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, June 04, 2005-Friday, July 08, 2005

 

 

FRAGILITY OF OUR WORLD

7/7 was a tragic day, which reminded us of the fragility of the current global economic and social system. Bomb blasts in the center of London killed 37 people and shocked many. The FTSE plummeted by more than 100 points and pulled down the regional markets as well. The current recovery in global economy, led by a global imbalance has created many political detractors as well. In our domestic context as well, politics is one subject, which has become cut-off from our economic and financial decision-making. Repeated law and order offenses have made the investors and also a common person, insensitive to such acts. However, the economy remains exposed to any major political and terrorist risk. The other exogenous factor, which adds to the riskiness of our social and economic system, is natural calamities. Today, India opened the floodgates of the dams in their region, inundating parts of Punjab. The floods have affected the cotton and rice crops. The textile sector would also be hurt by the fall of the EUR, which has depreciated by around 7% in the last four months. We advice our clients to reduce exposure in the textile sector. The AlfalahSec Model Portfolio, which we presented in our last Review, has posted a gain of 3.4% WoW in the week. We have reduced our exposure in Fauji Fertilizers (FFC) to 5% and instead included Askari Commercial Bank (ACBL) in the portfolio.

OUR STOCK IN FOCUS FOR THIS WEEK IS PTCL

Hours after making a successful bid for 2012 Olympics, the city of London was rocked by a series of immaculately coordinated bomb attacks. The rocking was very different in nature to the Live 8 rock-fest orgy that had taken place the weekend before. This time around the sound of music had a sinister tone to it. The explosions; six in total, took place in central London which also happens to be the hub of all financial activity.

Amidst all the debris and confusion the FTSE 100 plummeted more than 100 points; the move was closely followed by other European bourses including the likes of CAC 40 (Paris), DAX 30 (Frankfurt) and SMI (Zurich). All the major European bourses took a nosedive taking Londonís lead.

The oil prices took a similar cue. Crude oil fell from a record of USD62 a barrel in New York in reaction to the news emanating from London. Crude oil for August delivery dropped by USD1.83, or 3%, to USD59.45 a barrel minutes after the blast mayhem. Earlier, the prices had shot through the roof to USD62.10, the highest price since the contract was introduced on the New York Mercantile Exchange in 1983.

The main reason for the drop was the speculative bubble that oil had witnessed over the past week. Brent crude for August settlement dropped as much as USD2.14 or 3.6%, to USD57.71 a barrel and was down USD1.84 on Londonís International Petroleum Exchange. Prices earlier rose to a record USD60.70 a barrel.

The earlier surge in oil prices in London and New York was based on reports that Hurricane Dennis, headed toward the Gulf of Mexico from the Caribbean, might disrupt oil refineriesí production.

The tragedy underlines how insecure and exposed the financial markets are to such exogenous incidents. The Karachi Stock Exchange experienced a similar fate right after the September 11 attacks. Although, the KSE over the years has become familiar to such events taking place in its own back yard, there are still some very important lessons to be learned regarding ëConsumer Psychologyí related to such incidents.

According to research studies a terrorist attack has ëa huge impact on the psychology of consumersí. An attack instills a blind panic where people donít think rationally. The market becomes susceptible to a knee-jerk reaction and the eventual reign of a pessimistic mind set.

For the economy of Pakistan to prosper it is imperative that a stable environment conducive to development and foreign investment is provided by the Government.

With all its recent success in luring foreign investors for privatization bidding, a single untoward incident could very easily roll-back the whole process. With the President and the Government taking great pains to project a progressive image of Pakistan, such a heathen incident would certainly not keep Pakistan in good stead.

The key objective of the policy and decision making top-brass in Pakistan should be to steer the country out of such troubled waters. Positive steps in this direction have already started to take place, starting with the thaw in relations with India and closely followed by positive development on the Iran-Pakistan-India pipeline project.

FLOODGATE OPENING AND THE TEXTILE SECTOR

We contacted the Metrology Department in order to inquire about the flood condition. According to the DG Metrology Department, the recent flood from the opening of the floodgate of India, has affected the rice crop in Southern Punjab. Recent rains have also destroyed around 10-15% of cotton in the Punjab region. The Met Department also expects heavier monsoons in August and around 25% of cotton crop would be affected by it. To worsen the outlook of the textile sector, the EUR has depreciated by more than 7% in the last four months. If the European Central Bank (ECB) decides to cut interest rates in order to stimulate growth in the region, the EUR would further fall. The depreciation in EUR against the PkR would reduce the competitive of domestic exports to the region.

