The overall sentiment at the KSE
remained positive especially after the last week concluded on a high. The daily
volumes hovered around the 500mn figure except for Friday, where the volumes
were lower at 383mn. Considerable activity was seen in the top tier stocks after
a recent period where the investor interest had shifted towards second and third
tier stocks. Activity in the cement and banking sector provided a boost to the
market. Overall, the market closed 2.23% higher WoW.
OUTLOOK FOR THE FUTURE
We believe that the market would remain
range bound next week and will remain sensitive to news regarding KSE
Chairmanship and any directives on the CFS issue. Oil fluctuations will dictate
the performance of the oil and gas sector and can influence the market
direction. We are selectively positive on the market and recommend investors to
go long in Pakistan Oilfields, Fauji Fertilizer Bin Qasim, Nishat Mills, and
Azgard Nine. From a dividend yield perspective, KAPCO looks attractive.
The major developments this week were:
•MOL, an international petroleum
company based in Hungary, has expressed its commitment for acquisition of 51%
stake of Pakistan Petroleum Limited (PPL).
•The Islamabad Stock Exchange (ISE)
has approved the directives of the Securities and Exchange Commission for
election of non-member director as the Chairman of the Exchange.
•Speculation over the office of
Governor State Bank of Pakistan (SBP) finally ended with the appointment of Dr.
Shamshad Akhter. Dr. Akhter is currently serving as Director General South East
Asia Department in the Asian Development Bank.
•The Cabinet Committee on
Privatization (CCOP) gave its approval to privatization of NIT in its meeting
held yesterday and set a deadline of 15-April-06.
•According to news reports, the
Kuwaiti National Industries Group has acquired 29% stake in Karachi Electric
Supply Corporation (KESC) for US$150mn (PRs2.36/ share for 3.82bn shares).
•The first four months of the current
fiscal year have brought cheer for textile exporters, with 28% growth YoY
realized over July-October. Textile exports came in at US$3.34bn, as compared to
US$2.61bn last year.
•As per newspaper reports, quoting
Senior Executive Vice President Pakistan Telecommunication Company (PTCL),
Shahzad Sadan and Executive Vice President, Gul Bahadur Khan have announced that
not a single permanent employee of the company will be removed from job.
•As per newspaper reports, the new
management of KESC has announced that it will invest US$800mn in the entity, to
raise power generation capacity.
•State Bank of Pakistan (SBP)
scrapped 3M & 6M T-bill auctions, whilst it accepted PRs19.6bn worth of 12M
T-bills @ 8.79% (unchanged).
•Securities and Exchange Commission
is expected to announce new mechanisms for downward capping of stocks as well as
Continuous Funding System (CFS).
•As stated in a press release, issued
by the Karachi Stock Exchange (KSE), the stock exchange has decided to take
legal opinion on the matter of election of a non-member director as Chairman of
•Sui Nothern Gas Pipelines Limited
and Sui Southern Gas Company Limited, have sought a PRs26.20/mmbtu increase in
gas tariffs, effective from 1-Jan-06.
THIS WEEK'S TOP STORIES
SNGPL & SSGC - ALL SET TO
Aiming at privatization of Sui Southern
(SSGC) and Sui Northern (SNGPL) in FY06, OGRA is acting aggressively for setting
up all benchmarks, which are crucial in determining future profitability outlook
of the Sui twins. Latest to come to the fore are new benchmarks for UFG losses
and salary expenses, to be followed by the new return formula for the two
companies. Based on the new benchmarks, we find SSGC's profits are more
vulnerable to UFG (Unaccounted for Gas) targets (14.5% impact on EBIT) while the
company is sitting comfortable on lower-than-allowed salaries expenses. SNGPL
though appears above both benchmarks, still has a lower impact on EBIT than SSGC
(EBIT impact: 13%). Thus at current levels, we prefer SNGPL (Price Obj PRs79)
over SSGC (Price Obj PRs28) offering a total return of 20% (inclusive of
PTCL - PRIVATIZATION NEARING
As per newspaper reports, the PC is
reportedly likely to accept most of the demands put forward by Etisalat the more
important being lifting of restriction of employees lay off, listing of PTCL on
UAE bourses, and transfer of 30% stake of PTCL as opposed to 26% stake initially
offered for sale. Our concern on these concessions stem from the fact that these
concessions necessitate change in the basic parameters of the pre-bid documents,
which can raise concern of Singtel and China Mobile, the other two parties that
bid for PTCL. We await concrete developments on the lifting of restriction on
lay off of employees before turning positive on the stock, as higher employee
compensation remains a major drag on PTCL's earnings. We maintain our Neutral
stance on PTCL.
WHERE TO GO WHEN GROWTH SLOWS DOWN
The verdict has come in; earnings
growth at the KSE is slowing down. We expect earnings growth of 7.6% in CY06
after 22% growth expected for CY05. This in no way implies, however, that
valuable investment opportunities do not exist. We narrow down attractive scrips
into four key themes, which we believe, will generate returns superior to the
market. At this point in time, we advise investment in Consolidators (expanding
industry leaders) like Sui Northern Gas Pipelines, Nishat Mills, Nishat Chunian
and Packages; Niche Plays (companies that have identified demand trends
accurately) like Fauji Fertilizer Bin Qasim; Overlooked stocks (underperformers
and cheap overlooked stocks- we believe they will now perform) like Hubco and
Azgard Nine; and Revamped Focus Stories (internal momentum will propel growth)
like ICI Pakistan and Pakistan Oilfields.
NBP - CAPITAL GAINS TO BOOST INCOME IN
National Bank of Pakistan's investment
in National Investment Trust is likely to be freed up soon after a period of
almost five years. With the government aggressively pursuing the privatization
of NIT, banks are most likely to be handed over portfolio of stocks equivalent
in value to their investment in NIT. While NBP is likely to report a handsome
windfall gain in CY06 as a result of NIT's privatization (estimated at
PRs21/share), it is unlikely to have any major impact on the valuation of the
bank. NBP is already marking to market its investment in NIT, with the gain
being recorded as a surplus on revaluation. On privatization, the bank is likely
to record a capital gain on its investment as a result of which the revaluation
surplus would be transferred to retained earnings of the bank, leaving the book
value unchanged. On the other hand, sale of NBP's stake in Bank Al Jazira is
likely to result in over PRs20/share (excluding the impact of tax) impact in
earnings and book value. However, timing of this sale remains uncertain. On the
other hand, the change in Prudential Regulations for provisioning is likely to
result in an additional provisioning of PRs1,007mn (PRs1.70/share) by NBP is
CY05. Trading at 2.05x FY05E book value, we believe that most of the positives
have been discounted, and recommend a Neutral stance on NBP at current levels.
CALLMATE INTERNATIONAL DEBUT: VALUE
Callmate Telips Telecom Limited (CTTL)
has formally launched its international calling cards by initiating operations
in three countries (USA, UK and Canada). Targeted at expatriate Pakistanis
calling to and from Pakistan, the company remains excited at the prospects and
initial response to the product. We prefer to remain conservative in
incorporating the impact of the new product and estimate an additional
PRs2.9-3.0 per share bottom line impact for FY06. Carrying our conservative
forecasts forward, our revised fair value for the stock stands at PRs92 per
share offering 21% upside (including dividend yield) at current levels. After a
phenomenal run up in price, the stock is taking a breather at current levels as
the LDI license driven excitement has settled down. The aforementioned launch
may serve as a trigger as return of growth
prospects demands a re-rating of
Callmate's multiples. Combined with growth in earnings, interest in the stock
may well be re-ignited in the days to come. Go long on Callmate!
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