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, Sep 05, 2005-Friday, Sep 09, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

Atlas Honda Limited

09.09.05

Fri

Annual Audited Accounts for the year ended June 30, 2005.

Jahangir Siddiqui Capital Markets Limited

10.09.05

Sat

Financial Statements for the year ended June 30, 2005.

Attock Petroleum Limited

11.09.05

Sun

Annual Accounts for the year ended June 30, 2005 / for declaration of any entitlement.

Pakistan Oilfields Limited

11.09.05

Sun

Accounts for the year ended June 30, 2005 / for the declaration of any entitlement.

Attock Cement Pakistan Ltd.

11.09.05

Sun

Accounts for the year ended June 30, 2005.

Pakistan National Shopping Corporation

14.09.05

Wed

Annual Accounts for the year ended June 30, 2005.

Thal Limited

12.09.05

Mon

Audited Accounts for the year ended June 30, 2005.

Dawood Lawrencepure Ltd.

13.09.05

Tue

Annual Accounts for the year ended June 30, 2005.

Cherat Cement Co. Ltd.

15.09.05

Thu

Financial Statements for the year ended June 30, 2005.

Oil & Gas Development Co.

19.09.05

Mon

Annual Accounts for the year ended June 30, 2005 and for declaration of entitlement, if any.

Pakistan Oilfields Limited

12.09.05

Mon

Annual Accounts for the year ended June 30, 2005 / for the declaration of any entitlement.

Security Leasing Corp. Ltd.

19.09.05

Mon

Annual Accounts for the year ended June 30, 2005.

Maple Leaf Cement Factory Limited

15.09.05

Thu

Annual Accounts for the year ended June 30, 2005.

Dadabhoy Cement Industries Limited

16.09.05

Fri

Audited Annual Accounts for the period June 30, 2005 and to increase Authorised Capital of the Company from Six Hundred million to One Billion ordinary shares of Rs.

Askari Leasing Limited

27.09.05

Tue

Yearly Accounts for the period ended June 30, 2005.

MARKET FOCUS

THE TURNOVER TRAP

For the risk-averse Pakistani investors, the concept of diversifying portfolios is appealing. In this regard, we suggest that in addition to the famous high-volume stocks, the portfolio should also contain a fair share of stocks with lower average turnover.

Background: In continuation to our last weeks' analysis of investment strategies, we have investigated another criterion which investors may consider using while diversifying their portfolio. We propose that diversity in equity investments should be based not only on the number of stocks in a portfolio but also on average daily turnovers of stocks. Stocks with lower turnover, as opposed to those with higher turnover, are driven primarily by their company's performance, rather than market sentiment. Intuitively, this is a correct hypothesis since the lower rack companies have lesser shareholders, which results in a lesser room for speculation.

The Guinea pigs: Our theory is applicable only in the times of market dips because the factor of risk comes into the picture when the market is going down and the investor is likely to lose money. We have analyzed various periods of history during which the market dipped or has remained unchanged.

For our study, we chose 10 Stocks with the highest daily turnovers and another 10 with lower turnovers. Companies with lowest turnovers were not taken into consideration because the levels of their volumes were minimal.

The new Lemma: Our experiment proves that companies with a lower average turnover are a much safer bet during the recessionary periods of the market.

Data from Feb 2005 to date was taken into evaluation to conduct this research. Taken as a whole, during the times when the market return was negative, 70% of the time, the lower turnover companies performed better than their counterparts on the other side.

For the month of Feb 2004, whereby the market gave a cumulative return of 0.07%, the return of 41% of the lower 10 outperformed the return - 35% of the top 10. This episode ended with a stable market but with extremely different returns from the two teams.

During the period 15th July 2004 to 2nd Aug, 2004, we saw that the market gave a negative return of approx -1%, during which the top 10 gave a negative return of 36% and the lower 10 gave a negative return of 4%. Another example of such a situation was during 5th April and 19th April 2005, when the market fell by 14%. In this course, the top 10 scored -123%, while the lower 10 achieved -45%. Although both the sets achieved a negative return, the lower 10 presented a much lesser risk than the top ones.

