THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Dec 18, 2004

 

This week, the KSE-100 index remained bullish and surpassed its all time high level. The stock market exhibited buoyancy on the back of some exciting news emerging during the week, which included, news about KAPCO and HUBCO being asked to increase their capacity, Privatization Commission's (PC) announcement of receipt of 29 Expression of Interests for NRL, Telecom Minister's statement regarding Interest shown by some international communications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

FUNDAMENTAL CHANGES

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 National Refinery.

•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 PkR35/share

•Chenab Limited plans to divest 15mn shares of the company through an Initial Public Offering (IPO) at a price of PkR18 per share.

•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 FY05.

•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.

PRIVATIZATION HYPE

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 ENERGY

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.

 

 

PRIVATIZATION GAINS

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 sector.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

26.66

27.16

1.88%

Avg. Dly T/O (mn. shares)

449.09

445.55

-0.79%

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

449.65

389.41

-13.40%

No. of Trading Sessions

5

5

 

KSE 100 Index

5700.82

5842.59

2.49%

KSE ALL Share Index

3753.56

3854.70

2.69%