Pakistan Market Strategy - BMA CAPITALres.bmacapital.com/dailyreports/IDreport/PDFs... · Operations Rah-e-Nijat and Rah-e-Rast in FY09-FY10. Dec’15 Index target of 41,400! Our

Pakistan

Market Strategy

Macro improvements continue as a blend of political and economic developments lend credence to bullish momentum at the KSE where we foresee the KSE-100 racking up another 27% gain over CY15F. Our blended index target of 41,400 points for Dec’15 incorporates an earnings growth of 8%YoY and dividend yield of 6%, while the market is likely to re-rate by 10%+ backed by continued monetary easing, ample local and foreign liquidity and narrowing discount between KSE-100 and the region. KSE-100 currently trades at a CY15F P/E of 8.9x compared to regional average of 13.7x and MSCI FM 100 at 9.7x. At the same time, Pakistan market’s dividend yield at 6% is significantly above the regional average of 3% and MSCI FM 100 yield of 4%. Improved economic metrics particularly in light of declining global oil prices (inflation, CAD), continued privatization process (fx reserves) and economic reforms are likely to form key check points for price discovery in the market. Growth in FDI over a longer horizon particularly in light of recent agreements with China and Russia should also aid sentiment while increased political consensus as well as a decisive operation against militants constitute upside to our estimates. Preferred plays include Cements (MLCF, LUCK, FCCL) while we also like Fertilizers (ENGRO), Banks (UBL, BAHL) and Textiles (NML). With market having already priced in global oil price declines, we continue to like E&Ps (POL, OGDC) on developmental projects in CY15. Falling oil prices also lead to a bullish outlook on PSO as circular debt accretion slows.

Political consensus as attention shifts to the economy: With opposition protests a back page story, we believe the government’s focus is likely to once again shift towards economic reforms. Lower inflation levels (FY15: 6.0%-6.5%) against a backdrop of declining global oil prices should allow the government to gradually lower energy subsidies. We believe FY15 will witness broad improvements with a sustained Balance of Payment (BoP) surplus at USD4.1bn, CAD at 0.9%-1.0%, GDP growth at 4.5% and fiscal deficit at 5.3%. At the same time, continued privatization will likely capture headlines with a key distinction in CY15 being the privatization of inefficient entities.

Eyeing 41,400 points by Dec’15! Our Dec’15 KSE-100 index target of 41,400 points implies an upside of 27%. We expect the market to re-rate by 10%+ backed by monetary easing as well as reversion to mean historical differential between PIB and earnings yields. At the same time, continued ample liquidity on the local and foreign investor front as well as a potential peace dividend from a successful Operation Zarb-e-Azb may result in market beating our target. Any deterioration in law & order (particularly a terrorist retaliation) forms a key downside risk.

Several economic indicators are comparable to CY06; a time of peak multiples: The KSE-100 peaked at a P/E of 13.8x in Apr’06 while similarities between economic measures then (CPI: 8.9%; DR: 9.0%; SBP Reserves: USD10.6bn) and now (Average CPI: 6.1%; DR: 9.5%; SBP Reserves: USD10.3bn) are striking and support our view of an upward re-rating from CY15 P/E of 8.9x. Another key thesis for market’s re-rating is the contracting P/E to regional economies where Pakistan currently trades at a discount of 35% to regional markets.

Conviction Calls: Declining energy costs despite anticipated tariff pass-through in Jan’15 form the basis of our preference for ‘Industrials’. We continue to like Cements where our top picks include LUCK, MLCF and FCCL. We also like Textiles (NML) where declining energy costs will likely be complemented by lower raw material costs. Despite declining interest rates, we continue to like Banks (UBL, BAHL) owing to high PIB accretion and growth in non funded income. ENGRO makes our cut due to positive group developments while we also like Oil & Gas (OGDC, POL, PSO) as negatives from lower oil prices are already priced in.

Pakistan Equity Market Strategy 2015

Stage set for a strong re-rating!

BMA Universe Valuation Summary

5 Jan 2015

Priced on: 1-Jan-15

KSE100 Dec’15 target: 41,400

KSE100 Index: 32,480

Upside: 27%

KSE Market Capitalization

PKR7.4tn (USD73.6bn)

KSE100 Market Capitalization

PKR6.4tn (USD63.4bn)

12M KSE100 ADT Value

PKR7.8bn (USD78.3mn)

BMA Research [email protected] +92 111 262 111 www.bmacapital.com

CY14 CY15F CY16F

EPS Chg (%) 18 8 7

P/E (x) 10.1 8.9 8.1

P/B (x) 2.1 1.9 1.7

D/Y (%) 5 6 7

E/Y (%) 10 11 12

ROE (%) 21 21 21

ROA (%) 4 4 4

*All metrics based on current prices

KSE100 Index & Volume Chart

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Pakistan Market Strategy

5 Jan 2015


Timeline: Events Chart CY14 …………………………………..……………………………….……….. 1

Key Charts …………………………………………………………………………………………………. 2

Pakistan Market: Targeting 41,400 by Dec’15! …………................................................................ 4