THE FINAL VERDICT:

The examples stated above present various scenarios where our theory comes into play and minimizes the risk of losing money for the investor. Thus, we suggest that before investing blindly into the famous liquid stocks, one should analyze the risks attached to them. Our observations show that when the market dips, the lower turnover stocks show a better return and thus should be included in your portfolio as a tool for risk minimization.

SECTOR IN FOCUS

BANKING, INSURANCE AND INVESTMENT BANKING: WILL THE MARRIAGE WORK?

Love Triangle: We are set to witness a major process of consolidation in the financial sector. Commercial banks are increasingly diversifying into brokerage, investment banking and insurance subsidiaries. Most of the major banks have investment banking operations, while the trend of banks entering the insurance industry is also catching on. ALFALAH Bank is planning to launch its own insurance underwriting firm soon, while Bank of Punjab is said to have finalized its plans to enter life insurance business. The trend is not new in the banking sector. Mian Mansha took over Adamjee General Insurance soon after he had bought MCB Bank from the government.

In fact, Adamjee is said to be in the process of acquiring 5 million shares of MCB. Askari Insurance and Askari Bank are both operating under the umbrella of the Army Welfare Fund. Why are rising spreads not enough for commercial banks?

The motivation for banks into investing insurance and brokerage is to diversify their income base and to provide more financial services under one roof. This helps to keep large corporate clients loyal to the bank. Moreover, banks have an information advantage over a vanilla insurance company as it has conducted in depth risk and credit evaluation of corporate clients as part of its banking function. This would enable them to enter the insurance and investment banking businesses with greater efficiency. Finally, gains from reduced premiums shall also be realized.

A BIZARRE LOVE TRIANGLE- POTENTIAL CONFLICT OF INTEREST:

The problem is that it is an amalgamation of two different cultures; a culture of risk that is the securities and insurance business, and a culture of protection of deposits; that is the culture of banking. Many critics point to the high levels of risk inherent in insurance and investment banking and feel that commercial banks entering these industries are putting their depositors money at risk. There is also the fear that the bank might charge lower premiums from their corporate clients then their risk profile warrants. From the investment banking point of view, banks might give loans to undeserving clients for whom they are underwriters.

DOES PAKISTAN REQUIRE A GLASS-STEAGALL ACT?

It was precisely for this reason that the US Congress had passed the Glass Steagall Act of 1933 and the Bank Holdings Act 1956. They barred commercial banks from dealing in brokerage, investment banking, and insurance. The Federal Reserve wanted to erect a firewall, so that if something caught fire on the underwriting or insurance side, it would not burn the deposits away. One of the main motivations behind enforcing the Act was to break the corporate muscle of financial powerhouses such as J.P. Morgan, by making it give up one of its two main sources of money. The SEC wanted to punish Wall Street, and by downsizing J.P. Morgan, it was doing just that.

AN OVERREACTION TO THE GREAT DEPRESSION...

The Act was repealed in the US since 1999. The Citigroup merger between Citibank (banking) and Travelers (insurance) heralded the formal death of the Glass Steagall Act. The idea of keeping bankers and brokers in different rooms was an overreaction to the Great Depression, in a period of unprecedented bank failures.

We do not have a J.P. Morgan; nor do we have a great depression- so let the marriage go ahead:

Our financial sector expansion is taking place in a vastly different context. Banks have enjoyed an exceptionally good year in terms of profitability due to rising interest spreads. It is not purely for bottom-line considerations that banks are diversifying their business functions. The main motivation is to provide a greater degree of valueadded services to the corporate clients and to explore new niches in an increasingly competitive financial sector. The main advantage of a commercial bank owning its own insurance underwriting company is in the form of reduced premium margins. Especially in the booming auto loan market, this will translate into substantial cost saving for the banks. As far as investment banking is concerned, it is not the money machine like it is in the US. Investment banking is more of a corporate image enhancer tool, with a view to the future.

