Updated Jan 15, 2005


KSE-100 index continued its strong performance during the week crossing all-time high records. On Monday, the market started with a positive note on the back of promising economic growth indicators and the privatization hype about PTCL and PSO. The market crossed another milestone of gaining 225.89 points in a single trading session on Tuesday supported by oil and



gas discovery in NWFP. After the two consecutive days of bullish trends, the market underwent technical corrections the next day. Interestingly, the market breached another record of losing 232.60 points in a single trading session owing to the rising concerns over the military operation in Balochistan and gas suspension from Sui gas field by the operator, Pakistan Petroleum (PPL) to fertilizer and power companies. PTC and PSO remained the top picks through out the week owing to the regaining pace of privatization. The KSE-100 index gained 241.08 points to end the week at 6559.98.


The political situation at Sui and restoration of gas supply would be a cause of concern for the market during the next week. Any delays in restoration of gas to the Fertilizer and Power Companies would have a negative impact on PPL and the fertilizer stocks, mainly FFBQ. The privatization hype in PSO and PTCL is likely to trigger strong stock performance during the next week as well. Meanwhile Fertilizer companies and OMCs would be announcing their results soon after Eid. The annual and Half-yearly results of the other sectors are likely to be announced in the companies' BOD meeting during the next couple of weeks, which will trigger some activity in the respective stocks. At this juncture, we recommend investors to stick to fundamentally strong stocks, with good earnings expectations and dividend yield. We continue to recommend a cautious trading strategy. On a net basis, neutral to positive consolidations are expected during the next week.


The major developments this week were:

•Work on the proposed linkup of the Hub Power Company (Hubco) with Karachi Electric Supply Corporation targeted to complete up by the end of Dec-05.

•Videsh Sinchar Nigam Limited (VSNL), the Indian telecom company, is considering to participate in the privatization of PTCL.

•Federal government has decided to chalk out a long-term plan for urea import to meet the growing demand of urea in the country in line with the growth in the agricultural sector.

•According to a report, Japan has informed Pakistan that it will resume its US$500mn Official Development Assistance to Pakistan (ODA) and Yen loan package from March 2005.

•Pakistan has received US$200mn from the US out of the US$3bn economic package.

•MOL, the operator of the Tal block, has announced that it has made a discovery in the second exploratory well spudded at the Tal Block.

•Pakistan's import bill has increased by 47.1% in 1HFY05 according to reports. The import bill increased to US$9.7bn in 1HFY05, as compared to US$6.6bn during the same period last year.

•Singapore Telecom (Singtel), alongwith four international firms have expressed interest in participation in the privatization of PTCL.

•According to our estimates, the suspension in gas supply is likely to result in a maximum production loss of 3,020tpd for FFBQ (Urea, DAP) and 2,564tpd for Pak Arab (Urea, NP, CAN) out of the total loss of 7,985tpd of fertilizers (all products).

•With almost 51% of its revenues coming through crude oil, Pakistan Oilfields Limited stands to be the immediate beneficiary of rising in crude oil prices.

•Hundi, the unofficial system of transferring money from abroad, has recently been flourishing.


The Privatization Commission is revitalizing its efforts to complete the transactions on the privatization agenda. Once again, the momentum has picked up and the PC is aiming to privatize big ticket items within CY2005. Karachi Electric Supply Corporation, Pakistan Telecom Co. Ltd., National Refinery Limited and Pakistan State Oil are among the important transactions that are being slated for privatization within the current year.


After a prolonged discussion with the proposed bidders, the Privatization Commission (PC) has finally been able to bring KESC to the bidding table. According to the announcement by the PC, the bidding for KESC will be held on 4-Feb-2005. International Power of UK, Saudi Kunooz Group and Hassan Associates are among the main contenders for the government stake in KESC. The PC aims to divest between 51-73% of government's shareholding to the successful bidder along with the transfer of management control. The government currently holds around 99% of KESCs total shareholding. KESC, an integrated electricity generation and distribution company, is the second largest government owned entity in the power sector and holds the franchise of supplying electricity to the city of Karachi. KESC's own installed capacity is 1900MW, but barely 1200MW of installed capacity is operational. One of the major problems that KESC has been facing over the last 5-6 years has been the soaring transmission and distribution losses, which have been as high as 41%. The government had been seeking a firm commitment from the new bidder to invest up to US$400-600mn in the transmission and distribution infrastructure. At the current price, 51-73% stake of the company is valued at PkR37,476 — 53,642mn (US$630-902mn).


The privatization process of Pakistan Telecommunication Company Limited has generated a high level of excitement lately. The PC is aiming to divest up to 26% of the shareholding of the company along with management control to the new bidder. The government currently holds 88% of PTCL's shareholding.

PTCL's privatization has been a major excitement owing to strong interest received from regional/international operators. Singtel, Kuwait Mobile Telecommunications Co., Emirates Telecommunication Corp., MTN-International Pty. Ltd of South Africa, and Saudi Oger have expressed interest in participation in the transaction. PTCL is the largest fixed line telecom company in the country, which also has a 1.6mn cellular subscriber through its wholly-owned subsidiary, Ufone. The PC has set 28Jan-2005 as the last date for submission of Expressions of Interest (EoI), whereas the completion of the transaction is targeted by end of 3QCY05 that is Mar-05. At current price, 26% stake of the company is valued at PkR68,355mn (US$1,150mn).