BMA Conviction Portfolio……………………………………………………………......……………… 8

Pakistan Politics: A United Front! …………………………………………………………………….….. 10

Pakistan Economy …………………………………………………………………………………………. 12

Sectors…………………………………………………………………………………………….………….. 17

Oil & Gas: Exploration and Production……………………………………………………………………. 18

Oil Marketing Companies…………………………….………………………………………………......... 20

Banks……………………………………………………………………………………………………......... 23

Cements ...…………………………………………… ……………………………………………………… 26

Textiles………………………………………………………………………………………………………... 28

Chemicals (Fertilizer)………………………………………………………… ……………...……………... 30

Conviction Calls………………………………………………………………………………….………. 32

OGDC: Developments meriting a second look! ……………………..………………………………….. 33

POL: Negatives already priced in! ………………………………………………………………………... 35

PSO: Gaining momentum on recovery in energy chain………………………..……………………….. 37

UBL: Banking on diversified revenue base.……………..……………………………………….……….. 39

BAHL: The Safe Banking Haven .…………..………………….………………………….………………. 41

LUCK: The emerging conglomerate!………………………… …………………………………………… 43

FCCL: Yielding higher returns……………………………………………………………………………… 45

MLCF: De-risking with growth…………………………………………………….………………………… 47

NML: Core operations turning the corner…..…………..………………………...…….………………... 49

ENGRO: Gaining traction!….…………………………………………………………………..………….... 51

Table of Contents

Pakistan

Market Strategy

Events Chart CY14

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IMF secessful review

SBP reserves slip to 13‐year low

MSCI doubles Pakistan weight to 8.4pc

USD2bn Euro bonds launched

Moody's provide positive credit outlook

FY15 Budget announced

Operation Zarb‐e‐Azb launched

PTI and PAT sit‐in started

Forex reserves crosses $13bn mark

Flood inflicts Rs240bn loss to agri economy

Moody’s changes outlook for five bank

GIDC ordinancesigned by President

DR end by 50bps

OGDC SPO Cancelled

Sukuk 5 times oversubscribed

PTI calls off dharna

1 5 Jan 2015

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5 Jan 2015


Key Charts

Figure 1: Forward Regional P/E (x) Figure 2: Forward Regional Dividend Yield (%)

Source: Bloomberg, BMA Research

Figure 3: Average PIB and E/Y differential Figure 4: P/E vs. Reserves

Source: KSE, SBP, BMA Research

Figure 5: CPI vs DR Figure 6: BOP Composition (USDmn)

Source: SBP, BMA Research

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5 Jan 2015


Pakistan Market

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Market Outlook: Targeting 41,400 by Dec’15!

Pakistan Equities look geared for another year of stellar returns where our KSE-100 Index target of 41,400 points offers an upside of 27% from current levels. At the same time, the market continues to offer a dividend yield of 6%, the highest amongst the regional markets. KSE-100 P/E of 8.9x at CY15 earnings is at a considerable discount to historic peak of 13.8x in CY06 while similarities in macroeconomic indicators then and now are striking. Equities are supported in our view by five tailwinds of i) continued macroeconomic de-risking as economic indicators improve and privatization process remains on track, ii) reduction in policy rate by the SBP where BMA expects a cut of 150bps in CY15, iii) ample local and foreign liquidity, iv) political stability as all parties front a unified stand in the wake of recent terrorism and v) attractive relative valuations with the KSE continuing to be the cheapest market in the region.

Figure 7: Forward Regional P/E (x) Figure 8: Forward Regional Dividend Yield (%)


KSE-100's upward journey to continue in the wake of macro de-risking: In continuation with the economic theme in our strategy report released in Oct’14, we believe Pakistan’s macro de-risking remains on track. The end of protests by the opposition parties marks a prominent moment for the incumbent PML(N) government where we believe focus will shift back to economic reforms. In its recent meeting with the IMF, the GoP has outlined continued privatization of State Owned Enterprises (SOEs) with a key distinction in CY15 being the privatization of inefficient entities. At the same time, reduction in global oil prices will help Pakistan sustain its Balance of Payment (BoP) surplus to USD4.1bn with CAD improving to 0.9%-1.0% of GDP in FY15 from 1.2% in FY14. GDP growth is expected at 4.5% (FY14: 4.1%) while fiscal deficit is expected at 5.3% (FY14: 5.5%) with slippages on account of non-collection of GIDC as well as lower than targeted tax collection.

Attention will also turn to the outcome of Operation Zarb-e-Azb where the recent terrorist attacks have brought politicians, public, religious scholars and the military on one page with regards to the future course of action. News flow regarding success of the operation may unlock further foreign flows in the form of peace dividend along the same lines as Operations Rah-e-Nijat and Rah-e-Rast in FY09-FY10.

Dec’15 Index target of 41,400! Our Dec’15 index target of 41,400 offers an upside of 27% from current levels. Target index calculation is premised on a combination of i) earnings growth at 8% and dividend yield of 6% and ii) coverage universe target price mapping accounting for 150bps easing. The resultant index target incorporates a re-rating by 10%+.

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BMA targets the KSE100 to reach 41,400 by CY15 end. Current market P/E at 8.9x is a considerable discount to historic peak of 13.8x Macro derisking to remain on track amid political stability. Decisive action against terrorists to unlock peace dividend

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5 Jan 2015


Index target calculation & regional valuation

Re-rating the key theme for CY15: Monetary easing is likely to be one of the main driving forces behind market performance in CY15 where our economist estimates a 150bps cut in the discount rate during the year. Every 50bps cut in the discount rate increases valuations by an average of 5%. At the same time, current differential between earnings and PIB yields stands at a level of 0.1% against an average of 1.6% during the period CY07A-CY14A, indicating the need for earnings yields to decline. Assuming convergence to mean differential, the market should ideally trade at a CY15 P/E of 9.9x compared to current 8.9x, translating into a potential re-rating by ~11%.

