from the real estate business. Bonus speculation in Askari Bank
triggered activity in the banking sector. However, increase in COT rates
forced punters to offload carryover holdings. Worsening law and order
situation was another reason restricting the index on Thursday.
Friday's activity was mainly led by energy and fertilizer stocks owing
to the better earning expectations from the fertilizer companies for the
OUTLOOK FOR THE FUTURE
We expect the market to remain
in a consolidation phase on a net basis during the last week before the month of
Ramazan. Fertilizer companies and Banks are expected to announce their quarterly
results during the month, which is likely to trigger stock specific activity. We
don't expect the disturbing law and order situation in the country would have
any significant negative impact on the market as the KSE has been showing very
little sensitivity to such events in the recent past. We maintain our advice to
investors to stick to the core stocks of the Index, which include OGDCL, PTCL,
PSO, FFC and SNGPL.
The major developments this week were:
•The Water and Power
Development Authority has asked the government to make arrangements for the
import of 450,000 tons of HSFO.
•Privatization Commission (PC)
is planning to invite Expression of Interests (EoIs) for the privatization of
National Refinery Limited (NRL).
•Dewan Mushtaq Motor Company (DMMC)
will be launching their line of Mitsubishi vehicles in Pakistan.
•Heeding to a request by WAPDA,
the government is planning to import High Sulphur Furnace Oil (HSFO) to meet the
requirements of the power sector.
•The PC has announced that a
pre-bid meeting of the prospective bidders for KESC will be held on Oct. 7,
while the government is planning to hold the bidding in Nov-04.
•Local Cement Dispatches
reported a 23% growth during the 1QFY05 as opposed to 1QFY04 while exports
registered a 69% growth during the same period.
•According to SBP's recent
circular to the banks, the SBP has placed restrictions on the banks for their
financing of the land/plot purchases.
•As per the Hubco's progress
report, two of the generators are up & running whereas the company is conducting
test runs on the third generator.
•As per provisional trade
figures, exports in 1QFY05 rose by 17% YoY to US$3.5bn, while imports grew by a
massive 38% YoY to US$4.3bn.
•As per the Water and Power
Ministry, the recent rains will improve water availability from 5.3MAF to 5.5MAF
during the forthcoming Rabi season.
•The Privatization Commission
is scheduled to hold a pre-bid meeting with the three prospective bidders for
the Karachi Electric Supply Corporation on Thursday.
•Reportedly, 38 people were
killed and nearly 100 were injured in a bomb blast in Multan.
•The Economic Coordination
Committee (ECC) during its meeting held on Wednesday decided to release 1mn tons
of wheat during October-November in order to prevent the local prices of wheat
from rising too much in the run-up to Ramzan.
•The SBP siphoned out
PkR10.15bn through an open market operation on Thursday. The tenure was for two
weeks @ 2%.
•State Life Corporation of
Pakistan (SLICP) is planning to launch a 25-year investment bond.
•The government decided to
impose a ban on religious gatherings.
•Reportedly, the Federal
Minister for Industries has directed the NFC to carry out the direct marketing
of Nitro-Phosphate Fertilizer (NP) in order to control market prices and avoid
•As per the Minister for
Privatization, Dr. Hafeez Shaikh, the KESC's bidding would be held on December
OIL MARKET ANALYSIS
Following is an excerpt from
the recently published report on oil prices by Merrill Lynch.
Fundamentals Underpin Strong Oil Prices
In forecasting crude prices
there are two-key sets of considerations that drive Merrill Lynch's Global
Energy team analysis:
1. GEOPOLITICS; AND
2. ANALYSIS OF OIL BALANCE PRESSURES.
As was the case at the end of
1999, the precipitating factor was read out that OPEC became intent on
administering a higher average oil price in a range that had a mid-$20s
center-point (equating to average WTI prices of $27/barrel). The related work we
did for the oil supply/demand balance left us to conclude that the environment
for the cartel to administer such a price band was the most favorable since
1983, when Saudi Arabia alone acted as the "swing supplier" to defend prices. In
early 2003 leading up to Gulf War II, we discussed the prospects for crude
prices to gravitate around the $30 level in the post-Saddam period given our
analysis about capacity pressure (keep in mind that the consensus view was for
crude prices to fall back under $20 in a post-war environment). OPEC's spare
output availability was assessed by us as being only 2mmbpd (versus 7mmbpd in
1990 when Iraq invaded Kuwait) and the large inventory deficit was expected by
us to persist through the year. At the present moment, capacity pressure on OPEC
has become something of a cliche by energy market watchers, some of whom adopted
a view that $50 oil prices will be the new norm.
WHY HIGH OIL PRICES LATELY?
We believe that the higher oil
prices these past few months appears to have been precipitated by developments
on the "demand" side of the equation as opposed to OPEC having restricted output
to push up crude values. It's worth noting that an unusually large volume of
crude essentially disappeared into the global balance in the post winter period.
