| STOCK MARKET SYNOPSIS | |||
| | Last Week | This Weeks | %Change |
Mkt. Cap (US$bn) | 26.73 | 25.44 | -4.83% |
Avg. Dly T/O (mn. shares) | 151.28 | 110.97 | -26.65% |
Avg. Dly T/O (US$ mn.) | 91.95 | 64.02 | -30.38% |
No. of Trading Sessions | 5 | 5 | |
KSE 100 Index | 7276.61 | 6894.62 | -5.25% |
KSE ALL Share Index | 5216.66 | 4953.17 | -5.05% |
STOCK MARKET SYNOPSIS
KSE PLAYS THE RANGE IN MAY-09
Limited triggers, budget blues, military offensive in Swat and absence of leveraged product resulted in the KSE-100 index oscillating in a range of just 4% in May-09.
* MoM the KSE return was 1%, while volumes fell ~47% MoM to US$75mn. The insipid month for the KSE combined with a healthy rally in regional markets meant that Pakistan now trades at ~56% discount to peers vs 49% a month ago.
* Coming off a very tough 2008, YoY economic indicators showed an improvement in April 2009. However, MoM numbers suggest signs of some pent up pressure.
* The initial part of June 2009 could follow a pattern similar to May 2009. In absence of triggers the market will remain apprehensive about potential new taxes in the budget in our view. In terms of our preferred exposures, we highlight Hub Power and PSO as our top picks as they provide a blend of value and growth in our view.
KASB Research
* MoM the KSE return was 1%, while volumes fell ~47% MoM to US$75mn. The insipid month for the KSE combined with a healthy rally in regional markets meant that Pakistan now trades at ~56% discount to peers vs 49% a month ago.
* Coming off a very tough 2008, YoY economic indicators showed an improvement in April 2009. However, MoM numbers suggest signs of some pent up pressure.
* The initial part of June 2009 could follow a pattern similar to May 2009. In absence of triggers the market will remain apprehensive about potential new taxes in the budget in our view. In terms of our preferred exposures, we highlight Hub Power and PSO as our top picks as they provide a blend of value and growth in our view.
KASB Research
FUNDAMENTAL CHANGES
SECP PROPOSES CUT IN COMPANIES' INCOME TAX RATE. As per media reports, the Securities & Exchange Commission of Pakistan (SECP) has proposed progressive reduction in tax rates for companies from 35% to 30% in the FY10E budget. Taking it a step further, the Federal Board of Revenue (FBR) is also reportedly actively examining the incorporation of the same in the upcoming Finance Bill 2009-10, whereby under the given tax slabs the rate of tax should be 33% for 2009 and 30% for 2010. Regionally Pakistan has the highest corporate tax rate with EU at 24%, OECD at 27.8%, Asia Pacific at 30% and Latin America at 28%.
* PRS2.9TRN OUTLAY FOR FY10E BUDGET. The Ministry of Finance (MoF) in a standing committee session before the National Assembly revealed an intended FY10 budget outlay of PRs2.9trn, with a revenue target of PRs1.41trn and expenditure of PRs2.1trn, including PRs0.66trn debt servicing, PRs0.34trn for defense and PRs0.25trn for grants and subsidies. PRs745bn has been proposed for the development outlay, including PRs400bn federal share, PRs200bn for provincial and PRs70bn for Benazir Income Support Program (BISP), PRs50bn for internally displaced people (IDPs) and PRs7bn for Bait-ul-Maal.
* MOP PROPOSED REPLACEMENT OF CROSS-SUBSIDY ON GAS PRICES WITH DIRECT SUBSIDY. The petroleum ministry has proposed to implement uniform gas tariff for all domestic and industrial consumers in the upcoming FY10 budget. As per the reported estimates, domestic consumers and fertilizer sector were given cross-subsidy of PRs23bn and PRs11bn respectively during FY09. Domestic consumers (first slab) enjoys 54-75% discount while fertilizer sector (feedstock only) gets 72% discount in gas prices compared Pakistan Update - June 05, 2009 to general industries where the average price discount given to these sectors are covered via higher gas prices charged from other sectors including IPPs, cement, CNG stations and other commercial users.
