pakistan strategy 2016 -...

Pakistan Strategy 2016

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7 January 2016

IMS Research

[email protected]

+92-21-3713600

• Despite macro support from lower int’l oil prices and record low interest rates,

coupled with transformative developments led by CPEC, the Top-Down rerating

theme fell flat in 2015 as P/E remained unchanged at 8.5x. The KSE-100’s 2.1% gain

for the year was the lowest since CY11, while the Index was kept in check by

incessant foreign selling. However, this was still enough to comfortably beat both

MSCI EM & FM.

• 2015 can repeat in 2016 if upgrade to EM status does not come to pass (decision due

in mid-CY16). In our view, however, even a concrete roadmap for the same can drive

strong valuation rerating (10x) that can be topped up by progress on CPEC. On the

flipside, a largely cash-based market precludes a sharp market decline if the Top-

Down setting becomes less palatable and global risk-off sentiment prevails.

• Interim headwinds to corporate profitability, traditionally the Pakistan Market’s

strong suit, restrict our Dec’16 Index target to 38,000 points. We favor Financials,

Insurance, Construction, OMCs and Autos. Top picks include MCB, ABL, LUCK, CHCC,

PIOC, PSO, EFERT and FEROZ.

Top-Down is conducive; lower volatility to counter uncertain outlook

There is much to like about 2016. Notwithstanding periodic noise escalation, the broader

domestic political landscape appears in equilibrium while security conditions have

improved given firm push on Zarb-e-Azb and geopolitical epicenter shift to the Levant (rise

of ISIS). At the same time, a “lower for longer” outlook on int’l oil price spells positives for

the economy that can operate beyond IMF support. With upgrade to EM status a tangible

possibility (can take P/E to 10x on its own) and elements such as CPEC progress having the

capacity to deliver +ve surprises, the Top-Down backdrop remains favorable.

Risks arise if MSCI Upgrade does not occur and foreign selling seeps into 2016, thereby

keeping the valuation rerating theme in check again. That said, even if the Top-Down

setting becomes less palatable, we point to a cash-based market that since CY09 has

curbed market volatility and will likely act as a buffer against significant downside.

Bottom-Up headwinds call for cherry picking

A commodity-heavy Index tilt restricts IMS Universe profit growth for FY16F to 7% (ex-E&P

and Fertilizer: 12%). However, a cherry picking stance in selected stocks can still result in

substantial alpha. We see twin themes playing out for 2016 – while weak farmer

economics will likely result in a tough environment for rural-linked plays (FMCG, Fertilizer,

Tractors), the urban side should benefit from low commodity prices and greater availability

of private sector credit.

Accordingly, we favor Banks (improved macros can drive rerating), Insurance (general

insurers to see both retail and corporate demand), Construction (CPEC + urban

infrastructure development), OMCs (contained circular debt + white oil demand) and

Autos (Four Wheelers preferred over Two). We thematically like the entertainment and

hospitality sectors, but listed options here are limited. Outside the macro-driven theme,

we like selected Pharmaceuticals as well on the new drug pricing policy.

Intermarket perspective

Our Dec’16 Index target is 38,000 points with potential for 40,000 points on upgrade to EM

status or a tangible roadmap for the same. While we do not rule out initial market

weakness, particularly if ongoing foreign selling (US$315mn net outflow in CY15) continues

into CY16, a largely cash-based market should keep any downside in check. Our favored

stocks for 2016 include MCB, ABL, LUCK, CHCC, PIOC, PSO, EFERT and FEROZ. These can be

complemented by selected stocks likely to meet MSCI EM criteria (including ENGRO, FFC,

UBL) alongside a sprinkling of high D/Y themes (IPPs particularly HUBC). Outside our

formal coverage, we flag MARI, NML, AICL, ASTL, PAEL and CPPL as interesting names.

MSCI, light my fire

Market Snap

As of Year End Dec - 15

KSE100 Index 32,816.3

Market Cap (PkRbn) 6,947

Market Cap (US$bn) 66.33

CY15 Return 2.10%

Market PE (x) 8.5x

Avg. Daily Vol (mn shrs) 246.6

Avg. Daily Td Val (PkRmn) 11,408

Avg. Daily Td Val (US$mn) 111.4

CY15 KSE100 Index - High 36,229

CY15 KSE100 Index - Low 28,927

Market Free float 29%

Sym TP

(PkR)

2016F Return

P/B

(x)

P/E

(x)

D/Y

(%)

CYTD

(%)

LUCK 750.0 2.3 9.6 3.2% -1.0%

CHCC 131.0 1.8 11.2 3.3% 31.3%

PIOC 125.0 2.2 10.9 5.5% 6.1%

PSO 458.0 0.9 6.2 4.0% -9.0%

MCB 267.0 1.6 8.4 7.4% -29.1%

ABL 130.0 1.1 6.1 8.0% -17.0%

EFERT 109.0 2.6 7.3 9.2% 7.7%

FEROZ 1,639.0 3.5 11.4 6.7% 93.7%

Source: IMS Research

Pakistan Strategy

Contents Pakistan Strategy 2016 Page

2016 Strategy - Synopsis Pg 3

Top Picks for 2016 Pg 3

Other Potential Stocks Pg 3

2015 in Review: Pakistan survives a turbulent year Pg 4

2016 Strategy - Pictorial Representation Pg 5

Top-Down is conducive Pg 6

MSCI Upgrade – Case Study Pg 8

Bottom-Up headwinds call for cherry picking Pg 10

If 2015 repeats… Pg 11

Sectors & Top Picks Pg 13

Cements Pg 14

• Lucky Cement - Valuations not reflecting premium status Pg 15

• Cherat Cement - Early Bird Pg 16

• Pioneer Cement - Holding the fastest growth potential Pg 17

Oil & Gas Marketing Pg 18

• Pakistan State Oil - Beneficiary of potential improvement in the power sector Pg 19

Automobile Assembler Pg 20

Insurance Pg 21

Commercial Banks Pg 22

• MCB Bank - Still the go-to bank Pg 23

• Allied Bank - Underappreciated Pg 24

Fertilizer Pg 25

• Engro Fertilizer - Safest exposure to Pakistan’s Fertilizer space Pg 26

Oil & Gas Exploration Pg 27

Pharmaceuticals Pg 28

• Ferozsons Lab - Still room for price play Pg 29

Power Pg 30

Food & Personal Care Products Pg 31

Textiles Pg 32

Other Stocks Pg 33

Mari Petroleum Company Limited Pg 34

Nishat Mills Limited Pg 34

Pak Elektron Limited Pg 35

Adamjee Insurance Company Limited Pg 35

Amreli Steels Limited Pg 36

Cherat Packaging Limited Pg 36

Disclaimer Pg 37

3 | P a g e

Pakistan Strategy

2016 Strategy - Synopsis

• Pakistan continues to stand out against global peers but the KSE-100 may be range-bound in

2016 unless MSCI upgrade to EM status occurs or Banks surprise on growth. A cash-based

market and un-stretched valuations (P/E: 8.5x; at 35% discount to MSCI Asia Pac-ex Japan)

will provide downside protection.

• Our Dec’16 Index target is 38,000pts with offered 16% return slightly lower than 10yr

average return of 20%. While the Top-Down theme remains supportive, interim headwinds

to broader corporate profitability call for a cherry picking approach to generate alpha. That

said, there is potential for 40,000pts subject to MSCI upgrade to EM.

• With segments of the economy growing at peak-Musharraf era levels, we like cyclical

themes including Banks, Insurance, OMCs, Cements and Autos. Outside the macro-driven

theme, we like selected Pharmaceuticals as well on the new drug pricing policy. We are less

sanguine regarding prospects for Consumer Staples, Fertilizers and Tractors particularly

given their premium valuations.

• Our favored stocks for 2016 include MCB, ABL, LUCK, CHCC, PIOC, PSO, EFERT and FEROZ.

These can be complemented by selected stocks likely to meet MSCI EM criteria (including

ENGRO, FFC, UBL and LUCK) alongside a sprinkling of high D/Y themes (IPPs particularly

HUBC). Outside our formal coverage, we flag MARI, NML, AICL, ASTL, PAEL and CPPL as

interesting names.

Top Picks for 2016

Symbol Company

Name 31-Dec-15

Target

Price

(PkR)

Upside Total

Return Stance

2016F Return

P/B

(x)

P/E

(x)

D/Y

(%)

CY15

(%)

LUCK Lucky Cement 495.04 750.0 51.5% 54.7% BUY 2.3 9.6 3.2% -1.0%

CHCC Cherat Cement 90.18 131.0 45.3% 48.6% BUY 1.8 11.2 3.3% 31.3%

PIOC Pioneer Cement 90.86 125.0 37.6% 43.1% BUY 2.2 10.9 5.5% 6.1%

PSO Pakistan State Oil 325.77 458.0 40.6% 44.6% BUY 0.9 6.2 4.0% -9.0%

MCB MCB Bank 216.85 267.0 23.1% 30.5% BUY 1.6 8.4 7.4% -29.1%

ABL Allied Bank 94.26 130.0 37.9% 45.9% BUY 1.1 6.1 8.0% -17.0%

EFERT Engro Fertilizer 84.13 109.0 29.6% 38.8% BUY 2.6 7.3 9.2% 7.7%

FEROZ Ferozsons Lab. 1,106.90 1,639.0 48.1% 54.8% BUY 3.5 11.4 6.7% 93.7%


Other Potential Stocks

Symbol Company Name 31-Dec-15 PE (x) T12m Return CY15 (%)

MARI Mari Petroleum Company Limited

697.14

13.6 46.6%

NML Nishat Mills Ltd.

94.87

8.5 -21.6%

PAEL Pak Elektron Ltd.

62.54

18.4 52.8%

AICL Adamjee Insurance Co. Ltd.

56.51

6.8 14.3%

ASTL Amreli Steels Ltd.

60.07

15.9 12.2%

CPPL Cherat Packaging Limited.

303.11

13.8 91.6%


4 | P a g e

Pakistan Strategy

2015 in Review: Pakistan survives a turbulent year

• The KSE-100 Index gained 2.1% in CY15 (-1.1% in US$ terms), its worst performance

since CY11 (-5.6%; in US$: -10.0%). In comparison, the MSCI FM and EM indices

both shed 17% in the year under review leading Pakistan to once again outperform

peers.

• While the market posted a smart recovery after a bout of foreign selling in Feb/Mar

(liquidation of a foreign fund), a global-risk off sentiment punctuated by sustained

FPI outflow dragged the Index lower in 2HCY15. After three consecutive years of

net inflows, FPI outflow for the year registered at US$315mn.

• In valuation terms, the Pakistan Market ended the year where it started – at a P/E

of 8.5x. In doing so, it ignored multiples positives including record-low interest

rates, signing of the landmark CPEC agreement and inclusion in the MSCI Review

List for EM upgrade. In fact, the last major rerating for the market occurred in mid-

CY13 following the PML-N election win which took P/E up from < 7x.

2011 redux or inflection point? Although the market did not rerate, several developments in the last year can have long

lasting implications. In particular, these include (i) agreements pertaining to the China-

Pakistan Economic Corridor (CPEC) – a US$46bn multi-year deal that can transform the

energy & infrastructure landscape and (ii) MSCI putting Pakistan on the Review List for

potential upgrade to EM status. Put together, these spell significant +ve’s for both FDI and

FPI outlook. At the same time, data and anecdotal evidence suggest a significant

improvement in security conditions with Operation Zarb-e-Azb poised to extend for the 2nd

consecutive winter. Although too early to say, the rise of ISIS shifting the geopolitical center

point to the Levant, can lead to sustainably better conditions in the AfPak region. Finally, a

“lower for longer” oil price outlook is on balance +ve for Pakistan’s macros, if not for the

commodity-heavy Index at large.

Market developments A cash-based market carries both +ve’s and –ve’s. While average volumes/value clocked in

at a subdued 246mn/US$111mn (vs. 208mn/US$93mn in CY14), market volatility remained

in check for the 6th consecutive year where the difference between the Index’s high-low

was just 25% vs. a 63% differential since the KSE-100 Index was introduced in 1992.

However, despite a quicker pace to IPOs (8 in 2015) and the creation of the Pakistan Stock

Exchange (amalgamation of the Karachi, Lahore and Islamabad bourses), sustainably higher

volumes are unlikely in the absence of improved market leverage. This is underpinned by a

more interventionist regulator which can lead to long-term +ve’s but can affect sentiment

in the short-term.

