Updated Oct 09, 2004


The market continued its upward move during the first trading session of the week owing to buying in banking, cement and energy sector. The KSE-100 Index gained 97 points (1.8%) during the week where the index crossed the psychological barrier of 5300. The main reason for the current upsurge appeared to be the perception of diversion of speculative capital to the



stock market 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 3QFY04.




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 black marketing.

•As per the Minister for Privatization, Dr. Hafeez Shaikh, the KESC's bidding would be held on December 6.


Following is an excerpt from the recently published report on oil prices by Merrill Lynch.

Tightening Supply-Demand 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:



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.




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.


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.



Pricing of oil and gas in Pakistan 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 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 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 company.




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. 







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