However, market upbeat trend restored on Thursday
on the back of more investment poured in banking and textile sector
owing to the expectation of better than expected results. On Friday
market remained volatile and witnessed the sharp swings. This week KSE
index gained 100.5 points.
OUTLOOK FOR THE FUTURE
The market seems to be continuing with its positive
trend. However, high badla volumes and relatively high badla rates
continue to be a cause of concern. While we agree that badla volumes
generally move in line with stock market direction, any negative news
flow can trigger selling by weak-holders. We continue to recommend a
cautious trading strategy. At this juncture, we recommend investors to
stick to fundamentally strong stocks, where good dividend yield
protects the downside. FFC, PTCL, PSO continue to be our top picks in
the current market. We also see positive momentum to continue in the
upstream oil and gas stocks. With the result announcement around the
corner, the market should see stock specific activity as well.
The major developments this week were:
•The Public offering of Kot Addu Power Company (KAPCO)
will be made at PkR30/share.
•The Ministry of Petroleum and Natural Resources
has ordered an uninterrupted gas supply to fertilizer companies to
ensure adequate supply of urea in the country during the Rabi season.
•The Central Board of Revenue (CBR) has collected
over PkR249bn during July-December 2004.
•The start of the New Year saw PSF (Polyester
Staple Fibre) prices fall by PkR5.0/kg
•According to a recent statement by the
Pakistan's foreign office, Indian response is awaited on the gas
pipeline. Pakistan and Iran have in principal agreed to the project
•The World Bank has expressed its willingness to
provide loans to the corporatised entities of WAPDA.
•The rising interest rates have resulted in a
widening of the gap between the lending and deposit rates.
•The Pakistan Telecommunication Authority (PTA)
in a handout issued has warned cellular phone companies to improve
their service quality by Jan 15.
•The government is hopeful of achieving the
20.2mn ton wheat output target in FY05 on the back of timely rains
received by the country.
•As per the data released by APCMA, cement
dispatches reported a 16% growth on YoY basis and an 8% growth on MoM
basis during the month of Dec '04.
•Pakistan has asked Iran to consider the project
without India's participation
•The Cabinet Committee on Privatization has
proposed to hold the bidding for Karachi Electric Supply Corporation
between Jan 10-12.
•Nexus Automotive has decided to assemble the
Chevrolet 1000cc car in Pakistan.
•Reportedly, the retail prices for the imported
urea have crossed PkR500 per bag during the peak Rabi season.
•Government has reportedly set KESC's reference
price at PkR1.30 per share.
•The Central Depository Company (CDC) has
prohibited use of group accounts and will discontinue dealing in them
completely from 31-Mar-05.
•The road show for the US$350-500mn Sukuk bond
will start from Jan-08.
KAPCO - THE LATEST GOVERNMENT OFFERING
The public offering date of Kot Addu Power Company
Limited is likely to be announced soon. The Privatization Commission
(PC) plans to divest up to 20% of the total shareholding of the
company to the general public. With the public offering price
announced at PkR30/share, we believe that the offer is likely to
generate good response from small investors. However, we do not expect
KAPCO to perform in a fashion similar to some of the recent
divestments where stock prices gained almost 100% from the public
offering prices. In our opinion, KAPCO is likely to remain a dividend
yield story just like Hubco.
PUBLIC OFFERING OF KAPCO
The Privatization Commission plans to hold a public
offering of Kot Addu Power Company by the end of Jan05. The public
offer comprises of 20% of the total shareholding of the company (176mn
shares) to the general public. Currently, there are two shareholders
of KAPCO, the Government of Pakistan (64% stake) and International
Power (36%) stake. The divestment will be made through the holding of
GoP in KAPCO.
The Privatization Commission has already announced
the offer price of PkR30/share for the public offering. With all the
stock exchanges in the country giving clearance to the public offering
document of KAPCO, we expect the public offering date to be announced
KAPCO - THE LARGEST INDEPENDENT POWER PRODUCER IN
KAPCO is currently the largest Independent Power
Producer (IPP) time in Pakistan, with an installed gross generation
capacity of 1600MW. KAPCO was privatized in 1996 when the Government
of Pakistan sold 26% of its stake at a price of US$215mn to
International Power, along with the transfer of management control.
International Power later on acquired further 10% stake in KAPCO at a
price of US$76mn. KAPCO currently accounts for almost 8% of the total
energy produced in the country, and 26% of the total energy produced
by the Independent Power Producers. KAPCO is a dual fired power plant,
which uses Natural Gas and Fuel Oil for power generation.