In a turbulent year, KSE 100 ends 2.1% up

28,000

29,000

30,000

31,000

32,000

33,000

34,000

35,000

36,000

37,000

1-J

an

20

-Jan

8-F

eb

27

-Fe

b

18

-Mar

6-A

pr

25

-Ap

r

14

-May

2-J

un

21

-Ju

n

10

-Ju

l

29

-Ju

l

17

-Au

g

5-S

ep

24

-Se

p

13

-Oct

1-N

ov

20

-No

v

9-D

ec

28

-De

c

DR cut by

100bps to

US$700mn

CSF received

DR cut by 50bps

to 8%

Gas tariffs

increased

by up to

63%

Surprise

Chinese

Yuan

deval

PTI rejoins

Parliament

S&P ups

Pakistan's

credit

rating

DR cut by

100bps to 7%;

TR introduced

50bps below

FY16 Fedeal

Budget

announced

Pakistan added

to MSCI review

list for

Moody's

upgrades

Pakistan's

credit rating

Iran

Nuclear

Deal

Status

quo in

MoUs related to

CPEC signed ADB agrees to

provide US$6bn

over next 5yrs

DR/TR cut by

50bps to

6.5%/6.0%

Fitch

Assigns

Rating B

to

Pakistan

US interest

rate status

quo

US$500mn

Eurobond

Issued

PkR sheds

0.7%DoD

vs. US$

SBP keeps DR

unchanged

Dr. Asim

admits to

terror and

corrupton

charges

Incumbents

win in LB

elections

US Fed

raises

FFR by

25bps

CPEC-

financial

close of Port

Qasim coal

power

project


Countries CY15 Chg

China 9.4%

Vietnam 6.1%

Korea 2.4%

Pakistan 2.1%

MSCI World -2.7%

Philippines -3.9%

Malaysia -3.9%

Bangladesh -4.8%

India -5.0%

Sri Lanka -5.5%

Taiwan -10.4%

MSCI AAXJ -12.0%

Indonesia -12.1%

Thailand -14.0%

Singapore -14.4%

MSCI EM -17.0%

MSCI FM -17.3% Source: Bloomberg

5 | P a g e

Pakistan Strategy

Macro conditions positive for Banks & Insurance

PSDP + CPEC. We like Cements, Steel & Glassware

Sweet spot continues. Prefer 4-wheelers over 2

Stagnant circular debt + growing demand

Top-Down: Triggers headed for Materialization

Risk

Factors

• Deterioration in security climate • Macro indiscipline post IMF program • Sharp commodity price swings

Bottom-Up calls for cherry picking

Corporate profits to grow 7%YoY in FY16F vs. 10yr average of 16%YoY.

Ex-E&P and Fertilizer growth is 12%YoY Medium term growth trajectory is intact

Financials

Construction

Automotive

Oil Marketing

Falling crop prices & higher input costs compressing

farmer incomes

This is slowing growth for Consumables particularly

Food as well as Footwear and selected 2-wheelers

Urban sector doing much better on higher disposable

incomes together with improved access to credit

Expect Financials, Construction, Entertainment, Hospitality,

Durables and high-end Staples to outperform

• Political disruption • Global risk-off sentiment & FPI outflow • Regulatory overzealousness

Terrorism shifts focus from AfPak to Levant (ISIS), Zarb-e-Azb has curbed militancy

Peace dividend not probable, but cannot be ruled out

Valuation

Rerating

Improved Security

Limited headline growth

Rural Income Compression

Positives for the Urban side

GDP rate heading for 5%; CPEC can be game changer

Low oil prices & int. rates trickling down with urban growth to outpace rural

Macro Uptick

MSCI - EM upgrade decision due in mid-CY16

Regulator can drive LT reforms but leverage revamp is needed

Regulatory Backdrop

Civil-Military relations in balance with Army content to stay in background

LB elections favor incumbents. PML-N can win again in 2018

Political Equilibrium

6 | P a g e

Pakistan Strategy

Top-Down is conducive

• Notwithstanding periodic noise escalation, the broader domestic political landscape

is in equilibrium while security conditions have improved given firm push on Zarb-e-

Azb and geopolitical epicenter shift to the Levant (rise of ISIS).

• A “lower for longer” outlook for international oil price is positive for the economy

that can operate beyond IMF support, in our view. With upgrade to EM status a

tangible possibility and CPEC progress having the capacity to deliver positive

surprises, the Top-Down backdrop remains favorable.

• Unlike 2015, triggers may witness materialization in 2016 which can unlock valuation

rerating, possibly to 10x P/E. Risks occur on continued FPI outflow but a largely cash-

based market lowers volatility and offers downside protection.

Politics: 7yr itch? With the 2014 PTI sit-ins left in the past, the domestic political environment is much more

stable underpinned by the ruling PML-N’s strong showing in the recent Local Body elections

(Punjab). While pressure points exist and will likely lead to periodic noise via (i) COAS term

end in Nov’16, (ii) the festering Dr. Asim Hussain issue and even (iii) progress of US election

campaigns, there is an equilibrium in civil-military relations where the Army appears content

to stay within the background. With low oil prices helping to avert anti-incumbency

sentiment, we see PML-N winning out again in the 2018 General Elections, leading to policy

continuity from the top.

Security: Watershed developments The tragic events of the Army Public School (APS) tragedy in late 2014 galvanized political

will and public support, providing impetus to Operation Zarb-e-Azb that is set to continue for

the second consecutive winter. Data backed by anecdotal support suggests significant

improvement in security conditions which importantly, looks sustainable. In this regard,

while the emergence of ISIS raises geopolitical temperatures, the heat map is concentrated

in the Levant (esp. Syria, Turkey & Iraq) with conditions in the Afghanistan/Pakistan region

appearing much better in comparison. While we believe it is too soon to expect a peace

dividend in Pakistan, even consideration of the same speaks of immense gains on the

security front.

Economy: Standing on its own Headline macroeconomic metrics have continued to improve with (i) GDP growth looking to

accelerate from the mid-4% mark particularly as private sector credit offtake rises, (ii) FY16

CPI shaping to average < 4%YoY and (iii) interest rates likely to stay in single digits across the

medium-term. Furthermore, two historically problematic areas stand much improved –

Forex reserves with the central bank now imply 4.5 month import cover while the fiscal

deficit is projected to clock in less than 5% of GDP for FY16. Considering Pakistan has needed

Security conditions have improved

0

2,000

4,000

6,000

8,000

10,000

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

9M

CY

15

Civillian casualties Millitants killed

Source: SATP & IMS Research

LB elections: No anti-incumbency yet

0

500

1,000

1,500

2,000

2,500

3,000

3,500

PML-N PPPP PTI Indp. Others

No of Seats

Punjab Sindh KPK

Source: ECP & IMS Research

Unlike 2015, rerating triggers

can materialize in 2016, if the

Pakistan Market is upgraded to

EM status

7 | P a g e

Pakistan Strategy

IMF support when the import cover has dropped to 1.0m-1.5m, the Balance of Payments

position is strong enough to withstand completion of the ongoing IMF program in Sep’16,

particularly if international oil prices remain subdued. This takes into account potential SBP

intervention to contain PkR volatility while still letting the currency weaken gradually.

While we see risks from decelerating remittances (+7.6%YoY in 5MFY16) and weak exports (-

13.9%YoY in 5MFY16), we flag significant FDI potential from CPEC as a counterbalance. From

a medium to longer-term perspective, we highlight Pakistan’s strong domestic demand

theme that dilutes impact from rising US interest rates and China slowdown (China accounts

for a modest 9% of Pakistan’s exports).

Regulatory backdrop: MSCI upgrade can provide major uplift By far the most important development for 2016 is likely to pertain to MSCI’s decision to

upgrade Pakistan to EM status. Recall that Pakistan was part of the EM basket from 1994-

2008 before the events of late 2008 (price freeze for 110 days) first led to Pakistan classified

as a standalone market before being included in the FM Universe. In our view, an upgrade

(decision due in mid-2016) or even a concrete roadmap for the same will likely unlock major

valuation rerating for the Pakistan Market where P/E could conceivably reach 10x especially

as the trend of FPI outflow will likely reverse.

In the absence of an MSCI upgrade, factors such as creation of the Pakistan Stock Exchange

(amalgamation of the Karachi, Lahore and Islamabad bourses) are unlikely to enthuse local

GDP and Credit offtake poised to accelerate…

-5%

0%

5%

10%

15%

20%

0%

1%

2%

3%

4%

5%

6%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Real GDP growth (LHS) Private Sector Credit (YoY)

Source: SBP & IMS Research

FDI remains an issue but CPEC can be transformative

-100%

-50%

0%

50%

100%

150%

0

1,000

2,000

3,000

4,000

5,000

6,000

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FDI (US$ mn) - LHS Δ FDI (%)


Adequate import cover to steady PkR

0.0

1.0

2.0

3.0

4.0

5.0

92

96

100

104

108

112

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

SBP Import Cover (mths) PkR/US$ (LHS)


…inflation & interest rates likely to remain in single-digits

0%

2%

4%

6%

8%

10%

12%

14%

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

CPI YoY Discount Rate


8 | P a g e

Pakistan Strategy

investors particularly if market volumes remain dull. This has a silver lining however - a

largely cash-based market also lowers volatility and offers downside protection.

MSCI Upgrade – Case Study Pakistan was a part of MSCI Emerging Markets from 1994-2008 until market freeze for 110

days led to downgrade to Frontier space. From EM removal effective Dec 31’08 to inclusion

into FM (gap of 5m), the market saw FPI outflow of almost US$300mn. While Pakistani

companies have met requisite EM quantitative criteria for long, it was only in mid-CY15 that

Pakistan was formally added to the MSCI review list for potential upgrade to EM status.

Will upgrade finally happen? In our view, inclusion in the formal review list indicates that MSCI and the broader foreign

investor base is finally beginning to be comfortable on qualitative upgrade criteria which

pertains to ease of capital flows and stability of institutional framework, among others. In

terms of quantitative criteria, at least 3 companies are needed to each meet the

requirements.

Qualitative Criteria

• “Significant” openness to foreign ownership

• “Significant” ease of capital inflows/outflows

• “Good and tested” efficiency of operational framework

• “Modest” stability of institutional framework

Considering Pakistan was earlier part of the EM space, meeting these qualitative criteria

should not be problematic, in our view.

Qualitative Criteria

At least three companies to each meet (i) absolute market cap of US$1.26bn, (ii) free float

market cap of US$630mn and (iii) 15% ATVR (Annualized Traded Value Ratio). While 11

companies meet the first criteria, this list trims to 8 companies if the free float requirement

is added, and finally to just 4 names (FFC, UBL, ENGRO, LUCK) if the liquidity metric is

imposed.

Companies meeting upgrade criteria

(Abs mkt cap US$mn) Free float (Mkt cap US$mn) AVTR

OGDC 7,044

KEL 2,124

HBL 1,474 ENGRO 750

ENGRO 172%

NESTLE 4,392

UBL 1,983

MCB 1,142 PPL 713

LUCK 36.5%

HBL 2,947

FFC 1,665

OGDC 1,057 LUCK 644

FFC 26.3%

PPL 2,924

LUCK 1,609

FFC 916

UBL 17.6%

MCB 2,854

ENGRO 1,501

HUBC 811

HUBC 15.4%

PAKT 2,327

HUBC 1,081

UBL 793

PPL 13.2%

Source: MSCI & IMS Research

Lack of leverage has kept volumes in check…

-

100

200

300

400

500

600

-

50

100

150

200

250

300

350

400

CY

05

CY

06

CY

07

CY

08

CY

09

CY

10

CY

11

CY

12

CY

13

CY

14

CY

15

Avg .Vol (shr mn)- LHS Avg. Val Trd. (US$mn)

Source: KSE, IMS Research

…but this prevents major market downside

0%

40%

80%

120%

160%

200%

CY9

3

CY9

5

CY9

7

CY9

9

CY0

1

CY0

3

CY0

5

CY0

7

CY0

9

CY1

1

CY1

3

CY1

5

Hi-Low differential for KSE-100 Index

Source: KSE, IMS Research

MSCI EM – Pakistani Co’s (2008)

Weight (%) in

Stock MSCI EM MSCI Pak MCB 0.05 25.8

OGDC 0.04 20.5

JSCL 0.03 13.5

PTC 0.02 9.2

PSO 0.02 8.9

UBL 0.02 8.0

FFC 0.02 7.7

NBP 0.01 6.5

Total 0.21 100

Source: MSCI Barra

9 | P a g e

Pakistan Strategy

As per MSCI, upgrade will only occur if the change in status is viewed to be irreversible. We

believe an upgrade will be announced in Jun’16 if 2-3 additional companies meet criteria

(can happen if volumes pickup in OGDC/MCB/PPL and HUBC/LUCK witness an increase in

market cap). However, if only 4 companies meet the upgrade criteria and that too with a

thin margin, MSCI will likely continue to keep Pakistan on the review list and reconsider the

matter in 6m-12m.

