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Posted 24 June 2011 - 11:18 PM
Cotton Price: Supply demand dynamics still favourable
Cotton inventories still low
According to the latest USDA monthly cotton report, global cotton production is expected to rise by 8% YoY to 123mn 480lb bales while usage is expected to clock in at 119mn 480lb bales during FY12. FY12 is expected to be the first year after a 7 year period where cotton production will exceed usage though weather conditions will once again be the swing factor.
ENGRO – Stuck in a quagmire
Gas curtailment and Enven – a flash in the pan
Gas availability has remained the single largest impediment to the successful operation of Engro's USD 1bn worth new Urea plant, Enven. A series of holdups from the winter gas load management shutdown period of 45 days, which dragged on for much longer, to the recent technical issues at the Sui and Zamzama field have ENGRO stuck between a rock and a hard place.
HUBC - Strong dividend growth & capacity expansion to drive valuations; BUY!
We have rolled forward our discounting timeline for HUBC to Jun12 and our revised price target of PKR 49 per share reveals an upside of 29% from current levels. HUBC also offers a 12mo forward dividend yield of 13.9%, which translates into a total stock return (TSR) of 43%.
OGDC – One-offs; one too many
To comply with regulatory requirements, OGDC has recently released its interim financial statements for 10 moFY11. The financial statements, however, have been accompanied with a yet another "one-off" bomb-shell. The company's crude oil sales from the Kunnar field have been slashed retrospectively, wiping off nearly PKR 15.24bn from company's revenues.
LOTPTA - Expansion plans to act as catalyst
Forthcoming 'Expansion' Plans
According to ICIS, which quoted the CEO of LOTPTA on Jun16'11, the company is planning to triple PTA capacity to 1.5mn tons by late 2014. The cost of the expansion is expected to be between USD 450-500mn. Once the expansion comes online, Lotte will procure close to 1mn tons of PX and could also be interested in backwards integration through setting up its PX plant.
PAKISTAN WEEKLY REVIEW
KSE-100 Index closed at 12,361 up 0.8% over the week. Average Daily Volume during this week stood at 61 mn shares as compared to 53 mn shares last week. On daily closing basis, index touched a high of 12,508 and a low of 12,166.
MRC to start functioning by July-August:
Mortgage Refinance Company (MRC) is expected to start functioning by July-August this year. The government has decided to provide 20% of financial assistance, while World Bank and International Finance Corporation (IFC) are expected to inject 35 to 40%, the remaining finances will be arranged by eight commercial banks. Mortgage financing would be done through Pakistan Investment Bonds (PIBs). It is expected to improve the real estate market situation.
Govt. Borrowing from Banks sharply increases:
In the first 11 months (July-May), the government borrowed PKR 486 bn from banks, as compared to PKR 244 bn during same period last year, an increase of 99%. The monetary expansion stood at PKR 837 bn, out of this the government borrowing was PKR 729bn. This monetary expansion has kept inflation at a persistently higher level. To offset this kind of heavy government borrowing, the SBP might keep the existing discount rate or might even go for a tighter stance. The State Bank warns that huge government borrowing from commercial banks would not leave cheap money for the private sector to perform.
Record Cotton Output Likely in FY12:
Pakistan is expected to achieve record cotton production of over 15 million bales in FY11-12. This is due to the fact that agreements have been signed between Pakistani and Chinese institutions for development of hybrid cotton seeds and 8.5 mn acres of land is to be brought under cultivation which is 8% higher as compared to previous year. Moreover, plans are also being developed to fight against pest and viral attacks. Pakistan achieved record cotton production of 14.6 million bales in FY06, but since then the output fell sharply. Textile related exports to China are 65% of the total Pakistani exports to China. In the next year Pakistan and China has planned to launch Five Year (2012-2016) Pakistan-China Development Programme on Trade and Economic Cooperation (FYDP).
