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  STOCK WATCH

By SHABBIR H. KAZMI
Updated Nov 19, 2005

ICI Pakistan posted strong earnings growth during Jan-September 2005 on the back of strong demand for all of its business segments and efficiency gains as well as cost cutting. The increase in the bottom line was fueled by a 5% increase in top line, 29% reduction in financial and other related charges (all long term loans were repaid last year) and a staggering 158% jump in net other income. Significant improvement was also visible on a quarter to quarter basis, with a 34% increase in the bottom line. The increase was due to a 17% jump in net sales, 45% decrease in financial and other expenses and a 312% increase in other income. Overall, a relatively lesser increase in net sales has resulted in a higher bottom line. The jump in earnings clearly demonstrates the cost centric focus of the company which is paying dividends. With the asset modernization of the PSF plant underway and 22% expansion in Soda Ash capacity, analysts expect the company to demonstrate an even stronger operating performance going forward, resulting in higher profits. Based on strong earnings growth ICI Pakistan is expected to report profit after tax of Rs 1,707 million (EPS: Rs 12.30) for 2005. The company is expected to pay out a full year dividend of Rs 6.00 (interim Rs 2.00), signifying a yield of 5% at current levels. On the back of strong macro economic growth and favorable industry dynamics for Paints, Soda Ash and the Chemicals and Life Sciences business, the margins are expected to improve over the next three years.

Sui Southern Gas Company's low earnings growth in 2005 was a result of slower than planned capital expenditure (EBIT is formula driven, linked to 17% of net operating assets) and penalties for transmission losses. The capex program is heavy (Rs 43 billion over the next 5 years), and this will drive the bottom-line. The company also plans to begin LNG imports from Qatar equivalent to approximately 300mmcfd which adds a new growth dimension. The company stands to gain from the Iran-Pak-India gas pipeline, not only as a possible partner but also because SSGC will have to enhance its distribution capacity to cater to additional gas, meaning increased operating assets. Significant progress has been made during the last fiscal year towards the implementation of a five-year Rs 43 billion capital expenditure plan. The company increased its capital expenditure during the last fiscal year to Rs 6.2 billion which bodes well for the company's future. The company is expected to incur on average Rs 8 billion in capex over the next few years. The company's profit before tax is linked to its net operating assets therefore any increase in the company's asset base should reflect positively on the company's future earnings potentials. SSGC holds 51% stake in the ISGSPL (Inter State Gas System Limited), the company is responsible for importing of gas from either of the three trans-international gas pipelines - Turkmenistan-Afghanistan-Pakistan, Iran-Pakistan-India and Qatar-Pakistan pipeline. Pakistan is in the process of finalizing a deal regarding one or more of the 3 pipeline projects. Fast progress is taking place on Iran-Pakistan-India pipeline and it is expected that construction will start as soon as mid- 2006. Apart from any future dividends announced by ISGSPL , this would reflect positively on SSGC's earnings as SSGC scales up its transmission and distribution network to cater to the increased supply. During the year 2005, the company entered in gas supply contracts with BHP Petroleum, ENI and OPI for additional gas supply of about 300 mmcfd which will come on stream by 2007. SSGC consequently entered into a 10-year gas supply agreement with power generation companies (including two IPPS of 150MW each), a steel plant, and the upcoming Textile City. The company is also proceeding with the planning and project development of an integrated Liquefied natural gas (LNG) project which will bring another 2.5mn tons per annum (300mn cubic feet per day) of gas into the company's system by the year 2009-2010. Any future income and dividends from this project will further boost company's earnings.

For the fifth month running now, domestic PSF manufacturers have been unable to raise prices. Since July 2005, PSF prices have been held at Rs 82/kg but domestic cotton prices have gone up first floods stirred panic and then the government reduced the target for 2006 crop by 2.5 million bales. With mills still running on old stock courtesy last year's bumper crop, cotton prices have stoically maintained their discount to PSF. Whilst international PSF prices have inched up by a modest 7% from US$ 1.07/kg to US$ 1.14/kg, local producers have most likely allowed demand recovery after last years debacle to take precedence. Despite a nearly 6% decline in crude oil prices over the last 2 weeks, PTA and MEG prices have not budged. Current prices are higher than those of the last quarter by 7.6% for PTA and 11.3% for MEG, even as crude is 13.8% lower. Apparently the softening of oil prices has had no impact on PSF feedstock prices. According to regional petrochemical analyst at Merrill Lynch, at the heart of this issue is a delay in Naphtha cracking capacity additions in Iran. The result is the immediate upswing in MEG prices. It is believed that the softening of PSF feedstock prices over the last quarter has been a direct consequence of uneasiness about future growth prospects of Chinese textiles. With a deal with the US underway, PSF utilization rates will pick up resulting in reinforced demand for both PTA and MEG. With the delays in supply addition, it is unlikely that prices will soften in the near future. Meanwhile another good cotton crop in the US and India could keep international cotton prices low for another season. The deciding factor in the PSF tussle will be China, where strong PSF demand could bring in a price recovery. On the domestic front, January could herald in some improvement in PSF prices, when the new cotton stock comes into play.

 
 

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