OUTLOOK FOR THE FUTURE
The market will remain volatile with dry volumes
during the last week of the month of Ramadan. We are expecting the
market to move to and fro from the existing levels with marginal gain or
loss during the coming week. We are not expecting any news flow or
results during the next week, which would fundamentally drive the
market. We expect the market to stay range bound with a trading range of
The major developments this week were:
•OGRA has rejected SNGPL's demand to increase
tariffs by PkR1.43/unit. OGRA reduced the operating expenses of SNGPL by
PkR266.3mn, which included PkR77.5mn on account of Unaccounted For Gas
•Total revenue collection by the Central Board of
Revenue increased by 24% YoY to PkR162.9bn during Jul-Oct 2004.
•The Finance Ministry announced the release of
PkR1bn to the Oil Marketing Companies (OMCs) to compensate them for the
losses faced by them on account of government's decision to freeze oil
•As per a source, the CBR is under great pressure
from the Federal Government to raise its collections target to offset
the losses the government is facing from subsidizing local petroleum
•Reportedly, the Economic Coordination Committee (ECC)
of the Cabinet has fixed the price of imported urea at PkR450/Bag.
•The Rupee gained 48paisa versus the US Dollar to
close at PkR60.90 after the State Bank of Pakistan's intervention.
•As per Prime Minister Shaukat Aziz, car premiums
will be eliminated by December as more imported cars become available.
•Reportedly, the government expects to earn PkR49bn
in dividends from its listed investments in FY05, a 53% jump from the
PkR32bn that was targeted in Budget '05.
•Shell Pakistan and Pak Arab Refining Company
raised the prices of Furnace Oil by almost PkR1,000/ton.
•The Indus Motor Company announced a increase in
prices of the Cuore CL and CX by PkR10,000-20,000 on Monday.
•As per APCMA officials, cement sales rose by
12.68% (YoY) during the month of October to 1.339mn tones from 1.188mn
tones last year.
•The import of Liquefied Natural Gas is being
considered to meet the growing demand of natural gas in the country.
•George Bush secured another 4-year term in the
White House after winning a tightly contested election.
•According to an official of the company, PTCL is
expecting a 30% decline in international revenues as a result of the
•As per provisional figures released by the CBR,
collections during October dropped by 0.8% YoY to PkR37.17bn from the
PkR37.34bn reported during the same month of last year.
•Karachi Electric Supply Corporation has once
against sought a debt to equity conversion of government debt.
•As per the Economic Advisor to the Finance
Ministry, the government is not considering the introduction of a
mid-term budgetary framework (MTBF) in FY05.
•As per data released recently, duty-paid imports
shot up by 48% YoY to PkR119.8bn in 1QFY05 from the PkR80.7bn reported
during the same period last year.
•According to a news report, the Planning
Commission intends to oppose the proposal to import gas from neighboring
PAK SUZUKI — SLOWDOWN IN PROFIT GROWTH
The Pak Suzuki Motor Company Limited announced its
3QFY04 results recently wherein the company declared a 5% decline in
profits to PkR376mn despite a 37% YoY jump in revenues to PkR6,602mn.
The company has been facing severe margin pressure on the back of the
depreciating rupee, which it has been unable to pass on to end
consumers. At the same time, the company's capacity expansion is in
process and is expected to be completed by mid next year. With the stock
trading at a projected PER of 4x versus a sector PER of 6x, we issue a
BUY on PSMC.
The Pak Suzuki Motor Company released its 3QFY04
results recently wherein the company declared profits of PkR375.9mn
(EPS: PkR7.65) on the back of sales of PkR6,602mn.
STRONG REVENUE GROWTH
In line with the rest of the auto manufacturers, Pak
Suzuki saw its revenues shoot up by 37% YoY to PkR6.6bn during 3QFY04
from the PkR4.8bn reported during the same period last year. As a
result, the company's revenues for the 9-month period ending September
30, shot up by 35% YoY to PkR18.2bn as consumers continued to be
attracted to the company's popular 800cc and 1000cc offerings.
At the same time, the company has seen its margins
being squeezed on the back of a depreciating Rupee and political
pressures that prevent it from passing on these cost increases to end
consumers. Thus gross margins during the year have declined to 10% from
the 15% that the company reported last year on the back of the 8% YoY
decline in the value of the Rupee versus the Japanese Yen. The company
has, however, been able to restrict the increase in its operating
expenses, which grew slower than its revenues. Lastly, the fall in other
expenses and financing charges offset the fall in other income and led
to a relatively smaller decline in net margins to 6% from the 9%
recorded last year.