SBP extends limit under Export Finance:
The export refinance limits sanctioned by SBP was due to expire on June 30, 2011 which has been extended under Part-II of the Export Finance Scheme/ Islamic Export Refinance Scheme till August 31. This step has been taken in order to ensure that the financing facilities are available to exporters till finalization of their new limits. All banks and DFIs have been advised to furnish to SBP the limit requirements for FY2011-12 under Long Term Finance Facility Scheme, and also the borrower-wise details of cases being sanctioned and applications in process latest by June 25 to enable it to finalize the new limits.
Bank of Khyber En-route to Private Management:
The Khyber Pakhtunkhwa government took a decision to privatize Bank of Khyber (BoK). According to the decision, any private shareholders, with 26% shares, will take over the management of the bank. Presently, the shares of the provincial government constitute 51%, whereas 49% shares are privately held. BoK has planned to add 12 more branches, to its network in FY12. The deposits of the bank stood at PKR 37 bn as on March 2011. In 1Q'11, the bank registered a QoQ increase of 46% in deposit base, 88% in investment, and an increase of 33% in advances. The bank plans to open up branches of both conventional and Islamic banking. The move to private management might further foster growth and efficiency for the bank.
OIL & GAS SECTOR:
Govt. to offload its 2.5% (21 mn) stake in PPL:
Privatization Commission intends to sell 2.5% government stake which is around 21.105688 mn shares through secondary public offering. For this purpose, Expressions of Interest (EoIs) have been called from Lead Managers / Book Runners, for the secondary public offering. The Request for proposal (RFP) is to be submitted by 20th July 2011. Govt. holds 70.56% of PPL shares outstanding and if it is offered at the current market price of PkR 216.5, the govt. would be able to raise PKR 4.57 bn. The appointed Lead Manager/Book runner may also recommend other suitable capital market structural alternatives in the current scenario in order to extract maximum benefit to the both the Govt. and PPL. PPL is a main exploration and production company contributing around 25% of the country's total natural gas supplies in addition to crude oil production. We expect that this deal would provide the govt. with the requisite liquidity and the proceeds may be utilized to clear the dues related to circular debt.
Tight gas reserves in Sui – PPL to start drilling in 3 Months:
Minister for Petroleum & Natural Resources Dr Asim Hussain revealed that the country had more than 100 TCF of shallow and tight gas reserves. In order to extract the tight gas, PPL is expected to start drilling the first well in the next 3 months. In order to encourage exploration of tight gas, the allocation of gas would be made on the basis of flow rates supported by third-party determination under the 'Tight Gas (Exploration and Production) Policy 2011'. As per the tight gas policy the allocation of gas shall be done on the basis of flow rates in case gas is produced from the same well or from different zones of the D&P lease. Moreover, 40% premium would be given over the respective zonal price of Petroleum Policy 2009 in order to exploit tight gas. The exploration of tight gas is expected to raise the production levels which are critical to meet the long term energy requirement of the country.
OGDC bonds issuance - to be traded on Singapore bourse:
The GoP is in the process of issuing bonds exchangeable into ordinary shares of OGDC which would be traded on the Singapore Stock Exchange. It has been proposed to sell 10% shares of Oil and Gas Development Company (OGDC) through Exchangeable Bonds in the international market, in order to raise USD 500 mn. At present, the govt. has 75% share in the OGDC and 10 % share was proposed to be floated in the market to generate USD 500 mn for debt retirement and poverty alleviation in the country. Such amount will be considered a debt for three years and after this period, investor can redeem his capital or the bonds might be converted into shares. The government is expected to pay 5.2 to 7.2 % interest on it. OGDC is the largest Exploration & Production Company with Crude oil production of 38,075 bopd and gas production of 976 mmcfd. The ongoing circular debt crisis and tight liquidity position has restricted the company's payout ability.
Capital restructuring of Byco group companies:
Byco Petroleum Pakistan Limited intends to re-organise its loan and capital structure. Byco Oil Pakistan Ltd. (BOPL) is a 100% owned subsidiary of Byco Industries Inc. (BII) and BOPL owns 67.52% shares of BPPL. Various loans given to BPPL are novated to BOPL and converted into equity of BPPL. The loans of BPPL would be restructured such that BOPL will replace BPPL as borrower. For this purpose, BOPL and BPPL would enter into a corresponding rupee loan agreement under which BPPL will owe the same loan amount to BOPL. In order to end the liability, BPPL will convert the loan amount and mark up accrued thereupon into equity by issuing ~ 585.75 mn shares at par to BOPL without right offer. The said conversion of loan to equity would lower the debt obligation and enhance liquidity position of BPPL. After the issuance of new shares BOPL will have 850.5 mn shares, translating into 87% shareholding.
