FFBL's announcement and the strained Indo-Pak
relationship retained the market below 6900 level on Tuesday. However,
PTCL privatization hype and good expectations of NML results led the
index to gain strength during the later part of week. On the last
trading day of the week, the market witnessed the mammoth correction
of 154.7 points. On the whole, the KSE-100 index gained 51.72 points
over last week.
OUTLOOK FOR THE FUTURE
Though everyone had been talking about a possible
technical correction in the market, the fall in KSE-100 Index on
Friday took everyone by surprise. Declines were seen across the board.
Though the market saw some recovery towards the end of the session, we
are of the opinion that the sentiment is likely to remain mixed at the
start of next week. High badla rates and high badla volumes continue
to remain a concern. With some of the companies expected to announce
their half-yearly/annual results next week, we expect some stock
specific activity. Fauji Fertilizer and Pakistan Petroleum Limited are
likely to attract interest due to the expected announcement of results
by the two companies. On an overall basis, we advise investors to
adopt a cautious trading strategy for next week.
The major developments this week were:
•As per the report released by NFDC, Urea offtake
reported a 5.6% growth YoY to 4,716kt while DAP offtake reported an
8.6% growth YoY to 1,208kt during the CY04.
•According to Pak Arab Management. the government
is likely to fetch PkR170.51 per share from the privatization of
Pak-Arab Fertilizer (PAFL) as against the reference price of PkR157
•The cement cartel has raised the retail prices
of cement by PkR40-50/ bag to PkR285/ bag during the month of Jan '05.
•According to company officials, Chakwal Cement
is expected to commence commercial production from FY06.
•In its recently released Monetary Policy
Statement for 2HFY05, the State Bank of Pakistan (SBP) has stated that
it will follow a neutral and balanced monetary policy.
•According to the data released by Board of
Investment (BoI), the net inflow of FDI in 1HFY05 has increased by 61%
YoY to US$455mn.
•Despite claims by Pakistan Petroleum Limited on
restoring full supply of gas from the Sui field, Sui Southern Gas
Company (SSGC) has stated that it is still receiving low pressure from
the Sui purification plant.
•Telenor, one of the latest entrants in
Pakistan's cellular market, has stated that it would be investing up
to US$1bn in Pakistan's telecom network infrastructure over the next 6
•The government is considering further reduction
of up to 25% in duties on 800-1800 cc engine capacity automobiles.
•The privatization of Sui Southern Gas Company (SSGC)
and Sui Northern Gas Pipelines Limited seems to be unlikely in the
•A sharp decline in demand for High Sulphur
Furnace Oil has forced Pakistan State Oil to extend the date for
opening of tenders.
•The Senate standing committee on petroleum and
natural resources has directed Oil and Gas Development Company Limited
to intensify its exploration activities.
•Despite facing stiff opposition, the Pakistan
Army is working on establishing a cantonment in Balochistan.
•PTCL has announced that it will be starting
Wireless Local Loop (WLL) service in Karachi from next month
•In order to maintain their profitability
according to the guaranteed rate of return, both the gas utilities
have filed petitions with Oil and Gas Regulatory Authority for
increase in gas tariffs.
•International oil prices continued to remain
firm around the US$49/bbl mark.
•Nishat Mills Limited (NML) announced its 1Q05
results. The company posted after tax earnings of PkR806mn (EPS: 5.55)
for the quarter as opposed to PkR150mn (EPS: 1.03) during the same
period last year.
SBP — REAL INTEREST RATES TO MOVE IN TO THE
The State bank of Pakistan (SBP) has expressed its
intention of bringing real interest rates back into the positive zone
in its 2HFY05 bi-annual monetary policy statement released on Jan 19.
The objective is to eliminate inflationary expectations and discourage
speculative buying from the system. The change in SBP's monetary
policy stance was also reflected in the auction result of 3-month and
12-month T-bill, announced an hour before the monetary policy was
released for 2HFY05. The process of interest rate tightening had
gained some momentum during 1HFY05, when yield on benchmark 6-month
T-bill rose by 209 basis points to 4.32%. However, this gradual
monetary tightness had not proved sufficient to halt the rising
inflation, which stood at 8.81% YoY and the appetite for private
sector credit growth, which stood at PkR285bn, in 1HFY05. We are of
the opinion that in 1HFY05, the yield of 6-month T-bill has increased
significantly as compared to yield of long-term tenures. This has
caused the short-term yields to shift upward and the yield curve to
flatten in 1HFY05 as compared to the yield curve of FY04.
INTEREST RATE — YIELDS TO BE RAISED!
