MARKET THIS WEEK
A four-day week but eventful nonetheless, with
the market gaining 161 points WoW. Uncertainty again prevailed
during the initial part of the week, as investors stayed on the
sidelines. Wednesday saw the lowest volumes for the past three years
signifying the lack of certainty on part of market participants. The
turning point of the week though came in on Friday with the news
that the higher-ups were meeting to find a solution to the current
deadlock and announce the Continuous Financing System in place of
badla with a higher limit. Volumes shot up to 194mn and the market
gained 213 points in a single day, more than recovering its intra
week losses and closing in the green WoW.
OUTLOOK FOR THE FUTURE
The outcome of the above mentioned meeting would
determine the short-term direction of the market. If a solution
acceptable to market participants is announced, one could see a
couple of more days like Friday as punters return to the action.
However in case of another deadlock, just expect the same to happen.
We now are sounding redundant in predicting a range-bound market but
that is exactly what we foresee if the meeting does not bear any
fruitful result. Avoid punting in uncertain times and rely on
fundamentals. PAKO (rising oil prices), KAPCO (attractive dividend
yield), FFC and FFBL (benign farm economics) and Callmate (strong
result expectations) seem attractive at current levels.
The major developments this week were:
•The State Bank of Pakistan allowed mutual
funds to invest abroad. Mutual funds can now invest abroad a maximum
of US$15mn or 30% of the funds under management whichever is lower.
•Pakistan external debt and liabilities were
recorded at US$35.83bn as of Jun-05 (compared to US$35.25bn on
•Pakistan's import bill surged in July-05, as
in the month of July; total import was recorded at US$1.99bn (from
US$1.45bn in Jul-05). At the same time, total exports were recorded
at US$1.27bn (from US$1.18bn).
•Inflation for the month of July rose to 8.99%
up from 8.74% in June, whilst core inflation remained unchanged at
•The Oil Companies Advisory Committee (OCAC)
kept POL prices unchanged in the third consecutive fortnightly
•In a high-level meeting with Ministry of
Industries, Prime Minister Shaukat Aziz asked the ministry to
initiate incentives to pace up expansion, increase production and
avoid cartelization in the cement industry.
•SBP reported net withdrawal of PkR49.16bn from
domestic unfunded debt in FY05.
•The Karachi Stock Exchange is planning a KSE
Sensitive Index, which would comprise 30 most liquid scrips on free
•SBP reported a net decline of 5.8% YoY and 13%
MoM in worker remittances for the month of July-05.
•Chenab Ltd starts trading on 22nd August.
•Local car sales have gone up by 12 percent for
the month of July (YoY).
•State Bank of Pakistan marginally increased
the cutoff yields in 3 & 6 month T-bill, whilst keeping 12-month
yields unchanged at 8.7907%.
•Polling was carried out on the 18th of August
for union councils in 53 districts across the country. This marks
the end of the first stage. Stage 2 of elections is on the 25th of
•A consensus has reportedly been reached to
introduce Continuous Financing System (CFS) and amend future rules
to improve the liquidity in the market.
THIS WEEK'S TOP STORIES
PAKISTAN NEEDS AT LEAST 'ONE' MORE UREA PLANT
We are expecting urea supply demand imbalance to
continue even after the commencement of the expansion plans through
de-bottlenecking of existing units and a new urea plant, Despite
this, there remains room for at least 'one' more urea plant. Since
the government has shown its inclination to attract investment in
this sector, both FFC and Engro are willing to set up a new urea
plant under the existing Fertilizer Policy subject to long-term gas
supply assurance by the government. Engro's management has disclosed
its intention for setting up a new urea plant, which would be
identical in size to Engro's existing urea plant with an execution
time of approximately 2.5 years while FFC is not very hopeful about
getting favor from the government owing to monopoly control issues.
FUNDS INVESTING ABROAD- POSITIVE LONG TERM
State Bank of Pakistan (SBP) in a historical
decision has allowed mutual funds to invest in overseas market to
the extent of 30 percent of their fund size subject to a cap of
US$15 million at any given time. While the rules for such
investments are yet to be finalized, the development bodes well for
mutual funds and capital markets over the longer term. With enhanced
options for investment, mutual funds would be able to diversify
their investments and earn better returns for a lower risk profile.
Depreciation of currency should also add an additional component to
local currency returns translating into increased attraction for
investors. This should in turn help the mutual fund industry to
flourish, which is pivotal to the growth of capital markets in
Pakistan. In the short term however liquidity drain (maximum
PkR17-18bn) remains a latent threat but chances of all funds being
invested simultaneously remain remote.
SENSITIVITY OF EARNING FOR E&PS
Assuming a 19% higher middle-eastern oil price of
US$50 for FY06 as against our base case of US$42, we estimate
earnings of OGDCL, PPL and POL to be higher by 3%, 6% and 13%
respectively from our base case assumption. Given the pricing
mechanism for crude and gas pricing for the domestic E&P
sectors, we do not expect the top line of local E&P sector to
benefit directly from the movement in world oil price which have
jumped by 32% YTD. As per our calculations, even local crude oil
prices do not have a direct correlation due to pricing discount
applicable under old petroleum policies for all the E&P
companies. POL due to higher production from relatively new fields
has higher correlation to oil prices, and hence higher sensitivity.
We are maintaining our liking for POL, which trades at 9.1x FY06
earnings and offers a discount of 18% to our DCF based fair value of
PkR360 under base-case oil price assumption, while PPL also looks
attractive trading at a 8.3x FY06E earnings.
PTCL- LIFE AFTER PRIVATIZATION
We have released a report on Pakistan
Telecommunication Company Limited (PTCL), with a neutral stance. The
gist of the report is covered in the following:
Focusing on PTCL's future in a privatized and
deregulated environment, we opine that new management of PTCL,
Etisalat would concentrate on Wireless Local Loop (WLL) and cellular
to utilize them as growth engines for the company. The relative
quality advantage that PTCL currently possesses and the
infrastructure edge over new entrants in the industry should not be
ignored either. Etisalat's efforts for realizing efficiency gains
would however be marred owing to the drag on bottom line emanating
from the employee package and the threat of emerging LDI (Long
Distance and International) operators who come as a part and parcel
of deregulation for all incumbents like PTCL. The drags coupled with
ambiguities regarding Etisalat's exact strategy for PTCL compel us
to maintain a Neutral stance on the stock. Our 'sum-of-theparts'
fair value for the stock stands at PkR64 per share.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
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KSE 100 Index
KSE ALL Share Index