E&P drilling target likely to be missed:
The E&P sector would miss the target of exploring 80 wells in FY11 as only 42 wells have been spud till now due to rising circular debt and security issues. Last year 68 wells were drilled. In the current year, four wells made a discovery with a success ratio of around 30%. A total size of 1040bpd was discovered against 450bpd last year. The focus of the sector also changed from exploration to development of reserves since only 12 wells were explored against a target of 29 while 30 wells were developed against a target of 51 wells. OGDC who has started operations in the Zin Block has drilled only 3 wells against a target of 10 wells while focusing more on their existing wells. On the other hand, PPL and POL had drilled only 1-exploratory well each. The E&P sector have been facing liquidity constraints due to burgeoning circular debt which have slowed down.
150,000T of urea import deal finalized:
Trading Corporation of Pakistan (TCP) has made arrangements for the availability of 150,000 tons urea by next month. Considering the present gas non-availability where local production has declined significantly, there is a huge shortage of urea in the domestic market and farmers require large quantity of urea for the kharif season. According to the Urea Import tender, the lowest bid was won by M/s Multi Commerce LLC at USD 544.73 per ton C&F, while another bid of 50,000 tons urea was awarded to Ms Transammonia AG incorporated Switzerland at a price of USD 548.77 per ton. The remaining quantity of 50,000 tons would be imported through the SABIC facility in the second week of July. The import of urea would cost around PkR 2,370 per bag which is quite expensive as compared to the locally produced urea which costs PkR 1,250 per bag. With a major decline in the local production due to gas shortfall, we expect further urea imports by the government to meet domestic demand in the kharif season which would further increase urea prices.
FFC signs deal for Wind power:
The Fauji Fertilizer Company (FFC) has signed the closing documents of 49.5MW wind power project in Gharo-Ketibandar Wind Corridor which would produce electricity from renewable energy. The project is financed by FFC and leading banks costing around USD 133.516 mn which would be built in16 months. The commissioning of the wind power plant would reduce the operational expenses of FFC and would improve the profitability of the company.
The coming week is expected to remain range bound with lackluster activity in the absence of any market trigger.
Stock Market Overview
KSE: Select stocks drive positive closing
• The market started the week on a negative note, but picked up mid week. The performance however remained lopsided.
• KSE closed +0.83% WoW while volumes also recovered by 15.7% WoW.
• Gharibwal Cement, Nestle Pakistan Limited, Fauji Fertilizer, Habib Metro Bank and Pakistan Oilfields were the major gainers while Pace (Pak) Ltd, Grays Of Cambridge, Sui Northern Gas Ltd, K.E.S.C. and P.I.A.C. (A) were major losers at KSE this week.
News This Week
• Sluggish LSM growth at 1.7%YoY in 10MFY11
• Four IPPs withdraw final notices
• Govt raises PRs28.3bn through PIB Auction
• IMF talks expected toward end of Jul-11
KSE100 - All is well that ends well
Healthy sessions throughout the week were witnessed by KSE-100 index, as volumes were on the higher side, showing a jump of 15.68% WoW to 61mn shares. Although immense pressure was seen by ENGRO due to concerns arising out of prolonged gas outage, however, strong support provided by oil and other fertilizer scrip's inclined investors to take fresh positions in these sector stocks on the back of expected increase in urea price and as well as early announcement of PPL dividend of Rs5/share. On the economic front, govt's efforts to bridge budget deficit by issuing USD500mn OGDC bonds did not went very far in the near term as investors asked govt to delay it until Greek debt crisis has been resolved, or atleast when an appetite for such an issue is developed internationally. On the positive side, exports recorded growth of 27%YoY to stay at USD22.7bn during 11MFY11 (July-May), whereas textile group continued to contribute positively (51% of total) during the period. In the midst, KSE-100 index gained 102.94pts WoW to stood at 12,464pts(up 0.83% WoW). Meanwhile average traded value was at USD 41mn(up 86% WoW) but foreign investors were on the selling side evident by a net outflow of USD 3.6mn during the week.
