The (Passed) Winds of Change - Part 2

Posted on 01.23.07 by Tanveer Sultan @ 11:06 am    

Again, here’s my take on the news. I think the three more important ones, that directly pertain, hence affect, the Karachi stock exchange, are:

1. The release that Prime Minister Shaukat Aziz is to postpone the decision to levy Capital Gain Tax for the next year.
2. The Sindh Government’s decision to discontinue stamp duty on electronic transfer of shares. [This proposal was in the last budget (June 2006). The duty was Rs. 0.01 per share.]
3. The opposition and disfavor of the Public Accounts Committee toward the privatization of Pakistan State Oil (PSO).

Alright, so, we now stand at the juncture where predictions are the order, and everyone’s entitled to their opinion after making what they will of the reports, publications, recommendations and news. In my opinion, we should see some historical evidences.

In May 2006 Merrill Lynch had issued a report where it recommended SELL for the Pakistani stock exchange and BUY for Singapore market. A statement of such magnitude coming from such a dominant global financial agency had, needless to say, ramifications in terms of both local and foreign investments. A massive sell-spree saw the KSE Index, which was then witnessing its highest average of nearly 12,500 points, came down rapidly to 8,600 points. Déjà vu was akin to the 2005 crash, which led to a total breakdown of lives, liberty, money and sanity. Now, since it’s a BUY for us and SELL for India, most assuredly there are profits to be made in the short to medium term this time round.

Enough of the Gestaltian perspective, let’s look at one of the sectors I really like due to its more or less relatively cleaner earnings and revenue source and growth prospects. The telecommunication sector has been the major pick by foreign investors and I think will continue to be considering that there are many companies involved in the business not listed on the Stock Exchange. I wouldn’t be surprised in the least if Instaphone comes in through Callmate (CTTL) or Mobilink or Wateen expand their operations to Dubai, financing the move through an IPO sometime this year. In fact, I’ll stick my neck out so far as to say I perhaps two IPOs this anywhere between mid this year to late first quarter next year.

The company leading the sector is the slumbering, underachieving juggernaut Pakistan Telecommunications (PTCL). The company has the prerogative and funds to make considerable Investments in wireless, broadband, satellite, two-way (walkie-talkie, pardon the layperson term and if I am incorrect as to the technicalities, but you get the gist of it, don’t you?) and cellular phone services and solutions.

Oil sector has always been important for investment for its derived value and fractional backing. This sector will always be the perennial choice for and portfolio. New drillings are expected in Balochistan and Sindh, even offshore. As is known, negotiations for the Iran-to-India pipeline are in the final stage and the project is likely to start in the next two to three years. This would lead to not only an appreciation in this sector but the infrastructural sectors such as steel and cement, on the back of development through settlements in these areas.

Privatization of some companies is in pipeline. PSO will be privatized while initial work would be undertaken for Pakistan Petroleum Limited (PPL), perhaps even with an IPO early next year. I perceive PPL to be the main pick, with Pakistan Oilfields Limited (POL) following suit. Oil and Gas Development Company (OGDC’s) new IPO will slow down trading as there will be 20 million more shares available on board, thereby diluting transactions but nevertheless increasing trading volume. Attock Petroleum Limited (APL) will invest in establishing new petrol pumps while Bosicor white refineries will remain neutral with no significant growth.

Ah, the money mongers; lest we forget. Banking sector is the largest sector by sheer numbers. With the former SBP Governor’s target of an efficient number of banks being 20, most definitely the trend of mergers and acquisitions will continue. The next step, however, is going to be diversification and consolidation into financial umbrella corporations (for the anti-establishment readers) or supermarkets (for the more placid read). MCB Bank Ltd. (MCB), National Bank of Pakistan (NBP), Habib Bank Limited (HBL), Askari Commercial Bank (ABCL) and United Bank Limited (UBL) will stand their ground, no doubt, with the domestic middle-sized banks being cannibalized by foreign banks to entrench and localize their position/presence. Citibank could be the only one that does not follow suit. I see about 15 banks by the end of the decade. As far as shares are concerned, HBL might come out with an IPO and get on board, ACBL might come out with a right issue with NBP, being the cash cow that it is, as target for privatization. Banking sector would still be the third choice for FDIs and second-choice for equity investors.

Personally, the inconspicuous might be the real movers and shakers; in them the fertilizer and insurance sectors are important. The Government of Pakistan (GoP) is planning to have more fertilizer factories to fulfill growing requirements, in particular export to neighboring emerging markets (read China), as is evident from its “emphasis on greater production of DPA” according to our PM. It will have to issue more licenses to set new factories in different areas. Engro has already signed a Memorandum of Understanding (MoU) with a Chinese Company to set a new plant in Daharki. New investments will be made by Fauji Fertilizer Company (FFCL) as well. Larger businesses and groups might enter into the sector.

Insurance sector might become very active. The PM in a speech did say that GoP will concentrate on insurance sector in the next budget and take necessary statutory steps to usher growth and release the potential in the sector. EFU, an underdog, may do well with a new, foreign CEO at the helm, but let us wait and see. State Life’s privatization and ensuing IPO is in the cards.

With the increasing construction and build infrastructure cement production and sales will grow. Exports will also increase. Due to the expansion of plants, increased costs and stagnant sale price, companies might see a slight growth in the stock exchange.

To sum up: BUY. Stick around, enjoy the show. Overall the stock markets will be positive with Merrill Lynch expectations of RoI spot on, all else remaining the same. Financial institutions and investors might find it better to invest funds in equities rather than in saving certificates and deposit accounts. This should bring in the public. The index will set a new high; perhaps, in my mind, it may cross 13,000 before June 2007. Having said this, this year will see the last budget for this Government. Note, however, for the more conservative investor as opposed to the cavalier, such as myself, I recommend keeping your shirts on till the new Government, with buy around that time and sell later. Things will continue, as shall I, with my report on Engro to follow.