TARIFF STRUCTURE - STABLE PROFITABILITY AND PAYOUTS
Like all other Independent Power Producers, KAPCO's
tariff comprises of two components - Capacity Purchase Price and
Energy Purchase Price. While the EPP is primarily comprises of fuel
costs and is a pass through item, the company's profitability is
driven by the CPP. The CPP covers all the fixed cost components of the
company, and comprises of elements like equity return, debt servicing
and fixed Operations and Maintenance costs. The CPP is indexed to the
US CPI and PkR/US$ exchange rate. Unlike Hubco, KAPCO has a stable CPP
which should result in a stable earning and dividend stream.
TAX EXEMPTION TO EXPIRE IN 2006
With stable capacity payments, KAPCO is purely a
dividend yield play. However, the one major negative for KAPCO would
be the expiry of tax exemption in 2006. While other IPPs remain
exempted from corporate tax for the term of the project, expiry of
KAPCO's tax exemption would dent the company's profitability.
THIS WEEK'S TOP STORIES
PETROLEUM PRICES - PASSING THE BUCK!
Though marginally, but Oil Marketing Companies
stand to benefit from the recently announced increase in domestic
petroleum prices. We expect a pre-tax inventory gain of PkR97mn for
PSO and PkR36mn for Shell as a result of the latest price increase.
However, we are maintaining our previous earning estimates for PSO as
we have already accounted for higher petroleum prices for the year.
The Oil Companies Advisory Committee recently announced an increase in
domestic petroleum prices by an average of 2%. After taking a revenue
hit of almost PkR40bn, the government does not seem to be in the mood
to absorb any more increase in international oil prices. With the
receivables of the OMCs from the government already touching PkR7bn,
we expect the government to pass on the impact of any increase in oil
prices to the end consumer, while maintaining the government taxes on
petroleum products at zero..
FERTILIZER INDUSTRY - DAWOOD VS FAUJI
Fertilizer Industry undergoing through
consolidations, where the number of players is squeezed to two, Fauji
and Dawood Group. We are expecting a 3%+ growth in urea demand over
the next 5 years owing to the boom in the agricultural sector. Given
the growing shortfall between demand and supply and the upsurge in
urea prices, the most beneficial would be the one with higher
possibilities of expansions in the existing plants at the cheaper
costs. We prefer Fauji to Dawood group owing to its efficient market
leadership with a 60% market share, aggressive marketing and
investment strategies and a possible expansion of 500Kt+ over the next
2-3 years. While we recommend SELL for Engro at current levels with a
target price of 107 per share.
CEMENT SECTOR - SUPPLY ADDITIONS
The cement manufacturers are forcing themselves
into a situation that is similar to the one that existed in the early
90's. We foresee at least 21mn tones of additional cement capacity
over the next four years. Among the cement manufacturers, Lucky is
emerging as the market leader with the implementation of its massive
expansion plans of 16800tpd. The expansion will help the company to
gain pricing power as well as help it to exploit the growing demand of
cement in the domestic as well as exports market. We have an
underweight stance on the Cement sector owing to the increasing demand
supply gap in the industry.
T-BILL AUCTION - TIGHTENING OF MONETARY STANCE
The cut-off yield on 6-month bill has increased by
48 bps to 4.32% in the auction held yesterday. Above auction turned
out to be a dampened for the stock market as it lost all the gains
recorded during the day. The SBP's real concern at the moment is the
rising core inflation, which stood at 5.34% annualized rate in Nov04.
Interestingly, the 161 basis point rise in 6-month T-bill yield during
July-November 2004 did not have a major impact on core- inflation. We
are of the opinion that current inflationary trend is primarily fueled
by the supply-side concern rather than the demand-pull. Therefore, a
steep rise in interest rates in itself is unlikely to have a major
impact on the rising core inflation.
CEMENT DISPATCHES - 18% GROWTH DURING 2Q
Cement dispatches reported a 16% growth on YoY
basis during the month of Dec-04 despite speculations on the slow down
of construction activity during the winter season, particularly in the
Northern part of the country. The major reason for this is the strong
support from the domestic market for housing sector, infrastructure
projects and industrial projects undergoing through major BMR process.
Cement sales during 2QFY05 reported an 11% QoQ drop to 3.6mn tones,
while it has registered a 18% YoY rise which is likely to result in
substantial growth 2Q results of the cement companies expected during
the next month. If the current growth trend continues, we may expect
cement demand to register a 23%+ YoY growth for FY05. However, we do
not feel that the current upsurge in cement demand would resolve the
industry concerns over supply additions. We maintain our underweight
stance on the cement sector.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
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KSE 100 Index
KSE ALL Share Index