The KSE-100 index remained range bound during the
week. On Monday, market opened on a positive note, owing to the news
of 15 Expression of Interest (EoI) received for PSO privatization.
However, rumor regarding imposition of service tax on stockbrokers
dragged down the index on Tuesday. Selling pressure in OGDC, PTCL
and PPL continuously exerted downward pressure on KSE-100 index,
which remained in negative territory. On Thursday, the market
rebounded and remained positive due to 1)
news about oil discovery by POL, 2)
increase in cement prices and 3)
Positive outlook of Asian Development Bank on Pakistan's GDP growth.
On the last trading day of the week, market felt the heat of profit
taking. PTCL, PSO and PPL led the index down. On the whole, this
week KSE-100 index lost 3.45 points over last week.
OUTLOOK FOR THE FUTURE
The market is likely to remain range bound next
week. PTCL will be phased out from badla from Apr-22. This could
trigger some specific activity in PTCL. Trading in NBP is also
likely to remain dull with the stock going spot from next week.
KAPCO results are scheduled to announce on April 14. We continue to
advise our clients to keep limited exposure and trade only on a
strict stop loss basis. However, individual stock valuations have
become attractive. Our top picks for next week are POL, FFC, and
The major developments this week were:
•The domestic manufacturers of PSF have decided
to revise their price upwards by an unprecedented PkR4.0/kg.
•PC invites EOIs for privatization of Mustehkam
•As per the Minister of Privatization, Hafeez
Shaikh Pak Arab Fertilizer (PAFL) would be privatized prior to the
privatization of PTCL and PSO.
•Chevron gets aggressive in acquiring Asian
•In the last 5 months, SBP has paid a total of
US$1.84bn for oil import.
•CBR is considering to Levy excise duty on
brokerage's commission earnings.
•Cement Sales 12% up during the 3QFY05.
•OGRA to consult experts before raising gas
•The Chairman Karachi Stock Exchange refuted
reports relating to the imposition of service tax on commission
income of stock-brokers.
•Islamic Development Bank (IDB) will be
providing a US$600mn facility to Pakistan in FY05 for oil import
•Cement manufacturers have raised the cement
prices by PkR5-10/bag last month in response to the rising coal and
furnace oil prices.
•The Asian Development Bank (ADB) expects
Pakistan's GDP growth to be sustainable at 7-8% for the next three
•Pakistan and India formally started the bus
service between Muzaffarabad and occupied Srinagar for the first
time in nearly six decades.
•Tariff protection for auto assembler likely to
continue in FY06.
•OGRA grants Gas transmission license to FFC
•According to a Karachi Stock Exchange (KSE)
notice, the Board of Directors of KSE has decided that 24 percent
cap on Badla financing shall be applicable till 29th April 2005.
ECONOMIC GROWTH SUSTAINABILITY POST FY05
Following the Manufacturing sector boom, we
expect, services sector would lead GDP growth from FY05 onwards.
The main reason cited for services sector boom is
agriculture sector output boom, but we can see three other reasons
for services sector growth in FY05.
Wholesale and retail trade carrying (18.4%) weight in GDP is set to
lead services sector growth. Already in 8-M of FY05, both imports
and exports grew by +35.6% and +12.2% year over year respectively.
Ownership and dwellings, though, covers small fraction of services
sector, is poised to grow on the back of high rents accruing by real
and Insurance is also set to perform on the backdrop of higher
credit off-take and increasing spread between lending and deposit
Moreover, services sector is also set to produce
+6.5% growth in FY05, on the back of renewed foreign investment in
Telecom sector and increased appetite for domestic demand. This
translated in to high wholesale and retail turnover recorded in
first 8-M of current fiscal year.
Our agriculture growth target stands at 5.5% for
FY05. However, we are not expecting any significant growth from
Agriculture sector from FY05 onwards. We believe that Agriculture
output will remain subdued after a bumper crop recorded in FY05.
We expect LSM growth prospects are likely to
remain moderate due to 1)
capacity constraints, 2)
high-base affect, and 3)
rising international oil prices. However, in general the speed of
capital-intensive investment will determine the LSM growth in years
to follow, but, in particular, the CAPEX in textile would trigger
the LSM growth in FY05 onwards.
ADB ECONOMIC OUTLOOK POST FY05
The recently released Asian Development Outlook
2005 has further validated our post-2005 Economic outlook. According
to the report, with sound macroeconomic fundamentals achieved and
key sectors strengthened by reforms implemented in the past 4-5
years, Pakistan is expected to sustain strong economic growth of at
least 7% over the next three years.
