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 30, 2005 Friday, June 03, 2005

 

 

INVESTMENT STRATEGY: PTCL UNDER SIEGE

The market volatility is up by 240%YoY, while volumes have shrunk by 57% YoY. With PTCL privatization still under siege by employee unions, and uncertainty regarding the budget still looming at large, we believe that the market is likely to further decline. Our telecom analyst, Usman Farooqui came up with a Red flag on this employee-management tussle, which indeed has proved to be very much true. The employee union, which has strength of 45000, is demanding around PkR12bn for VSS. If the potential bidder has to pay this price, it would depress the fair-value by around PkR3 to PkR71. The employee tussle can even scare the potential investor away, or depress the potential bidding price. We advice our investors to stay away from Pak Telecom, as the uncertainty surrounding privatization can aggravate market volatility. The domestic law and order situation is also not favorable.

Last week, there were unfortunate incidents of sectarian violence, which have brought the city of Karachi under stress. Next week would be extremely critical for the capital market, with a budget, a t-bill auction and PTCL bidding date all coming in the same week. We advice investors to remain away from the market to avoid the uncertainty associated with these events. We recommend our clients to cherry pick under-valued stocks. Our selection is National Bank of Pakistan, Pakistan Oil Field, Fauji Fertilizer and Pak Suzuki Motor Company. This portfolio would diversity investment risk.

A WEAK MARKET

Last week, we presented our investment strategy to a local mutual fund. We advised our client, to stay sideline from the market until Aug-05 as we expect the market to remain under pressure due to 1) phasing out of COT 2) Deepening of CVT 3) Privatization risk and 4) High interest rates. We expect, that by June-05, the government would have to go for a PIB auction in order to meet its revenue requirements for FY06. The coupon rate on the 10-year PIB is likely to increase to the range of 10.5% to 11% in this auction. The increase in the risk free rate makes equities a less attractive option at the moment. We expect the interest rates to start declining by October-05, and till then we expect the market to remain under pressure.

As the graph below shows, the market volatility, as measured by standard deviation, has increased by a massive 240%YoY. The fundamentals seems to have taken a backseat as annual trading volume as a percentage of free float is 1698% as compared to 123% for GEM and 521% average for most markets (Source: Deutsche Bank). Annual trading as a percentage of market cap is around 510% as compared to 74% for the GEM.

INVESTMENT RECOMMENDATION: CHERRY-PICK!

The struggle between the bulls and the bears is likely to be dominated by the bears due to the confluence of negative triggers. We advice our clients to utilize this depression to accumulate undervalued stocks. To diversify risk we recommend, National Bank of Pakistan (NBP, price target: PkR150) from the banking sector, Pakistan Oil Fields (price target: PkR238) from the Oil and Gas sector, Pak Suzuki Motor Company (PSMC, Price target 140) and Fauji Fertilizer (FFC: Price target: PkR160). We believe in that current market situation, the premium would be on stock selection. Investors to stay away from the temptation of jumping in the speculative run in Pak Telecom, which we believe is too risky.

PTCL UNDER SIEGE

The negotiations between the employee unions and the Pak Telecom Management (acting as fall guys for the government) are in a tailspin. There has been news of cases being lodged and accepted in the Sindh High Court. A stay order in this regard could delay the whole privatization process. On another front there are the very potent threats by the employees, have induced the army to operate the company assets. Then there is the government, which in an egoistic state does not want to postpone the privatization of the company by one day. Indeed the current projection of the issue has been inadequate and we have managed to gather a consensus of opinion from various stakeholders.

Employees: This group is vehemently opposed against privatization. They are disgruntled with the situation relating to what they refer to as cronyism in promotions. They have no doubt over the government's seriousness about the issue, but believe that the new management will not succeed in running the company without giving the employees guarantees over job security and experience-based promotions.

Employee Union Leaders: They have dropped all their demands with regard to bonuses and salary increases. Now all they want is the stoppage of the privatization process. Pak Telecom with around fourteen employee unions and around 45000 members, including at least 10-12 members in each exchange have tremendous bargaining power when united. Union sources indicate that a compromise may be reached if significant VSS benefits are given.

