CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- COT WEEKLY REVIEW

3- FINEX WEEK

4. STOCK WATCH
5. STOCK MARKET AT A GLANCE
6. RISK MANAGEMENT AND ERRATIC TRADING PATTERNS AT THE BOURSES


STOCK MARKET AT A GLANCE

 

By SHABBIR H. KAZMI
Updated Apr 09, 2005

 

 

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 SNGP.

FUNDAMENTAL CHANGES

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 Cement.

•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 assets.

•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 tariffs.

•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 payments.

•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 years.

•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 units.

•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.

a. 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.

 

 

b. Ownership and dwellings, though, covers small fraction of services sector, is poised to grow on the back of high rents accruing by real estate.

c. Finance and Insurance is also set to perform on the backdrop of higher credit off-take and increasing spread between lending and deposit rates.

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.

AGRICULTURE OUTLOOK!

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.

LSM OUTLOOK

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

1. 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 FY05.

2. 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.

3. Buoyant 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 term.

5. Inflation worries will start to fade away in FY06, on the back of improved food supplies. Additionally, high-base affect will come in to play.

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 4QCY05.

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 PRICES

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.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

35.42

35.41

-0.03%

Avg. Dly T/O (mn. shares)

310.64

261.89

-15.69%

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

431.24

482.50

11.89%

No. of Trading Sessions

5

5

23

KSE 100 Index

7596.87

7593.30

-0.05%

KSE ALL Share Index

5017.96

5014.39

-0.07%