What can this mean? From EM removal effective Dec 31’08 to inclusion into FM (gap of 5m), the Pakistan Market

saw net FPI outflow of almost US$300mn. Taking this as an anchor, upgrade to EM status

should immediately result in FPI inflow of at least US$300mn, and possibly higher if funds

choose to OW Pakistan. In this regard, we understand that more than US$1tn in global

funds track the MSCI EM Index compared to less than US$20bn of funds tied to the FM

Index. Over the medium-term, this can result in significant FPI inflow even if Pakistan’s

weight in the EM Index is likely to be in the 0.1%-0.15% range (it was 0.2% when Pakistan

was last part of the EM space). Recall that FPI inflow peaked above US$550mn in any given

year (FY07: US$1.6bn FPI trims to US$123mn if GDRs are excluded).

EM upgrade and likely consequent FPI inflow should drive a rerating in the Pakistan Market

for the first time since mid-CY13. By way of example, the Qatar and UAE markets

experienced significant valuation rerating of ~20% in the run up to upgrade (announced in

Jun’13, effective in May’14). Applying this to Pakistan can take the market’s P/E from 8.5x

presently to as high as 10.2x, which will drive the Index close to 40,000pts all else the same.

In terms of risks, we lag thinner market volumes compared to when Pakistan was last in the

EM space, which can potentially impact quality of trade executions.

Pakistan is big in FM space…

Kuwait

25%

Argentina

16%Nigeria

13%

Pakistan

10%

Kenya

6%

Others

30%

Source: MSCI & IMS Research

…but valuation discount is 38% vs. MSCI EM!

-

5

10

15

20

25

Ru

ssia

Pak

ista

n

Turk

ey

Po

lan

dEg

ypt

Cze

ch

Qat

arB

razi

lK

ore

aU

aeTa

iwan

MSC

I EM

Pe

ruC

olo

mb

iaH

un

gry

Thai

lan

dC

hin

aM

alay

sia

S. A

fric

aIn

do

ne

sia

Ind

iaC

hil

eP

hil

lip

in…

Gre

ece

Me

xico

P/E (x)

Source: Bloomberg & IMS Research

…and trades at a 8% discount to MSCI FM

-

5

10

15

20

25

30

35

Kaz

akh

sta

n

Leb

an

on

Bah

rain

Ro

man

ia

Bu

lgar

ia

Pak

ista

n

Nig

eri

a

MS

CI F

M

Slo

ven

ia

Om

an

Ma

uri

tiu

s

Cro

atia

Sri L

anka

Ke

nya

Esto

nia

Lith

uan

ia

Arg

en

tin

a

Vie

tnam

Mo

rocc

o

Tun

isia

Ku

wai

t

P/E (x)


Pakistan will have a small share in MSCI EM…

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0.0

0.5

1.0

1.5

2.0

2.5

Hu

nga

ryP

eru

Cze

chQ

atar

Gre

ece

Pak

ista

nC

hil

eP

hil

ipp

ines

Egyp

tM

ala

ysia

S. A

fric

aC

olo

mb

iaU

AE

Thai

lan

dTa

iwan

Po

lan

dTu

rke

yIn

do

ne

sia

Me

xico

Ko

rea

Ru

ssia

Ind

iaB

razi

lC

hin

a

US$

-trn

GDP size (US$bn) GDP growth 2016-20*US$10.3trn

Source: IMF & IMS Research

Qatar and UAE markets rerated

by ~20% from EM upgrade

announcement to formal

inclusion (1yr period)

10 | P a g e

Pakistan Strategy

Bottom-Up headwinds call for cherry picking • A commodity-heavy Index tilt restricts IMS Universe profit growth for FY16F to 7%

(ex-E&P and Fertilizer: 12%). However, a cherry picking stance in selected stocks can

still result in substantial alpha.

• We see twin themes playing out for 2016 – while weak farmer economics will likely

result in a tough environment for rural-linked plays (FMCG, Fertilizer, Tractors), the

urban side should benefit from low commodity prices and greater availability of

private sector credit.

• We favor Banks (improved macros can drive rerating), Insurance (general insurers

to see both retail and corporate demand), Construction (CPEC + urban

infrastructure development), OMCs (contained circular debt + white oil demand)

and Autos (four-wheelers preferred over two).

IMS Universe: Not all sectors are equal While the Top-Down theme has historically been volatile, the Pakistan Market has been a

very strong Bottom-Up story where 10yr average corporate profitability growth has tagged

in at 16%YoY. A short-term role reversal defines outlook for 2016 where 1QFY16 IMS

Universe profits declined by 13%YoY. We forecast IMS Universe growth at 7%YoY for

FY16F and at 8%YoY for FY17F. This is largely due to a commodity-heavy Index tilt;

excluding E&P and Fertilizers will elevate FY16F Universe growth to 12%YoY with room for

more if Banks realize higher than projected capital gains. In contrast, sectors such as

Cements, Autos, Insurance, OMCs and Pharmaceuticals are projected to post much higher

growth.

Rural incomes: Feeling the pain

The commodities super-cycle theme has combusted spectacularly, buffeted by global

oversupply amid slowing Chinese growth. Prices for both hard and soft commodities are

sharply lower with oil, copper and wheat down 29%-51%YoY. With a “lower for longer”

commodity price view now gaining widespread currency, the implications for Pakistani

rural incomes and consequently spending power are sharply clear.

Agriculture incomes in Pakistan picked up significantly during 2006-12, buoyed by a

commodity price boom. This reflected in swift sales growth (CAGR: 20%) for rural-linked

sectors including FMCGs, Fertilizer, Tractors and Two Wheelers. Over the last year or so

however, agriculture incomes have witnessed sharp compression on (i) fall in crop prices

led by cotton and sugar, and (ii) higher input prices where urea prices have doubled from

FY10 levels. Together with deceleration in remittances, this income slowdown is

manifesting in a slowdown for rural-linked sectors, where sales growth has decelerated to

5%YoY. With the impact on farmer incomes unlikely to be fully mitigated by the recently

announced Kissan Package (PkR341bn; PkR147bn of which is through direct cash

handouts), we are less sanguine on sectors dependent on rural income growth including

Consumer Staples, Fertilizers, Tractors and Two Wheelers.

Lower farmer income…

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

Fertz Nutrient (N,P,K) Wheat

Sugar Cotton

Wheat Int'l

Source: Economic Survey, WB & IMS Research

…is causing deceleration in Agri-linked sales

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Consumer Sales (PkR mns) Lhs Avg sales growth

Source: Company Accounts & IMS Research

We are Over Weight on Cement,

OMCs, Autos & Insurance while

we also like selected Banks

We are Under Weight on Food

Producers & Textiles

11 | P a g e

Pakistan Strategy

Urban incomes: Pockets of growth In contrast to the rural sector, there has been a positive shift for the secondary and tertiary

sectors underpinned by (i) lower inflation leading disposable incomes higher, (ii) continued

focus on energy reforms & infrastructure development; and (iii) a revival in the private

sector credit cycle. In this regard, while headline GDP growth remains in the mid-4% range,

there is evidence that certain segments of the economy are growing at peak Musharraf-era

levels where we point to high business & consumer confidence, increasing number of

companies being incorporated and +ve’s emanating from key leading indicators (truck sales

and machinery imports).

This turnaround can further entrench if credit offtake continues to improve (LT loans

already growing at 20%YoY) and as CPEC starts delivering results. As a result, with the

economy appearing on a sustainable uptick, we continue to favor cyclicals experiencing a

sweet spot of high margins and robust demand. We favor Banks (improved macros can

drive rerating), Insurance (general insurers to see both retail and corporate demand),

Construction (CPEC + urban infrastructure development), OMCs (contained circular debt +

white oil demand) and Autos (four-wheelers preferred over two).

If 2015 repeats… The commodity fallout witnessed in 2015 is looking to extend into 2016. In this regard,

sector-wise price performance across CY15 is instructive. Commodity-linked sectors were

understandably sharp underperformers in the previous year while cyclicals remained the go-

to sectors as the broader economy continued to pick pace. This can turn out to the case

again in 2016 with a few notable exceptions, where we believe Banks and Non-life Insurance

can deliver positive price performance as economic growth accelerates. There is precedence

Capital formation has accelerated…

-

100

200

300

400

500

600

700

Au

g-0

3

Mar

-04

Oct

-04

May

-05

De

c-0

5

Jul-

06

Fe

b-0

7

Se

p-0

7

Ap

r-0

8

No

v-0

8

Jun

-09

Jan

-10

Au

g-1

0

Mar

-11

Oct

-11

May

-12

De

c-1

2

Jul-

13

Fe

b-1

4

Se

p-1

4

Ap

r-1

5

No

v-1

5

Machinery Imports (US$mn)


…which drives impressive pickup in LT Loans (YoY)

-10%

-5%

0%

5%

10%

15%

20%

25%

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c'1

4

Jan

'15

Feb

-15

Mar

-15

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Total Trade Finance

Working Capital Fixed Investment


Entrepreneurship is picking up…

0

1,000

2,000

3,000

4,000

5,000

6,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

No. of companies registering with SECP

Source: SECP & IMS Research

...underpinning increased business activity

0

100

200

300

400

500

600

700

Jul-

07

De

c-0

7

May

-08

Oct

-08

Mar

-09

Au

g-0

9

Jan

-10

Jun

-10

No

v-1

0

Ap

r-1

1

Sep

-11

Feb

-12

Jul-

12

De

c-1

2

May

-13

Oct

-13

Mar

-14

Au

g-1

4

Jan

-15

Jun

-15

No

v-1

5

Truck Sales

Source: PAMA & IMS Research

12 | P a g e

Pakistan Strategy

that cyclical sectors were among the top performing sectors during the previous macro bull

run across 2003-2007.

On the flipside, despite this being the only sector to attract FPI inflow in 2015, we continue

to remain downbeat on short-to medium-term price performance prospects for Food

Producers, given ongoing sales slowdown and relatively pricey valuations.

…which was repeated in 2015 with some exceptions

-35

.7% -1

7.8

%

-16

.5%

-15

.7%

-9.1

%

-8.6

%

-6.8

%

3.4

%

4.8

% 13

.3%

14

.2%

14

.4%

16

.3%

17

.2%

-50.0%

-35.0%

-20.0%

-5.0%

10.0%

25.0%

E&P

Ch

em

ical

s

Tele

com

Ban

ks

Foo

ds

OM

Cs

Tex

tile

s

Insu

ran

ce

Oth

ers

Po

we

r

Au

tos

Ce

me

nts

Ph

arm

a

Fert

iliz

er

Source: KSE & IMS Research

Cyclicals did well during the 2003-07 macro uptick…

1%

11

%

15

% 22

% 28

%

28

%

29

% 35

%

36

%

38

%

39

%

43

%

45

%

45

%

47

%

48

%

72

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Po

we

r

Tele

com

OM

Cs

Ch

em

ical

Re

fin

ery

Pap

er

Tex.

Co

mp

Ce

me

nt

Fert

iliz

er

E&P

KSE

10

0 In

de

x

Au

tos

Insu

ran

ce

Ph

arm

a

Foo

ds

Tob

acco

Ba

nks

2003-2007 CAGR (Returns)

Source: KSE & IMS Research

13 | P a g e

Pakistan Strategy

Sectors & Top Picks

14 | P a g e

Pakistan Strategy

Strong correlation between PSDP spending and local dispatches

-100 200 300 400 500 600 700 800 900 1,000

-

5

10

15

20

25

30

FY9

8

FY9

9

FY0

0

FY0

1

FY0

2

FY0

3

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

Local Dispatches (mnMT) - Lhs PSDP Spending (PkR bn)

Source: APCMA & IMS Research

Private sector lending has picked but still below FY08 levels

-20%

-10%

0%

10%

20%

30%

40%

Jun

-07

No

v-0

7

Ap

r-0

8

Sep

-08

Feb

-09

Jul-

09

De

c-0

9

May

-10

Oct

-10

Mar

-11

Au

g-1

1

Jan

-12

Jun

e-1

2

No

v-1

2

Ap

r-1

3

Sep

t-1

3

Feb

-14

July

-14

De

c-1

4

May

-15

Oct

-15

Private sector lending related to construction activity (YoY)


Sharoon Ahmad

Investment Analyst

[email protected]

+92-21-37131600 – Ext.302

___________________________________

SYM Rating TP PE (x) PB (x) DY (%)

(PkR) 16F 17F 16F 17F 16F 17F

DGKC Buy 235.0 8.4 8.6 1.0 0.9 3.0% 3.0%

LUCK Buy 750.0 9.6 8.5 2.3 2.0 3.2% 4.0%

MLCF Buy 106.0 9.1 8.6 1.9 1.8 6.0% 7.4%

CHCC Buy 131.0 11.2 9.2 1.8 1.6 3.3% 4.4%

FCCL Buy 42.0 11.2 10.9 2.7 2.5 6.8% 7.5%

PIOC Buy 125.0 10.9 8.0 2.2 2.0 5.5% 8.8%


IMS Cement Universe

-20%

-10%

0%

10%

20%

30%

Jan

-15

Feb

-15

Ap

r-1

5

Ma

y-1

5

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 Index IMS Cement Universe


Cements

Over Weight

Triggers

Strong domestic demand

Domestic cement demand has picked pace (+14.3%YoY) during 1HFY16

led by strong federal PSDP spending (+82%YoY) and improved private

sector lending related to construction activities (PkR108bn in Oct’15

end, +20%YoY). Stronger local sales more than made up for the exports

slump (-26.1%YoY in 1HFY16), keeping total dispatches growth at

4.7%YoY in 1HFY16. We expect dispatches to pick further pace on

continued domestic demand/normalizing exports trend.

