This week KSE-100 index remained very volatile.
On Monday, market opened with the confusion of amendments in
exposure rule. This initially dragged the index but later on market
has recovered on the back of rally triggered in Oil sector, PTCL and
cement sector. On Tuesday and Wednesday, the Index breached previous
records gaining 355.20 and 369.79 points respectively, led by PTCL
and OGDC. PTCL remained the focus during the first halve of the
week, owing to the rumor of US$2 reference price set for its
privatization. On Thursday, market witnessed profit taking and the
index remained volatile during all day out. On Friday, investors
remained cautious and restricted to fertilizer sector. On the whole,
KSE-100 index gained 811 points over the previous week.
OUTLOOK FOR THE FUTURE
We believe that National Bank of Pakistan (NBP)
would be the focus for investor in the next week. The NBP annual
meeting is scheduled to be held on Mar-18. Fertilizer sector is also
likely to perform on the back of rising urea prices. We expect the
oil sector to remain range bound, whereas we are mpt expecting any
major activity in cements as well. We continue to advise our
investors to maintain a cautious approach and stick to intraday
stock specific activity. On the whole, we expect KSE-100 index to
remain volatile during the next week.
The major developments this week were:
•According to the data released by SBP, total
private credit off-take was recorded at PkR309bn from July-04 to
•19 companies express interest in power
•The PSF producers have raised prices by
PkR3/kg to settle at PkR93/kg for the month of March.
•Pakistan seeking IDB facility for oil import
•Current account deficit recorded at US$1.06bn
•Commenting on the recent trend in oil prices,
the Iranian oil minister has expressed his opinion that the OPEC is
satisfied with a higher band of oil prices.
•Saudi group failed to deposit Bid money for
•Following the road shows held in London and
Dubai last week, the Ministry of Water and Power has announced the
intention of a US and a UK based firm to invest a total of US$2bn in
Pakistan's power sector.
•The figures for domestic Oil and Gas
production in 1QFY05 reveal a 3% improvement in oil production (up
to 64,000 bpd) and a 22% rise in gas production (3.5 bcf/day).
•According to a report, the government has set
a task force to rationalize the corporate tax in the country.
•Telenor Pakistan and Warid Telecom has signed
an interconnectivity agreement.
•Improved relationship with India on political
front, also strengthen the trade ties with India.
•United Bank Limited is offering the 2nd issue
of PkR500mn listed Term Finance Certificates (TFCs) for public
subscription out of the total issue of PkR2,000mn.
•According to a report, under the leadership of
National Bank of Pakistan, the big five commercial banks have set a
price floor of 6% interest rate for wheat procurement in FY05.
•Trading Corporation of Pakistan (TCP) has
spent over PkR30bn in different commodity operations to harmonize
the commodity prices at sustainable level.
•Gas Pipeline Fate Uncertain Once Again.
AGRICULTURE SECTOR- SET TO HIT 5.5% GROWTH IN
We are revising our agriculture growth target
from 4.5% to 5.5% for FY05, owing to the bumper cotton crop received
coupled with the expectations of the wheat crop to meet its 20.2mn
ton target. In FY05, total cotton crop was recorded at 14.1mn bales
(+40.3% year over year growth). Moreover, Pakistan is expecting a
bumper wheat crop in FY05, as a result of receiving timely rain
during the sowing period. We believe that enhanced share of these
major crops could trigger the exceptional growth in agriculture
sector. Major crops carry 34.33% weight in the agriculture sector.
Characteristically, four major crops, wheat, rice, cotton and
sugarcane together account for 91% of value-added in the crop
sector. Major Kharif crops (cotton, rice and cane) value-add
contributed around 52% of 91% and rest is contributed by wheat (Rabi
crop heavy-weight). Looking forward, with improved water conditions,
we expect the remainder of the agriculture sector (minus major
crops) to grow by 4% in FY05.
DYNAMIC MAJOR CROPS- TO LEAD AGRICULTURE GROWTH
We believe that the share of major crops could
trigger exceptional growth in the agriculture sector. Major crops
carry 34.33% weight in the agriculture sector. Characteristically,
four major crops, wheat, rice, cotton and sugarcane together account
for 91% of value-added in the crop sector. Against the backdrop of a
bumper cotton crop coupled with the expectation of the wheat crop to
meet its 20.2mn ton target, we are revising our agriculture growth
target from 4.5% to above 5.5% for FY05.
KHARIF CROP- COTTON CROP IN THE LIMELIGHT
The cotton crop has hit the record-breaking
production level of 14.1mn bales in FY05. This is the highest cotton
crop recorded in the history of Pakistan. In term of value addition,
cotton has dominated the share among all kharif crops. The share of
cotton stood at 46.66%, followed by rice (32.03%) and sugarcane
(21.33%). In FY05, the total cotton crop was recorded at 14.1mn
bales (+40.3% year over year growth). This has not only offset the
negative impact of below target production of sugarcane, but is also
likely to provide impetus to the growth of the entire agriculture
WHEAT CROP- THE APPLE OF OUR EYES
We believe that the country is set to achieve
20.2mn ton of wheat output target in FY05, as a result of receiving
timely rain during the sowing period. Wheat crop is considered to be
the heavyweight in the entire agriculture sector. Wheat is weighted
at 15.80% of the agriculture sector.
