CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- COT WEEKLY REVIEW

3- FINEX WEEK

4. STOCK WATCH
5. STOCK MARKET AT A GLANCE
6. AN INTERVIEW WITH CEO LSE

7. PAKISTAN EQUITIES MARKET

 

STOCK MARKET AT A GLANCE

 

By SHABBIR H. KAZMI
Updated May 07, 2005

 

 

This week KSE-100 index opened on a negative note owing to the rejection of Karachi Stock Exchange proposal of member's exposure in the future market. On Monday, KSE-100 index lost 271.91 points. However, the market recovered on Tuesday led by rumors on PTCL's privatization. Renewed interest of investors in Oil and Gas sector and in Telecom Sector led the index to post 199.50 points gain on Thursday. On Friday, market continued its bullish trend. Again PTCL and PPL led the index to post 85.03 points. Rounding up the week, the KSE-100 index gained 78.60 points over the last week.

OUTLOOK FOR THE FUTURE

We expect the privatization hype on PTCL to be the major driver for market sentiments during next week. Reportedly, the Privatization Commission is aiming to hold bidding for 26% government stake in PTCL by the end of May-05. We expect the positive sentiment on PTCL to spill over to other stocks as well, where we can expect a modest recovery across the board. Our top picks for next week are Callmate, Fauji Fertilizer Bin Qasim and Pakistan Oilfields, while we also like PTCL purely as a privatization play.

FUNDAMENTAL CHANGES

The major developments this week were:

•The Governor State Bank has stated that the corporate tax rate would be brought down from 35% to 3031% by next fiscal year.

•For the third consecutive fortnight, the Oil Companies Advisory Committee has not changed domestic petroleum prices.

•According to the provisional figures released by the Central Board of Revenue (CBR), total tax collection was recorded at PkR440bn in the first 10M of current fiscal year as against to PkR397bn during the same period last year.

•As per the data released by the State Bank of Pakistan, the spread between average lending and deposit rates has widened to over 5.5%.

•According to the data released by the State Bank of Pakistan (SBP), net outflow from NSS was recorded at PkR11.29bn in the first 9 months of current fiscal year.

•Large Scale Manufacturing (LSM) grew by 11.17% in the first 9 months of FY05, as compared to the full-year target of 12%.

•The government allowed duty free import of food items to ensure timely availability of food supplies.

•The State Bank of Pakistan has spent a total of US$2,107mn in oil payments during the last 6-months of the current fiscal year.

•In an unwelcome development, it is now being said that the US Trade Representative is considering the withdrawal of GSP trade incentives from Pakistan.

•As per the press release issued by Lucky Cement, the company has initiated erection work of Crusher and Pre-heater at its new plant site at Karachi.

•The Supreme Court issued notices to six respondents, including OGDC, Dewan Petroleum, Scimitar Hydrocarbon, Rally Energy and MESA Petroleum with regards to a petition filed about a month back, questioning the validity of the exploration licenses held by the mentioned parties.

•Board of Investment (BoI) has submitted a proposal to abolish central excise duty (CED) in the next fiscal budget.

•While none of the newspapers have reported anything on PTCL's privatization process, Geo Television reported yesterday that PTCL's first pre-bid meeting would be held on 28-May-05.

•CBR has decided to exclude 12 textile raw materials, including PSF, PTA and MEG from sales tax.

•As per newspaper reports quoting Chief Executive Pak Suzuki Motor Company Limited, there is a gap of around 40,000 units in demand and supply of cars in the country.

LIVING WITH HIGH CREDIT OFF-TAKE!

We believe that high private credit off-take is not sustainable in the longer term. Above average private credit off-take has been primarily responsible for 1) higher inflation number, 2) over heated economy and 3) inefficient capacity expansion in the system. In little over first 9 months of current fiscal year, the total private credit off-take was recorded at PkR362bn as compared to PkR254bn during the same period last year and revised private credit off-take target of PkR350bn. The main reason for revising the credit plan was 1) above target GDP growth expectation in FY05, and 2) Government's decision to pass over the impact of higher oil prices to end consumer. On the other hand, SBP has also revised the M2 (Broad Money) growth target to 14.5% from 11.3%, in line with the revised credit plan. Monetary expansion in FY04 and FY03 was recorded at +19.6% YoY and +18.0% YoY respectively. At the same time, nominal GDP was recorded at 10.97% and 8.2% respectively. In sum, we believe that a 9-10% monetary overhang in the last couple of years with low interest rates has triggered high private credit off-take. This reflects in higher GDP growth and higher inflation in FY05. We expect credit off-take to remain PkR350bn by June-05.

PRIVATE CREDIT OFF-TAKE IN 9 MONTHS

In the first 9 months of current fiscal year, total private credit off-take was recorded at PkR362bn as compared to the PkR254bn during the same period year. In our view, high private credit off-take is primarily triggered by 1) low interests rates 2) high inflation number 3) rising domestic demand, and 4) increased consumer financing. The revised private credit off-take plan for FY05 stands at PkR350bn as compared to initial target of PkR200bn.

The main reason for revising credit plan was 1) above target GDP growth expectation in FY05, and 2) Government's decision to pass over the impact of higher oil prices to end consumer.