CPEC can be an x-factor; private sector potential yet to be tapped

Cement sector will likely be a chief beneficiary of CPEC, given focus on

infrastructure development. Due to lack of clarity, valuation rerating

has thus far failed to take place; however, it should be observed in the

medium term where we hold a “when not if” view on CPEC.

Furthermore, private sector holds great potential for domestic demand

where current housing backlog stands at 9mn units, growing at 0.5mn

pa. In this regard, recent spate of new capacity announcements point

to the sector’s optimistic view.

Recent underperformance gives opportunity to build positions

Cements have underperformed in the recent market rout owing to

foreign selling/global market volatility even as the sector depicted

strong volumetric growth and jump in profitability (+30%YoY in

1QFY16). We expect to see similar earnings growth during rest of the

year due to persisting positive factors, where improving security

situation may provide further impetus to construction development.

Downside Risks:

(1) Potential price war when new expansions start rolling out

(2) Reversal in coal prices

(3) Interest rate up-cycle

(4) Reversal in security situation

15 | P a g e

Pakistan Strategy

Valuation Multiples 2014A 2015A 2016F 2017F 2018F

Sales (PkRmn) 43,083 44,761 46,398 50,266 53,859

Sales Growth (%) 13.9% 3.9% 3.7% 8.3% 7.1%

Npat (PkRmn) 11,894 13,756 16,679 18,885 20,672

EPS (PkR) 36.78 42.54 51.58 58.40 63.93

EPS Growth (%) 21.3% 15.7% 21.2% 13.2% 9.5%

PER (x) 13.46 11.64 9.60 8.48 7.74

ROE (%) 25.0% 22.8% 22.6% 20.7% 19.8%

ROA (%) 20.6% 18.7% 18.7% 17.6% 17.1%

BVS (PkR) 153.98 183.25 219.91 252.95 286.41

P/BVS (x) 3.22 2.70 2.25 1.96 1.73

CFS (PkR) 36.00 50.46 44.73 56.21 60.85

P/CFS (x) 13.75 9.81 11.07 8.81 8.13

DPS (PkR) 9.00 9.00 16.00 20.00 24.00

DY (%) 1.8% 1.8% 3.2% 4.0% 4.8%

Payout Ratio (%) 24.5% 21.2% 31.0% 34.2% 37.5%

Source: Company Accounts, IMS Research

Investment Thesis

• Lucky Cement (LUCK) has long reigned as the industry leader with the largest

market share (19%) together with the lowest cost structure. Medium-term

outlook for LUCK hinges on (i) capacity expansion in Pakistan, (ii) foreign JV

operations and (iii) diversification into different businesses.

• Given the attractive profitability of cement business and capacity constraints

(88% utilization in FY15), LUCK announced a 2.3mn tpa plant in Punjab at the cost

of US$200mn. The plant is expected to come online in 2QCY18 and will enable

LUCK to keep up with stronger anticipated demand. The company’s dispatches

are expected to grow at 5yr CAGR of 7%.

• While LUCK’s Iraq JV of 870k tpa cement grinding plant is operational since 2014,

its DR Congo JV of 1.18mn tpa cement plant is expected to come online in Oct’16.

Cross-border expansion is a natural counter to falling industry-wide exports.

Furthermore, investments in ICI and energy projects (660MW coal IPP and 50MW

wind farm) will help LUCK to effectively hedge against core business risks; in the

unlikely event of price war, LUCK will be the least impacted manufacturer due to

diversification (non-core businesses to contribute more than 40% of profitability

by FY21).

• Given its preeminence in the sector (and historically premium valuations), LUCK

trades at a cheap FY16/FY17F P/E of 9.6x/8.5x, attributable to its

underperformance in the latter half of 2015. Based on DCF valuation, our Jun’16

TP is PkR750/share, offering 51.5% upside.

Risks:

(i) Price war but LUCK to be least impacted by this event risk

(ii) Reversal in international coal prices but has a relative edge due to RDF in place

(iii) Delay in ongoing expansion to miss high growth period

LUCK vs. KSE100 Index

-20%

0%

20%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

LUCK KSE100 Index

Source: KSE

Lucky Cement Limited Price (PkR/sh) 495.04

Bloomberg / Reuters LUCK PA / LUKC.KA

Mkt Cap (US$mn) 1,528.4

52wk Hil-Low (PkR/sh) 590.01-424.8

3m Avg. Daily Vol ('000 shrs) 254

3m Avg. Traded Val (US$mn) 1.25

Lucky Cement Limited Valuations not reflecting premium status

Target Price: PkR750.0

Current Price: PkR495.04

Upside Potential: 51.5%

BUY

16 | P a g e

Pakistan Strategy


Sales (PkRmn) 6,451 6,565 7,278 9,409 11,838

Sales Growth (%) 2.5% 1.8% 10.9% 29.3% 25.8%

Npat (PkRmn) 1,316 1,288 1,428 1,730 2,237

EPS (PkR) 7.45 7.29 8.09 9.80 12.66

EPS Growth (%) 7.5% -2.1% 10.9% 21.2% 29.3%

PER (x) 12.10 12.37 11.15 9.21 7.12

ROE (%) 30.7% 20.0% 17.1% 18.7% 21.2%

ROA (%) 22.9% 16.2% 9.0% 7.8% 10.1%

BVS (PkR) 27.54 45.44 49.03 55.82 63.48

P/BVS (x) 3.27 1.98 1.84 1.62 1.42

CFS (PkR) 3.09 12.04 9.47 13.70 17.11

P/CFS (x) 29.20 7.49 9.53 6.58 5.27

DPS (PkR) 1.73 3.00 3.00 4.00 5.00

DY (%) 1.9% 3.3% 3.3% 4.4% 5.5%

Payout Ratio (%) 23.2% 41.1% 37.1% 40.8% 39.5%


Investment Thesis

• Cherat Cement (CHCC) has been operating close to 90% utilization since FY09,

failing to fully capitalize on the sector’s recent domestic demand pickup. This is

set to change, however, with CHCC’s ongoing expansion slated to come online earlier than for peers. To recall, CHCC is in midst of setting up a brown-field plant

of 1.3mn tpa capacity (2.2x of its existing capacity). The plant is expected to come

online by the start of 2HCY17, which will help CHCC to cater to swiftly growing

demand in the northern region. We expect CHCC’s dispatches (5yr CAGR: 13%) to

outpace peers.

• In order to manage energy costs efficiently, CHCC is setting up a 6MW WHR on its new line. New WHR is expected to begin operations at the same time as new

capacity comes online. This is expected to result in annualized after tax savings of

PkR1.52/share from FY18F onwards.

• CHCC’s expansion is being financed by the mix of debt and equity, which is

expected to increase its D/E from 3% in FY15 to 141% in FY16F. Though interest

rate liftoff next year poses risks, this remains an ideal time for expansion as the DR should remain in single-digits across the medium term.

• FY16F P/E of 11.2x compresses to 9.2x for FY17F and to 7.1x for FY18F as

expansion kicks in. Going by strong earnings growth in medium term (5yr CAGR:

19%), interim high multiples are justified. Based on DCF valuation, our Jun’16 TP

is PkR131/share, offering 45% upside.

Risks:

(i) Highly exposed in price war scenario due to low business/energy diversification

(ii) Reversal in international coal prices

(iii) Interest rate up-cycle poses risk due to higher expected leverage for expansion

(iv) Delay in ongoing expansion to miss high growth period

CHCC vs. KSE100 Index

-20%

0%

20%

40%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

CHCC KSE100 Index

Source: KSE

Cherat Cement Company Limited

Price (PkR/sh) 90.18

Bloomberg / Reuters CHCC PA / CHRC.KA

Mkt Cap (US$mn) 152.1

52wk Hil-Low (PkR/sh) 94.82-65.36



Cherat Cement Company Limited Early Bird




BUY

17 | P a g e

Pakistan Strategy


Sales (PkRmn) 8,025 8,426 9,166 10,033 10,917

Sales Growth (%) 6.0% 5.0% 8.8% 9.5% 8.8%

Npat (PkRmn) 1,769 2,496 1,893 2,576 2,859

EPS (PkR) 7.79 10.99 8.33 11.34 12.59

EPS Growth (%) 15.2% 41.1% -24.2% 36.1% 11.0%

PER (x) 11.67 8.27 10.90 8.01 7.22

ROE (%) 27.3% 33.0% 21.5% 26.2% 26.6%

ROA (%) 15.1% 20.8% 14.7% 18.5% 20.0%

BVS (PkR) 29.95 36.69 40.99 45.60 48.95

P/BVS (x) 3.03 2.48 2.22 1.99 1.86

CFS (PkR) 7.30 14.78 7.33 12.74 14.02

P/CFS (x) 12.35 6.10 12.30 7.08 6.43

DPS (PkR) 4.25 6.25 5.00 8.00 10.00

DY (%) 4.7% 6.9% 5.5% 8.8% 11.0%

Payout Ratio (%) 54.6% 56.9% 60.0% 70.5% 79.4%


Investment Thesis

• PIOC has been operating at low utilization averaging 60% since between FY09-15,

where its growing domestic demand was offset by falling exports to Afghanistan.

Now that swift exports decline is expected to normalize, its overall utilization will

likely go up. A glimpse of it was seen in 1HFY16 dispatches that grew by 4.6%YoY

(second highest after FCCL).

• PIOC has the highest exposure in local market (local dispatches proportion: 94%

in FY15) among its peers, which makes it attractive in current strong domestic

demand/falling exports theme. Note that PIOC’s reported earnings are expected

to go down by 24%YoY in FY16 due to non-recurring unrealized gains of

PkR2.46/share in FY15 owing to ADB/AFIC debt written off.

• PIOC has been completely reliant on national grid resulting in one of the highest

energy costs (PkR2,619/ton in FY15 compared with IMS Cement Universe average

of PkR1,896/ton in FY15). As a result, it has taken the initiative to setup 12MW

WHR plant that is expected to come online in the start of FY17. WHR is expected

to fulfill 37% of PIOC’s power requirement and contribute annualized after tax

savings of PkR2.20/share from FY17F.

• Despite holding the fastest growth potential, PIOC trades at a FY16F/FY17F P/E of

10.9x/8.0x. We project its earnings to grow at 5yr CAGR of 15% that can go

higher depending on +ve surprises from CPEC and PSDP spending. Based on DCF

valuation, our Jun’16 TP is PkR125/share offering 37.6% upside.

Risks:

(i) Highly prone to price war risk due to low diversification and high cost structure

(ii) Reversal in coal prices

(iii) Interest rate up-cycle is a potential risk if CHCC finances WHR through debt

PIOC vs. KSE100 Index

-30%

-15%

0%

15%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

PIOC KSE100 Index

Source: KSE

Pioneer Cement Limited


Bloomberg / Reuters PIOC PA / PION.KA


52wk Hil-Low (PkR/sh) 95.04-74.86



Pioneer Cement Company Limited Holding the fastest growth potential




BUY

18 | P a g e

Pakistan Strategy

Receivables in the power sector have stalled (PkRbn)

0

50

100

150

200

250

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

3Q

15

1Q

16

HUBC KAPCO PSO


Oil & Gas Marketing

Muhammad Saad Ali, CFA

Investment Analyst

[email protected]

+92-21-37131610 – Ext.205

___________________________________


(PkR) 16F 17F 16F 17F 16F 17F

PSO Buy 458.0 6.2 5.9 0.9 0.9 4.0% 7.4%

APL Buy 643.0 10.2 8.8 2.9 2.8 8.5% 9.9%

HASCOL Buy 176.0 11.4 10.1 2.8 2.4 4.2% 4.2%


IMS OMC Universe

-15%

-10%

-5%

0%

5%

10%

15%

Jan

-15

Fe

b-1

5

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

KSE100 Index IMS OMC Universe


Over Weight

Triggers

Volume growth of retail fuel has surpassed 5-yr average

A major positive for the Oil Marketing Companies (OMCs) at large is the

growth trend in sales of petrol (MS) and diesel (HSD). This is the major

characteristic driving our optimism for OMCs because these are cash

sales – payout positive and circular debt negative.

