THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Nov 27, 2004

 

The market continued its volatile performance during the week. The KSE-100 gained 36.7 points to end the week at 5556.87 levels. Key activity remained confined to the core stocks with a surprising performance by Pakistan Oilfields on the last day of the week. POL's stock price gained almost PkR10 on a single day. Among the other major performers was SNGPL. SNGPL's quarterly result announcement brought back substantial interest in the scrip. PPL, OGDC, Hubco, 

 

 

FFC Bin Qasim and FFC were the other scrips that exhibited strong performance during the week. Average daily volumes stood at 269mn share for the week, which remains a concern.

 

 

OUTLOOK FOR THE FUTURE

The KSE-100 Index has finally managed to cross the psychological barrier of 5555, albeit marginally. In the recent rally, the Index has been able to sustain levels above 5500 for long. We advise investors to maintain exposure in key stocks only, which in our opinion are likely to be the key drivers for the Index performance from this point onwards. Fertilizer and Energy stocks are our picks in the market.

FUNDAMENTAL CHANGES

The major developments this week were:

•Privatization Commission (PC) has invited Expression of Interest (EoIs) for the privatization of Pakistan Telecommunication Company Limited (PTCL).

•The Privatization Commission (PC) rejected all three proposals forwarded by Pakistan State Oil's Managing Director for privatization of National Refinery Limited.

•Remittances, country's second largest source of inflows after export proceeds have gone up to US$1,316mn during July-October 2004, as compared to US$1,212mn during the same period last year.

•Reportedly, most of the cement manufacturers in the Northern Zone have raised the cement prices by PkR10-15/bag in response to the increasing coal and oil prices internationally. .

•The stock market has received a much-needed booster. Standard and Poors Credit Rating Agency announced that it was raising Pakistan's credit rating on foreign currency debt by one notch up to B+ and BB for local currency.

•Oil and Gas Development Company announced that it has discovered oil and gas reserves at Dakhni in the northern region of the country.

•In a major political development, Asif Ali Zardari was released on bail on Monday after spending 8 years in prison.

•The Privatization Commission has sought a firm price from the lead manager for the initial public offering of Kot Addu Power Company Limited (KAPCO).

•As per the statement released by the President Musharraf, he would be announcing the construction of big dams in the next few months only after achieving consensus among the provinces.

•PPL announced that it has been able to discover gas reserves in deeper horizons of Sui gas field.

•Sui Southern Gas Company Limited signed a gas supply agreement with BHP Petroleum for additional supply of gas from Zamzama gas field.

•According to the Ministry of Finance, SBP injected US$1,400mn in last few months in forex market to stabilize Pak Rupee.

•The US Congress has approved a total of US$701mn in aid for Pakistan as opposed to the earlier numbers reported by majority of the newspaper.

•Securities and Exchange Commission of Pakistan has announced that it will be inititating a probe on the alleged leak of PTCL's Q1 earnings.

•Muttahida Majlis-e-Amal, the key opposition party, has asked the government to postpone the National Security Council (NSC) meeting.

•As expected, there was no major outcome from the recently meeting held between PM Shaukat Aziz and his Indian counterpart.

•PM Aziz reiterated that Pakistan would go ahead with the gas pipeline project to meet its requirement, even if India does not join the project.

•Diminishing return on National Savings Scheme (NSS) resulted in a drain of PkR1.07bn from NSS schemes during the first quarter of current fiscal year.

•The government has directed the Private Power Infrastructure Board to hold international competitive bidding to set up a 600MW power plant at Uch.

•As per the report released by National Fertilizer Development Center (NFDC), urea off-take reported a 6% decline on a YoY basis during the month of Oct-04 while DAP off-take registered a 1.1% growth during the month.

•Trading Corporation of Pakistan (TCP) has awarded supply contracts to 2 international firms for import of 60kt of urea.

•According to figures released, SBP has provided US$345mn for oil imports during the first 20 days of current month.

•Honda Atlas Cars (Pakistan) Limited announced its results for 1HFY05 yesterday, posting after tax profits of PkR183mn (EPS: PkR4.36).

FERTILIZER OFF-TAKE OCT '04 — COMMENTS

In line with the market expectations, urea off-take reported a 6% decline during the month of October on YoY basis owing to the pre-buying by the dealers in September. However we still expect a 9.5%+ growth in urea off-take during CY04. We expect FFC to come up with a 10%+ cash dividend while there is a strong possibility for Engro to announce bonus dividend along with its annual results. We maintain our Buy recommendation for FFC and Hold for Engro.

National Fertilizer Development Center (NFDC) released the fertilizer off-take numbers for the month of October-04 yesterday.

DELEARS ALREADY OVERBOUGHT UREA LAST MONTH

In line with the market expectations, urea off-take reported a 6% decline during the month of October on YoY basis. This can be mainly attributed to pre-buying by dealers during September in order to earn the price differential during the peak season. In a broader picture while ignoring the impact of pre-buying, fertilizer companies are still better off during the current year where there is 19% growth in urea off-take YoY basis to 562kt during Sept-Oct CY04 from 474kt during the same period last year. We still expect an overall 9.5%+ growth in urea off-take during the CY04.

