This week KSE-100 index has shown some sign of
consolidation. However, On Monday, market jolted following the SBP
decision to raise discount rate to 9% from 7.5%. The bears remained
dominant again on Tuesday owing to negative news flow regarding
interest rates hike. On Wednesday, the market rebound. Investor took
the entry in the market as some stock was offering at very
attractive prices. POL, PTC and FFC led the index to recover. The
later part of the week led the KSE-100 index to enter in to the
consolidation phase owing to the expectation of extension of BADLA
(COT) to Dec-05 from Jun-05. On the last trading day of the week,
KSE-100 index marked over 300 points gain. Rounding out the week,
this week KSE-100 index lost 80.39 points over the last week.
OUTLOOK FOR THE FUTURE
Next week market sentiments are heavily relying
on the SECP decision on extension of BADLA (COT). PTCL is phasing
out from BADLA on Apr-22. On the other hand, quarterly results of
FFBL, PTCL, ACBL, ENGRO, SHELL , MLCF and FCCL scheduled to be
announced next week. This may bring some excitement in stock
specific activities. 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, FFBL and SNGP.
The major developments this week were:
•The groundbreaking ceremony of the expansion
of 8000tpd Chakwal Cement Plant and 6000tpd Bestway Cement Plant and
gas restoration ceremony of DG Khan Cement Plant has attended by PM.
•Japanese premier is likely to announce the
resumption of suspended Yen loan worth US$500mn in his visit to
Pakistan on Apr-30.
•Both standing committee on Petroleum &
Natural Resources and the Oil Companies Advisory Committee (OCAC)
have suggested the revision of the prices of petroleum products
should be on a daily basis.
•Engro Lowers BMR estimates to 35,000t.
•The Resource Group (TRG) has announced the
acquisition of controlling interest in Reese Teleservices Inc (RTI),
a call center services company in the United States.
•OGRA indicates at increasing downstream gas
•OGRA to consult experts before raising gas
•The new management of Essa Cement has
announced a 200% right issue to partly finance its PkR2bn BMR plan.
•Trade deficit was recorded at US$4.26bn in
•In theT-bill auction held, cut-off yield of 3m
T-bill was increased by 139bps to 6.399%, while 12m T-bill cut-off
was raised to 7.247%.
•The steering committee for the tri national
gas pipeline, carrying gas from the Daulatabad gas fields of
Turkmenistan to Gwader, Pakistan via Afghanistan has been dubbed
•Kot Addu Power Company announced its 3QFY05
results yesterday. The company posted after tax profit of PkR1,
061mn (EPS: PkR1.21), taking cumulative profits for 9-months to
PkR4, 749mn (EPS: PkR5.39).
•Karachi Stock Exchange (KSE) will now be
formally requesting an extension in the Carry over Transaction (COT)
•Pakistan Telecommunications Limited (PTCL) has
announced a reduction in tariffs on NWD (long distance calls) with
effect from April 14, 2005.
RESULTS SEASON BEGINS
Cement companies are due to announce their 9MFY05
results from this Monday. We expect cement companies to report
substantial growth in their earnings during the period mainly due to
20% increase in sales volume; better retention levels for domestic
sales and lower financial charges which will offset the impact of
rising coal and oil prices. Pioneer Cement will be the first to
announce its 9MFY05 results. We expect the company to post after tax
earnings of PkR208mn (EPS: 1.46) for 9MFY05 as opposed to PkR166mn
(EPS: 1.16) during the same period last year. We maintain our
disliking for the entire Cement sector including Pioneer Cement.
CEMENT FIRMS TO ANNOUNCE 9MFY05 RESULTS
Cement companies are due to announce their 9MFY05
results from next week. Cement dispatches registered a 20% YoY
growth during 9MFY05, which is in line with KASB estimates for
Cement demand for FY05. We expect cement companies to report
substantial growth in their earnings during the period mainly due
to: (I) 20% increase in sales volume; (II) 6% higher retention
levels for domestic sales and (III) lower financial charges. This is
likely to offset the impact of 39% increase in international coal
prices and 18% increase in furnace oil (used for power generation).
However we see a marginal drop in margins (QoQ basis) during the
3QFY05 owing to slow down in construction activity in the domestic
market in Feb '05 and increasing focus on exports to sell the extra
PIONEER CEMENT — 9MFY05 RESULTS PREVIEW
Pioneer Cement is expected to announce its 9MFY05
results on Monday, 18-Apr-2005. We expect the company to post after
tax earnings of PkR208mn (EPS: 1.46) for 9MFY05 as opposed to
PkR166mn (EPS: 1.16) during the same period last year. A 51% YoY
growth in operating profit is likely to accrue from 15% growth in
local sales while the company has exported 83k tons of cement to
Afghanistan and Dubai during 9MFY05 as opposed to no exports during
the same period last year. Meanwhile, we can expect our earning
estimates to be inflated (or deflated) through recognition of
deferred tax by the company during 3QFY05.
