CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- COT WEEKLY REVIEW

3- FINEX WEEK

4. STOCK WATCH
5. STOCK MARKET AT A GLANCE
6. PAKISTAN WEEKLY REVIEW
 

 

PAKISTAN WEEKLY REVIEW

 

AlFalah Securities (Pvt) Ltd.
Monday, May 23, 2005 Friday, May 27, 2005

 

 

INVESTMENT STRATEGY: PRIVATIZATION, POLITICS AND BOMBS

No matter how much the investor community may want it, privatization indeed is a politically difficult subject. The pre-bid meeting of PTCL was the scene of violent riots between the employees and police. The employee unions are demanding job surety and regularization of contractual employees, while such demands would impede any plans of the eventual buyer in reforming the company. Till yet the government seems committed to meet its deadline of 10th June. However, if the situation further deteriorates, it might reduce the potential bid for PTCL or might even delay the process. Politics indeed has a critical role in affecting the economic and social facets of a country. In a tragic event today, a bomb blast killed at least 25 people in a holy shrine in Islamabad. Unrest in the federal capital can be a major scare for prospective investors who are currently considering entering the economy through participation in the privatization process. We have stated in our previous Weekly Reviews that the privatization of NRL, PTCL and later on of PPL and PSO can bring a large influx of capital in the economy and in the market. This wave of liquidity would be the driver of market by 3QCY05. However, investors should stay sideline till the uncertainties of CVT and phasing out of COT have settled down.

RIOTS FOR PRIVATIZATION

On Wednesday, there was another deadlock in talks between the IT & Telecom Ministry, Pak Telecom (PTC) management and the employee unions. On the same morning, the area around the PTC headquarters in Islamabad was the scene of violent protests on the part of the employee union members. Most of the employees of PTCL had been going on a two-hour strike every day, for the past few months, to protest against the privatization process. It was not a coincidence that the first meeting between the government and employee unions was held on the same day as that of the pre-bid conference (Tuesday). The major demands of the employees included (1) job surety post-privatization (2) regularization of contractual employees (3) pay raise.

There exists large-scale resentment among the PTCL employees of lower and middle levels as they feel that a new management would mean blocked promotions and possible layoffs. There is no doubt that PTCL is widely overstaffed with 55000 employees and a lines per employee ratio about 100, compared to the regional average of around 800 lines per employee. Even on a conservative estimate, there is an excess of 20000-25000 employees. When a new company comes in, some layoffs are inevitable but we feel that the extent will be minimal due to (1) time taken for new company to settle-in (2) avoidance of tussle with the employees (3) salaries are at a discount to market rates in PTCL (4) massive job creation in the telecom and its related sectors. All these factors should already go a long way in easing the company lay-off policy and providing for employee re-absorption in the sector. Acts of violent behavior would only put the country profile at risk. The government should hence ensure that genuine employee needs be heard, such as an increase in salaries whose structure has not changed for the last seven years.

We retain our positive stance on privatization. We reiterate our view that the consequences of privatization of PTCL resonate far beyond the boundaries of the telecom sector. If the government is to give-in to most of the employee demands, that would rebound negatively on foreign direct investment for years to come. With the government pursuing an ambitious privatization program and looking to privatize major units in the oil & gas sector before the year-end, the PTCL sell-off has to be completed. The army may have to be called in, as hinted by the PTCL management, and we may even see a surge of violence. In our view, PTC sell-off must take place, on June 10th.

BOMB BLAST IN ISLAMABAD

Political risk is no stranger to Pakistan's economy. This alone was the biggest factor for the 'lost decade' of the 90's. In the past foreign investors, and even local investors, have stayed away from Pakistan due to the perception of law and order stability. However, we have maintained that the perception of risk was much larger than the risk itself. The current government has been successful in ameliorating Pakistan's external image and has cracked down on extremist elements in the country. It is only the progress made by the economy over the last couple of years, along with positive external policy and Middle East oil boom, which has made foreign investors eye Pakistan for possible investment avenues. Today, there was a bomb blast in the Holy Shrine of 'Bari Imam' in the Federal capital, Islamabad, which killed 25 people and left many injured. Bari Imam Shrine holds a significant position in Islamabad and is visited by thousand of devotees every year. The Shrine is right behind the President House and the National Assembly Hall. This terrorist act would certainly have done major damage to the improving political risk of the country and might have send a shiver down the spines of foreign investors. Terrorist acts in Islamabad are extremely rare as the city is well guarded by police patrol and beefed up security for foreign consulates and government offices. Consequently, this event would raise red alarms for the security agencies in the country.