Total futures open interest up by ~8.6% WoW, spreads at 8.14%
Open interest position during the week was up by ~8.6% WoW (up ~Rs99.7mn) to stand at Rs1.25bn, on the contrary futures spreads down by 300bps WoW to 8.14%. Average volumes at the futures counter went up by 224% WoW to 6.9mn shares (includes June-July). The top-5 scrips at the futures counter constituted 68% of the total open interest. POL took ENGRO's place to be on top, followed by LUCK, DGKC, and UBL.
Weekly outlook - Neutral
In the coming week, we expect market direction would depend upon positivity on local or foreign front. In terms of individual sectors, fertilizer scrips might remain active on the bourse, specially in case ENGRO increases urea price to maintain its profitability margins amid gas shortage. We maintain "Neutral" stance on the market while our top picks for the week include POL, PPL, ENGRO, FFBL and PTC.
Selective buying lifts KSE-100 to 12,464 level, up 0.8%WoW
Though the week saw the KSE-100 index rising 0.8%WoW to 12,464 level, interestingly most of the gains were contributed by NESTLE, which was up a significant 24%WoW. Average daily volumes strengthened by 16%WoW to 61mn shares with ENGRO concluding to be the volume leader (6.1mn shares on avg.), making up 10% of the mkt. volume.
In focus: Macros
As per the data released, tax collection figure reached Rs1.43trn till June 20, leaving the govt. with an ambitious target of Rs158bn for the remaining 10 days of the fiscal year. Further, C/A registered a deficit of US$457mn in May, trimming the cumulative surplus for July-May to US$205mn. Lastly, the IMF refused to hold talks with Pakistan on the basis of provisional numbers and awaits actual economic data for FY11 for post-budget review talks.
All eyes on fertilizer and energy stocks
Chemical sector stood as a leading outperformer, with ENGRO being a notable exception (down 4.8%WoW) after reports of gas curtailment resurfaced over the weekend. The stock recovered marginally though post losing 8.8% during first three trading sessions. Meanwhile, FFC and FFBL outperformed the market by 4.7% and 0.3% as investors expect another round of urea price hike. With regards to energy stocks, POL remained firm (up 3.6%WoW) on the back of improved production prospects from its Domail-II field which has entered the testing phase. PPL, despite announcement of a secondary offering, declined 0.3%WoW after its much hyped interim dividend of Rs5 per share came in below market expectations.
MTS Investment at Rs358mn, rate at 17.33%
Mon-Thur MTS investment stood at Rs358mn, with average rate standing at 17.33% compared to 17.38% last week.
Posted 26 June 2011 - 12:21 AM
Negative news regarding ENGRO's gas plant negatively affected the overall market sentiment and KSE-100 index lost 195 points on Monday to close at 12,166 points. Volumes were recorded at 51 mn shares with ENGRO, LOTPTAand JSCL leading the ready market. Futures counter was led by DGKC-JUL, DGKC-JUN and ENGRO-JUL
Expectation of a potential increase in Pakistan's weightage in MSCI Frontier Index led the KSE-100 index to gain -160 points to close at 12,326 points on Tuesday. Turnover was recorded at ~68mn shares, with SILK, ENGRO and LOTPTA leading the ready market. Futures counter was led by LUCK-JUN, LUCK-JUL and HUBC-JUN.
Positive momentum continued on Wednesday when KSE-100 index gained 43 points to close at 12,369 points. Volumes were recorded at ~59mn shares with ENGRO, LOTPTAand SNBLR1 leading the ready market. Futures counter was led by ENGRO-JUL, ENGRO-JUN and ATRL-JUN.
With approval of Finance Bill in the National Assembly, the KSE-100 index gained -139 points to close at 12,508 points on Thursday. Turnover was recorded at -77mn shares with FFBL, ENGRO and SILK leading the ready market. Futures counter was led by HUBC-JUN, ENGRO-JUN and UBL-JUN.