We maintain our underweight stance for the Cement
sector and Pioneer Cement with a target price of PkR17/share. With
the current hike in interest rates, we have to revise our earning
estimates and valuations downward for Pioneer Cement owing to high
long-term solvency ratios (86% target gearing) while the mark up
rates on long term loans are based on LIBOR, 6M-KIBOR and SBP
POL — ALONG THE UPGRADE ROAD WE GO!
We are once again upgrading our earnings
estimates and Price Objective for Pakistan Oilfields Limited (POL).
POL is the most inexpensive stock in the upstream oil and gas
sector. The stock is currently trading at 10.5x and 9.0x FY05E and
FY06E earnings, and at a 23% discount to our revised price objective
of PkR357/share. We have upgraded our production estimates for POL
in line with the revised production estimates for Pariwali Well No.
5 provided by POL in a notice to the Karachi Stock Exchange. The
impact of the increased production from Pariwali Well No. 5 will be
immediate, as the well has been connected to the Pariwali Production
Facility. As per our estimates, the incremental production from the
Pariwali Field is likely to be PkR305mn (PkR2.32/share) in 4Q05,
which will directly contribute to the bottomline. We believe that
there might be future upgrades in store, as the exploration efforts
of the company seem to be paying off.
SBP TIGHTENS THE MONETARY SCREW!
The State Bank of Pakistan has made yet another
move to tighten the monetary screw by raising the discount rate. We
are of the view that higher discount rates will 1) increase the
financing cost for those banks that are relatively short on
liquidity 2) help SBP control excess lending in the market. The
decision to increase the discount rate also indicates the State
Bank's commitment to reducing inflation and long-term inflationary
expectations from the system. We expect rates will rise at a much
faster pace than initially anticipated. The discount rate adjustment
should be taken as an indication that current negative real rates
are likely to become positive in the medium-term. The increase in
Discount rate and 10-year PIB secondary market yield would have a
negative impact on stock valuations across the board with PPL, PSO,
PTC, OGDC, banking and cement sector leading the way. With the steep
rise in discount rate, we are revising our 6-M T-bill target from 6%
to 7% for FY05.
CEMENT EXPANSIONS — WHAT COMES ALONG?
We are expecting at least 23mn tons of additional
cement capacity coming over the next 3 years, which is likely to
cause an excess supply of 17.5mn tons in FY08 under the best case
scenario of demand growth of 14% (4year CAGR) till FY08. This
capacity additions and changing market leadership would be the
biggest threat for the survival of the cement cartel while this is
likely to have a negative impact of the retention levels as well as
the net earnings of the cement companies from excessive fixed costs
(increasing financial costs plus depreciation). This will also give
another reason to the cement companies to continue their poor payout
policies. Having said this we maintain our Underweight stance for
the Cement sector.
CEMENT UPDATE - COAL PRICES WILL PEAK IN 2005
Following is an excerpt from ML's recent report
on Global Metals and Mining. "The high coal price of 2004
reflects both panic buying and rising freight charges. Thermal coal
prices are expected to peak during 2005 but capacity additions will
bring the global coal industry to more normal circumstances by
2009". Local cement manufacturer margins are inversely related
to increase in coal prices. During 1HFY05 fuel and power cost/bag of
cement has reported a 15% YoY rise leading to a 300bps drop in cash
margins. However on QoQ basis, the fuel and power cost/bag has been
decelerating. We believe this will allow the cement companies to
maintain their margins for FY05 as tightening of the demand-supply
gap will allow cement companies to pass on the impact of coal and
oil price hike to the end consumers. However we do not expect the
cement companies to maintain their margins in the long term owing to
the excessive cement supply and the likely break up of cement cartel
in the long term. We maintain our Underweight stance on Cement
FFBL 1QCY05 RESULTS — PREVIEW
Fauji Fertilizer Bin Qasim Limited (FFBL) is scheduled to
announce its 1QCY05 results on Monday, 18-Apr05. We expect the
company to post after tax earnings of PkR357mn (EPS: PkR0.38) for
1QCY05 as compared to PkR111mn (EPS PkR0.12). A 222% YoY growth in
the company's net earnings is likely to accrue from 139% higher urea
and 3% higher DAP sales during this quarter. The company achieved a
new urea daily production record of 1900tpd during 1QCY05, which
enabled the company to offset the impact of lower gas supply from
Sui in Jan-05. Meanwhile better urea and DAP prices are likely to
improve FFBL's gross cash margins to 41% in 1QCY05 as opposed to 39%
last year. The recent hike in interest rates is unlikely to have a
major impact on FFBL profitability as a major portion of its
financial cost is compensated through government subsidy. We
maintain our bullish long-term view and reiterate our BUY
recommendation for FFBL with a revised target price of PkR44/share.
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