in gas tariffs. We maintain our Buy recommendation on the stock with a target price objective of PkR35/share.



SSGC will be announcing its FY04 results on 30 September. We expect the company to post after tax profits of PkR1,481mn (EPS: PkR2.21), 2% YoY higher. We also expect the company to announce a cash dividend in the range of PkR1.80-1.90/share. One negative development for SSGC has been the higher line loss figure for the year, which can significantly impact the company's earnings. We recommend a BUY on SSGC, which is trading at a 38% discount to our price objective of PkR35.4/share.


While we will be covering the quantitative side of PTCL's FY04 Pre-result tomorrow, today's article is about the qualitative side of these results and the changes taking place in investors' perceptions about the company. Our comment will cover the change in the nature of the company's profile; emerging competition; confusion regarding the demerger of the company and the sensational research flow in the company. With the company's changing fundamentals we are not very hopeful about PTCL going towards our earlier DCF based fair value of PkR49.5 per share. We are in the process of downgrading our fair value and will be back with a new recommendation tomorrow.


PTCL is scheduled to announce its FY04 results today. The company is likely to post a 11% growth in earnings to PkR25,527mn. We also believe that the likely reported numbers are about 10% higher than our earning forecasts owing to more than expected volume growth and reduction in the effective depreciation rate for FY04. The company is also expected to declare a PkR4.0/share cash dividend along with the results. We are downgrading our DCF based fair value of the company by nearly 11% to PkR44 per share and are changing our BUY call on PTCL to a HOLD.


Apparently, a 26% improvement in the bottom line along with a super PkR5 per share dividend is something what the weakening KSE required the most at this juncture. The result announcement proved to be a key trigger and changed the market sentiment. Almost 10% of the reported profits of PTCL is of lower quality compared to the rest. There are at least two factors which helped the company in achieving this, apart from the fact that reported growth in top line is a bit inflated owing to a downward revision in last year's revenues, the rest of the operating highlights of PTCL are very much in line with our expectations. PkR5 per share is definitely a one time development in PTCL. Given the fact that the company will be posting a decline in its profitability in the future, we feel that a PkR4 per share dividend is a sustainable future dividend. We reiterate our new stance on the company that the growth argument in PTCL is no more valid. Thus PTCL seems to be maturing in terms of its business in the medium to long term. And this is why we are using a zero percent terminal growth factor for the company in our discounted cash flow valuation. We still prefer a DCF based valuation model over DDM for PTCL on account of the technical superiority of the former over the latter. This model suggests a fair value of PkR44 per share to the company. We maintain our Hold on PTCL.


Pioneer Cement is due to announce its results for FY04 on Monday. We expect Pioneer to post after tax profits of PkR288mn (EPS: PkR3.02) for FY04 as compared to after tax profits of PkR5mn (EPS: PkR0.47) declared in FY03. We are not expecting the company to announce any dividend for the said period. The growth in Pioneer's earnings are likely to accrue from: (I) a 27% increase in sales revenue, (II) relatively higher margins during FY04 owing to cost savings as a result of the conversion to coal from furnace oil, and (III) healthy retention prices during the year. Owing to high long-term solvency risk, we recommend a Sell for Pioneer Cement with a price objective of PkR12.83/share.








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