The Privatization Commission received a very strong response to the proposed Privatization of National Refinery Limited (NRL). A total of 29 Expression of Interests (EoIs) were received by the PC from local as well as international/regional players. National Refinery Limited, is among the largest fuel and lube refineries in the country. The company has the distinction of being the only lube refinery in the country. The major contenders for government stake in NRL include Al Tawairqi Trading & Construction Limited; Al-Ghurair Investment (LLC); ALP Group Limited; KPC Holdings (Aruba); AEC; Lukoil International Trading and Supply Company, Attock Oil Company Limited; Fauji Foundation, Engro Chemical Pakistan Limited, Shell Pakistan Limited, and Pakistan State Oil. At current price, 51% stake of the company is valued at PkR10,196mn (US$172mn).


The latest excitement on the privatization front has been Pakistan State Oil. After a lull of almost 6-8 months, the privatization process has been revived, with PC inviting for fresh Expressions of Interest for PSO. The PC has set 4-Mar-2005 as the last date for the submission of EoIs. We expect PC to receive a strong response to the privatization of PSO owing to keen investor interest in the oil and gas sector. A pure oil marketing company, PSO controls almost 65% of the market share, with competition mainly coming from Shell Pakistan. The PC aims to divest 51% shareholding of the company along with management control. The government directly holds 26% shareholding of the company, and another 25% through two state-owned mutual funds. The privatization process of PSO started in 2002. However, investor interest diminished owing to the delays in the privatization process. Kuwait Petroleum Limited, MIDROC of Saudi Arabia. At current price, 51% stake of the company is valued at PkR28,148mn (US$474mn).





The recent disruption in the transmission of Sui gas field would be a cause of concern for all the parties involved. With the rising demand for gas during the winter season, maintaining gas throughout in the wake of these disruptions is likely to become a difficult task. The production from the Sui gas field, though on a declining trend, still accounts for a major chunk of the overall gas supply in the country. With almost all the major infrastructure insured, we do not expect these attacks to result in an immediate impact on the profitability of the companies. The two gas distribution companies, Sui Southern Gas Company and Sui Northern Gas Pipelines Limtied should remain unaffected as their profitability is linked to their respect asset base. Therefore, decline in sales volume should not have any material impact on their profitability. However, should this disruption prolong, Pakistan Petroleum Limited should be affected as a result of reduced sales volume. Apart from this, both the gas distribution companies as well as PPL (the operator of the field) should see an increase in their insurance costs with rise in attacks on gas infrastructure at Sui. We maintain our Buy recommendation on SSGC with a price objective of PkR35.4/share, while recommend a Neutral stance on SNGPL which is trading at a 10% discount to our price objective of PkR65/share.


With the last date for submission of Expression of Interest drawing closer, the privatization hype of PTCL is gaining momentum. The stock price has performed strongly over the last couple of weeks, gaining almost 20% in the last 14 trading days, on the back of rising hopes on the privatization of the telco giant. Among the 4 Expression of Interests (EoIs) received for PTCL by the Privatization Commission, Singtel appears to the strongest contender. Singtel is one of the leading telecom service providers in Asia and Temasek Holdings own 63% share in Singtel. The recent acquisition of 26% shares of a local private bank by Temasek has raised investor confidence that Singtel would be a serious contender in the privatization of PTCL. While we believe that PTCL in its existing state is fairly valued, the privatization of PTCL is likely to have a positive impact on the stock price. While the privatization process is likely to extend to atleast 3-6 months, we believe that the investor confidence on the sell-off is very high.


The timing of inflation rate exhibiting a downward trend was just about right as the fears of a surge interest rates were at its peak owing to the rising inflation. According to the data released by the Federal Bureau of Statistics (FBS), inflation during the month of Dec-04 recorded a rise of 7.37% YoY as compared to a 9.26% YoY rise in Nov-04. Interestingly, the CPI index fell by 0.85% month-on-month in Dec-04, as compared to a gain of 1.12% in Nov-04. Deflating food prices and high base affect has primarily driven the decline in CPI index. However, our main concern still hangs around with core inflation, which stood at an annualized rate of 5.71%-by Dec-04. We believe that, if the State Bank is able to control the excessive money supply, which directly affects the output first and then the price level, it would be able to control the core inflation in months to follow. Our target for inflation stands at 7.1-7.3% for FY05.


As per our expectations, the shutdown of the Sui gas field has had a major impact on the overall gas supply situation in the country. The gas utilities, Sui Southern Gas Company Limited, and Sui Northern Gas Company Limited, have announced that they have curtailed/stopped gas supply to the power, fertilizer and cement sector. While Pakistan Petroleum Limited has announced that it will resume production from the Sui gas field soon, we expect repair of pipelines to take some time. Thus, we believe that the Sui gas field would not be operating at full capacity initially. Shutdown at Sui has come at a time when gas demand, specifically from the domestic sector, is usually at its peak owing to the winter season. With the gas utilities having domestic consumers up on the priority list, the industrial consumers have had to bear the major burden of a decline in gas supply.


Strong volume growth, higher prices, and growing market share. Add the privatization story on top of that. What else does one need to be bullish on Pakistan State Oil? The Privatization Commission (PC) has reinvited Expressions of Interest for the privatization of PSO, for which 4-Mar-2005 has been set as the last submission date. We are of the opinion that the PC would be able to generate a strong interest in PSO this time around on account of huge investor interest in the oil and gas sector. The strong interest seen in some of the other privatization transactions like PTCL and National Refinery has also raised PC's hope of attracting major international/regional players in the privatization process. PSO on the other hand has been able to recover from a humongous drop in sales volume as a result of declining demand for furnace oil. Strong recovery in furnace oil on the back of increased demand from power units, and continuous double digit growth in Motor Gasoline Consumption has completely changed the future outlook of PSO as compared to what it was a year back. While we do not expect a lot of efficiency gains in PSO resulting from a change in ownership, the privatization hype is likely to keep the share price firm on the back of strong investor interest. Regionally as well, we have seen that privatization usually results in a strong share price performance.






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