BANKS CAN HELP INSURANCE TO CLEAN UP ITS ACT

Granted that the SECP is still coming to grips with the lack of transparency in the financial sector and does not wield enough power to control the unruly elements in the insurance industry. But in the banking sector where banks are in a cutthroat competition for the marginal deposit, reputation is everything. It is therefore realistic to assume that as the banking sector consolidates and expands, it will not doing so at the expense of its depositors. Moreover, in an insurance market strewn with inefficiencies and high levels of market concentration (the top two insurance companies share 58% of the deposit revenues), the entry of banks augurs well. It should lead to a spillover of banking sector efficiency into the insurance market, and will also help the insurance sector consolidate (already the SECP is contemplating raising the minimum capital requirement from PKR80million (at present) to PKR200 million). The heady heights that J.P. Morgan achieved in the early 1900s are nowhere in sight.

RESULT REVIEW

KOT ADDU POWER COMPANY - FY05

KAPCO-"Continuing to exceed shareholders' expectations".

•PAT (FY05): PkR 8.05 bn (EPS: PkR 9.1), * higher by 16% YoY
•Revenue: PkR 27.6 bn, up by 26% YoY. Gross Margin down from 39.2% in FY04 to * 35.3% this year.
•Final cash dividend: PkR 4.5 (45%)

As claimed by the KAPCO management at the year-end, the company has performed its best in FY05. The annual results released by KAPCO displayed a PAT of PkR 8.05 bn (up 16% from PkR 6.9 bn in FY04). This upside had a positive impact on EPS, which jumped up 16% from PkR 7.9 per share to PkR 9.1 per share.

A WALK DOWN THE MEMORY LANE:

The increase in the revenues can mainly be attributed to their ability to avoid major machinery breakdown during the course of the year. Any unforeseen mechanical faults in the system cause the available capacity to decline, which hits the company's bottom line substantially. A plant shutdown for KAPCO means an additional cash outflow for the damaged asset's replacement, since a certain fixed portion of that cost cannot be passed on to WAPDA. Furthermore, the liquidated damages that the company has to pay in such a situation cannot be recovered from the insurance company for a certain time period, during which a liquidity crunch prevails in the company. Having dealt with such problems in the past, the KAPCO management has invested in making sure that the chances of a breakdown are minimal.

THE GLITCH IN THE FAIRY TALE:

The decrease in gross margin shows that costs for the company have increased at a higher rate than sales. Sales are not expected to go higher in the next year due to the capacity constraints. Thus, the improvement in the net profit is expected to come from the reduction of costs. This will result in a higher efficiency of producing 1 unit of electricity and as a result carry the gross margin down.

The final cash dividend of PkR 4.5 per share (45%) was higher than the expected dividend of approximately PkR 4.0. This in addition to the interim dividend of PkR 3.5 has served to make KAPCO a good long-term investment in the market, with an attractive dividend yield of 17.3%.

MARKET THIS WEEK

The KSE gained 1.28% last week, closing at 7889.24 Index level on Friday. The average volume traded over the week (341 shares) remained lower than last week (377 mn shares) as the CFS amount of Rs25 bn met its cap on Monday. Scrip-wise correction, to some extent, was witnessed during the week but at the same time, side scrips performed well. The noted factor of the week was that most ex dividend scrips saw healthy volumes and good price appreciation, such as Pakistan State Oil, Faysal Bank, Adamjee Insurance and Engro Chemicals.

With the dip in international oil prices at around $65 a barrel, after hitting a record high of $70.8 last week, most of the oil sector scrips remained range bound whereas the banking sector saw an upward trend throughout the week on the back of healthy results. Refining sector performed well, notably Attock refinery and Pakistan refinery, closing up 11.32% and 9.67% respectively WoW. Monday started off with the index closing up by around 61 points, though the volumes remained almost 1.4% lower from the last day. Overall, the refining sector did well on Monday except for NRL, which closed down 5% (PkR 343.90) after its below-than-expected full year announcement of Rs 31.8 and 75% cash dividend. Pakistan Telecommunication remained the volume leader, contributing 22% to the total volumes. Banking sector continued the upward trend with MCB and NBP closing up 0.4% and 1.6% respectively. Correction was witnessed on Tuesday on the back of dip in international oil prices and CFS amount reaching its cap of PkR25bn. Buying at dips averted the market from a major fall with the index recovering 1.14% after making an intra day low of 7719 points (down 1.67%) from the previous day close. Banking sector continued the upward spree with NBP, MCB and BOP closing up 2.5%, 1.9% and 1.7% respectively.

