MARKET THIS WEEK
The market remained range bound during
the week. Though, positive news on PTCL privatization deal did provide the
much-needed impetus to the market, the Bull Run was short-lived and volumes of
less than 300mn shares were witnessed on the last two trading days. Overall, the
average daily volumes witnessed a WoW decline of 11.62% and the index fell by
OUTLOOK FOR THE FUTURE
With the year-end approaching, we
believe that both the institutional and individual investors are likely to
remain on the sidelines. The settlement of the future contracts and uncertainty
on the political front regarding the Kalabagh Dam issue is likely to put
pressure on the index. We are selectively positive on the market and recommend
investors to go long in Pakistan Oilfields, Fauji Fertilizer Bin Qasim, Nishat
Mills, Callmate Telips and Azgard Nine. From a dividend yield perspective, KAPCO
The major developments this week were:
*India and Pakistan have agreed to
start work on the US$7bn Trans-national pipeline project from Mid-2007 and
complete the project by 2010.
*A total of 10.4mn bales have reached
ginneries, down 11.3% from the same time last year whereas a fortnight ago the
current crop was closer to 13% short of the previous year.
*OPEC officials have hinted at an oil
price range of US$45-55/bbl for CY06 as its heaviest crude brand. According to
Chairman of Orascom Telecom, Nassef Sawaris, Orascom is expected to invest
US$500mn in Pakistan during 2006.
*Changes in the mechanism of Continuous
Financing System (CFS) have resulted in some discomfort among investors,
primarily owing to the lack of understanding of the system.
*Reportedly, E&P companies have
threatened the government with shut down of gas production in case the
government does not remove cap on gas prices.
*The government is considering an
increase in gas prices by at least 15.2% from 01-Jan-2006.
*In a surprise move, SNGPL has
suspended gas supply (due to winter load shedding) to an additional 110
companies on Multan Road and Sheikhupura Faisalabad Road, despite a strong
negative reaction by Aptma on the first tranche of supply cut and SNGPL's own
earlier undertaking to supply 50% of the requirement of in the area.
*Large Scale Manufacturing (LSM) growth
came in at 8.7% in 1QFY06 (compared to 24.9% during the same period last year).
*Reportedly, Pakistan has allowed
Etisalat to make the payment for 26% stake in Pakistan Telecommunication Company
Limited (PTCL) over a period of five years.
*The last auction of this calendar year
saw T-bill yields for 3, 6 and 12-month tenors left unchanged.
*The KSE board in a meeting decided to
approve the SECP directive to elect a non-member director as the Chairman of the
*In an effort to bring more investment
in Dairy Industry Ministry of Finance has forwarded a proposal to grant
Zero-rating status for Sales Tax to the industry.
*According to Chairman of Orascom
Telecom, Nassef Sawaris, Orascom is expected to invest US$500mn in Pakistan
THIS WEEK'S TOP STORIES
PSO - READY FOR A DECLINE IN PETROLEUM
We believe that petroleum product
prices could potentially decline by an average of 6-8% in 2HFY06, which can lead
to substantial inventory losses for the Oil Marketing Companies (OMCs). While
1QFY06 saw profitability of OMCs skyrocket on the back of higher prices and
inventory gains, we expect this trend to reverse in 2HFY06. The government has
already started collecting revenue in the form of Petroleum Development Levy (PDL)
from the downstream oil sector. Given the sensitive nature of petroleum prices,
we expect the political pressure on the government to increase if international
oil prices continue to hover below the US$60/bbl mark. According to a newspaper
report, the government has already recovered approximately PRs5bn in the form of
PDL, as against revenue loss of PRs10bn in the first four months of FY06. We
maintain our Neutral stance on Pakistan State Oil at current levels.
Privatization remains the only trigger in the near term for the stock.
CREDIT DEMAND- STILL HIGHER!
Late cotton crop arrival and Capex
cycle resulted in higher private credit off take in July to Dec 3rd. As per
State Bank of Pakistan (SBP), private credit off take was recorded at
PRs209.02bn compared to PRs176.03bn in the corresponding period last year. In
our view, Manufacturing sector, where pricing power is underpinned by high
utilization rates has triggered demand for private credit. This is also
reflected in the import statistics. Trade deficit in the first 5M were recorded
at US$4.55bn (US$1.86bn in 5MFY05) primarily on account of higher imports. In
1QFY06, total machinery imports were recorded at US$1.62bn (compared to
US$1.00bn over the same period last year), whilst petroleum products import was
recorded at US$1.45bn (as against US$954mn last year). As a result of higher
credit off take, we expect SBP to maintain cutoff yields in tomorrow's T-bill
auction. Cutoff yields of 3, 6 and 12M T-bills currently stand at 8.10%, 8.29%
and 8.79%. We also expect 6M T-bill yields to be around 7.5-7.7% by Jun-06.
GAS PRICE HIKE- NOT A CONCERN FOR
With an increase of 15.2% in fuel gas
prices, we expect urea cost to increase by PRs9.5/bag. To mitigate the impact of
this on gross margins, we expect fertilizer companies to announce at least
PRs10-11/bag increase in urea prices to PRs490/bag. Given the tight demand
supply situation in the country, improved purchasing power of farmers from
previous cotton crop and higher farm credit, we expect farmers to absorb the
said increase in prices. Meanwhile we expect minimum government intervention
over fertilizer price increase owing to its concerns over rising subsidy on
imported urea. At current levels, we do not see much trigger for upside in FFC
(currently trading at 14% premium to our fair value of PRs119/share); while we
can expect some excitement in Engro over the announcement of gas supply by
Jan-06 and bonus expectations with 2005 results. FFBL remains our long-term pick
in the sector offering a 25% upside to our fair value of PRs47.9/share.
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