To discourage speculative buying and dispel
inflationary expectations from the economic system, the State Bank of
Pakistan (SBP) has decided to increase interest rates in 2HFY05. This
has also been reflected in the results of 3 month and 12-month T-bill
auction held on Jan 19. The yields of 3-month and 12-month T-bill
increased by 38 and 49 bps respectively. The low key interest rate
offered during FY03 and FY02 already seems a phenomenon of times past,
as the process of interest rates tightening has been underway since
SBP'S REAL CONCERN — THE RISING INFLATION
We believe that the rising inflation will continue
to be the primary source of concern for State Bank of Pakistan in the
remaining half of current fiscal year. To ward-off rising CPI
inflation which stood at 8.81% YoY in 1HFY05, the SBP would follow the
tight monetary policy. The unexpectedly high inflation witnessed in
1HFY05 was driven by both rising aggregate demand from ongoing private
sector credit boom and supply side constraints such as shortages of
food items. Food price inflation stood at 12.6% YoY in 1HFY05.
PRIVATE SECTOR CREDIT — MAINLY BROAD-BASED
The private sector hunger for credit reached a new
high in 1HFY05, owing to the strong domestic demand. Interestingly,
the distribution of credit was fairly broad based and the bulk of the
credit went to the manufacturing sector (52%) followed by consumer
financing (15.9%). We are of the opinion that the credit distribution
should be considered in terms of its increasing contribution to GDP
growth and employment rather than its contribution towards rising
THIS WEEK'S TOP STORIES
FFBQ CY05 RESULTS — PREVIEW
FFBQ is expected to announce its CY04 results
tomorrow. We expect FFBQ to post after tax earnings of PkR1,728mn
(EPS: 1.90) for the full year 2004 as opposed to PkR1,245mn (EPS:
1.32) for the last year. We do not expect the company to come up with
a cash dividend along with the annual results however there is a
likelihood that the company may announce 5% token dividend. A 44%
growth in FFBQ's bottom line is likely to accrue from revival of the
DAP plant, 2% higher capacity utilization for the CY04 and improved
margins on both products: Urea and DAP. We are in the process of
revising our target price of FFBQ.
2004 — A GOOD YEAR FOR FERTILIZERS
Overall, in CY04 the global fertilizer industry
enjoyed the benefits of improving margins resulting from the rising
fertilizer demand, international bumper cotton and corn crop and tight
supply which has dimmed the impact of rising input prices. Following
the trend across the globe, our domestic offtake for urea reported a
5.6% YoY growth during the CY04 to 4,716kt, which is backed by
agricultural growth. In terms of production, FFC maintained its market
leadership with 48% market share followed by Engro (20%), FFBQ (13%),
NFC (10%) and Dawood Hercules (8%). Capacity utilization at FFC
remained the highest at 108% as the plant has not suspended its
operations for the annual maintenance. We maintain our Overweight
stance on the Fertilizer sector and are expecting 4% growth in Urea
offtake in CY05.
FFBL CY04 RESULTS — REVIEW
Fauji Fertilizer Bin Qasim (FFBL) announced its
CY04 results yesterday. The company posted after tax profits of
PkR1,831mn (EPS: 1.98) as opposed to PkR1,201mn (EPS: 1.29) during the
same period last year. The results came in slightly above our
expectations owing to higher sales revenue and lower than expected
financial charges. A 52% growth in the bottom line can be attributed
to re-commencing of the DAP plant, better margins on both products;
DAP and urea, and lower financial charges during the CY04. We are in
the process of revising our earnings forecast for the company.
OIL — SUPPLY TO INCREASE BUT PRICE BAND TO GO UP
A softening in oil demand growth rates expected to
begin in 4th quarter of last year did not occur, and as a consequence,
OPEC output has continued to hover at record high levels leaving spare
output capacity snug. While that capacity pressure is expected to
moderate as the year wears on, the situation is likely to result in
oil prices gravitating above OPEC's intimated target range, especially
in early 2005. At some point, we are of the opinion that the OPEC
would formally adjust up its US$22-28 range. While the price band
remains a somewhat elusive topic, recent indications suggest that the
cartel is targeting an even higher alteration.
ATTOCK PETROLEUM LIMITED — PUBLIC OFFERING
Operating in an industry experiencing strong
volumetric growth, coupled with high oil prices, make Attock Petroleum
Limited an attractive offer. Though relatively smaller in size, Attock
Petroleum Limited (APL) has developed its own niche. The company's
main source of revenues is direct industrial sale (57%). Though the
company's presence in the retail segment remains very minute, it
represents a growth area where the company is planning to expand its
retail outlet network. We are initiating coverage on APL and advise
our investors to SUBSCRIBE to the public offering being held on Jan
28-29, 2005. Our 12-month price objective for the stock is PkR108.2,
which represents an 87% upside over the offer price. We do not believe
that our price objective is aggressive as it is only 10.1x FY05E
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