On the face value one fails to
understand the latest point of confrontation between the brokers' fraternity and
the regulators on the election of Chairman KSE. However, those who could read in
between the lines that the SECP suggestion is noting but to strip off the
brokers' community from whatever power they believe to enjoy. As the law stands,
on the 10-member board of the KSE, five are elected by the brokers, four are
technocrats including the managing director, approved by the SECP and the tenth
member is the chairman. In case of an equality of votes (on any controversial
issue), the chairman of the (board) meeting shall have a second or casting vote.
Knowledgeable brokers fear that if the regulator wrests the authority of
appointment of chairman from the brokers, the stock exchanges would be left
powerless. According to informed sources, the proposed change could not be made
through a directive but has to be made through amendment in the Articles of
Association of the Stock Exchange. To do so, a process has to be followed,
whereby the Board first proposes a special resolution in its meeting, which is
required to be passed by three-fourth of the members present at a general body
meeting. And finally to effect an amendment in the articles of association a
21-day notice must be given to the members. Since the date of election of
directors falls on December 15, there was not enough time to bring about the
change at least this year. It looks like the issue would finally boil down to
the question whether or not a directive by the regulator supersedes the Articles
of Association of the Exchange?
While any concrete development
regarding the Pakistan Telecommunication
Company (PTCL) transaction does not
seem to be in sight, optimistic statements from government officials continue
intermittently. The latest in line is the statement from Dr. Abdul Hafeez
Sheikh, Minister for Privatization and Investment, who has reiterated that the
talks are in final stage and a result should be forthcoming in the next few
days. Analysts are of the view that the transaction is heading towards its
logical conclusion but the timeline and the concessions that Etisalat is able to
extract at the end of the day remain to be seen. On the operational front, PTCL
has launched a new marketing campaign under the banner "Cities of the
Month" in which rates for NWD calls have been slashed. The decline in rates
is somewhat expected given the competition PTCL is facing from LDI operators.
The auto sector has been in limelight
since July this year, supported by an ongoing boom in auto demand, expansions,
and relatively low PE multiples. The sector underperformed in the last month.
Despite the share price growth seen to date, there is still value in the sector.
The four listed auto assemblers (Honda Atlas, Indus Motor, Pak Suzuki and Dewan
Motors) are currently trading at an average PER of 7x. Auto companies have
historically traded at a lower PER than the market, but given that the sector is
in a growth phase with major capacity expansions ongoing, combined with the fact
that auto assemblers have little to no leverage. Expansions will drive revenue
growth, and earnings will be supplemented with increased imports, especially of
high-end cars, where margins are higher than for locally assembled cars. Aside
from growth, Indus offers a healthy dividend yield of 8% while Suzuki is trading
at the lowest PER of 5x (to estimated year 2006 earnings).
On Thursday 73 percent shares of KESC
along with management control was transferred to the consortium of Saudi
investors' group Al-Jumaih and Hasan Associates. Privatization Minister, Dr.
Abdul Hafeez conceded that the transaction was difficult but the involvement of
the government at the "top level" made it a success. He was confident
that the new management would make KESC a public service utility and a
profitable entity. Sheikh Abdul Aziz of Al Jumaih on the occasion promised to
make KESC a service organization that would be responsive as well as
responsible. Frank Scherschmidt in his speech hinted at upgrading and expansion
of the KESC system and services in future. Farooq Hasan of Hasan Associates made
it clear that there was "absolutely no room for failure" and it had to
be only success and nothing else. He recalled that KESC was the first utility
company to be registered in 1910 under the Company Act, 1913 and started
operations with a generation of 60 megawatt.
The long awaited merger between PICIC
and PICIC Commercial Bank appears to be going ahead with the announcement this
week of a swap ratio. The notice sent by the two companies to the KSE proposes
amalgamation of PCBL into PICIC, with a swap ratio of 1.87 shares of PCBL for
each share of PICIC. The swap ratio is after inclusion of 20% bonus shares by
PICIC, which will be issued in December 19th, 2005. PICIC has total assets of Rs
37 billion, and equity of Rs 8.7 billion, as of 30th September 2005. Its book
value per share is Rs 23.12, and it is currently trading at Rs 87.25 per share.
Commercial bank has total assets of Rs 62 billion and equity of R3.9 billion.
Its book value per share as of end September was Rs 17.12 it is being traded at
Rs 40.35 per share. PICIC owns 60% of Bank's shares (109.395 million shares),
recorded at historic cost of Rs 1.437 billion, which will effectively be
cancelled after the merger. The combined balance sheet will have total assets of
approx. Rs 97.75 billion and equity of Rs 11.2 billion. On a post-merger 426
million shares outstanding, the book value per share for the merged company
would be Rs 26.6 per share (this is an estimate as part of the merger process
will include revaluation of fixed assets to reflect current market value, plus
income and balance sheet changes since end September). Combined nine-month
earnings for PICIC and Bank are Rs 2.43 billion, and the company is currently
trading at a PER of 9.55 to annualized earnings.
In the absence of expected production
enhancement through development and commencement from some of POL announced
field plans, it is necessary to revisit the company. On production front, recent
calamity, weather conditions and some technical problems have led to delay in
addition of production from both POL operated and joint venture fields.
Collectively a delay of 2-3 months in the addition of 1,800bpd oil and 3-4MMCFD
gas production respectively is feared. The major delay is expected from various
fields. The management expects completion of drilling work on new well Pindori-VI
to prolong to end January due to some technical problems. Pindori-VI was
expected to add 2,000bpd (POL share: 700bpd) and 5MMCFD of gas (POL Share:
1.75MMCFD) in November. The second discovery at Tal block was expected to come
online with a total production of 5,000bpd (POL share: 1,050bpd) and 5MMCFD (POL
share: 1.05MMCFD) of gas in January, which has now been delayed up to end