THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Jan 29, 2005

 

The week belonged to PTCL. Privatization hype led the market throughout the week. During the week, the market has witnessed sharp swings on the back of hype created on the privatization of PTCL & PSO. On Monday, market continued its rising trend and marked 115.57 points gain, which helped KSE-100 index to set record level of 6861.97 points. Most of the gains on Monday were by and large contributed by massive buying spree in PTCL and PSO. Absence of dividend in

 

 

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.

FUNDAMENTAL CHANGES

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 per share.

•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 years.

•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 near term.

•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 POSITIVE ZONE

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 1HFY05.

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 inflation.

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 earnings.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

31.37

31.53

0.51%

Avg. Dly T/O (mn. shares)

528.55

629.96

19.19%

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

592.14

787.46

32.99%

No. of Trading Sessions

3

5

22

KSE 100 Index

6746.40

6798.12

0.77%

KSE ALL Share Index

4426.82

4438.10

0.25%