The market underwent a slight correction on Friday with KSE-100 index losing 44 points to close at 12,464 points. Volumes were recorded at ~52mn shares with ENGRO, LOTPTA and FATIMA leading the ready market. Futures counter was led by PTC-JUN, HUBC-JUN and DGKC-JUN.
Posted 26 June 2011 - 02:03 PM
KARACHI: Inflation has risen for the fourth consecutive week owing to the Holy month of Ramazan and budget announcement early this month, analysts said.
The Sensitive Price Indicator (SPI), the barometer to check prices of essential items, increased by 16.24 percent by the week ended on June 23 against the corresponding week last year, the Federal Bureau of Statistics (FBS) said on Saturday.
The SPI on week-on-week basis also grew by 0.53 percent against the last week, according to the data.
Analysts said that during the ongoing month, prices of basic kitchen items moved upward due changes in the tax rate announced in the Federal Budget.
They said that prices were also influenced due to hoarding by some traders to create artificial shortage or ensure stocks availability ahead of Ramazan.
The FBS calculates SPI with base 2000-2001=100, covering 17 urban centres and 53 essential items for all the income groups.
The prices of 21 items registered increase during the week under review and only eight witnessed decline and the prices of 24 items remained unchanged.
Posted 26 June 2011 - 02:09 PM
KARACHI: The Karachi Stock Exchange (KSE) is likely to rise this week on the back of energy and fertiliser shares, which have shed value in the recent sessions and become attractive for investors, traders said on Saturday.
Engro Corporation, Pakistan Oilfields (POL) and Oil and Gas Development Company Limited (OGDCL) have particularly turned into definite picks because of industry specific reasons, they said.
“Traders are getting active as June end draws near and that is a positive sign for the market,” said Qasim Ali Shah, head of equities at Global Securities. “Profit of the petroleum companies will be really good this year. I see a lot of activity in industry shares.”
The KSE-100 Index rose 94.03 points during the last five sessions to end at 12,455.34 points against the close of Friday. However, the number of shares traded on daily basis remained low.
Crossing the 12,400 points level is significant as the index has more than twice receded after reaching this threshold, analysts say. In technical analysis, such a change helps keep the momentum going.
Though crude oil price in the international market fluctuated between $90 and $120 per barrel, it remains above the average of previous fiscal 2009/10. Profit of petroleum exploration companies is benchmarked with the Gulf crude oil rates.
The current fiscal 2010/11 ends this month and results are not expected to be announced before late July and the middle of August, but investors had already started building up their positions.
Shah said that OGDCL, Pakistan Petroleum Limited (PPL) and POL will report double-digit increase in profits.
“POL will be looked at with particular interest as it drills deeper into Domial-2.”
POL stands among the few stocks, which have been traded heavily during the last few weeks, especially after discovery of petroleum reserves in Domial. Now the work is in progress on another well in the same field.
Engro crashed and then recovered last week as concerns over gas supply to its new fertiliser plant continued to haunt shareholders. But the weekend saw company’s top management allaying most of the fears.
The corporation has finally announced start of commercial operation of $1.1billion urea plant. Company’s CFO Ruhail Mohammad told analysts in a briefing on Friday that the group will easily be able to meet debt payments.
One reason traders expect market to keep going up is the interest of mutual funds in such a trajectory. The equity funds with portfolio of Rs50 billion will try to keep the KSE-100 Index at a higher level as fiscal year comes to an end.
Nevertheless, analysts say that low participation of investors as evident from the volume of a fewer than 100 million shares keeps the market at the mercy of a few big shares. Any significant movement in OGDCL alone can singlehandedly decide the fate of the KSE-100 Index.
“Capital gains tax might no longer be an immediate worry for the traders,” said a market participant. “But once date for filing tax returns becomes due, all these gains could be wiped out again.”
Fatima Fertiliser, Lotte Pakistan PTA, Fauji Fertiliser Company Limited and Pakistan State Oil (PSO) are also expected to see interest.