For countries outside the OECD, figures for "demand" actually reflect oil being
consumed as well as any barrels that may be placed into storage. A major
short-coming of oil balance data is the absence of inventory numbers for
countries outside the OECD which includes China and the rest of developing Asia,
the former Soviet Union, the Middle East, Africa and Latin America.
Historically, stock changes in non-OECD countries was assumed to be negligible.
Indications were that developing countries used oil on a "hand to mouth" basis.
That working assumption appears to have broken down in the current year. In
looking at the available 2004 information for estimated OPEC and non-OPEC
production as well as the inventory changes that we can see (OECD nations only),
it appears that world oil "demand" rose a wee more than 4.1 million barrels/day
in the 2Q period (versus 2Q 2003).
We have contended that some
portion of this disappearance likely reflects precautionary inventory
accumulation (sometimes called hoarding) in areas that we simply have no stream
of data for. There was a one-off data point for India that indicated that 25
million barrels of crude were purchased/imported during June for purely
precautionary reasons. When we look at separately available data for China, the
implied "demand" numbers suggest that a chunk of oil being imported may also
have been for precautionary stock accumulation.
CIRCLING BACK TO OPEC AND THE PRICE BAND
While critical OPEC countries
have publicly commented to date that the current $22-$28 price band stands "as
is," our sense is that a host of analyses are taking place behind the scenes by
a number of producers to assess a value that balances its needs against those of
large importing nations. The issue is hardly settled and for political reasons
doesn't look to be formally addressed until after oil prices cool down further.
However, we get a sense that OPEC formally raising its price band at some point
in the foreseeable future is probabilistic. Even recognizing the unsettled
aspects of the issue, our assessment suggests the band being hiked up by perhaps
$3 to $5 per barrel is in the cards. This would equate to an average WTI price
of between $31 and $34 per barrel.
THIS WEEK'S TOP STORIES
UPSTREAM OIL & GAS — PRICING MECHANISM
Pricing of oil and gas in
is linked to international oil prices. In case of crude oil, the price is
determined by taking an average of the four Middle Eastern crude oil benchmarks.
No floor or ceiling exists on crude oil prices. For gas, however, a defined
pricing mechanism exists in the Petroleum Policy, where crude oil/HSFO is used
as a benchmark to determine the wellhead price of natural gas, and a floor and
ceiling exists. Oil prices for upstream producers are generally revised every
month. The well head prices of natural gas are generally revised every six
months, in January and June of every year.
DEWAN FAROOQUE MOTORS — FY04 RESULTS REVIEW
Dewan Farooque Motors Limited (DFML)
released its FY04 results, wherein the company declared a 60% jump in profits to
PkR223mn (EPS: PkR3.0/share) on the back of a 40% jump in sales revenues to
PkR6,587mn. The company however, reported declining gross and operating ratios
as a result of a relatively faster increase in expenses, which was more than
offset by a massive decline in financial charges during the year. The company
also declared a 10% cash dividend and a 5% bonus share issue. With the stock
trading at a 14% discount to our fair value of PkR25.8/share, we issue a BUY
call on the stock.
PIONEER CEMENT — FY04 RESULT REVIEW
Pioneer Cement announced its
results for FY04. The company posted after tax profits of PkR424mn (EPS:
PkR3.79) for the period as compared to a net loss of PkR157mn for last year. The
announcement came in above the market as well as our expectations mainly due to
lower financial charges and higher deferred tax realized during the FY. We are
in the process of revising our future earning projections in line with FY04
result announcement and will be back with new numbers shortly. However, we do
not believe that this revision will affect our existing SELL call on the
DSFL — FY04 RESULT REVIEW
Dewan Salman Fibre Limited
announced its FY04 results, posting after tax profits of PkR327mn (EPS: PkR0.96)
for the year. The improvement in the profitability of the company has been
driven mainly by a 28% decline in financial charges. The profitability of the
company has not shown much improvement at the operating level which is signified
by an only 1% increase in gross margins, and a 10% decline in EBIT margins. We
recommend a Sell on DSFL which is trading at almost 16x FY05E earnings.
With the sale of Dalda, which
makes up about 95% of food revenues of Unilever, we expect the segment to report
improved growth and substantially improved margins. Furthermore, we expect the
company to report a strong one time dividend on the back of the approximately
PkR850mn gain on sale of the Dalda business. Unilever has traditionally
maintained a strong dividend payout policy. The company's payout has averaged
106% since 1997. We expect this ratio to remain strong in the future. With the
gain on sale on Dalda, we expect the company to report Net Profits of PkR1.9bn
(EPS: PkR145) for FY04, from which we expect the company to declare dividends of
PkR144.5/share, leading to a dividend yield of 9%. We issue a HOLD on Unilever.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
No. of Trading Sessions
KSE 100 Index
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