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
 

 

STOCK MARKET AT A GLANCE

 

By SHABBIR H. KAZMI
Updated June 25, 2005

 

 

With the privatization of PTCL on the 18th of June, the market celebrated with almost all scrips moving up. The euphoria however was short lived with PTCL shedding some of its privatization related weight and the market moving in tandem. With the second weekly reduction in COT phase out falling on the 21st, the market reacted negatively. Friday brought in the last day of settlement of June futures and the high switchover rate determined that investor sentiment remained somber. The lack of margin financing as badla phase-out date approaches was another dampener.

OUTLOOK FOR THE FUTURE

With oil prices sitting firm above the US$50 mark, we expect the oil related stocks to continue performing. EU Quota reduction bodes well for textile stocks as well. However, until the margin-financing debacle is over, we do not see a sizeable positive market movement. From a fundamental perspective though, we continue to recommend Callmate, Fauji Fertilizer bin Qasim, Fauji Fertilizer, Pakistan Oilfields and Packages as BUY.

FUNDAMENTAL CHANGES

The major developments this week were:

•The government finally completed the privatization of Pakistan Telecommunication Company Limited at a bid price of USD1.96 per share (74% premium to market price) from Etisalat of UAE. Showing glimpses of its strategy for PTCL, they are targeting a payback period of 5 years and will not be firing any of PTCL's employees. Etisalat highlighted plans of training PTCL employees and the possibility of using some of PTCL's workforce for other foreign subsidiaries of Etisalat in African nations.

•The PM highlighted the planned utilization of privatization proceeds worth PkR155.158bn generated from sell off of 26% stake in PTCL clarifying that the proceeds would not be utilized for social sector and development but for reducing fiscal deficit and bank borrowing.

•The Saudi Kanooz Group pulled out of the running for government stake in Karachi Electric Supply Corporation (KESC) as they failed to deposit the bid money after making the highest bid of PkR1.65/share for 73% government stake in KESC. The PC has invited local consortium of Hasan Associates, the second highest bidder for a meeting, with an initial condition to match the bid price offered by Kanooz Al Watan. The consortium only agreed to raise its original price (PkR1.01 per share) by PkR0.29 per share to the reference price set by the government (PkR1.30 per share).

•Privatization Commission has decided to offer 2% of total outstanding shares of KAPCO to regular WAPDA employees. The shares will be offered at the price at which they were offered during the offer for sale in February 2005 (PkR30 per share). This further increase in free float is likely to put additional pressure on share price.

•The European Union is likely to remove or substantially marginalize the 13.1% anti-dumping duty on bed linen, which makes up about 10% of Pakistan's textile exports. The duty is more likely to be cut to around 6% as compared to scrapped altogether.

•Long-term bond yields have declined by 40bps over the last week. In the secondary market, 3, 5 and 10-year bonds are now trading at 8.80%, 9.10% and 9.70% respectively.

•Total foreign direct investment (FDI) reached US$1,000mn mark in the first 11 month of current fiscal year, compared to US$ 903mn during the same period last year.

•In the T-Bill auction held on the 22nd of June, the SBP left the cutoff on all three T-Bills instruments unchanged and still managed to realize PkR80.50bn against a hefty participation of PkR116bn.

THIS WEEK'S TOP STORIES

PTCL- ETISALAT TAKES THE CAKE- WHAT NEXT?

 

 

18th June 2005 marked history as the government completed the privatization of Pakistan Telecommunication Company Limited (PTCL) in a smooth manner, realizing an impressive bid price of USD1.96 per share from Etisalat of UAE. In addition to carrying far reaching positive repercussions for the economic outlook of Pakistan, the transaction bodes well for the employees' issue because the union should view Etisalat favorably compared to Singtel or China Mobile. With the transaction completed, we expect positive externalities to accrue to other privatization related scrips. However we believe that the momentum impact and any positive impact from possible dual listing of PTCL should be muted. On the secondary market, we expect the stock price to shed some privatization related weight after an initial rally. We advise investors to use the momentum rally as an exit point. Sell on strength.

FERTILIZER MOVING UP- ENGRO LAGS

We expect fertilizer off take to grow at a stable growth rate of 3% over the long term, on the back of strong agricultural indicators. However, despite the positive factors for agricultural and fertilizer demand growth, Engro will not reap benefits of the situation owing to product limitation. Engro is sitting with a production capacity of 850k tons while there is possibility of capacity enhancement by 90k tons, which is not sufficient to maintain its market share. We are expecting a 2% drop in Engro's existing urea market share of 20% after CY07. Going forward we also expect Engro's income from core earnings to fall due to higher costs than peer companies, lower margins on imported fertilizer and rising gas prices. However, its earnings from other income of associated companies are likely to provide up to 40% cushion in the future. Similarly the launch of the PkR2bn subsidiary Engro Foods (Pvt) limited, engaged in milk processing business will provide diversification for Engro. We recommend a hold on Engro at current levels.

T-BILL AUCTION- LET'S SEE HOW IT WORKS!

Following the May-05 inflation outcome, we expect State Bank of Pakistan to maintain T-bill cut-off yield in the auction. In the first 11M of current fiscal year, SBP has raised cutoff of 6M T-bill by 592bps. We expect 3, 6, and 12M T-bills yield to remain range bound in today's auction, as inflation is tapering off. In the month of May-05, inflation was recorded at 9.84% as compared to 11.10% in Apr-05. Since the statement that government had no intentions to sell Pakistan Investment bonds (PIBs) in this fiscal year (ending Jun-05), the 10-yr bond yields have fallen by 70bps. This leaves confusion in the secondary market counter, especially at a time of high inflation. We believe the outcome of today's auction will clearly indicate the intentions of SBP's monetary stance in the months to follow and the SBP's future expectations of inflation.

MILK BUSINESS - A CHALLENGE FOR ENGRO!

Engro's decision to invest PKR2bn in milk processing business as a part of its diversification strategy fits in well with the country's fundamentals as well as Engro's strengths. Packed Milk business in Pakistan offers promising returns where only 4% of the total milk produced in the country is processed and this proportion is expected to grow at a fast pace with growth in population and level of urbanization. Engro intends to capitalize its strength of long-term relationship with farmers in Sindh in order to develop their supply chain. However, operating in a highly competitive environment of consumer products would be a big challenge for Engro. We expect this investment to have a negative impact on Engro's earnings and dividends for the next 2-3 years due to high financial charges. We maintain our Neutral rating for Engro with a target price of PkR117/share (including Engro Foods).

POL - UNDERPERFORMING WHILE OIL PRICES ARE HIGH!

While oil prices continue to soar, the stock that is the largest beneficiary of oil price increase has been underperforming since 02-May-05. Meanwhile, the stocks of the other two oil and gas producing companies have been outperforming the KSE-100 Index. We believe that this underperformance in unjustified and are of the opinion that concerns over NRL's acquisition are exaggerated. Our calculations indicate that the maximum impact on POL's earnings arising out of NRL's acquisition is likely to be in the range of PkR1.40-1.50/share and should be mitigated through strong earnings growth resulting from higher oil prices and higher volumetric production growth. We maintain our Buy recommendation on POL with a price objective of PkR340/share.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

34.52

34.24

-0.81%

Avg. Dly T/O (mn. shares)

215.40

233.87

8.57%

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

373.60

428.13

14.60%

No. of Trading Sessions

5

5

 

KSE 100 Index

7398.73

7350.46

-0.65%

KSE ALL Share Index

4849.72

4817.34

-0.67%