Figure 9: Average PIB and E/Y differential

Source: SBP, Bloomberg

Historical Precedence – Comparison with CY06: While current forward market P/E stands at an undemanding 8.9x, the KSE-100 peaked in Apr’06 when market P/E went as high as 13.8x. Similarities in macroeconomic indicators during the two periods are striking and certainly merit a revisit on market multiples.

Comparison - Key Metrics

Dec'14 Apr'06

SBP Reserves (USD bn) 10.3 10.6

CPI (%) 4.3 8.9

Discount Rate (%) 9.5 9.0

Market P/E (x) 8.9 13.8

Source: SBP, KSE, Bloomberg

Current policy rate stands at 9.5% with further easing expected while SBP reserves have increased to USD10.3bn. At the same time, average CPI for FY15 is expected in the range of 6.0%-6.5% while Dec’14 CPI stood at just 4.3%. In CY06, the economic situation was somewhat similar, with the policy rate then at 9.0% while SBP reserves stood at

Monetary Easing – the key driving force behind KSE100 rerating in CY15 Economic similarities between CY06 and CY15 further strengthens confidence on market rerating

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Current PIB yields have been artificially inflated given GoP’s need for re-profiling of debt Transition towards normalized rates as well as monetary easing in CY15 will likely take PIB yields significantly lower than CY15 E/Y

Country P/E (x) D/Y (%) ROE (%) Pakistan 8.9 6.2 21.0 India 16.7 1.5 15.9 China 12.3 2.7 13.5 Malaysia 15.7 4.4 12.6 Vietnam 12.3 3.6 15.5 Sri Lanka 11.2 2.5 12.3 MSCI FM100 9.7 4.2 16.1


Index Target Dec'15

Current Index 32,480

Earnings Growth & D/Y 40,398

TP Mapping 42,413

Blended Index Target 41,400

Upside to Index Target 27%

Source: BMA Research

6


5 Jan 2015


USD10.6bn. Inflation in Apr’06 stood at 8.9%, significantly higher than the current level. Given comparable economic indicators as well as a 35% discount to peak market multiple, we believe there exists a strong case for market to re-rate in CY15 by 10%+.

Figure 10: P/E vs. DR Figure 11: P/E vs. Reserves

Source: Bloomberg, SBP, BMA Research

Liquidity to remain ample! Market liquidity remains ample where Pakistan equities have continued to attract significant inflows. Total CY14 inflows stood at USD457mn, up 15%YoY while foreign holding as a percentage of free float has increased to ~35% from 31% in Jun’12. Moving into CY15, we believe foreign inflows are likely to continue given attractive valuations for the Pakistani market (P/E: 8.9x, P/B: 1.9x, Earnings growth: 8%, D/Y: 6%) as well as the initiation of quantitative tightening in the US, widely expected in 2HCY15 and coinciding with a period of easing in Pakistan.

Figure 12: FIPI and Market Performance

Source: KSE, Bloomberg

Outlook for local liquidity remains favorable given i) continued monetary easing resulting in a shift from fixed rate investments to equities and ii) spare cash with locals as costs of doing businesses decline given falling interest rates and input costs (fuel, raw material). A quick and easy guide to increasing local liquidity would be the current ratios of domestic businesses where the Textile sector’s current ratio has improved by 38% in just 3 years,

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Market returns have historically tracked FIPI inflows Inflows are expected to continue in CY15 given attractive valuations Tightening in the US coinciding with easing in Pakistan could unlock further foreign flows

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Foreign investment to remain steady on attractive valuations and strong fundamentals Continued monetary easing plus ample cash to drive local liquidity in the market

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5 Jan 2015


while the same for Cement and Auto manufacturers has improved by 2.3x and 20%, respectively. CY14 market performance recap: Despite consolidation in the latter half of CY14 as political disruptions came to the fore, the KSE-100 performed admirably, returning 24% in PKR terms and 33% in USD terms during CY14. In the process, the KSE-100 became the third best performing market in the world, trailing only China and Venezuela. At the same time, the Pakistan market also outperformed the MSCI FM100 index which remained flat (+1.1% YoY).

Figure 13: Regional Market Performance in CY14 Figure 14: Regional Market Performance in 2HCY14


Market Strategy: Preferred plays include leveraged sectors with particular liking for Cements (FCCL, MLCF, and LUCK) as well as selective Fertilizers (ENGRO). The Cement sector is also expected to benefit from a growing local appetite as well as reducing costs as coal and FO prices come off. ENGRO will likely benefit from i) continuation of gas supply to both of its fertilizer plants, ii) potential initiation of chargeability of the concessionary gas, iii) improving margins of food subsidiary Engro Foods given recent increase in retail milk prices, iii) cash induction from a secondary offering of EFERT and iv) initiation of the LNG project by Feb’14. Despite the fall in oil prices, we continue to like the Energy chain with top picks being POL, OGDC and PSO. Falling interest rates should somewhat benefit Banks this time given AFS gains on PIB portfolio with our top pick being UBL, which offers an exposure to a blend of Pakistan and Middle East. Lower cotton costs and interest rate benefits result in our liking for Textiles with NML being our top pick. Rising power and gas costs, as agreed with the IMF recently, however, could result in some volatility at the start of the year. Long term fundamentals, however, merit a bull stance on Pakistan Equities!

