companies in PTCL's privatization. On Thursday, the
market reacted positively on the back of upward revision petroleum
prices and PSO and Shell were the main beneficiary. Cement sector
respond positively on Friday owing to the news of survival of the cement
cartel. KSE-100 index gained 141.77 points to end the week at 5842.59.
OUTLOOK FOR THE FUTURE
We expect the market to consolidate at current levels
before surging ahead. High Badla rates and volumes are likely to check
the continuous surge in the index in the short term. With the corporate
result announcement season around the corner, we expect some
accumulation in the core stocks on account of pre-result buying. We
expect the Energy and Fertilizer sector to remain active during the next
week. Meanwhile, the overall economic indicators will remain a net
positive factor for the market. Fertilizer and Energy stocks are our
picks in the market. On a net basis, the continuation of neutral
consolidation trend is likely to continue next week.
The major developments this week were:
•Bidding for three power projects next month.
•Pakistan's current account deficit stood at
US$80mn during July-October 2004 as compared to a surplus of US$1,492mn
during the same period year earlier.
•Hubco and Kapco are currently in talks with the
government and National Electric Power Regulatory Authority to enhance
their generation capacities.
•To create a buffer stock of gas for the winter
season, the government is currently working on a proposal to create
underground gas storage.
•Privatization Commission received 29 EoIs for
•The Governor State Bank of Pakistan recently
informed that Pakistan has recently paid an amount of US$172mn in
interest payments on previously issued Eurobonds.
•Askari Commercial Bank's board meeting is
scheduled on Dec. 21.
•KAPCO public offering price fixed reportedly at
•Chenab Limited plans to divest 15mn shares of the
company through an Initial Public Offering (IPO) at a price of PkR18 per
•National Savings Schemes witnessed outflow of
PkR34.6bn during July-October FY05. On the other hand, PkR34.15bn were
invested in Behbood and Pensioner' Benefit account during July-October
•Karachi Electric Supply Corporation has informed
the Karachi Stock Exchange that its Board of Directors have given the
approval to the proposed PkR15.284bn debt to equity swap.
•Workers' remittances during the first five months
of the current fiscal year have jumped by 8.1% YoY to US$1,609mn.
•President Musharraf said that the government is
committed to build new dams despite the opposition by the provinces.
•Country's total foreign exchange fell to
US$11,711mn on the eve of Dec 11 from US$11,632mn on Dec 4.
PICIC GROWTH FUND — FROM PSO TO NRL
PICI Growth Fund (PGF) continues to remain the focus
of investor attention with the government moving ahead with its
privatization program. After apparent slowdown in PSO and pickup of
progress on NRL's privatization, PGF has once again
come in to the limelight. The Fund's portfolio is heavily tilted towards
fuel and energy stocks which together account for 79.5% wieght of the
total portfolio. Among individual stocks, PSO and NRL have the highest
weights in the portfolio at 39.6% and 23.1% respectively. Based on the
portfolio presented in PGF's Sep-94 accounts, and stock prices as of
Friday, 17-Dec-04, the fund's certificates are trading at a 10.8%
discount to their Net Asset Value of PkR58.50/certificate. We believe
that in the short term, progress on the privatization of NRL would be a
major driving force for PGF's certificate price.
After the apparent slowdown in progress on PSO's
privatization and pickup of speed in privatization of National Refinery
Limited (NRL), PICIC Growth Fund (PGF) once again has regained investor
interest. Any developments on the privatization of PSO or NRL are likely
to affect their individual stock prices. With both PSO and NRL enjoying
a susbstantial wieght in PGF's portofolio, we believe that PGF's unit
price is likely to move in line with the prices of both these stocks.
PORTOFLIO ANALYSIS — HIGH TILT TOWARDS FUEL AND
The overall portfolio of PGF has a major tilt towards
fuel and energy stocks. Oil and Gas Marketing, Oil Refining, Oil and Gas
Producers and Power Utilities together account for almost 79.5% of the
total weight of the portfolio. Among individual stocks in the portfolio,
PSO and NRL enjoy the highest weights at 39.6% and 23.1% respectively.