KASB POST FY05 OUTLOOK
Pakistan is likely to grow by 7.1% in FY06. However, we are not
expecting any significant growth from Agriculture sector. We believe
that Agriculture output will remain subdued after a bumper crop in
Services sector would trigger the GDP growth in FY06, owing to the
strong foreign interest in the Telecom sector and increasing growth
in financial intermediary services.
LSM sector will remain moderate owing to the higher international
oil prices and rising financial charges.
4. In sum,
we expect that over 7% GDP growth is sustainable, at least in medium
Inflation worries will start to fade away in FY06, on the back of
improved food supplies. Additionally, high-base affect will come in
THIS WEEK'S TOP STORIES
PSO — A LONG LIST, BUT NOT VERY IMPRESSIVE
The Privatization Commission announced that it
has received 15 Expression of Interests for the privatization of
Pakistan State Oil. The list although long, includes mostly local
and Middle East based business groups. Chevraon Texaco, Kuwait
Petroleum and Lukoil Internati onal Trading & Supply Company are
the big names that appear in the list. Because of the specific
trading nature of the company, we believe that PSO has not been able
to attract interest of regional oil majors. The timeline suggested
by the PC also appears a little ambitious, as we believe that the PC
already has a long agenda to complete. We are of the opinion that
the privatization process of PSO is likely to be completed by
ARE RESOURCES THE NEW TECH?
Following is an excerpt from ML's recent report.
In recent weeks, we have become increasingly aware of the parallels
between the investor perceptions of resources (energy + mining)
today and the tech bubble of 1999/2000. That is not to say there
aren't big differences (most obviously in valuations). But some of
the arguments that the investors are currently using to justify
overweight positions in resources, 'Old Economy' cyclicals, and
emerging market equities do remind us some of the traps in to which
investors fell in 1999/2000. The most dangerous time for these
assets will be when the US consumer spending growth slows or is
slowed down. The key issue for us is what combination of Fed
tightening and higher oil prices will dampen US domestic demand
growth to such an extent that it will start to adversely impact the
US supply chain in Asia. When that happens, the stocks that
investors today are talking about as the new 'Growth' stocks, may
find that their cash flows are a lot more cyclical than they
realized. Our concern may be premature, but we think that this is
the key question to ask right now.
ENGRO CHEMICAL — COMPANY VISIT
After a detailed meeting with Engro 's management
yesterday, we are lowering our earning estimates for CY05 to
PkR1,644mn (EPS:10.75) from our previous estimate of PkR1,700mn (EPS
11.11). The revision in our earning estimates is mainly due to (1) a
29-day plant turnaround in CY05 is likely to lower production by 2%,
and (II) 400bps drop in cash margins owing to rising fuel and
feedstock prices. It is crystal clear that the urea business is not
likely to provide YoY growth in Engro's earnings consistently. On
the other hand, the company continues aggressively pursue its
diversification plans. Dairy milk business continues to enjoy the
greatest importance in Engro's diversification plan, and is expected
to commence by 1HCY06 subject to final decision by the board.
Meanwhile the contribution of dividend income from subsidiary
companies is likely to improve to 40%+ from this year owing to
first-ever dividend expected from Engro Asahi. We have not
incorporated any of the diversification option in our valuations
owing to non- availability of information. We recommend a Neutral
stance for Engro with a price objective of PkR114/share.
OILS — ATTRACTIVE, IF YOU BELIEVE IN HIGHER OIL
It has been some time since the market has been
forecasting oil prices to decline 'next year'. However, it has not
happened. As a consequence, oil stocks always looked expensive —
until the next upgrade. In order to pre-empt the next upgrade, if
any, we have looked at earnings and valuations using the forward
curve in our model. Under our base case scenario, POL is the only
stock that looks attractive on valuations, while
OGDCL and PSO appear fairly priced and PPL seems
stretched on valuations. However, under the forward curve scenario,
OGDCL and PSO appear attractive on valuations. POL remains our top
pick in the sector, which is trading at a steep discount to its
peers even under our base case scenario.
POL — EXPLORATION EFFORTS PAYING OFF
We are revising our price objective for POL to
PkR337/share on the back of the recent discovery of oil and gas in
the Pariwali Development and Production Lease. In line with POL's
estimates, we have incorporated a 912bopd and 5.3 mmcfd production
increase in our model. While we agree that there exists a potential
for further upgrade in the production estimates from this well, we
would also like to point out that the true production potential of
any well can be only judged after testing over a period of 4-6
months. As per our estimates, 752bopd production from Pariwali
Well-5 (912bopd adjusted for POL's Working Interest) is likely
Pakistan Update — 9 April 2005 to result in a 13% growth in oil
production of the company. We recommend a Buy on POL, which remains
our top pick in the Upstream Oil and Gas sector.
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