CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- COT WEEKLY REVIEW

3- FINEX WEEK

4. STOCK WATCH
5. STOCK MARKET AT A GLANCE

 

STOCK MARKET AT A GLANCE

 

By SHABBIR H. KAZMI
Updated Apr 16, 2005

 

 

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.

FUNDAMENTAL CHANGES

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 prices.

•OGRA to consult experts before raising gas tariffs.

•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 9MFY05.

•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 commercially viable.

•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) financing.

•Pakistan Telecommunications Limited (PTCL) has announced a reduction in tariffs on NWD (long distance calls) with effect from April 14, 2005.

CEMENT SECTOR

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 produce.

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 Discount rate.

TOP STORIES

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 sector.

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.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

35.41

35.02

-1.10%

Avg. Dly T/O (mn. shares)

261.89

235.72

-9.99%

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

482.50

347.05

-28.07%

No. of Trading Sessions

5

5

23

KSE 100 Index

7593.30

7512.91

-1.06%

KSE ALL Share Index

5014.39

4960.04

-1.08%