While traditionally the mutual funds have distributed
all gains realized from the privatization of state owned companies, we
believe that this is unlikely to be the case now. The recent amendment
to the rules governing mutual funds, as long as mutual funds distributed
90% of their dividend income, they will continue to enjoy the tax
exemption status. Hence, capital gains realized through privatization of
NRL and PSO are unlikely to completely flow down to the shareholders as
dividends. However, according to our understanding PICIC Growth Fund
would be distributing some portion of the capital gains realized, and
retaining major portion of the gain with themselves.
TRADING BELOW ITS NAV
Our calculations suggest a Net Asset Value of
PkR58.50 for PICIC Growth. For our calculations we have used the
portfolio given in PGF's Quarterly Accounts for the period ending
30-Sep-04, and used closing prices of stocks as of Friday, 17-Dec-04.
Based on our calucations, PGF is currently trading at a discount of
10.8%. With NRL almost enjoying a total weight of 23.1% of the total
portfolio in value terms, we believe that the privatization hype of NRL
will be the driving factor for PGF's unit price.
THIS WEEK'S TOP STORIES
FAUJI CEMENT — COMING OUT OF THE BLUES!
FCCL has gone through major restructuring during the
last FY, which is likely to result in a 47% YoY reduction in financial
charges during FY05 and reduced pressure on cash flows which would
eventually be used to finance its operations and BMR plans. We expect
the company to come up with a token dividend this year with the annual
results, however it remains purely dependent on Fauji Foundation's cash
flow requirements. We maintain our Neutral recommendation with a target
price of PkR14 per share.
INFLATION — SEASONAL IMPACT!
According to data released by Federal Bureau of
Statistics (FBS), CPI inflation for Nov-04 stood at 9.26% year-on-year (YoY).
Above data on inflation released by FBS has to be viewed with the fact
that Eid fell during the month of November. Generally the price level of
food and apparels remains higher during the Eid season. As the data
depicts, food inflation recorded at 13.6% increase during Nov-04,
compared with 12.3% a month earlier. Core inflation during the month of
Nov-04 stood at 7.0% as against 6.9% month earlier. We believe that
inflation for year to Nov-04 was bit over exaggerated on account of low
base inflation witnessed during the same period year earlier. Looking
forward, the upward trend of high rents is unlikely to change in coming
months due to continuous rise in real estate prices. Our inflation
target still remains at 7.0-7.2% for FY05.
PAKLAND CEMENT — UNDERGOING RESTRUCTURING!
Pakland Cement has been undergoing a major financial
restructuring after the acquisition by the Dewan Group during the last
FY. The restructuring is likely to improve the company's gearing ratios
substantially to 61% in FY05 from 84% in FY03. Pakland's Line-2 is
currently in process and is likely to be completed by May 2005 while the
coal conversion process was completed in May 2004. The company posted
after tax loss of PkR177mn for FY04, while it is expected to announce
1QFY05 results today.
OIL PRICES — LIFTING THE CAP!
After maintaining domestic petroleum prices for
almost 7 months, the government has finally lifted the cap. Oil
Companies Advisory Committee, which met last evening, announced an
average of 6.6% increase in domestic petroleum prices. The deteriorating
financial position of the government on account of subsidy on oil prices
finally forced the government to allow a raise in domestic petroleum
prices. According to estimates, the government has taken a hit of almost
PkR33bn on account of maintaining a freeze on oil prices. The
government's taxes on petroleum prices remains at zero whereas the Oil
Marketing Companies are the major beneficiary of this price increase.
Reportedly, the incremental receivables of OMCs on account of import
differential, has also been settled with this revision. We maintain our
Neutral stance on PSO with a revised price objective of PkR298/share.
CEMENT CARTEL SURVIVED — FOR HOW LONG?
The Cement Cartel broke down on Wednesday evening
where Lucky Cement was operating beyond its allocated quota since Oct
'04, which was not recognized by the cartel while the company threatened
that it would leave the cartel and function independently if its actual
100% capacity utilization was not recognized. After the intervention of
the big players yesterday, the cartel eventually persuaded Lucky Cement
to remain within the group resulting in restoration of the cartel. We
expect the cartel to remain effective at least for another 2-3 years,
however, its survival would become difficult in the post-FY06 era.
Meanwhile we maintain our Underweight stance on the entire cement
Mkt. Cap (US $ bn)
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