BROAD BASED PRIVATE CREDIT OFF-TAKE

In our view, credit disbursement recorded in FY05 is relatively broad based as compared to the credit distribution in FY04. In the first 6 months of FY05, 44% of total private credit went to the manufacturing sector, followed by consumer sector (18%), commerce (14%) and services (7%). Interestingly, the credit extended for working capital purpose is much higher than fixed investment in 1HFY05. In fixed investment, bulk of the credit went to the textile sector. However, working capital credit recorded a growth of 108.3% during the same period. This reflects the increase in capacity utilization.

IMPACT OF CREDIT OFF-TAKE ON ECONOMIC CYCLE

We believe that high private credit off-take is not sustainable in the longer term. Above average private credit off-take has been primarily responsible for 1) higher inflation number, 2) over heated economy, and 3) inefficient capacity expansion in the system. Monetary expansion in FY04 and FY03 was recorded at +19.6% YoY and +18.0% YoY respectively. At the same time, the nominal GDP was recorded at 10.97% and 8.2% respectively. In sum, we believe that a 9-10% monetary overhang in the last couple of years with low interest rates has triggered high private credit off-take, reflected in higher GDP growth and higher inflation in FY05. SBP measures to curb private credit lending

In the first 9 months of current fiscal year SBP has increased cut-off yield of 6-month T-bill yields by 511bps. This indicates SBP commitment to curb both speculative buying and inefficient lending. Since SBP has increased the discount rate from 7.5% to 9.0%, there are some indications in reversal of the private credit off-take. We expect credit off-take to remain PkR350bn by June-05.

 

 

THIS WEEK'S TOP STORIES

SNGPL — 9MFY05 RESULTS REVIEW

Sui Northern Gas Pipelines Limited (SNGPL) announced its 9MFY05 results posting after tax profits of PkR2,120mn (EPS: PkR4.25), up 14% YoY. For 3QFY05 alone, SNGPL posted after tax profits of PkR731mn (EPS: PkR1.46), up 14% YoY. Volumetric sales during 9MFY05 increased by almost 20% YoY to 393,362mmcf. While the company has not released information about implementation of the capex plan, we believe that the company has made an addition in excess of PkR2.5bn to its net operating asset base during 9MFY05, In addition, the company's other income, primarily consisting of interest income, has showed a 158% YoY improvement during 9MFY05. We believe that the improvement in other income is driven by higher interest income and insurance claim by the company. We maintain our Buy recommendation on SNGPL with a price objective of PkR72/share.

DEWAN SALMAN FIBRES 3QFY05 — RESULTS REVIEW

Whilst assuming that Dewan Salman Fibres would post disappointing results for the 3QFY05, we underestimated the true extent of the damage. The results are now in and Dewan Salman Fibres (DSFL) has posted an after tax loss to the tune of PkR169mn (EPS: PkR -0.46) for 3Q05 creating an after tax loss of PkR75.85mn (EPS: PkR -0.21) for 9MFY05, down 309% and 129% YoY, respectively. The main reason for the dismal performance has been extremely high cost of sales, and the cotton factor is still relevant to the dismal state of the PSF Sector. Gross margin over the 9MFY05 is 34% lower than that for 9MFY04. Although a swift recovery is not imminent, we maintain that this quarter was probably the worst this year and a gradual recuperation process should start now.

CEMENT SALES — 19% GROWTH IN 10MFY05

As per the data released by APCMA, cement sales recorded 25% YoY growth during April-05 and 19% YoY growth during the first 10 months of FY05. Our forecast for 20% YoY growth in cement sales for the FY05 remains intact. where the peak cement sales season has just started in the month of April. Going forward we are expecting a 16% YoY growth in overall cement sales for FY06. We are expecting a double-digit growth in cement sales for next three years but at a decelerating rate. We are also expecting a major threat from Iran and other Middle East countries, planning massive expansions for exports. We maintain our Underweight stance on the Cement Sector.

NSS FUTURE DEPOSITS TO REMAIN QUESTIONABLE!

We believe that the future of National Savings Scheme (NSS) remains questionable as the rate of return on NSS remains relatively unattractive for investors. The current rate of return offered by Defence Saving Certificates (DSCs) stands at 8.15%. According to the data released by State Bank of Pakistan (SBP), net outflow from NSS was recorded at PkR11.29bn in the first 8M of the current fiscal year as compared to the net inflow of PkR3.93bn during the same period last year. In our opinion, high inflation (9.06% + YoY) has primarily triggered the huge outflow from NSS, as real NSS returns currently stand in the negative zone. Looking forward, we expect NSS future deposit to be tested in the medium term due to 1) rising interest rate scenario, as investors favor investment in short-term rather than long-term investment schemes, and 2) private commercial banks are offering up to 10% on term deposit certificates as compared to 8.15% offered by DSCs.

KSE — PRIVATIZATION COULD BE A TRIGGER

The KSE-100 has remained range bound within 6700-7700 for over a month now. Dented investor confidence coupled with rising interest rates have dealt a severe blow to the KSE, where average daily volumes have declined by almost 50%. While we believe that KSE-100 is likely to continue its consolidation phase, developments on privatization could be a trigger for the stock market. In the near term, possible increase in yields on bonds can also depress the market. We recommend selective exposure in the stock market where Pakistan Oilfields, Fauji Fertilizer and Askari Commercial Bank are our top picks.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

33.79

34.00

0.62%

Avg. Dly T/O (mn. shares)

223.14

192.82

-13.59%

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

350.25

314.22

-10.29%

No. of Trading Sessions

5

5

 

KSE 100 Index

7104.65

7183.25

1.11%

KSE ALL Share Index

4702.96

4745.64

0.91%