Oil and Gas Exploration & Production: The market already appears to have factored in the negative impact of declining oil prices in current valuations, thus providing for an attractive entry point. Our conviction on the sector is based on i) steady volumetric additions (3 year oil production CAGR of 10%), ii) more than 100% reserve replacement owing to drilling in high impact areas, iii) strong FCFE generation (up by 15%YoY to PKR51.7bn in FY15F) and iv) undemanding sectoral valuations of 7.7x (P/E) and 4.5x (EV/EBITDA), depicting a marked discount of 37% and 25% over regional peers, respectively. We flag POL (TP: PKR550/sh) and OGDC (TP: PKR261/sh) as our preferred plays.

Oil Marketing Companies: The OMC sector is expected to witness a better CY15 driven by i) strengthening petroleum sales, ii) increasing share of high margin and cash based

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The KSE100 yielded 33% in USD terms in CY14, becoming the third best market in the world BMA Conviction ideas: FCCL, MLCF, LUCK, ENGRO, NML, PSO, UBL, BAHL, OGDC, POL We believe the market has already priced in the negatives within E&Ps

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5 Jan 2015


products, iii) declining interest rates and iv) decreasing exposure to circular debt. The sector is currently trading at a marked discount of 18% over the KSE-100. We re-iterate PSO (TP: PKR463/sh) as our top pick in the OMC sector.

Banks: The banking sector will continue to remain in the limelight in CY15 due to robust yields locked in on the investment portfolio along with a gradual uptick in private sector credit off-take. As a consequence, BMA Banking Universe is expected to register earnings growth of 16% in CY15 with an impressive 5yr CAGR of 20%. Within the banking universe, we reiterate our preference for UBL with a TP of PKR225/sh, reflecting an upside of 29% from current levels. We also like BAHL with a TP of PKR60/sh, offering an upside of 24%.

Cements: The cement sector backed by 1) declining fuel and power costs, 2) monetary easing and 3) growing local cement demand is expected to continue its growth streak. FCCL, MLCF and LUCK remain our top picks with target prices of PKR34/sh, PKR62/sh and PKR596/sh, translating into upsides of 27%, 33% and 16%, respectively.

Textiles: The sector is all set to post healthy returns in CY15 due to i) 21%YoY decline in cost of raw material, ii) reduced fuel and power cost on account of 40% FYTD decline in prices of FO and iii) 17%-31%YoY growth in the exports of value added textile products. Our top pick from the textile sector is Nishat Mills Limited (NML) with a TP of PKR146/sh, offering an upside of 25% from current level.

Electricity: In the backdrop of falling yields on fixed income instruments, IPPs will continue to garner increased investor attention with an attractive dividend yield of 10% and US dollar based revenue stream. Our investment theme is premised on the sector being i) the highest yielding sector in the market, ii) hedge against macro volatilities (inflation and exchange rate depreciation) and iii) potential improvement in liquidity position amid slowdown in circular debt pile-up.

Chemicals: The fundamentals of the sector will remain critically dependent on stable gas supply and any imposition of levy by the government on feedstock rates. With falling oil prices taking its toll on international urea prices, thereby narrowing premium over local prices, we believe the outlook of the sector remains mixed. Though we advocate a cautious stance on the sector, we maintain our liking for ENGRO, backed by improving fundamentals, secondary market cash generation and new risk free business ventures (note: Engro Elengy).

BMA Conviction Calls:

Banks are likely to depict a 5 year earnings CAGR of 20% Declining fuel and power cost to expand margins of Textiles and Cements Multiple triggers strengthen our conviction on ENGRO

Conviction Calls

Companies Price TP Upside DY Total

Return P/E P/B ROE

(1-Jan-15)

POL 382 550 44% 13% 57% 7.2 2.5 35%

OGDC 206 261 26% 6% 32% 8.0 1.9 24%

PSO 362 463 28% 3% 31% 6.2 1.1 17%

UBL 175 225 29% 7% 36% 8.2 1.8 22%

BAHL 48 60 24% 5% 29% 7.0 2.3 32%

LUCK 513 596 16% 2% 18% 12.2 2.8 23%

FCCL 27 34 27% 7% 35% 10.7 2.2 21%

MLCF 46 62 33% 0% 33% 7.3 1.4 19%

NML 124 146 17% 4% 21% 7.2 0.8 12%

ENGRO 232 272 17% 0% 17% 6.2 1.4 23%

Portfolio Return 31%

9


5 Jan 2015


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11


5 Jan 2015


Politics takes a back-burner; focus likely to shift on economic policy: The end of the protests marked a triumphant moment for the incumbent PML-N where we believe attention will once again shift towards economic decision making. The Government’s decision to sit with the opposition for forming a committee to look into the alleged rigging in CY13 elections is a big positive and will likely further strengthen the democratic set-up in the country. A key positive is also the continued non-interference of the military despite several hiccups.

Given the backdrop of improving political situation within the country, the government has started focusing on regional relationships and attracting investments. Recent successes in this regard include

i) the recently signed USD1.7bn energy deal with Russia for laying a liquefied natural gas (LNG) pipeline from Karachi to Lahore

ii) the USD3.0bn Gwadar LNG pipeline and terminal project with China

iii) the USD45.6bn China-Pak Economic Corridor project.