Low oil prices has positives for the sector as well

Even though declining oil prices have led to ugly inventory losses, we

think it has benefited the sector as well. In case of PSO, furnace oil (FO)

sales have more than halved since the US$100/bbl scenario, which

enables both the GoP and PSO to better manage cash-flows and subdue

circular debt buildup (manifested in declining receivables, albeit

gradual). Also, retail fuel now contributes much more to bottom line

and increases distributable earnings. Low oil prices may also keep PkR

depreciation (and thus exchange losses) in check.

Major improvement in circular debt is still due

The root causes of circular debt have not subsided – only the

magnitude has reached more manageable levels, in our view. We opine

privatization of the “inefficient” discos and rationalizing power fuel mix

(more generation from coal/hydel plants) are among the most

pertinent solutions. Reportedly, recoveries have improved by 4ppt to

91% and line losses have fallen by 2ppt to 17%. We would revisit if the

trend persists.

Recurring earnings may normalize further

With the present bearishness in oil market, FO margins may come

further down, elongating the decline in recurring earnings in 2016.

Downside Risks:

(1) Further deterioration in oil prices (inventory losses)

(2) Heavy PkR depreciation (exchange losses)

(3) Rebound in circular debt buildup

Low oil prices sustaining robust growth in petrol/HSD sales

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

HSD MS


19 | P a g e

Pakistan Strategy




BUY


Sales (PkRmn) 1,187,639 913,094 664,287 706,966 976,123

Sales Growth (%) 8.0% -23.1% -27.2% 6.4% 38.1%

Npat (PkRmn) 21,818 6,936 14,285 15,052 16,772

EPS (PkR) 80.31 25.53 52.58 55.40 61.73

EPS Growth (%) 72.6% -68.2% 105.9% 5.4% 11.4%

PER (x) 4.06 12.76 6.20 5.88 5.28

ROE (%) 27.8% 8.4% 15.2% 14.6% 15.2%

ROA (%) 6.7% 1.9% 4.5% 5.1% 5.3%

BVS (PkR) 289.38 302.96 345.41 380.65 405.62

P/BVS (x) 1.13 1.08 0.94 0.86 0.80

CFS (PkR) -209.46 -67.84 148.23 43.54 -26.37

P/CFS (x) n.m n.m 2.20 7.48 n.m

DPS (PkR) 7.64 10.00 13.00 24.00 30.00

DY (%) 2.3% 3.1% 4.0% 7.4% 9.2%

Payout Ratio (%) 9.5% 39.2% 24.7% 43.3% 48.6%


Investment Thesis

• PSO is the largest OMC in Pakistan with a 55% market share and largest retail

network (3500 pumps). Having endured a tough period across CY08-CY14,

fortunes are beginning to turnaround with (i) subdued buildup of circular debt

stock in 1HFY16; (ii) sharp inventory/FX losses balanced with timing of

inventories; (iii) LNG sales counter downtrend in FO sales and granular details of

tripartite agreement indicates LNG imports may be circular debt; and (iv)

increased economic activity (incl. additions to road network and rising car sales).

• We expect strong rebound in core profitability during FY16F on improved

volumetric sales underpinned by (i) overall pickup in economic activities (amid

improving GDP growth), (ii) enhanced vehicle population outlook (FY16-FY20F:-

Local Cars: +8%pa, Motorcycle +11%pa, Imported Cars: +10%pa) and (iii)

potential resurgence in the high-margin lubricants market.

• PSO receivables are expected to standstill in the near term. This is majorly

attributed to government’s ability to ensure swift payments in the overall energy

chain. A potential upside for PSO is the settlement of outstanding net penal

income of about PkR35bn.

• Improving cash-flow dynamics will gradually improve payout, which can trigger

valuation rerating (lower discount to overall market multiples). PSO trades at a

FY16F P/E of 6.2x (29% disc. to market) where our Jun’16 TP of PkR458/share

offers 40.6% upside.

Risks

(i) Sharp rebound in oil prices negative for circular debt buildup and cash-flow.

(ii) Weaker PkR (exchange losses)

(iii) Inventory losses from oil price volatility.

PSO vs. KSE100 Index

-40%

-20%

0%

20%

Jan

-15

Fe

b-1

5

Ap

r-1

5

Ma

y-1

5

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

PSO KSE100 Index

Source: KSE

Pakistan State Oil Co. Ltd. Price (PkR/sh) 325.77

Bloomberg / Reuters PSO PA / PSO.KA


52wk Hil-Low (PkR/sh) 408.05-287



Pakistan State Oil Beneficiary of potential improvement in the power sector

20 | P a g e

Pakistan Strategy

Pakistan Autos – OEM sales volume

0

20,000

40,000

60,000

80,000

100,000

120,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

HCAR PSMC INDU


Industry sales volume

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0

40,000

80,000

120,000

160,000

200,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

LCVs & Pickups (Rhs) Trucks (Rhs) Cars Tractors


Automobile Assembler

Yusra Beg

Investment Analyst

[email protected]

+92-21-37131600 Ext.306

___________________________________

IMS Auto Sector vs. KSE100 Index

-20%

0%

20%

40%

60%

Jan

-15

Feb

-15

Ap

r-1

5

Ma

y-1

5

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 Index IMS Auto Universe


Over Weight

Triggers

The year begins with a whiff of expansion

Pakistan Autos depicted strong volumetric growth in FY15 (+28%YoY)

and are expected to continue their dream run on expected expansions.

Talks of new variants by PSMC, HCAR and GHNL have already emerged

alongside potential entry of new names in the market (Volkswagen,

Renault). Suzuki has internationally launched their 660cc variant along

with Nissan’s recent addition; Redi Go and Go Plus in India. Although

official announcements are awaited, we believe the new Auto Policy

(based on draft) provides healthy tariff rationalization measures,

setting the stage for expansion by local OEMs.

Input costs in control

Rapid increase in output capacities by Chinese steel makers created

oversupply in the international steel market with prices nose-diving to

as low as US$361/MT (CRC: -36.5%YoY in CY15). We expect steel prices

to continue to remain depressed in the next year, which would prove

beneficial for local OEMs in terms of margins sustainability.

Furthermore, the JPY – a key denomination for CKD imports –

depreciated 4% vs. the PkR in CY15 on QE measures undertaken by the

BoJ and is expected to continue to remain depressed into 2016.

Draft Auto Policy - Positive measures in the offing

We believe that the Draft Auto Policy, if instated in its present form,

will be positive for local auto sector via margin improvement from

lower duty structure. Among listed players, GHNL (Category-A) will

likely be the biggest beneficiary on planned launch of the new Datsun

brand in 2016. HCAR would be falling into Category-B of the policy

against roll-out of HR-V (1497cc) with no other major incentives for

PSMC. 3-year import policy for used cars is expected to persist.

Downside Risks:

(1) Behavior of margins over medium-term with US$, JPY and int’l steel

prices being key variables.

(2) Entry of new players increasing competition for incumbents.

21 | P a g e

Pakistan Strategy

Insurance

Abdul Ghani Fatani

Investment Analyst

[email protected]

+92-21-3713600 – Ext 305

___________________________________

IMS Insurance Sector vs. KSE100 Index

-20%

-10%

0%

10%

20%

30%

Jan

-15

Feb

-15

Ap

r-1

5

Ma

y-1

5

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 Index IMS Insurance Universe


Over Weight

Triggers

Macro uptick to drive premiums

Ongoing macro uptick leads us to prefer Non-Life over Life Insurance.

We expect robust growth in premiums (9MCY15: 15%YoY) to accelerate

on expansions in Corporate Pakistan, with medium-term impetus to

arise from CPEC projects. Key beneficiaries likely to include the larger

companies such as AICL (no.2 player), which is already exhibiting a

stellar turnaround in underwriting operations.

Auto insurance: A lot more to offer

Increase in discretionary income coupled with marked pickup in auto

finance (+35%YoY) is driving demand for auto insurance. This trend is

likely to further entrench across the medium-term on anticipated

introduction of new car models/possible OEM expansions. Auto

insurance accounts for almost 50% of AICL’s premiums.

Loss ratio to narrow down further

Loss ratio has hit 10-year low (49.3% in 9MCY15 vs. 71.0% in CY07),

supported by improvement in security situation. Improvement in the

latter appears sustainable which can drive higher underwriting profits

going forward.

Takafuls & national health schemes

In an effort to address religious concerns, acceleration of Islamic

insurance (Takaful) could drive LT industry growth. Potential expansion

of national health schemes is also a trigger.

Downside Risks:

(1) Natural disasters

(2) Deterioration in political & security climate

(3) Weak financial markets performance could inhibit investment

income

Claim ratios has fallen…

40%

45%

50%

55%

60%

65%

70%

75%

CY0

6

CY0

7

CY0

8

CY0

9

CY1

0

CY1

1

CY1

2

CY1

3

CY1

4

9M

CY1

5


…with support coming in from impressive growth in premiums

-10%

-5%

0%

5%

10%

15%

20%

10,000

15,000

20,000

25,000

30,000

CY0

7

CY0

8

CY0

9

CY1

0

CY1

1

CY1

2

CY1

3

CY1

4

9M

CY1

5(PkRmn)

Net Premium Growth in premium (RHS)


22 | P a g e

Pakistan Strategy

LT Loan growth turnaround already underway

0%

5%

10%

15%

20%

25%

2,700

2,800

2,900

3,000

3,100

3,200

Feb

-14

Ma

r-1

4

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c'1

4

Jan

'15

Feb

-15

Ma

r-1

5

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

(PkRmn)

Loan to pvt. sector LT Finance Growth (RHS)


Valuation re-rating theme supported by macro improvement

Jan

-08

No

v-0

8

Oct

-09

Au

g-1

0

Jul-

11

May

-12

Ap

r-1

3

Mar

-14

Jan

-15

De

c-1

5

(x)

2.0

1.5

1.0

0.5

Big 5- Pbv (x)


Commercial Banks

Abdul Ghani Fatani

Investment Analyst

[email protected]

+92-21-3713600 – Ext 305

___________________________________


(PkR) 16F 17F 16F 17F 16F 17F

ABL Buy 130.0 6.1 5.8 1.1 1.0 8.0% 8.2%

MCB Buy 267.0 8.4 8.3 1.6 1.5 7.4% 7.4%

NBP Accum. 60.0 6.4 6.1 0.6 0.6 11.6% 12.0%

HBL Accum. 235.0 8.2 7.8 1.5 1.4 7.5% 7.7%

UBL Buy 195.0 6.9 6.5 1.1 1.0 8.4% 9.0%


IMS Bank Universe vs. KSE100 Index

-30%

-20%

-10%

0%

10%

20%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 Index IMS Bank Universe


Market Weight

Triggers

Credit cycle uptick

Loan/GDP is 15% vs. peak of 27% in 2007 but turnaround is visible. LT

loans are already growing at 20%YoY with headline loan growth to

accelerate on macro uptick underpinned by (i) CPEC demand (direct

and ancillary), (iii) stabilizing commodity prices and (iii) higher urban

incomes (consumer credit). 22% loan CAGR across CY02-07 is a bull case

scenario, with capital buffer to determine outperforming banks.

Regulatory risks played out

2015 saw (i) 300bps cut in DR, (ii) continued steps to trim spreads and

(iii) higher one-off taxation. 2016 should be better with anticipated

interest rate increase in May’16 MPS a key trigger, particularly as

further spread tightening measures are unlikely. Our average DR

projections for CY16/17/18F are 7.0%/8.0%/8.5%.

Valuation rerating

ROEs will stabilize in CY16/17F before a U-shaped recovery. With last

valuation rerating in 2013 (general elections), we argue that the market

has only priced in macro stabilization and not a much improved

economic and security outlook. Big-5 forward P/B and P/E are an un-

stretched 1.16x/7.42x (ex-NBP: 1.32x/7.58x) with 8.2% D/Y implying

limited downside.

Capital gains & credit costs

9MCY15 capital gains are 8% of PPOI and can sustain as per precedence

(similar levels in low interest rate cycle across CY03-04) while systemic

coverage of 81% implies low credit costs ahead. With capital gains and

provisions having capacity to deliver +ve surprises, the market appears

overly cautious on CY16F growth outlook.