The petroleum ministry has proposed that the finance ministry provide a direct gas price subsidy to these two sectors via gas utilities instead of charging higher rates for other sectors. If such proposal is accepted, it will have muted impact on fertilizer companies and domestic consumers with just a change of source of subsidizing the gas prices while it will positive for industries currently charged higher gas prices. The chances of this materializing seems dim to us due to the recent efforts being taken by the govt. to eliminate all kind of direct cash subsidies under IMF regime.
* PRS2.9TRN OUTLAY FOR FY10E BUDGET. The Ministry of Finance (MoF) in a standing committee session before the National Assembly revealed an intended FY10 budget outlay of PRs2.9trn, with a revenue target of PRs1.41trn and expenditure of PRs2.1trn, including PRs0.66trn debt servicing, PRs0.34trn for defense and PRs0.25trn for grants and subsidies. PRs745bn has been proposed for the development outlay, including PRs400bn federal share, PRs200bn for provincial and PRs70bn for Benazir Income Support Program (BISP), PRs50bn for internally displaced people (IDPs) and PRs7bn for Bait-ul-Maal.
* MOP PROPOSED REPLACEMENT OF CROSS-SUBSIDY ON GAS PRICES WITH DIRECT SUBSIDY. The petroleum ministry has proposed to implement uniform gas tariff for all domestic and industrial consumers in the upcoming FY10 budget. As per the reported estimates, domestic consumers and fertilizer sector were given cross-subsidy of PRs23bn and PRs11bn respectively during FY09. Domestic consumers (first slab) enjoys 54-75% discount while fertilizer sector (feedstock only) gets 72% discount in gas prices compared Pakistan Update - June 05, 2009 to general industries where the average price discount given to these sectors are covered via higher gas prices charged from other sectors including IPPs, cement, CNG stations and other commercial users.
The petroleum ministry has proposed that the finance ministry provide a direct gas price subsidy to these two sectors via gas utilities instead of charging higher rates for other sectors. If such proposal is accepted, it will have muted impact on fertilizer companies and domestic consumers with just a change of source of subsidizing the gas prices while it will positive for industries currently charged higher gas prices. The chances of this materializing seems dim to us due to the recent efforts being taken by the govt. to eliminate all kind of direct cash subsidies under IMF regime.
OUTLOOK FOR THE FUTURE
The near term direction of the market in our view remains pegged to news flow on the budget and potential developments on re-introduction of a leverage product in the market. In addition, the market should also continue to keep an eye on the law and order situation, the trend in international oil prices and the recent up tick in foreign activity for a direction, in a market otherwise devoid of significant triggers. From a budget point of view, we highlight cement as the key beneficiary of higher PSDP allocation, start of construction work on Bhasha Dam and reconstruction activities in affected areas. Our preferred picks in the sector remain LUCK (PO: PRs65/sh) and DGKC (PO: PRs33.50/sh). Any roadmap given by the government on potential resolution of the inter-corporate debt issue by the close of the fiscal year (30th Jun) should bode well for both IPPs (HUBC and KAPCO are Buy rated) and OMCs (PSO and APL are buy rated). Meanwhile, we continue to favor stocks with greater earnings visibility and high dividend yields. Our preferred picks other than the above remain E&Ps (PPL, POL), fertilizers (FFC) and telecom (PTCL).
MARKET THIS WEEK
The KSE ended the week in better spirits than were witnessed during most of the week's lackluster performance - in terms of both index direction and volumes. The week witnessed a mixed-bag of news regarding the upcoming budget and geopolitical developments. Government plans to end electricity, gas and oil subsidies and enhance tax net to include services and real estate sectors kept investors nervous. At the same time, SBP's quarterly report stated risks to both the economy and banking sector (although amply capitalized to absorb any shocks) which also put pressure on the sector. On the flip side, however, the market cheered NEC (National Economic Commission) clearance of PRs621bn PSDP for FY10 and the positive intent showed by stakeholders' in introducing leverage financing products in the market. Dow Jones' announcement to include Pakistan in DJ-FEAS (Federation of European and Asian Stock Exchanges) Composite Index -with 9.3% share - is also a positive development though the real benefits in term of FII flows may take time to materialize. In sector specific news, while strong oil prices continued to buoy sentiment in the oil sector, banking spread during April 2009 shrunk by 12bp MoM to 7.54%. On the telecom front, the government is planning to cut SIM activation tax from PRs500 to PRs300 that should save ~PRs2.7bn to cellular companies who currently subsidize the amount.
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