The last two months have seen the local polyester staple fibre (PSF) stocks engulfed in a bull-run whereby the Synthetic & Rayon sector has outperformed the benchmark KSE-100 Index, after miserable years of 2002 and 2003.
According to a latest report released and distributed by InvestCap last week, "this sudden interest in PSF stocks has more to do with their laggard behaviour during the last few years rather than any major fundamental shift".
The brokerage house believes that PSF shares may see some short-term activity and may provide trading opportunities. Analysts at InvestCapBut say that "we maintain our 'Neutral' view on the sector and think that the current price run has more than incorporated the likely improvement in sector's profitability".
The local PSF sector is expected to fill up its demand-supply gap by mid-FY06. But as soon as that happens, Ibrahim's new capacity of 209,000 tons will be there to create yet another oversupply syndrome.
PSF demand, the report predicts, is expected to grow at a five-year (FY04-FY08) CAGR of 8 percent, based on the growing textile sector. "The cotton substitution argument, we believe, doesn't hold for PSF, and we expect polyester-cotton usage ratio to remain between 20 and 25 percent going forward."
Local PSF pricing is still heavily dependent on volatile international petrochemical prices. As the commodity prices, including petrochemicals, are increasing currently, local PSF companies will book inventory gains in the short run. In the long run, primary margins that may not rise sharply, will continue to dictate profitability, the analysis shows.
Currently, oversupply has caused local PSF to be priced at a discount to imported PSF. However, as per the report, "As oversupply shrinks in FY05 and FY06, local producers may see an increase in pricing power and margins, until Ibrahim's new capacity comes online".
Declining interest rates and other company-specific steps will result in some recovery in profitability of PSF companies. But, the brokerage thinks that share prices have already responded and chances of above average returns are slim. Recommending the stocks, the report says that Ibrahim offers the best long-term prospects and recommend 'Buy on weakness'. ICI has been upgraded to 'Hold' due to rising portfolio value (PPTA). "For Dewan, we recommend profit-taking".
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