With stable internal politics, the focus will now shift to regional strategic relationships, unlocking potential FDI

12


5 Jan 2015


Pakistan Economy

13


5 Jan 2015


Inflation - CPI to remain under 7.0% owing to lower commodity prices

We expect FY15 CPI inflation to average 6.0%-6.5% (FY14: 8.6%), lower than the IMF and SBP estimates of 8.0% and 6.5%-7.5%, respectively. We foresee a high likelihood of lower inflation to continue and expect FY16 CPI in the range of 7.0%-7.5% even if global oil prices rebound to USD70/bbl. We do not foresee a bull run in oil prices given surplus supplies and a weakening global demand. While oil has a weight of 3.03% in the CPI basket, spending on oil comprises 6.2% of Pakistan's GDP and 46% of Manufacturing Sector's GDP. As such, in the absence of any sharp rebound in oil price levels, price pressures within the economy would remain muted in the medium term. Lower oil prices are likely to more than offset the impact of increasing power (already up 4%) and gas tariffs (expected: 14%) as current spending on gas comprises 1.8% of GDP while spending on electricity comprises 3.5% of GDP.

Recent inflation figures are highly encouraging

Moderation in commodity prices coupled with freefall in global crude prices resulted in CPI declining to 4.3% in Dec’14 (Nov’14: 3.96%) from 9.2% in Dec’13. This has dragged average inflation for 6MFY15 to 6.1% from 8.9% recorded during the same period last year. Further, NFNE (Non Food Non Energy inflation), a close proxy of core inflation, has also moderated to 6.7%YoY in Dec’14 from 8.2% in Dec’13. We expect headline inflation to remain on the lower side during 2HFY15 as well given i) benign food prices along with ii) the recent decline in fuel prices.

CY15 to be a year of monetary easing; expect another 150 bps cut in policy rate

We expect a cut of 150 bps during CY15, given expanding real interests. 2HFY15 expected CPI at 6.3% yields a positive real interest rate of 3.2% against previous 5 year average of 1.5%, underpinning our expectation of monetary easing.

Figure 16: Inflation vs. DR Figure 17: CPI, Food and Non Food


External Account; Strong financial flows to strengthen BoP position

We expect the external account to remain in surplus in FY15, owing to an expected decline in CA deficit and accretion in financial account. A successful conclusion of discussions (fourth and fifth reviews) with the IMF has already augmented the forex reserves by USD1.05bn. This will likely pave the way for additional inflows from other lending agencies including World Bank, ADB etc. In addition, the GoP witnessed an overwhelming investor interest in its recent sovereign global Sukuk offering, raising USD1.0bn against an oversubscription of USD2.3bn. Timely realization of these flows has strengthened the external position of the country while increasing total fx reserves to USD14.9bn (SBP Reserves: USD10.3bn).

0

5

10

15

20

25

Mar

-10

Jun-

10

Sep

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n-14

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-14

CPI Food Index NFNE

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Jul-0

9

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug

-11

Jan-

12

Jun-

12

Nov

-12

Apr

-13

Sep

-13

Feb

-14

Jul-1

4

Dec

-14

May

-15

CPI DR

CPI is expected to remain in the range of 6.5%7.5% during FY15 & FY16 We expect cumulative easing of 150bps given lower CPI and widening real interests Disbursement of IMF tranche to unlock further flows from other multilateral agencies

14


5 Jan 2015


With a likely policy shift towards economic reforms, we believe FDI may also witness an improvement in FY15F to USD2.0bn, up 23%YoY particularly within the Energy & Telecom sectors. Incorporating lower import bill along with robust remittances (up 10%), we expect CA deficit in FY15 to clock in at USD2.7bn (1.0% of GDP). Consequent to our expected financial flows as well as a reducing CAD, we expect overall BoP to post surplus of USD4.1bn in FY15F, taking SBP reserves likely above USD13.3bn. Continued strength in SBP reserves also makes a case for a stable PKR vis a vis the greenback.

Are we ready for the next FDI spurt?

As stated above, FDI in 5MFY15 stood at USD423mn while full year FY15 FDI is expected at USD2.0bn, up 23%YoY contingent on investment flow within the Telecom and Energy sectors. Despite the improvement, expected FDI in FY15 is significantly lower than average FDI of USD4.0bn recorded during the period FY07A-FY10A but in-line with the insipid USD1.4bn averaged during the past 4 years (FY11-FY14).

We believe Pakistan is primed for a spurt in FDI over the next few years where the next leg is likely to be led by investment in the Energy sector (primarily Power) while the previous leg (FY07-FY10) was led by the Telecom sector. In this regard, as already mentioned earlier, the GoP has put ink to paper on deals with Russia (USD1.7bn energy deal) and China (USD3.0bn Gwadar LNG Pipeline; USD45.6bn China-Pak Economic Corridor).

Figure 18: BoP Composition (Units USDmn) Figure 19: Mix trend FDI and FIPI (USDbn)


On-track reform process to bear fruits:

Renewed commitment towards reforms and resultant conclusion of fourth and fifth IMF reviews has unlocked cumulative USD1.05bn tranche, pushing FX reserves near the psychological barrier of USD15bn. Moreover, the economy has shown significant signs of recovery as evident from 4.1% increase in GDP where GoP expects it to further augment to 5.1% and 6.0% in FY15 and FY16. In addition, fiscal deficit was restricted to 5.5% of GDP in FY14 where expenditure rationalization together with expansion in revenue base will further improve fiscal deficit to 4.9% and 4.0% in FY15 and FY16, respectively. The comprehensive energy sector reforms are planned for resolving administrative constraints in energy companies and price distortion where GoP will reportedly increase gas tariffs by 10% to 63%.