NRL INFLOWS

The inflows from NRL can be a driver for the liquidity in the economy and the market. The final bidding of the company is to be held on 31st May. The government has received Expression of Interest (EoI's) from 29 parties for the acquisition of the only lube producer in the country. We expect the privatization price to range from PkR375-PkR425 per share. This would bring about PkR12.74bn to PkR14.4bn from the transaction in the economy (34mn shares). The party specific reason, perception of economic and industry fundamentals and competition among the bidders may result in higher bidding prices.

We believe that NRL can bring-in a liquidity influx in the market. Around 59.37% of the shares of NRL are held by financial institutions. NIT holds around 20mn shares of the company (out of which 19.9mn are held for NBP Trustee Department), PICIC Growth Fund has 5.39mn shares while National Bank of Pakistan has around 1.02mn shares. According to our Oil and Gas Analyst, Fawad Khan, the privatization price for the company would range between PkR375 and PkR425 per share. We have taken two extreme case scenarios and analyzed how much liquidity would the transaction bring-in the market. In Case A (if price: PkR375), there would be a total influx of PkR10.03bn. In Case B (Privatization price: PkR425, there would be an influx of PkR11.37bn for NIT, PICIC Growth Fund and National Bank of Pakistan. NIT is poised for the greatest liquidity gain of around PkR7.6bn to PkR8.6bn. We believe, that NIT unit might be an attractive investment avenue at the moment.

 

 

LIQUIDITY FROM NRL PRIVATISATION

 

NUMBER OF SHARES (MN)

CASE A:
PRIVATIZATION PRICE:
PKR375 INFLUX (MN)

CASE B:
PRIVATIZATION PRICE:
PKR425 INFLUX (MN)

NIT

20.34

7,627.5

8,644.5

PICIC Growth Fund

5.4

2025

2295

NBP

1.02

382.5

433.5

Total

 

10,035

11,373

Source: Annual Reports, Alfalah Securities Research

INVESTMENT RECOMMENDATION

Our recommendations have been hitting the bull's eye consistently. Last week we recommended investors to get out of stocks like PTCL, which indeed have comeoff considerably. We maintain our sell call on the market and advice the clients to stay sideline. However, truly undervalued stocks like POL and the banking sector, especially NBP are attractive at current levels and should be accumulated for later bull run. We expect a bull run by 3QCY05 when the interest rates head down (see table), corporate results come out, liquidity from privatization proceeds enters the market and uncertainties regarding CVT and phasing out of COT.

IN THE MARKET THIS WEEK

 

 

The week proved dire for the index as it shed 833 points (11.4%) driven by negative news and sentiments. The major players on the sentiment were negative expectations of the imminent budget, the PTCL workers' strike, the interest rate hike, and hike in CVT. The index shed a substantial 315 points on Monday falling below the 7300 psychological barrier that it had maintained for the previous two weeks. The major set-back to the market came in the form of government's proposal to double the Capital Value Tax (CVT) from 0.01% to 0.02%, which made the investors relatively skeptical of future gains under the revised CVT rate. Additionally, the SECP rejected the brokers' petition to increase the exposure from 1% of the free float to 5%, which will restrict trading activity. The market saw meager support the following day but was unable to pick any major strength. For the rest of the week, the market continued its slide based on activity on Pakistan Telecommunication Ltd (PTCL) front. The line workers' strike and the failure of the union and management to reach an agreement placed major downward pressure on the scrip, which began its subsequent slide. The 18% decrease in the settlement rate also cast a shadow on the outlook of the script with a 6% fall in its EPS (3QFY05 PkR. 4.7). Furthermore, two interested parties; Saudi Telecom and MTN of Kuwait, were absent from the pre-bid meeting adding to the negative sentiment concerning the scrip. The scrip lost 13.4% (PkR 9.75) this week, despite government's repeated reiteration of the PTC privatization to continue as planned. We have HOLD call on the scrip until the privatization is completed, until that time the scrip value will fluctuate in a range bound zone. The week was further over cast due to the 69 basis points hike in 6-month t-bill rate auctioned on Wednesday. The week closed with a bomb-blast in Bari Imam, Islamabad which proved detrimental to the market and political sentiments.

OUTLOOK FOR NEXT WEEK

The market will see some respite as it has seen a substantial decline of 11.4%, going forward, the market will remain highly sensitive to the budget outcome.

Please review the attached event calendar, as the investor community will be keeping an eye on the corporate announcements in the coming week.

