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