On Wednesday market continued to move in a narrow range with not much fluctuation in index mover scrips. Companies having cross-holdings, such as MCB, AICL, NML and DGKC, performed well. KAPCO closed on its upper circuit (PkR 45.60), after announcing a hefty final dividend of PkR 4.5 making it PkR 8 for the full year. POL suffered on the back of delay in its BoD Meeting (Sep. 11th) and reduction in international oil prices. BOP was unexpectedly the volume leader on Wednesday, generating great buying interest among investors, to close up 3.2% (PkR 103.60). Thursday again saw a bull run on rumors regarding increase in CFS cap. Refineries were the out performers with ATRL and NRL closing on their upper circuits at PkR 204.80 and PkR 337 respectively. Banking sector again maintained its uphill course, especially NBP, to close up 2%.

On Friday, market remained range bound with low volumes, being the last working day. Though the index crossed the 7900 barrier in the first session but intra day profit taking did not allow the market to settle above the same level. Refinery sector was again the pick of the day with NRL and PRL closing up 3.9% and 4.5% respectively. PTC and OGDC, the main index movers and volume leaders, maintained their downward trend closing down 1.1% and 0.7% respectively. Adamjee Insurance reached its upper circuit for the third consecutive day closing at PkR 105.55.

OUTLOOK

Since the replacement of CFS with COT, the market has seen an upside of almost 600 points without any major correction. We expect major activity to remain in the selected stocks. We maintain our bullish stance on the banking and oil sector. However, a cautious approach should be adopted by the investors.

WEEKLY

W-3

W-2

W-1

W

.

Forex Reserves (USD mn)

12,419

12,447

12,406

12,627

EXCH RATE:

Exch Rate: PkR/USD

59.70

59.78

59.760

60.760

PkR/Euro

72.98

72.47

73.39

72.34

MONTHLY

APR-05

MAY-05

JUN-05

JUL-05

INTEREST RATES

3m T-bill

7.2%

7.60%

7.48%

7.69%

6m T-bill

7.8%

7.95%

7.94%

7.97%

12m T-bill

8.3%

8.45%

8.40%

8.69%

INFLATION

CPI (YoY)

11.1%

9.8%

8.74%

8.99%

MONEY

Currency in Circulation (YoY)

15.1%

Na

Na

Na

Deposits (PkR bn)

2290

2320

2355

Na

(YoY)

20.49%

19.4%

18.2%

Na

Loans (PkR bn)

1720

1752

1759

Na

(YoY)

37.5%

36.7%

32.8%

Na

M2 (YoY)

14.1%

Na

Na

Na

EXTERNAL BALANCE

Exports (USD mn)

1301

1384

1541

1272

(YoY)

Na

Na

23.4%

-17.4%

Imports (USD mn)

1903

2033

2241

1996

YoY

Na

Na

20%

-10.9%

Trade Balance (USD mn)

-601.5

-648.7

-699.5

-724

Yearly

2001

2002

2003

2004

2005

GDP (USD bn)

58.51

63.50

67.70

69.07

75.29

GDP growth

1.84%

3.10%

5.11%

6.40%

8.4%

Agricultural Growth

-2.2%

0.1%

4.1%

2.6%

7.6%

Services Growth

4.76%

5.30%

5.24%

5.49%

7.9%

Manufacturing Growth

9.3%

4.5%

6.9%

13.4%

12.5%

Population (mn)

143

146

148

149

152.5

GDP per capita (USD)

408.6

433.9

457.4

463.6

503

TRADE BALANCE

Imports (USD bn)

10.202

9.434

11.333

15.47

20.6

YoY

6.2%

-7.5%

20.1%

36.5%

32%

Exports (USD bn)

8.933

9.14

10.889

12.27

14.4

YoY

9.1%

2.3%

19.1%

12.7%

17.1%

Trade Balance (USD bn)

-1.269

-0.294

-0.444

-3.2

-6.2

Current Account (USD bn)

-0.513

1.33

3.16

1.73

-1.9

Remittances (USD mn)

1087

2389

4236.85

3800

4168