The government has successfully launched its privatization initiative and divested its stakes in UBL, PPL (partially) and ABL and raised a total of USD680mn out of which 71% was subscribed by foreign investors. GoP failed to conduct a 10% stake sale in OGDCL due to

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FDI FIPI

(20,000)

(15,000)

(10,000)

(5,000)

-

5,000

10,000

15,000

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15F

Current Account Bal Capital AccountFinancial Account

CA Deficit to GDP in FY15 to narrow down to 0.9%1.0% The GoP has already signed deals with Russia (USD1.7bn energy deal) and China (USD3.0bn Gwadar LNG Pipeline; USD45.6bn ChinaPak Economic Corridor) FY15 and FY16 GDP growth is estimated at 5.1% and 6.0%

15


5 Jan 2015


a sudden plunge in oil prices around the time of OGDCL offering. GoP is planning to offload 42% stake in HBL in 3QFY15 which will likely raise USD1.2bn. Besides capital market offerings, GoP has successfully raised USD2.0bn through Euro Bonds and USD1.0bn through International Sukuks in CY14. Unlike CY14 where the divestment plan was focused on shoring up reserves, we believe CY15 will mark the strategic sale of government’s stake in inefficient entities (see table).

Privitazation of Public Sector Entities in CY15

Public Sector Entities Transaction Type GoP Stake Timeline

National Power Construction Corporation Strategic and Asset Sale 100.0% End Mar 2015

Habib Bank Limited Capital Market Transaction 42.0% End April 2015

Faisalabad Electric Supply Company (FESCO) Strategic Sale 100.0% End Aug 2015

Northern Power Generation Company (NPGCL Strategic Sale 100.0% End Aug 2015

Islamabad Electricity Company (IESCO) Strategic Sale 100.0% End Oct 2015

Lahore Electric Supply Company (LESCO) Strategic and Asset Sale 100.0% End Oct 2015

Source : IMF

Fiscal Account: Fiscal consolidation to continue

Fiscal consolidation measures opted by the government are in the right direction, in our view. That said, further stringent measures are required on both the revenue and expenditure side for attaining an envisaged fiscal deficit target of 4.9% and 4.0% in FY15 and FY16, respectively. The fiscal position improved remarkably in FY14 where fiscal deficit reduced to 5.5%, lower than 8.2% in FY13. The improvement in FY14 fiscal deficit was driven by 22% growth in total revenue along with a controlled expansion in expenditure by 9.2%.

FY15 will be a challenging year as revenue collection is likely to fall below GoP’s target of 24% growth in tax collection to PKR2.8tn, primarily on account of oil related sales tax collection. To note, oil comprises 40% of overall sales tax collection. However, growth in 1HFY15 tax collection was below target at 12% (GoP target: 24%), indicating subpar performance on overall revenue enhancing efforts. The applicability of Gas Infrastructure Development Cess (GIDC) is in doldrums where GoP expects PKR145bn (0.5% of GDP) collection under GIDC. GoP is aiming to boost tax to GDP ratio to 11.5% in FY15 and 12.1% in FY16 from 10.6% in FY14. While on the expenditure side, the government ought to take stringent measures for achieving expenditure to GDP target of 19.4% in FY15 however bourgeoning expenditures in the wake of defense spending (considering on-going military operation) and additional funding for rehabilitation of IDPs and flood victims may swell expenditures.

Figure 20: Tax Revenue Budget vs. Revised Figure 21: Improving Fiscal Deficit to GDP Ratio


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15F

Fiscal Deficit to GDP

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14E

FY

15B

Budget Revised

Privatization process to remain on track with focus shifting towards divestment of GoP stake in loss making entities Fiscal Deficit will improve to 5.3% in FY15 compared to last 5 year average of 7.1%

16


5 Jan 2015


Schedule of Performance Reviews & EFF Tranches

Date SDRsmn USDmn Percent of Quota

Conditions

September 4, 2013* 360 522 35 Approval of arrangement

December 2, 2013* 360 522 35 First review and end-September 2013 performance/continuous criteria

March 2, 2014* 360 522 35 Second review and end-December 2013 performance /continuous criteria

June 2, 2014* 360 522 35 Third review and end-March 2014 performance /continuous criteria

September 2, 2014* 360 522 35 Fourth review and end-June 2014 performance /continuous criteria

December 2, 2014* 360 522 35 Fifth review and end-June and end-September 2014 performance /continuous criteria

March 2, 2015 360 522 35 Sixth review and end-December 2014 performance /continuous criteria

June 2, 2015 360 522 35 Seventh review and end-March 2015 performance /continuous criteria

September 2, 2015 360 522 35 Eighth review and end-June 2015 performance /continuous criteria

December 2, 2015 360 522 35 Ninth review and end-September 2015 performance/continuous criteria

March 2, 2016 360 522 35 Tenth review and end-December 2015 performance /continuous criteria

June 2, 2016 360 522 35 Eleventh review and end-March 2016 performance /continuous criteria

August 1, 2016 73 106 7 Twelfth review and end-June 2016 performance /continuous criteria

Total 4,393 6,366 425 *( Amount Received)

Source: IMF

Benchmarks S.No Structural Benchmarks Time Frame (by End of Period)

Fiscal sector

1 Enact amendments to the relevant tax laws (as defined in the TMU) and submit amendments to the Anti-Money Laundering Act (AMLA) to Parliament.

December 2014

2 Approve an administrative order to consolidate the responsibilities of public debt management in the debt management office.

Partially met

Monetary sector

3 Enact the amendments to the SBP law to give SBP autonomy in its pursuit of price stability as its primary objective, while strengthening its governance and internal control framework, in line with Fund staff advice.