Higher Management: The upper Management understandably wants privatization to go through. It is, however, skeptical over the actual success of the whole process. This is probably in part due to its recognition of employee power with regards to the operation of the whole infrastructure. The management over all is in a conundrum of being in the firing line between the government higher-ups and the employees. According to view we are getting from the management, there is a 40% chance of the new management successfully taking over the company, if it fails to satisfy the unions.

Privatization Commission: Seems the most helpless body of them all. Meetings between the Commission and the employee unions are being constantly adjourned, due to the Privatization Commissions, referral of most decisions to the higher-ups in the government. This itself shows its inability to make decisions on its part and the impending seriousness of the issue.

Bidders: We have tried to contact the front-runners in the process (Singtel, Etisalat and Telekom Malaysia) and as expected they are tight-lipped over how they would deal with the issue. They however will be keeping a close eye on the developments on this front and any untoward incident will affect the privatization price. According to various sources, the companies have till now agreed only to one year's job surety for every employee.

Privatization Risk: Our estimate of employee restructuring costs comes to about USD 200mn and in that case the companies will figure that amount into their bids, thus depressing the bidding price. Add to it the worsening law and order situation and political stability; our expected bidding price comes to about USD 1.3 per share. The first quarter, post-privatization, will be crucial in ascertaining whether the foreign company can adjust in the environment and whether restructuring incentives are sufficient for quelling the employees' discontent. Our restructuring cost estimate of USD200mn will cause about a PkR3 fall in its fair value. If the cost of lay-offs is borne by the company, then this one-time expense would entail a significant drop in EPS for FY06 by PkR2.35. This would also depress the dividend yield, which we believe would stand at around 4% in FY06.

We advise the investors to stay away from the stock, and adopt a wait and see approach.

IN THE MARKET THIS WEEK

The market closed at 7213, up 12% since last week's closing at 6467.15. After the dismal performance the previous week, the market sprung back to higher levels as the fears that had been the primary cause of last week's slide were allayed. This week's average trading volume was higher than that of the last four weeks' and the value traded remained in the higher range (USD 461 mn). The major stocks traded were Pakistan Telecommunication Ltd. (PTC) and Oil and Gas Development Company (OGDC). The week was spotted with major events beginning with the sectarian violence culminating in eight deaths. On the technical side, the market got a tremendous boost with the turn around in the SECP-KSE relationship. The other event marker in the week has been the aggravation of the PTC union-management relations.

After taking an 11% beating the previous week, this week picked up on a technical correction. The investors taking advantage of the lower values on vital scrips, drove the market up with a bull drive. The market remained buoyed in the face of sectarian violence which began on Monday evening. The positive driver for the buoyancy was the National Refinery Ltd (NRL) privatization which provided the market with added liquidity and with positive sentiments. All stocks associated with NRL privatization; Attock Refinery Ltd (ARL) and Pakistan Oil Field (POL) also picked up in value, driving up the index. The rest of the week saw the fall-out from the suicide attack and consequent turbulence witnessed on Monday. Muttahida Majlis-e-Amal called strikes in protest of the murder of Jamat-e-Islami leader. However, the market again remained buoyed with the lower COT/ Badla rates in the market that day. However the major force in pushing the positive sentiment was the outcome of the SECP-KSE board meeting. The major fears that had plagued the market during the previous few weeks were laid to rest as the limit on the future trading was increased from 1% of free-float to 3% of free-float with expectation of the eventual increase to 5% once the pre-trade verification has been implemented. Additionally, the 100% cash margin requirement for exposure exceeding PkR. 200 million was reduced to 50%. The week closed with some profit taking which put a downward pressure on the market. PTC fell 5%, reacting to the aggravation of union-management tiff.

Outlook: Neutral to Negative. The upcoming week is going to be vital for the market. Although the budget is expected on Monday, there are rumors regarding delay in its presentation. Such a move, together with the dim prospects of the union-management tiff in PTC, spell negative for the index.

 

 

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

Service Fabrics

0306-2005

BoD Meeting

Beema Pakistan

0406-2005

BoD Meeting

Pakistan Income

0706-2005

BoD Meeting

Pakistan Income Fund

0407-2005

BoD Meeting

Pakistan Stock Fund

0407-2005

BoD Meeting

Pakistan Stock M. Fund

0407-2005

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