Downside Risks:

(1) Extension of repricing effect

(2) Reinvestment risk with large quantum of PIBs maturing in CY16F

(3) LT credit growth potential can lead to higher capital needs

23 | P a g e

Pakistan Strategy


Net Int. Income (PkRmn) 43,641 49,444 51,318 52,310 60,076

NII Growth (%) 14.9% 13.3% 3.8% 1.9% 14.8%

NPAT (PkRmn) 24,656 27,007 28,621 29,045 32,238

NPAT Growth (%) 12.7% 9.5% 6.0% 1.5% 11.0%

EPS (PkR) 22.15 24.26 25.71 26.10 28.96

PER (x) 9.81 8.96 8.45 8.33 7.50

ROE (%) 19.6% 19.0% 18.8% 18.1% 18.8%

ROA (%) 2.8% 2.6% 2.5% 2.3% 2.4%

BVS (PkR) 121.97 122.99 139.87 147.74 159.62

P/BVS (x) 1.78 1.63 1.55 1.47 1.36

Yield on earning assets 10.1% 9.1% 8.5% 8.6% 9.0%

Cost of funds 4.7% 3.9% 3.5% 4.0% 4.2%

NIMs 5.4% 5.3% 5.0% 4.6% 4.8%

DPS (PkR) 14.00 15.00 16.00 16.00 17.50

DY (%) 6.5% 6.9% 7.4% 7.4% 8.1%


Investment Thesis

• Significant capital buffer (CAR: 20.3%) and low ADR levels (< 45%) position MCB

as a prime beneficiary of the domestic credit cycle uptick, particularly as 98% of

the business is in Pakistan vs. 70%-80% for UBL and HBL.

• While differential on cost leadership (C/I: 34% vs. 42% for peers) and NIMs (5.2%

vs. 4.5% for peers) isn’t as acute as it used to be, asset quality remains

significantly superior with provisioning reversals booked in nine of the last 10

quarters. MCB’s track record suggests better risk management in ongoing loan

growth cycle.

• MCB trades at a CY16F P/B of 1.55x, P/E of 8.45x and D/Y of 7.4% with P/B

trading 15% lower than last 5yr average. A relatively conservative stance has held

MCB back but (i) launch of separate Islamic banking operations and (ii)

management guidance for medium-term loan growth outlook (17%-18%YoY)

indicates a shift.

• Significant capital gains backlog (Sep’15: PkR23.1bn pre-tax) opens room for

positive earnings surprises. Even in absence of high capital gains, strong capital

base should keep dividend trajectory intact, limiting share price downside.

Risks

(i) Sizeable exposure in PIBs (48% of investments in Sep’15), a significant portion of

which matures in CY16F, exposes MCB to reinvestment risk.

(ii) Repricing effect to extend into next year as DR is unlikely to rise before May’16.

(iii) Failure to adequately participate in the loan growth cycle could lead to our

earnings estimates being missed.

MCB vs. KSE100 Index

-40%

-30%

-20%

-10%

0%

10%

20%

Jan

-15

Fe

b-1

5

Ap

r-1

5

Ma

y-1

5

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

MCB KSE100 Index

Source: KSE

MCB Bank Limited Price (PkR/sh) 216.85

Bloomberg / Reuters MCB PA / MCB.KA


52wk Hil-Low (PkR/sh) 338.82-205.34



MCB Bank Limited Still the go-to bank




BUY

24 | P a g e

Pakistan Strategy


Net Int. Income (PkRmn) 28,173 36,273 37,053 40,174 45,399

NII Growth (%) 30.1% 28.8% 2.2% 8.4% 13.0%

NPAT (PkRmn) 15,202 16,114 17,587 18,710 20,667

NPAT Growth (%) 2.8% 6.0% 9.1% 6.4% 10.5%

EPS (PkR) 13.28 14.07 15.36 16.34 18.05

PER (x) 7.10 6.70 6.14 5.77 5.22

ROE (%) 20.5% 18.3% 17.8% 17.5% 17.7%

ROA (%) 1.9% 1.8% 1.7% 1.6% 1.6%

BVS (PkR) 71.23 82.50 89.65 97.46 106.52

P/BVS (x) 1.32 1.14 1.05 0.97 0.89

Yield on earning assets 9.7% 8.7% 8.1% 8.6% 8.9%

Cost of funds 5.6% 4.3% 4.1% 4.5% 4.7%

NIMs 4.1% 4.4% 4.0% 4.1% 4.2%

DPS (PkR) 6.50 7.00 7.50 7.75 8.50

DY (%) 6.9% 7.4% 8.0% 8.2% 9.0%


Investment Thesis

• Similar to MCB, strong capital buffer (CAR: 22.2%) and domestic focus are key

positives in the current operating environment while sizeable equity exposure

lowers ABL’s susceptibility to low interest rates.

• Significant capital gains backlog on equities (PkR17.5bn, pre-tax) opens room for

positive earnings surprises in the medium term particularly if SBP does not budge

on investment limit requirement (30% of Tier-I Equity). On the flipside, current

equity portfolio warrants strong dividend income via high yielding scrips like

HUBC, KAPCO and FATIMA.

• We believe ABL is underappreciated on cost efficiency (C/I: 40%, 2nd

best after

MCB) and on asset quality (NPL ratio: 6.8%, Coverage: 90%) which results in

strong ROA/Tier-I ROE of 1.8%/23.8%.

• ABL has shed 19% from its 52wk high of PkR116/share to trade at a CY16F P/B of

1.05x, P/E of 6.14x and D/Y of 8.0%. We flag (i) excessive discount to MCB on P/B

despite similarity on key metrics including ROE; and (ii) limited risks to dividend

sustainability going by strong CAR. Low liquidity in the stock does not warrant

such a steep valuation discount, in our view.

Risks (i) Extension of repricing effect into CY16F will likely keep NII in check while

significant exposure in PIBs (62% of investments) suggests greater reinvestment

risk for ABL.

(ii) Traditional conservative management stance with respect to lending can lead to

ABL missing out compared to more nimble peers.

ABL vs. KSE100 Index

-30%

-20%

-10%

0%

10%

20%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

ABL KSE100 Index

Source: KSE

Allied Bank Limited


Bloomberg / Reuters ABL PA / ABL.KA


52wk Hil-Low (PkR/sh) 116.05-90.11



Allied Bank Limited Underappreciated




BUY

25 | P a g e

Pakistan Strategy

Local urea price discount to international

-

800

1,600

2,400

3,200

Jan

-10

May

-10

Sep

-10

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Urea-Ex factory Price (PkR/bag) Imported Urea price (PkR/bag)


Gas supply vs. fertilizer production

0

100

200

300

400

500

600

700

0%

20%

40%

60%

80%

100%

FY09 FY10 FY11 FY12 FY13 FY14 FY15

NP/NPK CAN DAP Urea Gas (mmcfd)-Rhs

Source: NFDC & IMS Research

Fertilizer

Abdul Samad Khanani

Investment Analyst

[email protected]

+92-21-37131600 Ext.303

___________________________________


(PkR) 16F 17F 16F 17F 16F 17F

FFC Accum. 136.0 7.9 7.4 5.6 5.2 12.0% 12.3%

EFERT Buy 109.0 7.3 6.9 2.6 2.3 9.2% 10.7%

FFBL Buy 73.2 11.8 6.8 3.5 3.2 7.6% 11.4%

FATIMA Buy 55.0 8.1 7.6 2.0 1.8 7.3% 7.8%


IMS Fertilizer Universe

-20%

-10%

0%

10%

20%

30%

40%

Jan

-15

Fe

b-1

5

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

KSE100 Index IMS FERTILIZER Universe


Market Weight

Triggers

Pricing power warrants selective stance

Recent announcement by China to keep export tariff on Urea/DAP

constant at RMB80/ton (US$12-13/ton) and reduction in anthracite

coal prices by 16%CYTD/11%FYTD provides us with a new floor Urea rate between US$230-235/ton.

With limited pricing power (official Urea prices at par to int’l urea prices

of US$240/ton) amidst increased gas pricing (+62%/23% for old

fertilizer plants on feed/fuel), medium-term core outlook on volumes

and pricing power is unexciting particularly for the Fauji’s. Others like

EFERT and FATIMA which are fairly immune to gas price increase should be the preferred plays on core fertilizers.

Attractive dividend yields

Fertilizer as a sector is known for its decent yield of 8%-9% (spread over

12M KIBOR: 271bp), we flag a possible shift towards higher payouts

from EFERT due to lack of investment opportunities and high cash

generation, while FFC may remain a pure yield play.

Improvement in Gas Supply

Fertilizer sector consumes nearly 15% of total gas production. With

improvement in gas supply from SSGC and MARI, fertilizer production

including Urea, DAP, CAN and NP/NPK improved 12.5%YoY in FY15. We

expect this trend to continue coupled with lower urea imports (200k-

300k tons) due to higher gas production and import of LNG.

Diversification in Power & Food sectors

Issue of price congestion exists but concessionary gas plays (EFERT &

FATIMA) are relatively immune. Those exposed to core business risks

(FFC & FFBL) are in the midst of aggressive diversification in Food,

Power and Banking. We believe near to medium-term price

performance for the Fauji’s is likely to be more a function of their diversification projects than the core fertilizer business.

Downside Risks:

(1) Further reduction in international Urea/DAP prices.

(2) Increase in gas curtailment

(3) Steep increase in gas prices

26 | P a g e

Pakistan Strategy


Sales (PkRmn) 61,425 86,418 81,146 80,499 81,891

Sales Growth (%) 22.5% 40.7% -6.1% -0.8% 1.7%

Npat (PkRmn) 8,208 14,533 15,262 16,203 17,242

EPS (PkR) 6.17 10.92 11.47 12.17 12.95

EPS Growth (%) 49.3% 77.0% 5.0% 6.2% 6.4%

PER (x) 13.64 7.70 7.34 6.91 6.49

ROE (%) 23.8% 37.6% 35.0% 33.9% 32.6%

ROA (%) 7.4% 15.1% 16.5% 17.5% 17.3%

BVS (PkR) 25.91 29.00 32.72 35.89 39.77

P/BVS (x) 3.25 2.90 2.57 2.34 2.12

CFS (PkR) 10.99 10.06 3.16 3.43 3.73

P/CFS (x) 7.65 8.36 26.60 24.51 22.55

DPS (PkR) 3.00 6.25 7.75 9.00 9.08

DY (%) 3.6% 7.4% 9.2% 10.7% 10.8%

Payout Ratio (%) 48.6% 57.2% 67.6% 73.9% 70.1%


Investment Thesis

• EFERT is highest conviction play in IMS Fertilizer Universe, due to (i)

concessionary gas pricing, (ii) room for +ve surprises in shape of additional gas

supply (iii) swift deleveraging of balance sheet and (iv) decent expected payouts.

• With every PkR10/bag movement in Urea prices, EFERT’s earnings adjust by

PkR0.11/share. We place baseline earnings at PkR11.47/12.17 in CY16/CY17F,

while any possible extension at current gas prices (urea prices: PkR1,959/bag)

should provide for earnings upside of PkR2.3/PkR2.5 in CY16F/CY17F.

• With ECC yet to make a final decision regarding gas supply from current and

future prospects, gas pricing and timeline remain key. We believe accessibility of

gas to old plant under 2012’s petroleum policy will create earnings room of

PkR1.06/1.05 in CY16F/CY17F (assuming weighted avg. GIDC rates).

• Coupled with swiftly de-leveraged balance sheet and Eximp’s DAP trading

contribution, EFERT is expected to pay decent payouts (medium term avg. D/Y

9%) Higher payouts would also serve the financing needs of parent ENGRO

Corporation (ENGRO).

• Our Jun’16 DCF based TP comes to PkR109/share, which offer 29.6% potential

upside coupled with 9.2% D/Y. Valuation methodology incorporates Beta of 1,

COE of 14.5% and WACC of 11.4%.

Risks (i) Steep downward revision in international Urea pricing.

(ii) Cancellation of subsidies under Kissan Package for farmers.

(iii) Diversion in gas and Urea prices going forward.