The performance reported by Pak Suzuki is similar to
the performance being reported by the other auto assemblers, wherein
revenues are rising strongly on the back of the easy availability of
cheap financing. At the same time however, political pressures have
prevented the assemblers from passing on the impact of the depreciating
rupee to end consumers and thus all the companies are facing major
margin pressure, which is likely to continue in the foreseeable future.
Pak Suzuki is currently expanding its production capacity, which should
be completed by mid next year, thus raising its capacity to 100,000units
Pak Suzuki's highly conservative dividend policy has
played havoc with its stock price. However, with the stock trading at a
projected PER of 4x versus an industry PER of 6x, we issue a BUY on PSMC.
THIS WEEK'S TOP STORIES
SBP ANNUAL REPORT FY04
The SBP released its Annual Report FY04 on Saturday
wherein it noted that GDP growth in FY04 came as a result of exceptional
performance by the manufacturing sector, which offset the agricultural
sector's underperformance. Inflation also grew during the year,
surpassing the government's target of 4%. While
Pakistan's fiscal deficit improved during the year,
trade deficit increased, thereby putting great pressure on the value of
the Rupee. For FY05, GDP growth is likely to come in lower than in FY04,
with higher inflation and greater pressure on the Rupee.
SNGPL — NOT AS BAD AS IT SEEMS
OGRA's decision to disallow certain expenditures by
SNGPL dealt a bad blow to the stock price. However, an analysis of
OGRA's decision leads us to believe that the company's results are
unlikely to be as bad as was initially thought. In terms of un-accounted
for Gas (UFG), SNGPL is marginally above the target set by OGRA (6.75%
as against the target of 6.50%). In addition, OGRA has also disallowed
the inclusion of certain capex incurred by the company. While the impact
of this has been negative on the profitability of the company, we are of
the opinion that it is likely to be in the range of PkR0.25-0.40/share
and SNGPL is still likely to post 14% growth in earnings for FY04. We
advise investors to BUY SNGPL on dips.
NATURAL GAS — DEMAND GROWTH TO OUTPACE SUPPLY
Gas consumption in Pakistan has grown at a 5-year
CAGR of 6.6% and all new additions to production are quickly absorbed.
As a result, Pakistan is looking for alternative sources to beef up its
gas supply to meet growing demand. At an annual consumption rate of
almost 1.0 TCF per annum, Pakistan's current gas reserves of 26.1 TCF
are expected to last for 20-25 years. However, given the aggressive
growth in gas consumption over the last couple of years, both the gas
utilities are wary of giving firm long-term commitments for gas supply.
We are of the opinion that the government would need to start working
seriously on one of the proposes inter-state gas pipeline projects if it
wants to ensure long term gas supply.
HUBCO — EXPANSION PLAN SHELVED
Lack of availability of natural gas has forced the
government to shelve proposals for 6 natural gas based thermal power
projects in the country. According to reports, two of these power
projects were proposed for Karachi and included projects for which Hubco
had submitted its proposal. We are of the opinion that this will for the
time being dampen Hubco's plan for expansion. The link up with KESC,
however, has been approved and the company expects this link to be
established within the next 12-18 months. On the positive side, we
expect the majority of the cash releases expected in FY06 to be paid out
as dividend. For FY05, we expect that annual dividend to be in the range
of PkR3.20-3.50/share, whereas the FY006 dividend is likely to be higher
as Hubco is likely to pay out all excess cash. We maintain our Neutral
stance on Hubco with a 12month price objective of PkR35.4/share.
SNGPL — NEGATIVE NEWSFLOW DISCOUNTED
With the stock price loosing almost 10% value in just
4 trading sessions, we believe that the negative news flow has already
been discounted. We maintain that the impact of OGRA's determination is
unlikely to be very significant, and expect SNGPL to be able to register
double digit growth in earnings. We expect the company to announced its
FY04 results soon and expect SNGPL to post after tax profits of
PkR2,291mn (EPS; PkR4.59). The stock is currently trading at 10.6x FY04E
earnings. We recommend Buy on SNGPL with a price objective of
Mkt. Cap (US $ bn)
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