Looking forward, with improved water conditions,
we expect the remainder of the agriculture sector (minus major
crops) to grow by 4% in FY05.
THIS WEEK'S TOP STORIES
UPSTREAM OIL & GAS - STRETCHING VALUATIONS
High international crude oil prices are likely to
remain sticky at near about current levels in the near term. Strong
demand and lack of additional supplies are being cited as the key
factors driving international crude oil prices. Driven by high oil
prices, domestic upstream oil and gas companies have performed
exceptionally well over the last couple of months. However,
comparison to the regional oil and gas companies indicated that
valuations are getting stretched. Pakistani oil and gas stocks are
trading at an almost 30-50% premium to their regional comparables in
terms of P/E and EV/EBITDA multiples. To a certain extent,
privatization has been also a factor that has led the rise in
valuations of stocks. For instance, Pakistan Petroleum Limited is
currently trading at almost 20x FY05E earnings. The high valuations
of the stock can be purely attributed to the privatization hype.
However, as per our information, there are no other oil and gas
companies that have been slated for strategic sale in the near term.
FFC - FOCUSING ON CORE BUSINESS
FFC Board of Directors has finally decided not to
go for Pak Arab Fertilizer (NFC unit) acquisition as the transaction
is turning out to be too expensive. The management believes it would
be too expensive to invest more than PkR12bn for the acquisition of
PAFL and another PkR2bn in the project after acquisition to address
the environmental concerns attached with the project. We believe
that it's a wise decision for FFC to focus more on the core business
rather than being illogically aggressive for the privatization
transaction of PAFL. The company has identified a possible increase
in production capacity by 175kt from minor de-bottle necking in the
units which is other than the capacity enhancement possibilities in
all three units. Meanwhile, FFC has raised the urea prices by PkR15
per bag in response to increase in fuel gas prices. We recommend
HOLD for FFC with a target price of PkR165.50/share.
CURRENT ACCOUNT DEFICIT- AT A SUSTAINABLE LEVEL
Pakistan's current account deficit was recorded
at 1% of GDP in the first 7-M of current fiscal year. In its
recently released investment plan, Ministry of Finance (MoF),
disclosed that Pakistan is looking to maintain its current account
deficit at 1.9% of GDP by 2009-10. This indicates that at the
present level of current account deficit and USD inflows, country's
current account deficit is standing at sustainable level. According
to the data released by State Bank of Pakistan, country's current
account deficit was recorded at US$1.06bn, as compared with the
surplus of US$1.93bn during the same period last year.
Interestingly, the balance of goods and services account deficit was
recorded at US$4.48bn in the first 7-M, as compared to trade deficit
of US$2.57bn in the same period. This indicates that the country's
services account deficit alone was recorded at US$1.91bn in the
first 7-M. We believe that the main triggers behind services account
deficit are shipping line services, and personal travel. Looking
ahead, as the Haj and Ramadan season is already over, we expect the
personal traveling expenditure will be lower in the remaining part
of current fiscal year. This would control the services account
deficit. Our full-year target for current account deficit stands at
US$1.5bn or 1.45% of GDP.
SSGC - LNG TO ADD VALUE IN THE LONGER TERM
The potential demand for natural gas in the
country continues to be higher than supply despite the fact that
over 1,000mmcfd of gas has been injected in to the system over the
past couple of years. With no major addition to gas supply expected
over the next two years, Pakistan is looking at various options to
meet the rising demand for natural gas in the country. While talks
continue on the transnational gas pipeline, SSGC has expressed
interest in importing Liquefied Natural Gas (LNG) and setting up a
storage plant at Port Qasim to meet the growing demand for natural
gas. The project, though still in the initial phases of planning, is
likely to add substantial value to the asset base of SSGC, which
will lead to higher profitability under the existing asset based
return formula. However, we believe that this value would be
realized in the longer term, and capex on network expansion is
likely to remain the key driver for earnings growth of the company.
In the immediate term, we expect control on system losses to lead to
a recovery in the profitability of the company. We recommend a
Neutral stance on SSGC with our revised 12-month price objective of
CELL MARKET- STELLAR GROWTH BUT RISING
The cellular market in Pakistan has experienced a
stellar growth in the last few years. The number of cellular service
subscribers has grown at a 5-year CAGR of almost 94%, reaching
almost 8.5mn subscribers by Jan-05. With both Warid and Telenor
expected to start their operations in the next couple of months, the
competition within the cellular market is likely to intensify .
While the growth potential for the cellular market remains
promising, we believe that the increased number of operators is
likely to result in increased competition, with Average Revenue Per
Unit likely to come down. We have already seen some benefit accruing
to subscribers through lowering of tariffs and provision of free
minutes/sms by almost all the cellular service provider. We believe
that with more competition in the sector, the tariffs are likely to
come down further.
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