Updated June 25, 2005



According to the weekend report by AKD Research, quite a few major events have occurred during the last couple of months. These include: the much awaited privatization of Pakistan Telecommunication Company and National Refinery, phasing out of Badla, international prices of crude oil touching new highs and market consensus converging to a stable interest rate outlook. Although, all these events have made their mark on the market, the impact has been short-lived. In the immediate term, market looks range bound. A trigger is needed for the KSE-100 to break the strong resistance level of 7,500, which has been tested over 7 times now. Over the medium term, bulls are expected to take over the gaming board from the bears. The earnings season and privatization related further news flow have the potential to provide the next trigger in the medium term.

Privatization of big-ticket items was considered as the major impetus for the next Bull-run. However, despite the successful privatization of PTCL and NRL, the market sentiment has remained dull. It could be attributed to the fact that the market had already built the privatization benefits into the price and followed "Sell on News" strategy with privatization being over. Going forward on the privatization front, any positive news flow with regards to the strategic sale of PSO and PPL should serve as short-term triggers for the positive market sentiment.

Although, high oil prices are bad for the economy in general but given the fact that oil stocks heavily dominate KSE, they become a positive trigger for the market. The view is further complemented by the fact that investors use oil stocks as a hedge against the rising inflation (normal domestic investors do not have access to direct oil futures). However, it is necessary to remind the investors that the benefit of high oil prices is limited for domestic oil companies except Pakistan Oilfields, where oil contributes more than 50% to the top line. The remaining two E&P companies are mainly gas producers, where the output prices of gas are capped. On the oil marketing side the GoP, by reducing its PDL, has partially absorbed the hit; restricting the full benefit of high international oil prices to be passed on to the oil marketing companies. Nonetheless, analysts believe that the GoP will allow domestic POL prices to increase by approximately 5%. Therefore, investors should watch the movement of share prices of oil marketing companies to take advantage of forthcoming price revision by OCAC.



Reportedly the GoP has shelved its plan for the next auction of Pakistan Investment Bonds (PIBs). This has led to a dearth of long tenor instruments in the market. The growing demand for long term instruments has led to declining yields on PIBs. In fact, the 10-year PIB has witnessed an almost 200bps fall in yields over the last couple of months. In addition, in the latest T-Bills auction, the SBP did not raise interest rates, signaling that further monetary tightening is on hold for the time being. AKD Research believes that the interest rates have peaked for the near term and on this basis recommend investors to consider KAPCO and HUBCO, as these stocks will be the primary beneficiaries of this policy.

In spite of the fact that Badla phase out schedule has been pre-announced and known to everyone, the actual occurrence continues to be a drag on the overall market. In fact it is the lack of alternatives that has really made speculators/investors vary of the things to come. Hence, the process continues to dampen the overall market sentiment. According to Alfalah Securities, the issue of Badla phase out has kept the grim grip on the market. The volumes have remained dry as most funds are waiting for the 30th June, the year end closing. The immediate question is, would the market remain as dead as a tomb or is this the lull before the storm which would take the index to new highs? The market is expected to remain range bound till the issue of Badla phase out persists. This means that bears are likely to remain strong until 5th August. The investors should utilize this phase for accumulation of value stocks. The portfolio should comprise growth stocks belonging to banking, oil, fertilizer and automobile sectors.

Attock Oil Group has arranged debt financing facility of Rs 7.24 billion for the acquisition of National Refinery. Pakistan Oilfields, with a 25% stake in the acquisition of NRL, required Rs 8.05 billion to finance the acquisition. POL is using Rs 2.7 billion in debt and Rs 5.35 billion of its cash reserves for the acquisition. Elixir Securities expects this to have a marginal impact on 2005-06 earnings, with a decline of Rs 0.61/share only. Using a borrowing rate of KIBOR+1.5% and bank deposit rate of 4% (for interest income), the cost of financing the NRL acquisition comes to Rs 2.41/share for POL. The financing cost looks nominal with an expected payout of Rs 15/share from NRL. The acquisition of NRL appears part of a bigger integration scheme of the Attock Group. The group would now be eyeing PSO's acquisition. Acquisition of NRL has significantly increased the debt raising capacity of the group, as NRL is debt free. With an oil exploration company (Pakistan Oilfields), two refineries (Attock and NRL) and a small-sized oil marketing company (Attock Petroleum), the group should be willing to enhance its down-stream strength and PSO's acquisition appears to be the most logical step ahead.