EFERT vs. KSE100 Index

-20%

-10%

0%

10%

20%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

EFERT KSE100 Index

Source: KSE

Engro Fertilizer Limited Price (PkR/sh) 84.13

Bloomberg / Reuters EFERT PA / ENGR.KA


52wk Hil-Low (PkR/sh) 99.19-73.47

3m Avg. Daily Vol ('000 shrs) 1,140


Engro Fertilizer Limited Safest exposure to Pakistan’s Fertilizer space

Target Price: PkR109


Upside potential: 29.6%

BUY

27 | P a g e

Pakistan Strategy

Oil & Gas Exploration

Major production additions & discoveries in FY16

Field Stakeholders Estimated addition

Mardankhel OGDC, PPL, POL 2500bpd of oil

Adhi OGDC, PPL, POL 1000-1500bpd of oil

Makori East OGDC, PPL, POL 1000-1500bpd of oil

KPD-TAY OGDC 3000-4000bpd oil & 125mmcfd

Sinjhoro OGDC 2000bpd oil

Discoveries Stakeholders Estimated production

Kalabagh Mari 840bpd oil & 8mmcfd gas

Fazl PPL, Mari 50bpd oil & 20mmcfd gas

Dhok Sultan PPL 253bpd oil & 2mmcfd gas

Gambat South PPL 56mmcfd gas

Source: KSE, PPIS

Correction in Pakistan E&Ps has been overblown

-80%

-60%

-40%

-20%

0%

20%

40%

Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

Arablight KSE100 Index OGDC PPL POL


Muhammad Saad Ali, CFA

Head of Research

[email protected]

+92-21-37131610 – Ext.205

___________________________________

IMS E&P Sector vs. KSE100 Index

-60%

-40%

-20%

0%

20%

Jan

-15

Fe

b-1

5

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

KSE100 Index IMS E&P Universe


Market Weight

Triggers

Subdued earnings growth amid “lower for longer” oil prices

With oil prices averaging US$56/bbl in 1HFY16, there is still no clarity

on the extent of downside in the near future. Negative triggers abound:

Iran will likely increase exports by about 0.5mnbpd in 1Q16; US

production/inventory decline are yet to excite investors adequately;

OPEC’s rhetoric has not changed; and China’s economic woes may

worsen. E&Ps in Pakistan (particularly ones with significant holding by

foreign investors) may therefore remain under pressure in CY16.

Production growth will moderate the downside

However, bearish positioning skews risk to the upside. One trigger that

may elevate investor sentiment is higher-than-expected production

growth in CY16. Among the major sources are: (1) Mardankhel in Tal

Block (stake-holders include: OGDC/PPL/POL) estimated to add about

2000-3000bpd of oil; (2) improvement from Adhi and Makori East (all

three exposed); (3) KPD-TAY (OGDC); (4) potentially Mari field (MARI).

Exploration success may improve sentiment

All four listed E&Ps have employed aggressive exploration strategy, in

order to counter decline in cash-flows and replace depleting reserves.

We think most promising assets include Tal Block, Gambat South (PPL

has already announced a discovery of 56mmcfd), Margala, Surqamar,

and Sup.

Positive regulatory changes are possible

Recently, the government has hinted more positive regulatory changes.

We await development on the conversion of discoveries in 2007-2012

to 2012 policy, which may improve realized gas prices. Also, increase in

gas price for new production from Mari field is positive for MARI.

Downside Risks:

(1) Further deterioration in oil prices

(2) Continued selling from foreign investors

(3) Dry wells and other E&P operational risks

28 | P a g e

Pakistan Strategy

Pharmaceuticals

Yusra Beg

Investment Analyst

[email protected]

+92-21-37131600 Ext.306

___________________________________


(PkR) 16F 17F 16F 17F 16F 17F

FEROZ Buy 1,639.0 11.4 15.4 3.5 4.6 6.7% 5.0%


IMS Pharma Sector vs. KSE100 index

-30%

-20%

-10%

0%

10%

20%

30%

Jan

-15

Fe

b-1

5

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

KSE100 Index IMS Pharma Universe


Market Weight

Triggers

Increase in drug prices

Pakistan pharmaceuticals have fared well in the face of frozen prices

since 2012, however as per Drug Policy 2015, annual increase in drug

prices would be linked to CPI for both scheduled and non-scheduled

drugs. This would be a game changer for our listed pharmaceuticals,

which have witnessed subdude growth in core pharmaceutical

segments and will allow over 1500 pending applications with DRAP to

be processed for price increase with GLAXO, ABOT and SEARLE to be

major beneficiaries.

Rationalizing prices of hardship products

Hardship product formula, being the most controversial and politically

tinged segment, will have a transparent mechanism devised by the

Drug Policy Board, for drugs which have become unviable for the

market due to high production cost relating to life saving drugs for

fighting cancer, hepatitis, TB, Thalassemia etc. This would allow

smoother margins on these products; a +ve for ABOT, GLAXO, SANOFI,

FEROZ and SEARLE.

Era of nutrition and healthcare

Pharmaceuticals over the last three years have undertaken substantial

measures to target growth oriented segments namely: nutrition and

healthcare. With shift in consumer healthcare awareness, these

segments have flourished under better margins with focus on infant

formula, multivitamins, nutritional growth formula, oral hygiene etc.

With growing population and rising predisposition towards healthy

living, GLAXO, ABOT, IBLHL and SEARLE standout.

Downside Risks:

(1) Difficulty in implementation of Drug Policy for New Chemical Entries

with lack of clarity on pricing

(2) Depreciation of the PkR vs the US$ could put pressure on margins.

(3) Political disinclination to allow drug price increases

Pharma – Relatively cheap on PE vs. 22x (Reg. Avg)

54.5

29.3

22.6

21.7

18.5

11.4

- 20.0 40.0 60.0

SANOFI AVENTIS

HIGHNOON LAB

SEARLE PAKISTAN

GLAXOSMITHKLINE

ABBOT LABS PAK

FEROZESONS LABS


Pharma Sector – Sales Trend (PkRmn)

14,331

16,29717,437

13,391 13,555 13,667

0

5,000

10,000

15,000

20,000

1Q 2Q 3Q

CY15TD CY14TD


29 | P a g e

Pakistan Strategy


Sales (PkRmn) 2,535 4,434 11,436 9,534 10,327

Sales Growth (%) 29.8% 74.9% 158.0% -16.6% 8.3%

Npat (PkRmn) 418 749 2,919 2,165 2,233

Net Margin (%) 16.5% 16.9% 25.5% 22.7% 21.6%

EPS (PkR) 13.83 24.80 96.69 71.72 73.97

EPS Growth (%) 36% 79% 290% -26% 3%

PER (x) 80.03 44.64 11.45 15.43 14.96

ROE (%) 15.4% 24.3% 30.1% 29.9% 30.8%

ROA (%) 13.2% 17.1% 26.2% 24.7% 25.0%

BVS (PkR) 89.95 101.84 320.79 240.06 240.55

P/BVS (x) 12.31 10.87 3.45 4.61 4.60

DPS (PkR) 12.00 19.00 74.08 54.95 56.68

DY (%) 1.1% 1.7% 6.7% 5.0% 5.1%

Payout Ratio (%) 86.8% 76.6% 76.6% 76.6% 76.6%


Investment Thesis

• In an environment where most pharmaceuticals have faced squeezed margins

amid frozen drug prices (till Jun’16), FEROZ’s flagship product Sovaldi (Sofosbuvir

Hep-C drug) has managed to build a niche.

• Sovaldi offers a very high success ratio, without the crippling side effects of

earlier treatments that took longer. FEROZ holds a monopoly in this segment,

through their contract for Sovaldi with Gilead Sciences at a cost of

US$1,922/24week course, vs US$84,000 in the international markets.

• Recent approval of manufacturing license for 14 pharmaceuticals (awaiting price

fixation), poses risk to thesis, where we incorporate the impact of potential entry

of Sofosbuvir into the market by 3QFY16. FEROZ is expected to counter with its

own manufacturing license; however, pressure may build up on earnings

sustainability for an interim period.

• While monopolies don’t tend to last, we believe the next few set of likely strong

results by FEROZ could provide a window to further propel share price

performance. Furthermore, while windfall earnings in FY16F are unlikely to

replicate, we still see potential for EPS of PkR70+ from FY17F onwards.

Risks (i) Entry of cheaper Sofosbuvir drugs into the market is a key downside risk.

(ii) Failure to grow other lines of business.

FEROZ vs. KSE100 Index

-30%

0%

30%

60%

90%

120%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

FEROZ KSE100 Index

Source: KSE

Ferozsons Laboratories Ltd.

Price (PkR/sh) 1,106.90

Bloomberg / Reuters FEROZ PA / FERO.KA


52wk Hil-Low (PkR/sh) 1133.84-475.05



Ferozsons Laboratories Ltd. Still room for price play

Target Price: PkR1,639.0

Current Price: PkR1,106.9


BUY

30 | P a g e

Pakistan Strategy

Furnace oil prices (PkR/ton) vs. Fuel charges (PkR/kwh)

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

25,000

35,000

45,000

55,000

65,000

75,000

85,000

Jul-

14

Au

g-1

4

Sep

-14

Oct

-14

No

v-1

4

De

c-1

4

Jan

-15

Feb

-15

Ma

r-1

5

Ap

r-1

5

May

-15

Jun

-15

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

FO Prices - Lhs Fuel Charges/Kwh

Source: Bloomberg and IMS Research

Source wise generation (Gwh)

1,000 11,000 21,000 31,000 41,000

Hydel

RFO

Gas

HSD

Nuclear

Coal

Others

FY14 FY15


Power

Yusra Beg

Investment Analyst

[email protected]

+92-21-37131600 Ext.306

___________________________________

IMS IPPs Sector vs. KSE100 Index

-20%

-10%

0%

10%

20%

30%

Jan

-15

Feb

-15

Ap

r-1

5

Ma

y-1

5

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 Index IMS Power Universe


Market Weight

Triggers

CPEC projects: Tip of the iceberg

CPEC can be a game changer for Pakistan, with the bulk of investments

riding on energy related projects (17500 MW worth US$33.7bn). These projects will provide swift uplift in Pakistan’s electricity generation

capacity (current: 22,700MW) with early harvest projects to come

online by 2017-18 (10,400MW). The impact of this massive addition

would resolve major sectoral issues, augmenting electricity generation

by 77%. This would ensure lower reliability on less efficient and costly

plants (GENCOs) and would reduce load shed.

Oil price decline: Cracking down on the viscous debt cycle

Despite GoP’s efforts against reoccurrence, the debt cycle emerged

with renewed vigor (over 2.5% of GDP) in Dec’14 before the plunge in

international crude prices came to the rescue. This sudden slump has significantly cut short incremental circular debt buildup in 2015; the

stock flattening at ~PkR300bn and expected to be brought down to

PkR211bn (-30%) by FY18. This would result in significant ease in

liquidity and fuel supply constraints for IPPs.

Phasing out RFO and rationalizing tariffs

Fuel mix shift from furnace oil (FO) based generation to alternative

resources (LNG/Coal) has begun with Pakistan’s first two coal fired

power plants under SECMC and Port Qasim recently achieving financial

close. This scenario suggests phasing out of FO (generation: -

13%FY16TD/-10%YoY in FY15) towards coal and LNG (new GSA of Rousch Power 450MW signed), affirming alteration of the GoP’s fuel

allocation policy (CNG diversion from domestic to power & fertilizer

sector). Moreover, gradual phasing out of tariff differential subsidies

while curtailing pass through of lower oil prices in electricity tariff

would precipitate liquidity for the entire energy sector.

Downside Risks:

(1) Any hindrance in materialization of CPEC projects.

(2) Rise in circular debt build up, constraining sector liquidity.

31 | P a g e

Pakistan Strategy

Food & Personal Care Products

Yusra Beg

Investment Analyst

[email protected]

+92-21-37131600 Ext.306

___________________________________

IMS Food Sector vs. KSE100 Index

-15%

-10%

-5%

0%

5%

10%

15%

Jan

-15

Fe

b-1

5

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

KSE100 Index IMS Food Universe


Under Weight

Triggers

Consumer staples demand decelerating

Consumer staples have witnessed a deceleration in sales in line with

the commodity downcycle punctuated by much lower crop prices (eg:

cotton: -20%YoY, rice: -21%YoY) and disproportionate increase in input

costs (Urea: +6.5%YoY). Considering the rural sector has been a key

propellant for growth, listed food sector sales have decelerated to

10%YoY, in stark contrast to the commodity cycle boom during FY06-11

where the consumer sector grew at a massive 30% CAGR. This trend

can lead to some de-rating in sector multiples (P/E: 36.5x).

LT potential is intact

Interim negatives aside, the LT potential is immense, aided by a large

young population, rising middle income group and increased

penetration of organized retail in tandem with growing awareness in

these segments. However, lift off may take some time in the FMCG

sector in Pakistan, given spending levels still remain well below

developed nations with the general trend tilted towards basic

necessities.

Margins provide respite

Continuous downtrend in value of FAO Food Price index since 2010

(188 points) could provide respite to margins on cheaper raw material

imports. FAO Food Index clocked in at 165.2 points in 2015 (-18%YoY)

propelled by downfall in sub-indices: Dairy and Sugar with oversupply

in the international markets and strengthening US$ being key factors

behind the decline.

Downside Risks:

(1) Extended depression in key commodity prices (rural income

compression).

(2) Continued rise in input costs.

(3) Potential valuation de-rating.

