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.
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
•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
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.
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