The market has been trading in a narrow band for the last three weeks. Therefore, only an either side breakout would determine the benchmark Index direction in the following weeks.
Hub Power Company (Hubco) along with five other companies removed from the KMI-30 index after the re-composition effective Tuesday, June 15, 2010). The reason for this removal was mainly the higher long-term debt spurred by the company's borrowing for Narowal and Laraib power projects that crossed the threshold specified in the selection criteria. On Tuesday, scrip witnessed selling pressure with quoted price eroded by Rs1.41 to Rs30.74 at the close of market and volume traded exceeding 10.603 million shares, the second highest traded volume of the day. Total trading volume of the companies comprising the KSE-100 index was close to 83 million shares. Some of the experts expressed the concern that removal of Hubco from the KMI-30 index would lead to distressed selling of the scrip by the mutual funds investing in Shariah-compliant scrips alone. They also fear that distress selling will have the adverse impact on net asset value of the funds, where Hubco makes substantial part of the portfolio.
The re-composition has been carried out on the basis of the criteria of selection of companies as per the details available in the KSE-Meezan 30 Index. The other five companies removed from the Index include Fauji Cement Company, Pak Elektron, Shell Pakistan, Ghani Glass, and Kohinoor Energy. The six companies included in the re-composed Index are Lotte Pakistan PTA, Attock Petroleum, Tri Pack Films, Thal, Atlas Battery, and Siemens Pakistan Engineering Company.
The recent run off at the KSE has provided attractive entry points for fundamentally strong scrips, particularly scrips in the fertilizer sector. Budget FY11 was largely a non event for the fertilizer sector and the strong fundamentals in the form of pricing power and earnings outlook warrant a second look at the sector. Engro enjoys multiple growth stories and near term triggers that include 1.3 million tons/annum urea expansion and Engro Food's Rice plant, both of which are expected to come online in 4Q10. The May urea price hike of Rs75/bag in response to the gas curtailment, which was initially scheduled to be 12% for companies on the Mari network but is currently at less than 5% was a blessing in disguise for Engro as urea prices have not been reduced while the profitability of Engro's fertilizer segment relative to peers will enjoy the greatest boost once its new plant comes online, enjoying concessionary feed gas coupled with higher energy efficiency.
Fauji Fertilizer Bin Qasim Limited (FFBL) will be most negatively impacted by the gas curtailment by 20%. Analysts have adjusted earnings for the gas curtailment which is likely to continue in CY11 as well. Still the scrip is attractive given that CY10 earnings would be lifted by exceptionally high DAP margins. The current margins stand at US$211/ton based on the DAP price of Rs2,560 per bag. Primary margins are expected to remain high for CY10 which will provide the Company maneuverability in reducing prices given the prospects of cheaper DAP imports. Normalization in the input prices of phosacid (phos rock and sulphur) as well as phosacid prices bodes well for PMP, whose share in FFBL's total profitability is expected to improve substantially from CY10 onwards. FFBL is most attractive on dividend yield basis with a payback period of 6 years.
Fauji Fertilizer Company (FFC) is also a big beneficiary of the urea price hike post gas curtailment. FFC's urea business is expected to remain stable given the strong demand for the product, while growth is expected to accrue from FFBL (51% share).
In a notice sent to Karachi Stock Exchange, Faysal Bank confirmed signing of a share purchase agreement with Royal Bank of Scotland NV for the purchase of 99.37 per cent shareholding in The Royal Bank of Scotland (RBS Pakistan). According to the details Faysal Bank agreed to pay 41 million Euros equivalent to Rs4.298 billion with price per share working out at Rs2.52 per ordinary share. RBS Pakistan has more than 1,717 million outstanding shares and the Bank is listed at all the three stock exchanges of Pakistan. The transaction is yet to be formally approved by the State Bank of Pakistan and all other applicable regulatory approvals. It is believed that all the formalities will be completed in the third quarter of CY10.
The Karachi Stock Exchange has received the copy of a letter sent by The Shell Petroleum Company accepting bid of OPI Gas (Private) Limited for purchase of its 67.91 per cent holding in Shell Gas LPG Pakistan. The Share Purchase Agreement is conditional upon obtaining regulatory approvals and consents and the making of a mandatory tender offer under the applicable law. The transfer of shares to OPI Gas will only take place after all of these requirements have been met satisfactorily.
Nishat Group, Abu Dhabi Investment Council (ADIC) and City School have successfully acquired AES Lal Pir and AES Pak Gen from AES Corporation of USA. Nishat Group and Associates collectively own 50% of the shares whereas, ADIC and City School has a share of 30% and 20% in the project respectively. Further, it has also been revealed that Nishat Mills (NML) would have a 32% shareholding in each of the two companies out of the group's total holding of 50%.