Pakistani staples are the most expensive in the region…

12.9

16.3

17.1

19.7

32.0

33.7

36.5

0 10 20 30 40

Thailand

Indonesia

Phillipines

Malaysia

India

China

Pakistan

PER (x)

Source: Bloomberg and IMS Research

…and may de-rate on rural income compression

0

500

1,000

1,500

2,000

2,500

-

50

100

150

200

250

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Feb

-11

Au

g-1

1

Feb

-12

Sep

-12

Mar

-13

Sep

-13

Ap

r-1

4

Oct

-14

Ap

r-1

5

No

v-1

5

Urea PricesPkR/ton (Rhs) Basmati Rise (US$/QTL)

Cotton Prices (cents/pound)

Source: Economic Survey & IMS Research

32 | P a g e

Pakistan Strategy

China roiling the cotton market…

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

0

50

100

150

200

250

China Stock to Use Ratio (Rhs) China grade Price (US$c/ton)

Source: Bloomberg

…and outlook for exports is unexciting

-10%

0%

10%

20%

30%

5,000

7,000

9,000

11,000

13,000

15,000

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

Textile Exports (US$mn) - Lhs PkR Dep. vs US$

Textile exports growth (%)

Source: PBS & SBP, IMS Research

Textiles

Abdul Samad Khanani

Investment Analyst

[email protected]

+92-21-37131600 Ext.303

___________________________________

IMS Textile Sector vs. KSE100 Index

-30%

-20%

-10%

0%

10%

20%

Jan

-15

Fe

b-1

5

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

KSE100 Index IMS Textile Universe


Under Weight

Triggers

International cotton dynamics call for caution

We are Underweight Textiles as the sector is at the wrong end of the

commodity down-cycle. With continuous signs of weakness in China –

the major consumer of global cotton – we see persistence of bear case

in cotton in the medium term. China has accumulated as much as 65mn

bales of cotton which is about 2x its annual demand. This has led to

decline in Chinese imports of cotton and yarn (Pakistan exports

substituted by cheaper alternatives). Product prices move in tandem

with cotton; and as such, should continue to fall in CY16.

Pakistan non-competitiveness is subduing volume growth

Pakistan’s major Eurozone market is hurting because of (i) collapse of

Euro against US$ and (ii) South East Asian competition, which is

countering the availability of GSP+ status. We believe this scenario of

declining exports might not change for another year.

But there might be exceptions; NML is unique

In this rather grim scenario, we highlight the merits of Nishat Mills Ltd

(NML); where the core textile business stands overshadowed by

investment diversification. The stock has a solid portfolio of some of

the best banking, cement and power stocks (all largely defensive and

expected to do relatively well in CY16) and has been unfairly valued at

about 24% discount to the overall market P/E (even if we exclude the

textile business). With an uncertain outlook going into CY16, NML

offers an attractive value proposition. It is worth mentioning that it is a

rare vertically-integrated play on KSE-100; when textile dynamics do

rebound, its textile business will be among the first to fare well.

Downside Risks:

(1) Further downside of commodity prices.

(2) Delay in resolution of energy issues.

(3) Crop failure and more expensive imports.

33 | P a g e

Pakistan Strategy

Other Stocks

34 | P a g e

Pakistan Strategy

Mari Petroleum Company Limited


Bloomberg / Reuters MARI PA / MGAS.KA


52wk Range (PkR/sh) 707.42-363.18



About the Company Mari Petroleum Ltd (MARI) is an oil& gas exploration and development

company (E&P) which is operating the largest gas producing field in Pakistan

(3.4tcf; 17% of total conventional gas reserves in Pakistan). The company

operates 15 other blocks – mostly exploration assets –in the country.

Investment Thesis Although as per consensus estimates, MARI may be fairly valued with regards

to its step-up pricing formula, which can double the gas price on the Mari field

by 2019; there are potential triggers that can sustain the sector-defying

momentum in the stock (up 47% in CY15). MARI may add ~100-150mmcfd

from the field while government has hinted 2012 E&P policy which although is

not final yet, may be a big trigger for MARI’s earnings. On the 600mmcfd from

the field, Mari is getting a gas price of sub US$1/mmbtu; while base price from

the 2012 E&P policy is about 4x hIgher. MARI leads its peers in cost and capital

efficiency: Finding and Development (F&D) costs and operating expenses

sums to about US$2.0/boe compared to US$3-5.0/boe for its peers. This

makes the company more sensitive to upside in revenue from either

production growth or uptrend in oil/gas prices (thus step-up pricing is crucial).

For payout, the company still has to follow the older regime until 2024.

Mari Petroleum Company Limited

MARI vs. KSE100 Index

-40%

-20%

0%

20%

40%

60%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 MARI

Source: KSE

Nishat Mills Ltd.


Bloomberg / Reuters NML PA / NISM.KA


52wk Hil-Low (PkR/sh) 135.85-92.97



About the Company Nishat Mills Limited (NML) is one of Pakistan’s very few vertically integrated

textile units with a capacity of 227k spindles, 789 looms, dying, and garment

manufacturing machines coupled with a captive power plant of 80MW. Other

than this, NML is not just a pure textile play with its investment in Cements,

Banking, Power, Dairy, Entertainment and Hospitality sectors.

Investment Thesis NML provides a blend of different business models, ranging from conventional

textiles to investments in banks, cements, power, dairy, entertainment and

hospitality. We flag that textile earnings contribution is less than 40% where

we urge viewing NML less as a textile unit and more as a holding company

providing discounted exposure to Pakistan.

We assign core business value of PkR32/share of the textile unit where the

portfolio is comprised of (i) Power co’s having fixed capacity payments &

excellent D/Ys (mkt cap: US$170mn; PkR51/share of NML) and (ii) stakes in

DGKC (31%), MCB (7%) and NCL (14%) - combined mkt cap: US$357mn;

PkR108/share of NML. Further, unlisted ventures (entertainment/hospitality)

will likely add value given group track record.

Nishat Mills Limited

NML vs. KSE100 Index

-30%

-20%

-10%

0%

10%

20%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 NML

Source: KSE

35 | P a g e

Pakistan Strategy

Pak Elektron Ltd.


Bloomberg / Reuters PAEL PA / PKEL.KA


52wk Range (PkR/sh) 94.97-42.33



About the Company Pak Elektron Ltd (PAEL) is a leading producer of transformers, electric meters,

and home appliances (refrigerators). The Saigol Group owns 56% stake in the

company. The business is divided into Power and Appliances divisions (50:50%

contributions to revenue). Wapda and K-Electric are major customers of its

Power Division. In its Appliances Division, PAEL has a network of over 1,500

dealers and 22 service centers; products include refrigerators, freezers, AC

splits and microwaves. PEL has 81% market share in the power distribution

market. It is the second largest player in the refrigerator market (26% share).

Investment Thesis PAEL is exposed to most positives which played out last year and are expected

to continue in CY16 – suitable macros driving sales of refrigerators; and

imminent turnaround and investment bonanza in the Pakistan energy sector.

In a nutshell, it is leveraged to the most of the key themes in CY16.

PAEL has benefited from the commodity down-cycle as it imports about 60%

of its raw material. About 65% of imports of the power division is coming from

EU, where we think further depreciation in Euro will be beneficial.

Furthermore, ADB is set invest about US$15bn in revitalizing the Pakistan T&D

network through smart meter; PAEL has 35% market in this market.

Pak Elektron Limited

PAEL vs. KSE100 Index

-30%

10%

50%

90%

130%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 PAEL

Source: KSE

Adamjee Insurance Co. Ltd.


Bloomberg / Reuters AICL PA / ADIN.KA


52wk Range (PkR/sh) 61.12-38.08



About the Company Adamjee Insurance is one of Pakistan’s leading insurance company, offering

both Life & Non-Life Insurance services. The company has its operations in the

UAE as well, where it aims to strengthen its global presence.

Investment Thesis Ongoing growth in net premium (9MCY15: +57.5%YoY) is likely to accelerate

further on the back of (i) expansions in Corporate Pakistan, (ii) macro uptick,

and (iii) medium term stimulus provided by CPEC. Furthermore, we can expect

auto insurance (48% contribution to total premium) to observe robust growth

underpinned by (i) spike in auto finance (+35%YoY), and (ii) introduction of

new models/possible expansion of local auto players. Moreover, the

industry’s declining trend of loss ratio (49.3% in 9MCY15 vs. 71.0% in CY07), is

likely to extend going forward, supported by improvement in security

situation. Introduction of Islamic insurance products would help address

religious concerns and thus drive LT growth. From a valuation perspective,

turnaround in core underwriting income can drive a valuation rerating in the

name.

Adamjee Insurance

AICL vs. KSE100 Index

-30%

-20%

-10%

0%

10%

20%

30%

Jan

-15

Feb

-15

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Sep

-15

No

v-1

5

De

c-1

5

KSE100 AICL

Source: KSE

36 | P a g e

Pakistan Strategy

Amreli Steels Ltd.


Bloomberg / Reuters ASTL PA / AMST.KA


LTD* Range (PkR/sh) 63.23-53.55

LTD Avg. Daily Vol ('000 shrs) 2,742

LTD Avg. Traded Val (US$mn) 1.58

*List to date

About the Company Amreli Steels manufactures steel reinforcement bars and steel billets. It is one

of the premium brands of the country and holds 8% market share in rebars

segment. Its sponsors have been in the steel manufacturing business for over

50 years.

Investment Thesis Amreli Steels recently conducted its IPO in order to finance its expansion (re-

rolling capacity: 180k tpa to 380k tpa; steel melting capacity: 200ktpa to

350ktpa). Amreli Steels managed to raise enough capital to fully finance its

expansion from equity, thus enabling the company to avail 5yr tax holiday,

which adds to CPEC-driven demand potential. Together with the use of new

technology and integration of steel melting plant with new re-rolling plant, it

will likely be able to garner significant cost savings. The new capacities are

expected to come online by the end of CY16. As a result, its pricing power

(premium pricing over other brands) and low steel scrap prices will likely

result in significant improvement in GMs, particularly as management has

flagged ability to withstand imported competition (esp from China) due to

nature of product coupled with applicable import duties.

Amreli Steels Limited

Cherat Packaging Limited.


Bloomberg / Reuters CPPL PA / CHPR.KA


52wk Range (PkR/sh) 314.84-156.79



About the Company Cherat Packaging Ltd (CPPL) is the largest producer and supplier of packaging

material to the cement industry in Pakistan. It has an annual production

capacity of 265mn paper bags and 145mn polypropylene (PP) bags. The

company is majorly owned by the Ghulam Faruque group (which also owns

Cherat Cement).

Investment Thesis Our liking for CPPL stems from its direct exposure to the cement sector,

because it a major supplier of sacks to the sector where we think the cement

sector is likely to do well in the upcoming year. CPPL is set to expand capacity

from 145mn paper and poly propylene bags (PP) to 265mn bags. This will

make it the largest supplier of PP bags in the country. It is also a beneficiary of

“lower for longer” oil price scenario, as PP prices have fallen in tandem with

oil prices. Besides cement sector, the company has also begun supplying PP

bags to fertilizer, sugar and wheat producers, in addition to exploring export

markets.

Cherat Packaging Limited

ASTL vs. KSE100 Index

0%

5%

10%

15%

20%

1-D

ec

4-D

ec

7-D

ec

10

-De

c

13

-De

c

16

-De

c

19

-De

c

22

-De

c

25

-De

c

28

-De

c

31

-De

c

KSE100 ASTL

Source: KSE

CPPL vs. KSE100 Index

-25%

0%

25%

50%

75%

100%

Jan

-15

Fe

b-1

5

Ap

r-1

5

May

-15

Jun

-15

Au

g-1

5

Se

p-1

5

No

v-1

5

De

c-1

5

KSE100 CPPL

Source: KSE

37 | P a g e

Pakistan Strategy

We, IMS Research Team, certify that the views expressed in the report reflect our personal views about the subject securities. We also certify that no

part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this report. We further certify that

we do not have any beneficial holding of the specific securities that we have recommendations on in this report.

Ratings Guide

Buy Upside more than 20%

Accumulate Upside more than 10% but less than or equal to 20%

Neutral Upside from 0% to 10%; Downside from 0% to -10%

Reduce Downside more than 10% but less than or equal to 20%

Sell Downside more than 20%

Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information, opinions and estimates herein

are not direct at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or

regulation or which would subject Intermarket Securities Limited to any additional registration or licensing requirement within such jurisdiction.

The information and statistical data herein have been obtained from sources we believe to be reliable where such information has not been

independently verified and we make no representation or warranty as to its accuracy, completeness and correctness. This report makes use of

forward looking statements that are based on assumptions made and information currently available to us and those are subject to certain risks

and uncertainties that could cause the actual results to differ materially. No part of the compensation of the author(s) of this report is related to

the specific recommendations or views contained in this report.

This report is not a solicitation or any offer to buy or sell any of the securities mentioned herein. It is meant for information purposes only and

does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any

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Intermarket Securities Limited directly or indirectly may have used the information contained herein before publication and may have positions

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Investors should contact their Intermarket Securities representative if they have questions concerning this report.

38 | P a g e

Pakistan Strategy

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