 

 

DOMESTIC DAP PRICES FOLLOWING INTERNATIONAL TREND

DAP prices surged to PkR1050/bag in line with international prices during mid-Nov '04 from PkR952/bag during mid-Sept '04. Speculators/ importers have finally started off loading their DAP inventories apparently due to continuous pressure from the government. However the reason appears different to us, most of the importers have imported DAP during the low-priced season (June-July '04) and now they are off loading their holdings to get the maximum benefit of the peak season prices. We expect DAP prices rise further owing to the negligible demand supply gap during Dec '04 -Jan '05.

WHAT ABOUT ENGRO?

Being targeted by FFC, Engro has already reported a decline in market share from 21% to 20% along with the 9-months CY04 results. We expect FFC to target Engro's share further directly as well as indirectly (through FFBQ), which is likely to result in a further 1% drop in Engro's market share. Engro Chemicals has reported a 1.8% growth in urea production while a 3% improvement in NPK production during the month of October (YoY basis). Meanwhile the company has already reported a limited stock availability for 4th Quarter, which is likely to result in lower sales and profits for company during 4QCY04.

DIVIDEND EXPECTATIONS AND RECOMMENDATION

Owing to high payouts in 3QCY04, we do not expect fertilizer companies to announce good cash dividends in 4QCY04. FFC can come up with 10%+ cash dividend. However we cannot rule out positive surprises from Engro in the form of Bonus dividends along with the Annual results. We maintain our BUY for FFC while Engro is trading at a slight premium to our fair value of PkR107/share.

THIS WEEK'S TOP STORIES

PM'S FIRST ADDRESS TO THE NATION

Prime Minister Shaukat Aziz made his first address to the nation after assuming charge as Prime Minister of the country. The PM briefly touched upon all the major issues confronting the economy and announced broad and specific measures to provide boost to the economy. The PM reiterated his view that the country was on its way to an 8-10% GDP growth rate and highlighted five key sectors as having the potential for rapid growth and creating employment opportunites. The major surprise in the PM speech was the announcement that the government would be prematurely ending the IMF program. We believe that this decision has a symbolic significance as it suggests that the government is comfortable with the current situation of the economy. The speech however fell short of market expectations as there were rumors prior to the speech that the PM would be making specific announcement on the construction of the dams, and privatization of Pakistan State Oil. We expect the cement sector and PSO to witness a correction after a hype that was created prior to the PM's speech.

SNGPL — FY04 RESULTS DUE ON NOV 25

The board of direcotrs of Sui Northern Gas Pipelines Limited is scheduled to meet on Nov 25 to approve and announce the results for FY04. We also expect the company to announce its quarterly accounts along with the annual results. We expect SNGPL to announce after tax profits of PkR2,321mn (EPS: PkR4.65) for the year. We also expect the gas utilty to announce a cash dividend in the range of PkR2.4-2.5/share for the year. The OGRA's decision not to allow some of the expenses of the gas utility triggered a major decline in the stock price of the company. The stock price, through recovered from the negative newsflow, still has some upside potential. We recommend Buy on SNGPL with a price objective of PkR65/share.

AGRI-CREDIT AND FERTILIZER SECTOR PERFORMANCE

The consumption of fertilizer is strongly correlated to the credit disbursement to the agricultural sector. The Federal government has allocated PkR85bn to the agriculture sector for the FY05 out of which 32% of the targeted credit has already been disbursed during the first four months of the current FY. Given the enhanced focus of the federal government towards agricultural credit we expect Fertilizer sector to report a double-digit growth in the top line followed by an exceptional growth in earnings and improved stock performance during the medium term. We maintain our liking for the fertilizer sector, where FFC is our top pick.

STATE BANK ACTS TO CHECK INFLATION

A sharp increase witnessed in the yesterday's T-Bill auction was beyond market consensus estimates. Weighted average yields on 3 and 12 month T-Bills rose to 3.8419% and 4.4290% as SBP picked up PKR26.3bn against its pre-auction target of PkR55bn. The aggressive rate hike clearly indicates that SBP's intentions to check towering inflation, which has already touched to 3.57% during first four month of current fiscal year. Needless to say, we believe that the inflation would be exceeding the 5% target for the current fiscal year. We believe that, average-lending rates will increase by 60-80bps in the near to medium term; in addition, export refinance rate will go up as well. We also expect the State Bank to conduct an Open Market Operation today to absorb the remaining liquidity accruing from a PkR56bn inflow due today.

SNGPL — STRONG GROWTH CONTINUES

Sui Northern Gas Pipelines Limited (SNGPL) announced its FY04 annual accounts and 1QFY05 accounts.

As expected the company posted strong growth in earnings. Despite reduction of the asset base and certain expenses by OGRA, SNGPL posted growth of 14% for FY04, and 23% for 1QFY05. The company has also capitalized on the low interest rate environments in the country, which has resulted in a 37% YoY reduction in financial charges in FY04 and a 29% YoY reduction in 1QFY05. The company also announced a dividend of PkR2.50/share for FY04. We believe that the profitability of the company is likely to remain strong on the back of the huge capex plan of the company. We maintain our Buy recommendation on SNGPL with a price objective of PkR65/share.

 

 

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

25.38

25.74

1.42%

Avg. Dly T/O (mn. shares)

214.73

268.51

25.05%

Avg. Dly T/O (US$ mn.)

195.17

274.23

40.51%

No. of Trading Sessions

5

5

 

KSE 100 Index

5520.17

5556.87

0.66%

KSE ALL Share Index

3621.87

3656.77

0.96%