MARKET THIS WEEK
The sentiment at the KSE remained mix,
with investors remaining a bit cautious especially as the year-end is
approaching. The index opened on a positive note on Monday but witnessed a
decline on the next two trading days. The market picked up on Thursday posting a
jump of 87 points amidst a trading volume of only 288mn. The week-end marked a
positive close as the Index closed above the 9,500 level. Overall, the trading
activity during the week remained relatively dull and the average daily volumes
witnessed a WoW decline of 24.73%. Overall, the market closed 0.88% higher WoW.
OUTLOOK FOR THE FUTURE
We expect the market to remain range
bound during the next week with the investors taking a cautious stance. Any
developments on the Kalabagh Dam issue would determine the market sentiment.
Developments on the PPL & SNGPL
privatization deal could trigger stock specific activity. 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:
*OPEC, supplier of one third of world's
crude production dropped a clear hint of possibility of production cut in 2QCY06
and 3QCY06 in its latest meeting
*Local car production and sales
witnessed a 45% and 50% YoY increase during the month of Nov- 05.
*According to newspaper reports,
Pakistan is seeking complete removal of anti dumping duty on bed linen exports
to the European Union (EU).
*In its Dec 12th Pakistan report,
Moody's maintained Pakistan's rating of B2/Not-Prime country for Foreign
Currency bonds and bank deposits.
*The OCAC has kept petroleum prices
unchanged for the next fortnight. The petroleum product prices rose during the
last fortnight in international market by 3%-4%, which has reduced PDL levy on
Mogas from PRs17.71 to PRs16.97 per liter.
*As per the Ad published in BR, FaujI
Foundation has invited expression of Interest for the sale of its 52% strategic
stake in Fauji Cement (PRs5.2bn at market price). The last date for EOIs
submission is 10-Jan-06.
*It is rumored that the KSE might
accept a non-member as Chairman of the KSE in the upcoming elections scheduled
*Reportedly the government has decided
to hold a pre-bid meeting next month for the eventual sell off of Pakistan
Petroleum Limited (PPL).
*The Ministry of Finance has directed
Ministry of Food & Agriculture (MINFAL) to review the option of either
reducing or withdrawing a direct subsidy on imported urea and an indirect
subsidy to domestic fertilizer companies in form of subsidized feedstock gas
*As per news reports, President
Musharraf has strongly advocated the construction of Kalabagh Dam by saying that
the government would go ahead the project with or without the consensus of all
*Reportedly, the Ministry of Petroleum
and Natural Resources is considering entrusting Oil and Gas Regulatory Authority
(OGRA) with the authority to determine prices of petroleum product (POL).
*Privatization Commission (PC) has
invited Expression of Interest (EOIs) for the sale of its 51% stake or 255mn
shares in Sui Northern Gas Pipelines (SNGPL) to a strategic buyer. The last date
of submission is 11-Feb-2006.
A local newspaper has quoted that PTCL
deal has been secured as a result of President Pervez Musharraf's meeting with
UAE ruler on the sidelines of Organization of Islamic Conference (OIC) summit in
Makkah (on December 8th).
*As per the 9-month supply agreement,
SNPGL has begun gas load shedding for the industrial sector in Punjab & the
NWFP from 15-Dec-2005.
*Employees of Pakistan
Telecommunication Company Limited (PTCL) have yet again threatened to go on
strike in light of the latest developments regarding PTCL employee lay off.
THIS WEEK'S TOP STORIES
CURRENT ACCOUNT DEFICIT - IMPORTING
Current account deficit came in at
US$2,043mn during Jun-05 to Oct-05 (compared to US$121mn in the corresponding
period last year). We believe higher trade account deficit remains the area of
concern, as the gap between import and export has risen extraordinarily high,
whilst current account transfers remain stagnant. Interestingly, reserve draw
down in the first four months is just US$541mn compared to US$1,038 during the
same period last year. Lower reserves draw down is primarily attributed to
extra-ordinary jump in Foreign Direct Investment (FDI) and Foreign Portfolio
Investment (FPI). This indicates the growing confidence of foreign investors in
Pakistan's economy. In sum, we believe current account deficit is largely
financed through non-debt generating flows, which indicates Pakistan is
importing growth without putting any pressure on its budgetary balances.
