week, as most of the upstream oil and gas stocks, as
well as gas utilities recorded healthy gains. With international crude
oil prices continuing to soar, the stock prices of the refining sector
also recorded healthy gains. Apart from the energy sector, Fertilizer
stocks also saw some increased activity as both Fauji Fertilizer and
Engro Chemical recorded gains during the weak.
OUTLOOK FOR THE FUTURE
With the onset of the holy month of Ramazan, we
expect a marginal decline in activity at the KSE, which is traditionally
the case. In the coming two weeks, the majority of the companies will be
announcing their quarterly results, which in our opinion is likely to be
the key driving factor for the market. We expect the energy sector
stocks to report healthy profits on the back of high oil prices. In
addition, the fertilizer companies are also expected to post decent
results on the back of increased fertilizer offtake during the last
quarter. We advise investors to remain overweight on the energy related
The major developments this week were:
•Sui Northern Gas Pipelines Limited has been
appointed to lead the inter-state gas pipeline project.
•The Minister for Petroleum and Natural Resources
maintained that the government would not be passing on the impact of
high oil prices to end consumers.
•The government is working at devising plans to
meet the imminent shortage of electricity supply during the winter
season and is planning to import 450,000 tons of furnace oil during
Nov-Dec 2004 period.
•As per figures released by the Federal Bureau of
Statistics, CPI inflation rose 9% YoY and 0.4% MoM in September 2004,
thereby causing annualized July-September 04 inflation to fall to 9.2%
from the 9.3% recorded during July-August 04.
•The Hub Power Company Limited has announced that
three of its four units have resumed operations and the company's 900MW
net production capacity is available for dispatch to WAPDA.
•The International Finance Corporation has
expressed its willingness to finance the expansion plan of KESC post
•Reportedly, the Privatization Commission is in the
process of getting the Presidential nod for the privatization of PTCL
•As per sources, the government estimates that
PkR154.4bn of the PkR160bn that was allocated for the Public Sector
Development Program (PSDP) was utilized during FY04.
•In an effort to further expand its subscriber
base, the largest mobile company of Pakistan, Mobilink, has announced
the launch of the Village Phone Program.
•Reportedly the management of PTCL has reached an
agreement with its employees' unions. The company is giving a 15% salary
increase to the unionized staff.
•As per figures released recently by the Federal
Bureau of Statistics, the manufacturing sector grew 19.6% YoY in
July-August, versus the 18.1% YoY growth recorded last year.
•The State Bank injected about US$500mn in the
foreign exchange market in order to stabilize the value of the fast
depreciating Pakistan Rupee.
•The SBP raised PkR1.25bn through the sale of 6
month T-bills against its target of PkR5bn, with the cut off yield
rising by 20bps.
•The rupee continued its decline versus the US
dollar, when it lost 12paisas against the US dollar in the interbank
market, causing it to cross PkR60/US$ in the open market.
•As per figures released recently by the State Bank
of Pakistan, private sector credit offtake shot up by 139% YoY to
PkR37.3bn for the period July 1 to September 18, 2004 versus the
PkR15.6bn recorded during the same period last year.
•Crude oil prices are continuing with their
record-making run. Crude oil prices jumped above US$54/bbl and touched a
high of US$54.80/bbl on Thursday.
•The National Assembly approved the Uniform bill on
Thursday. With the requirement of a mere simple majority for its
clearance, it was evident from the beginning that the government would
not face any difficulty in getting it through the legislature.
THIS WEEK'S TOP STORIES
RECKITT BENCKISER PAKISTAN LIMITED
The 13% rise in Reckitt's stock price on the back of
the 1% rise in the KSE100 Index during the last 3 months, is an
indication that the market has built the company's improved
profitability into its share price. Furthermore, the rumors regarding
the eventual de-listing of the company has also created a lot of
excitement in this stock. On a PER valuation basis therefore, we find
that Reckitt Benckiser trades at a PER of 12.5x versus a consumer sector
PER of 15.6x. On a DCF valuation basis, we find that the stock trades at
an 8% premium to our DCF based fair value of PkR100/share. However, we
suggest that our readers hold their investments till the end of the EGM.
The delisting of the company may bring some extra value for them in the
CEMENT SECTOR — WITH OR WITHOUT DAMS
Some of the cement investors are still hoping to see
the materialization of the two dams, Bhasha and Kalabagh, which will
eventually change the cement companies' fortune by eating up the entire
supply surplus without realizing the basic facts that: (I) the present
government is unlikely to develop a national consensus on these projects
and (II) these dams can utilize up to a maximum of 3mn tons of cement
spread over the construction period of 5-8 years as against the excess
supply of more than 21mn tons by FY08 and (III) the government has yet
to make feasibilities of these projects. We maintain our Negative stance
on the Cement sector and our Buy recommendation on Maple Leaf Cement at
INFLATION DROPS 9% IN SEP-04
While the recently released figures from the Federal
Bureau of Statistics indicate that inflation has slowed marginally since
August, CPI inflation still remains at 9.2% during July-September. At
the same time, core inflation continues to accelerate, rising to 6.4% in
July-September mainly as a result of the continued rise in house rents.
With domestic petroleum prices likely to rise after Ramazan and with
food prices likely to rise during Ramazan, we expect inflation to come
in cross 6% versus the government's target of 5% in FY05.
PAKISTAN OILFIELDS LTD. — BENEFICIARY OF HIGH OIL
Oil prices have remained on an uptrend for the major
part of the current calendar year. Initially supply fears and now demand
growth, owing to the start of the winter season, are the two factors
that have triggered the hike in oil prices. While it is difficult to
predit how high oil prices might go, they are unlikely to come down very
quickly. From a domestic perspective, we see Pakistan Oilfields Limited
(POL) as the biggest beneficiary of the oil price increase. With almost
51% of POL's revenues coming from crude oil, we expect the impact of
high oil prices to flow much more quickly to POL as oil prices are
revised on a monthly basis whereas gas prices are revised semiannually.
At current prices, POL is trading at 9.6x FY04E earnings. We maintain
our Buy recommendation on POL with a price objective of PkR261/share.
OMCS — RECENT TRENDS
The Oil Marketing Companies have been unable to
realize the full impact of the rising oil prices. While the impact on
profitability is likely to be positive despite the domestic petroleum
prices remaining constant, we expect a negative impact on the cashflows
of the company. The government's insistence on maintaining oil prices
has resulted in the Petroleum Development Levy turning negative. And
OMCs have been asked to create receivables against the PDL. We expect
receivables to rise substantially in 1QFY05 and expect them to continue
soaring for as long as domestic petroleum prices are maintained at
current levels. We maintain our Neutral stance on the OMCs.
Mkt. Cap (US $ bn)
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