June 2015

Financial sector 4 Enact the Securities Bill, in line with Fund staff advice. June 2015

5 Enact the Deposit Protection Fund Act, in line with Fund staff advice. June 2015

Structural Policies

6 Privatize 26 percent of PIA's shares to strategic investors. December 2015

New Structural Benchmarks 7 Draft legislation that will permanently prohibit the practice of issuing SROs that grants exemptions and loopholes. March 2015

8 Announce a time-bound plan to improve the SBP's interest rate corridor by setting the policy rate between the floor and ceiling rates of the corridor.

February 2015

9 Improve the internal operations of the SBP by the following measures: (i) the Investment Committee of the SBP Board will begin regular (at least four times per year) oversight and approval of the reserves management strategy and risk practices; and (ii) the authorities will provide confirmation that in line with standard IMF safeguard procedures, the Internal Audit Department will conduct reviews of the program monetary data reported to the IMF, within two months after each test date, for accuracy and compliance with the TMU and share the findings with IMF staff.

February 2015

10 Reorganize the Debt Policy Coordination Office as a middle office responsible for updating the MTDS and monitoring its implementation, coordinating the credit risk management functions.

March 2015

11 Conduct a review to reduce the number of existing processes and forms for paying sales and income taxes. March 2015 Source: IMF

17


5 Jan 2015


Sectors

18


5 Jan 2015


Oil and Gas: Exploration & Production

The sharp decline in oil prices has already taken its toll on the Exploration and Production (E&P) sector leading to 28% underperformance by the sector against KSE-100. E&P sector is currently trading at an undemanding P/E of 7.7x against 8.9x for KSE-100, an unusual discount of 13% as opposed to an average premium of 7% in last 5 years. We believe the sector has absorbed the impact of reduced oil prices. As per our estimates, closing prices have priced in oil at between USD50-55/bbl. Pakistan E&Ps have an aggressive development program with 3-year CAGR of 10% for oil and 3% for gas during FY15-17. Given huge exposure to largely untapped high potential blocks, the sector offers a high exploration upside. E&Ps remains unleveraged with strong cash generation. We believe the ramp-up of exploration activity in high priced new concessions offer further upside to valuations in the form of discoveries and reserve upgrades. Pakistan E&Ps trade at a discount of 37% and 25% over regional peers on P/E and EV/EBITDA respectively. We flag OGDC and POL as our preferred picks in the sector with TPs of PKR261/sh and PKR550/sh, translating into total returns of 32% and 57%, respectively. PPL follows with a TP of PKR228/sh.

Upbeat on rising production: The healthy trend in volumetric growth of E&P companies is expected to continue as we foresee a 3-year production CAGR of 10% in oil and 3% in gas during FY15-17. While expected growth in gas production is low due to declines in production in large maturing fields, 2.0x-3.0x higher prices offered on new discoveries will continue to keep gas sales on the uptrend. Consequently, we expect the sector to post decent FY15F-FY18F earnings CAGR of 5% despite falling oil prices. Robust volumetric growth coupled with i) an expanding reserve base on accelerated exploration efforts, ii) lower lifting costs and iii) hedge against PKR depreciation under pins our investment case for the sector.

Figure 22: Oil and Gas Production Trend Figure 23: TAL and Nashpa to lead the growth (bpd)

Source: PPIS, Company Reports, BMA Research

Reserve accretion to continue on aggressive exploration: The E&P companies managed to drill an impressive 50 exploratory wells in FY14, up 53%YoY, despite reemergence of circular debt. We believe the momentum in exploration is set to continue going forward, given an aggressive drilling target of 50 exploratory wells in FY15F compared to last 5 year average of 30 wells. Moreover, the pickup in exploration efforts and pilot projects in new concessions and shale formations will further bolster reserve accretion. The drilling will remain concentrated in hydrocarbon rich Sindh and Baluchistan regions.

0

20,000

40,000

60,000

80,000

100,000

120,000

3,000

3,200

3,400

3,600

3,800

4,000

4,200

4,400

4,600

FY12 FY13 FY14 FY15F FY16F FY17F

Oil Production (bpd) Gas Production (mmcfd)

0

5,000

10,000

15,000

20,000

25,000

30,000

0

20,000

40,000

60,000

80,000

100,000

120,000


Total Nashpa TAL

19


5 Jan 2015


Figure 24: Drilling Trend (wells) Figure 25: Smooth CAPEX on strong cash flows

Source: PPIS, BMA Research

Dollar hedged revenue streams: Given the USD denominated revenues, E&Ps provide a perfect hedge against PKR depreciation. As per our estimate, 1% depreciation in PKR against the greenback translates into annualized earnings impact of 1%-2% on the E&P sector.

Attractive yields on robust cash generation: The cash flows of the sector continue to remain strong as evident from 37% growth in operating cash flows of the sector in 1QFY15 to ~PKR50bn despite the resurgence of circular debt. Robust earnings and reduced intensity of circular debt will continue to keep cash flows strong in FY15 as well. We expect FCFE generation of the sector to improve by 15%YoY to PKR51.7bn in FY15F. POL will continue to offer highest yield of 13% in the E&P space followed by OGDC and PPL with 5% and 7%, respectively. The cash rich and unleveraged balance sheets of the exploration companies further strengthens our conviction on the sector.