EVENT CALENDAR

NAME OF COMPANY

DATE

EVENT

Regent Textile

28-05-2005

BoD Meeting

Sind Fine Textile

28-05-2005

BoD Meeting

JDW Sugar

28-05-2005

BoD Meeting

Shahpur Textile

28-05-2005

BoD Meeting

Sunrays Textile

28-05-2005

BoD Meeting

ICC Textile

28-05-2005

BoD Meeting

Indus Dyeing & Mfg.

28-05-2005

BoD Meeting

Yusuf Textile

28-05-2005

BoD Meeting

Chaudhry Textile

28-05-2005

BoD Meeting

Amin Fabrics

28-05-2005

BoD Meeting

Taj Textile

28-05-2005

BoD Meeting

Nazir Cotton

28-05-2005

BoD Meeting

Mubarak Textile

28-05-2005

BoD Meeting

Masood Textile

28-05-2005

BoD Meeting

Fazal Clothe

28-05-2005

BoD Meeting

Zahidjee Textile

28-05-2005

BoD Meeting

Kohinoor Spinning

30-05-2005

BoD Meeting

Yousuf Weaving

30-05-2005

BoD Meeting

 


 

PAKISTAN ECONOMICS SNAPSHOT

WEEKLY

W-3

W-2

W-1

W

 

Forex Reserves (USD mn)

12,766

12,995

12,996

13,000

Exch Rate: PkR/USD

59.45

59.51

59.63

60.01

PkR/Euro

76.70

76.82

77.44

77.08

PkR/Yen

0.55

0.56

0.57

0.57

MONTHLY

JAN-05

FEB-05

MAR-05

APR-05

INTEREST RATES

3m T-bill

4.14%

4.70%

6.30%

7.2%

6m T-bill

4.8%

5.2%

7.1%

7.8%

12m T-bill

4.96%

5.49%

7.10%

8.3%

INFLATION

CPI (YoY)

8.5%

9.9%

10.2%

11.1%

MONEY

Currency in Circulation (YoY)

15.5%

15.1%

15.1%

na

Deposits (PkR bn)

2,143

2155

2209

na

(YoY)

20.2%

19.9%

20.1%

na

Loans (PkR bn)

1590

1637

1657

na

(YoY)

35.9%

34.1%

34.5%

na

M2 (YoY)

20.5%

19.0%

19.3%

na

EXTERNAL BALANCE

Exports (USD mn)

1121

1151

1194

na

(YoY)

24%

2.6%

3.8%

na

Imports (USD mn)

1668

1616

1786

na

YoY

11%

-3.1%

10.5%

na

Trade Balance (USD mn)

-547

-465

-592

na

YEARLY

2000

2001

2002

2003

2004

GDP (USD bn)

60.33

58.51

63.35

67.70

69.07

GDP growth

4.13%

1.84%

3.10%

5.11%

6.40%

Agricultural Growth

1.95%

-2.2%

0.1%

4.1%

2.6%

Services Growth

3.09%

4.76%

5.30%

5.24%

5.49%

Manufacturing Growth

3.73%

9.3%

4.5%

6.9%

13.4%

Population (mn)

140

143

146

148

149

GDP per capita (USDmn)

429.7

408.6

433.9

457.4

463.6

TRADE BALANCE

Imports (USD bn)

9.602

10.202

9.434

11.333

15.47

YoY

-0.1%

6.2%

-7.5%

20.1%

36.5%

Exports (USD bn)

8.19

8.933

9.14

10.889

12.27

YoY

8.8%

9.1%

2.3%

19.1%

12.7%

Trade Balance (USD bn)

-1.412

-1.269

-0.294

-0.444

-3.2

Current Account (USD bn)

-1.143

-0.513

1.33

3.16

1.73

Remittances (USD mn)

983

1087

2389

4236.85

3800

This report has been prepared by Alfalah Securities (Pvt.) Limited. Alfalah Securities based on the information and opinions that has been compiled or arrived at from sources believed to be reliable and in good faith. Such information has not been independently verified and no guarantee, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Whilst all reasonable care has been taken to ensure that the facts stated are accurate and the opinions given are fair and reasonable, neither Alfalah Securities nor any director, officer, employee, group company, affiliate, or sponsor shall in anyway be responsible for the contents. Alfalah may trade as a market maker in the investments that are the subject of this document or in related investments and may have acted upon or used the information contained in this document, or the research or analysis on which it is based, before its publication. Alfalah Securities, its directors, officers, employees, group companies, affiliates, or sponsors may also have a position or be otherwise interested in the investments referred to this document. This is not an offer to buy or sell the investments referred to in this document. This document may not be reproduced, distributed or published for any purposes.