 

 

ALFALAH SECURITIES MODEL MARKET PORTFOLIO:

Over the last week, AlfalahSec MMP gave a healthy return of 3.4%. From the 15th of July, we would increase the exposure into equities to 80% of total portfolio. Our clients who have followed this recommendation would have seen their portfolio grow by 3.4%WoW as compared to market performance of 1.7%WoW. The portfolio has outperformed the market by 1.7%. We are reducing our exposure in Fauji Fertilizers to 5% due to the flood reports and expected higher monsoons. (see Appendix for graphical plots of the weekly performance of the stocks included in Alfalah Model

Portfolio). All of the stocks in our portfolio, besides SSGC increased during the week. Pakistan Oil Fields (POL) showed the highest increase of 6%WoW.

ALFALAHSEC RESEARCH: MODEL PORTFOLIO

 

PORTFOLIO

WEIGHTS      

NAME

TICKER

EQUITY

WEIGHT

CURRENT

PRICE

FV

UPSIDE

DIVIDEND

YIELD

Equities

70

National
Bank of Pakistan

NBP

30     

109.35 

150

37%

1.1%

 

 

Pakistan
Oil Fields    

POL    

30

283.45 

334    

18%    

4.5%

 

 

Bank of Punjab 

BOP    

10     

82.95

NA     

NA     

NA

 

 

Muslim Commercial Bank 

MCB   

 10

79.1

96     

21%    

3.0%   

 

 

Sui
Southern
Gas Company       

SSGC

10    

 22.85  

29     

27%

6.5%

 

 

Fauji Fertilizers Company

FFC

21.8  

160    

31%

10.2%

 

 

Askari Commercial Bank

ACBL

5

79

137

73%

1.8%

Cash

30

 

       

 

 

 

 

 

Source: Alfalah Securities Research

STOCK IN FOCUS: PAKISTAN TELECOM

Since Last Week we have started to provide, one stock recommendation in our weekly review. This week we are giving an overview of Pakistan Telecom, in the wake of takeover by ETISALAT.

Our Price to Book target for FY05 is 3.8 and 3.4 for FY06. For calculating book value we have not taken into account any revaluation surplus, which may be realized, due to possible valuation of the companyís real estate holdings. In our view, the effect of such an exercise would be highly uncertain, and its gain would be barely recognizable in terms of cash inflow, due to highly illiquid state of most of the companyís estates.

In FY05, we expect the company to attain an EPS of PkR 5.8 posting an earnings growth of 0.18%. This figure seems surprisingly low in the wake of some highly ambitious expansion by PTC in which 761,000 extra fixed lines went into service during the first 9m of FY05. The benefits of that we feel would be realized fully in FY06 when EPS is forecasted to rise by 20% to PkR 6.88 per share.

Our Fair Value for PTC is presently under revision as it would be premature to give one before Etisalatís final strategy is announced. Our projections at this moment are on the basis of what we believe to be Etisalatís most likely strategy.

Speaking of likely strategy, Etisalat is likely to embark on a massive program of expansion, with an annual layout of 1-1.5mn WLL lines in next four years. Presently Average Revenue per User (ARPU) from Wireless Local Loop Services are about 40% below the total companyís ARPU. That is predominantly because of WLL concentration in the rural areas, and that trend is likely to continue in the future as long as the present limited mobility clause, of one cell site restriction pertains to WLL operators in Urban areas.

Ufone may be perceived to be the Jack in the Box, but from environmental analysis, we don't foresee Ufone adding more that 9-10% to PTCís bottom line, come 2009. UFONEís potential has been mentioned countless times, and even though we project

UFONE's market share to increase to 24% from the present 20%, the dividend generating capacity of UFONE is going to be severely hurt by low tariffs and an increasing proportions of Subscribers with inactive accounts, further depressing ARPUís. For FY05 UFONE is expected to achieve a Profit After Tax of around PkR 541 mn. This is around a 30% decline over FY04, mainly as a result of connection subsidizations over the Government Activation Tax by PkR 700 per connection.

PTC in our view is a stock to be looked as soon as any news of Etisalatís strategy pours in. The company is expected to be the dominant market player in not only the fixed wire line segment, but also WLL due to the presence of Broadband ADSL lines, which are so common in the UAE, will once again prove why, Fixed Line Segment will continue to provide Etisalat most of its Revenue Base, well as its Earnings Growth. With a projected ADSL subscriber base of over 550,000 by 2008, ADSL revenues could add more than PkR 10 bn to PTCís top line People can rightly dismiss, Etisalat as being the prodigal child in aiming to double revenue within one year, but doubling

 

 

revenue within four years! Is definitely not out of question. We advise the clients to be very alert over PTC and be hooked to any hints Etisalat may provide for the future.