FAUJI CEMENT - IT'S BEST TO SELL NOW!!!
With Fauji Cement (FCCL) poised for its
best earnings in FY06, Fauji Foundation is looking to cash in on good times and
has announced its plan to sell off its 52% strategic stake in FCCL. Given the
high cost of this acquisition, we find little reason for existing manufacturers
to be aggressive (barring Maple which is eyeing a strategic export location).
Fresh investment therefore seems likely, as was the case with Javedan and Essa
Cement. With competitor expansions coming online, we expect FCCL to witness a
decline in earnings going forward. With further expansions in FCCL unlikely, we
recommend investors to cash in on the hype and SELL ON STRENGTH. Our revised DCF
based price objective stands at PRs16.04/ share.
THE THREAT OF INFLATION - FADING!
November inflation statistics came in
at 7.89% YoY (from 8.27% in Oct-05), whilst core inflation was recorded at 9.65%
YoY (from 9.91% last month). Importantly, Core inflation recorded a MoM decline,
for the first time since Feb'04. We believe SBP's tight monetary policy combined
with government's administrative measure (import liberalization of essential
food items) has played a pivotal role in confronting inflation.
However, balance of risk is still
favoring long-term inflationary expectations, as concerns of high utilization
rates, oil prices and budget deficit linger on. In addition, expected shortfall
in wheat output in current fiscal might push inflation higher. On the monetary
front, we believe SBP will carefully review other macro economic variables by
December end and will devise its monetary stance for 2HFY06. Given the
macroeconomic trend, we expect SBP to shift its monetary policy stance from
'Tight' to 'Neutral', as more macro economic variables are stabilizing. We
expect inflation to be around 7.5-8.0% by June 2006. Muzzammil Aslam
PETROCHEM MARGINS- THE CONTRARIAN VIEW
"We expect Asian petrochemical
margins to pick up in 1-2 months, as the region's supply/demand balance should
get tighter with exports to the US. Our survey of traders and shippers as well
as chemical producers confirms that Asia-US Gulf chemical trade should
accelerate in the coming months...Production losses at US plants during
September 2005 to May 2006 amount to 6.2% of Asian capacity. Although not all of
it will be replaced with Asian imports, the expected trade flow should be
significant enough to bring the price gap close to the equilibrium. If Asian
prices rise to the equilibrium, there is a theoretical margin upside 51-74% for
ethylene derivatives". Sonia Song, Merrill Lynch.
What does this imply for PSF margins in
Pakistan? Not really very good news. The upward price revision we anticipated
early next year is not likely to result in better margins if Asian raw material
prices play a game of catch up with US prices. The share price of Pakistan's PSF
giant, Dewan Salman Fibres Ltd. moves closely with primary margins. With the
latter promising little upside in the medium term, we believe DSFL will drag its
feet for a little while longer. We are neutral on the stock.
GAS PRICE CAP REMOVAL -POL TO BENEFIT
E&P companies have recently
forwarded a proposal to remove the cap on gas prices in order to provide
incentives for investment in the sector. This proposal is in early stages and
would take time for finalization.
Pakistan Oilfields Ltd. (POL) stands to
benefit most from any policy decision by the government to remove the cap on gas
prices. We estimate an impact of PRs12 on POL valuation from this. We estimate
an upward revision of 2% on average in FY07E -FY09E earnings for POL. Impact on
earnings for PPL and OGDCL would however be muted. We do not expect a major
impact on gas prices for end consumers, as most of the gas fields either do not
have such a ceiling or follow other Petroleum Policies. We maintain our liking
for POL that offers an upside of 12% and provides a dividend yield of 4%.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
No. of Trading Sessions
KSE 100 Index
KSE ALL Share Index