THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Jan 08, 2005

 

KSE-100 index continued its rising trend and surpassed another milestone of 6300 level during the week. On Monday market remained range bond but banking sector performed owing to the rumor that banking sector would be allowed to invest 30% in the stock market. Nishat mill picked up on Tuesday owing to the news of bumper cotton crop, which would ease the cost of produce of Nishat mill. Higher interest yields offered by SBP on 6-month t- bill drag the market back on Wednesday.

 

 

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.

FUNDAMENTAL CHANGES

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 soon.

KAPCO - THE LARGEST INDEPENDENT POWER PRODUCER IN PAKISTAN

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.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

29.02

29.53

1.76%

Avg. Dly T/O (mn. shares)

558.52

646.62

15.77%

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

643.74

809.45

25.74%

No. of Trading Sessions

5

5

24

KSE 100 Index

6218.40

6318.90

1.62%

KSE ALL Share Index

4104.86

4182.57

1.89%