MARKET THIS WEEK
PTCL dominated market proceedings throughout the
week contributing on an average 45% of total market volumes. News
reports on union issues, possible bid price and rumors on dwindling
interest of potential bidders in PTCL continued to drive the market
in both directions with the week rounding off with a net decline of
73 points (-1% WoW). Among other scrips interest was also seen in
Pakistan Petroleum Limited due to privatization sentiments and
speculation on gas discoveries in Gwadar area.
OUTLOOK FOR THE FUTURE
Similar to the week gone by, PTCL privatization
is expected to be the key driver for market direction. Monday is
likely to mark the beginning of a new era for PTCL, a post
privatization era. The outcome of the bidding process should have a
major impact on PTCL, and given the market moving status of PTCL in
the past few weeks, externalities should flow through to other
stocks. An overtly positive surprise in terms of bid price should
bode well for the stock and the market in the near term whereas bid
price in line with or lower than expectations should see the stock
and the market shed some weight. From a fundamental perspective
though, we continue to recommend Callmate, Fauji Fertilizer bin
Qasim, Fauji Fertilizer, Pakistan Oilfields and Packages as BUY.
The Major Developments This Week
•PTCL privatization remained in the limelight
throughout the week with government announcing a new date for
privatization followed by another strike by the workers' union only
to be called off later in the week. The week rounded off with
resolution of the employees' issue and announcement of the final
three bidders for PTCL namely Etisalat, China Mobile and Singtel.
Bidding was scheduled for June 18, 2005.
•Chairman, Technical Committee on Water
Resources would be submitting a report on the proposed construction
of big dams to President Musharraf by 31st Aug instead of the
initial deadline of 30th June.
•The first shipment of 60k tons of urea from
Saudi Arabia and Bangladesh reached Pakistan during the week while
another 35k tons is expected to arrive by next week.
•According to sources at the Central Board of
Revenue (CBR), Senate's standing committee for revenue and finance
proposed that the rate of import duty on big cars be raised from 75%
•In a bid to counter inflation, the government
allowed private sector to import wheat. Previously, imported wheat
was channeled through government in the country.
•Continuing with debate on proposed budget
measures, the government announced withdrawal of withholding tax on
payphones and duty on scrap levied in the budget
•Total worker remittances were recorded at
US$3,810mn in the first 11M of current fiscal year as compared to
US$3,517mn during the same period last year.
•The Oil Companies Advisory Committee,
maintained domestic petroleum prices for yet another fortnight. The
deadline for payment of bid money for Karachi Electric Supply
Corporation (KESC), set at 15th June, passed and the Privatization
Commission did not recieve the bid money from Kanooz Al Watan.
Alternate course of action is being contemplated upon.
•Kot Addu Power Company Limited announced that
it is undertaking a feasibility study to identify prospects of
increasing the generation capacity of the power plant.
THIS WEEK'S TOP STORIES
PTCL BIDDING- WHAT'S THE RUSH?
18th June was announced as the new date for
bidding of 26% government stake in Pakistan Telecommunication
Company Limited (PTCL). Though announcement of privatization date is
a good omen, the commotion amidst which the new date has been
announced leads us to contemplate whether basic objectives behind
privatization (efficiency gains and maximum proceeds to retire
expensive foreign debts) have been pushed to the background to a
certain extent. The current scenario neither seems ideal to enable
realization of efficiency gains post-privatization nor does it seem
likely that the transaction at this stage would fetch maximum
possible price. The negative impact on the bid price should,
however, be muted to a certain extent as international bidders
appear to be 'in the loop' regarding proceedings, evident from
government's confidence that 6 international bidders will be bidding
for PTCL. Nonetheless, these issues are expected to drag the bid
price to some extent.
SSGC - DOWN BUT NOT OUT!
Sui Southern Gas Company's (SSGC) stock price has
under performed the KSE-100 Index by almost 72% over the last 12
months. While this was partly due to lower profits reported by the
company over the last few quarters, we believe that the worst is
over for SSGC and most of the negatives have already been discounted
in the stock price. With the capex plan of the company picking up
speed, we expect SSGC to report healthy growth in profits going
forward. The company is also working on the feasibility of setting
up a Liquefied Natural Gas plant at Port Qasim to meet the growing
demand for natural gas in the country. The company is working on
reducing its transmission and distribution losses, which stood at 7%
last year. We recommend a Buy on SSGC with a price objective of
PAKISTAN EXPORT GROWTH TO LEAD GDP
We believe that Pakistan's export growth will
lead GDP growth in the years to follow. Exports are picking up in
the last three months, primarily owing to the post 2004 WTO quota
free regime. In our view, the capacity expansion in the textile
sector would continue in the wake of rising demand for exports. This
is also reflected in the first 11M import statistics. Total imports
were recorded at US$18.39bn, out of which US$4.51bn has been spent
on machinery imports. This, combined with increase in raw material
imports (US$6.0bn) lead us to believe that Pakistan's economy is
undergoing major expansion, which will translate into enhanced
exports and higher GDP growth going forward.
BUDGETARY IMBALANCES- NO WORRIES, NO PIBS!
With strong revenue collection, both tax and
non-tax, in the outgoing fiscal year, we believe that the Ministry
of Finance (MoF) is well placed to manage its budgetary deficits
without raising further domestic debt through Pakistan Investment
Bond (PIB). In FY05, three PIB auctions were held but all of them
were rejected owing to a higher rate of return demanded by the
participants. In his recent interview, Dr Asfaque Hassan Khan
(Director General Debt Management Office) has indicated that the
government has no intentions to sell PIBs this month, as it has
sufficient funds to finance the deficit. In our view, virtually no
supply of PIBs in FY05 has partially disturbed the shape of the
yield curve in FY05. This leaves a lot of confusion in the secondary
market, especially at a time of high inflation. In the first 11M of
current FY, inflation has averaged 9.33% YoY as compared to 4.21%
during the same period last year. With a rising inflation trend, we
are of the opinion that the government should step forward to
conduct PIB auction and set long-term bond yields, instead of
leaving it to the market sources
FAUJIS- THE STAR PERFORMERS
Fertilizer industry has reported a 44% increase
in urea offtake during the first five months of 2005 where FFC and
FFBL have outperformed Engro with 5% & 30% increase in urea
production respectively. Taking advantage of the turnaround at Engro,
Faujis have successfully captured 2% market share of Engro, leading
to an improvement in market share to 63%. We strongly rule out
rumors in the market relating to FFC plant shut down yesterday and
recommend a BUY for Faujis, FFC and FFBL, which provide investors a
defensive shield in a volatile market.
Mkt. Cap (US $ bn)
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KSE 100 Index
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