We will get back, with the detailed financials as soon as Etisalat finalizes its expansion plan.

INCOME STATEMENT

PRsm   

2004   

2005F

2006F

2007F

2008F

2009F

Domestic Revenue

54,323

57,294 

68,872

 82,368 

99,109 

112,190

Intl. Revenue + APC Rev.

19,681

21,074 

19,896

21,590 

24,126 

28,374

Other Revenue  

120

132

145

160

176

193

Total Revenue  

74,124

78,500 

88,913

104,117

123,411

140,757

Total Operating Expenses

32,187

35,884

 39,012

45,220 

52,952 

61,203

Operating Income

41,937

42,616 

49,901

58,897 

70,459 

79,555

Profit Before Taxation 

43,359

44,811 

52,437

61,687 

73,528

 82,930

Provision for Taxation 

14,190

15,684 

18,353

20,974

 24,999 

28,196

Profit After Taxation

29,169

29,127

 34,084

40,713 

48,528 

54,734

EPS    

5.72

5.71

6.68

7.98

9.52

10.73

Price to book value

3.9

3.8

3.4

3.0

2.6

2.3

Dividend yield 

8%

8%

7%

9%

10%

12%

Source: Company Accounts, Alfalah Securities Research

MARKET THIS WEEK: BETTER THAN EXPECTED

The KSE 100 index gained a meagre 1.6% over last week closing at 7588.94 Friday afternoon. The average volume traded over the week (178 mn), remained lower than last weekís (199 mn) spelling weak institutional support. The market is continued to be plagued by constricting COT / Badla and the lag in the induction of margin financing. However, positive sentiment was imbued into the market with rumours of extension in the COT phase out till December 31, 2005; pushing the index over the much anticipated 7500 level. Rumours regarding the parallel running of the Badla market also penetrated the market on the following days. The index remained range bound through the weak and the overall trend seems to be one of a very gradual rise. Interest in the market remains lethargic.

The market opened on a negative note this week, due to conflicting rumors regarding the COT phase out. The volumes fell to six month low (103mn) as primary institutional investors remained sidelined. The market picked up with the index gaining 109 points to 7517 with the rumours of COT extension. The oil equities, Pakistan State Oil (PSO) and the Oil and Gas Development Company (OGDC) with a cumulative weightage of 28 percent and Pakistan Telecommunication Ltd. (PTC) with a weightage of 13 percent together pulled the index across 7500. The index has remained fairly static since, closing at 7588 this evening.

OUTLOOK FOR THE NEXT WEEK

Neutral. The market will be waiting for confirmation for rumours regarding extension in Badla Phase out before we see the volumes pick up and the index rise further in the absence of other catalysts.

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

Associated Ind.

11-07-2005

BoD Meeting

Faysal Bal. Growth Fund

12-07-2005

BoD Meeting

Fauji Fert. Bin Qasim

21-07-2005

BoD Meeting

Unilever Pakistan

26-07-2005

BoD Meeting

BOC Pakistan

27-07-2005

BoD Meeting

Rafhan Best Foods

28-07-2005

BoD Meeting

Shell Pakistan 

04-08-2005

BoD Meeting

 


 

PAKISTAN ECONOMICS SNAPSHOT

Weekly 

w-3

w-2

w-1

 w

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forex Reserves (USD mn)

12,995

12,996

13,000

 

Exch Rate: PkR/USD

59.45

59.51

59.63

60.01

PkR/Euro

72.61

72.87

72.29

71.31

MONTHLY

FEB-05 

MAR-05 

APR-05 

MAY-05

INTEREST RATES

3m T-bill

4.70%

6.30%

7.2%

7.60%

6m T-bill

5.2%

7.10%

7.8%

7.95%

12m T-bill

5.49%

7.10%

8.3%

8.45%

INFLATION

CPI (YoY)

9.9%

10.2%

11.1%

9.8

MONEY

Currency in Circulation (YoY)

15.1%

15.1%

15.1%

Na

Deposits (PkR bn)

2155

2209

2290

2320

(YoY) 

 19.9%

20.1%

20.49% 

19.4%

Loans (PkR bn) 

1637

1657

1720

1752

(YoY)  

34.5%

39.4%

37.5%

36.7%

M2 (YoY)

19.0%

19.3%

14.1%

Na

EXTERNAL BALANCE

Exports (USD mn)

1166

1356

1301

1384

(YoY)  

2.6%

3.8%

Na

Na

Imports (USD mn)

1783

2143

1903

2033

YoY    

 -3.1%

10.5%

Na

 Na

Trade Balance (USD mn)

 -616.90

-786.2 

-601.5 

-648.7

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