Figure 26: Dividend Yield Figure 27: Robust FCFE on Steady Profitability (PKRbn)

Source: Company Accounts, BMA Research

Declining oil prices – negatives overplayed: 51% decline in oil prices since Jun-14 has led Exploration and Production (E&P) sector to shed 19% of its value as the sector underperformed KSE-100 by 28%. E&P sector is currently trading at an undemanding P/E of 7.7x against 8.9x for KSE-100, an unusual discount of 13% as opposed to an average

16 2135

50 50 53 563436

6250 54 57 60

FY11 FY12 FY13 FY14 FY15F FY16F FY17F

Exploratory Development

0

10

20

30

40

50

60

70

80

90

0

20

40

60

80

100

120

140

160

180

FY11 FY12 FY13 FY14 FY15F FY16F FY17F

Operating Cash (PKRbn) CAPEX (PKRbn)

6%7%

13%

OGDC PPL POL

0

10

20

30

40

50

60

70

80

0

50

100

150

200

250


PAT FCFE

20


5 Jan 2015


premium of 7% in last 5 years. We believe the sector has absorbed the impact of tumbling oil prices and is pricing in an oil price of USD50-55/bbl. Any further dip in stock prices on account of weak 2QFY15 results shall provide an attractive entry point for the investors. We have kept our long term oil price assumption at USD75/bbl. Even in a bear case scenario (USD65/bbl long term oil price assumption) the sector still offers a total return of ~22% against current market prices.

Figure 28: Production driven Sales growth Figure 29: Profitability Trend (PKR bn)

Source: PPIS, BMA Research

Attractive valuations: The recent bearish trend in the E&P sector on account of dwindling oil prices has led to considerable undervaluation of E&P stocks, trading at an 37% discount to regional peers. We are upbeat on long term prospects on account of significant volumetric additions and upside in reserves due to aggresive exploration. Current preferred plays include OGDC and POL with TPs of PKR261/sh and PKR550/sh, which translates into total returns of 32% and 57%, respectively. PPL follows with a TP of PKR228/sh.

Oil Marketing Companies

CY15 will mark a period of recovery in the Oil Marketing Sector (OMC) owing to growing petroleum sales and easing liquidity position on the back of 51% reduction in oil prices during 2HCY14. The sector witnessed a dull CY14 on account of i) heavy inventory losses, ii) resurfacing of circular debt and iii) weakening FO margins. Though aforementioned variables may keep the sector in pressure in the near term, we believe long term fundamentals remain strong. Our bull case on OMCs is based on likely robust sales of high margin motor fuels on the back of considerable reduction in differential over CNG alternative amid declining MOGAS and HSD prices. Improved liquidity of IPPs would help steady FO sales. Falling interest rates would help reduce finance cost while lower oil prices will also reduce the pace of accumulation in circular debt. Long awaited restructuring and privatization of DISCOs in 2HCY15 will remain the key to the resolution of circular debt. OMCs are trading at an attractive P/E of 7.3x (18% discount over KSE100) thus providing an attractive entry opportunity at current levels. PSO, the main beneficiary of easing liquidity position in energy chain, is our top pick and currently trades at an attractive P/E of 6.2x with an upside of 28%. We also like APL which offers an upside of 23% along with a dividend yield of 10%.

Attractive entry opportunity as the worst is almost behind us: OMC sector remained under pressure in CY14 as earnings will likely fall 21% YoY in FY15 on account of inventory losses caused by a 51% plunge in oil prices and lower recovery of interest income on receivables during 1HFY15. That said, we believe the sector has priced in the negatives given the recent underperformance of 15% wrt to KSE-100 FYTD. With oil prices having stabilized around USD55/bbl, we believe the focus shall soon shift to the resulting stronger outlook on increased motor fuels volumes and improvement in circular debt. Long

270

280

290

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310

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0

50

100

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Sales (PKR bn) Production (mn boe)

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50

100

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300

350

0

50

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EBITDA NPAT

21


5 Jan 2015


awaited restructuring and privatization of DISCOs in 2HCY15 would be a key sign post to watch. OMCs are trading at an attractive P/E of 7.3x (18% discount over KSE100) thus providing an attractive entry opportunity. We continue to flag PSO as our preferred play in the OMC sector currently trading at an attractive P/E of 6.2x, a discount of 31% over local peers. We also like APL due to its strong cash generation and highest yield in the sector.

Figure 30: Sales Trend Figure 31: Profitability Trend (PKR bn)

Source: Company Reports, BMA Research

Increasing share of cash based and high margin products: We expect OMC volumes to grow at a 3 year CAGR of 7% during FY15-FY17 while core earnings will likely grow at a CAGR of 10% during the same period. The growth in volumetric sales will continue to be driven by MOGAS and HSD fuels further supported by growth in non-fuel segment (particularly Lubricants and Asphalt). The increase in sales of MOGAS (3 year CAGR of 14%) will be primarily driven i) narrowing premium over CNG (down to 6% from 45% three months back) and ii) continued expansion in outlets by OMCs. Moreover, expected growth in the sales of Asphalt and Lubricants coupled with increase in margins on HSD and MOGAS by 5% and 26% respectively, will increase the share of high margin and cash based products in the profitability.

Figure 32: Volume mix to skew in favor of cash based products

Figure 33: Share in Gross Profit

Source: OCAC, BMA Research

0

5

10

15

20

25

30

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800


Sales (PKR bn) Volumes (mn tons)

0

5

10

15

20

25

30

0

5

10

15

20

25

30

35

40

45

50


EBITDA NPAT

44% 43% 44% 44% 43% 42%

56% 57% 56% 56% 57% 58%


FO Others

35% 37% 38% 44% 43% 42%

41% 42% 40%39% 37% 38%

23% 21% 21% 17% 19% 20%


HSD+MOGAS FO others

22


5 Jan 2015


Figure 34: APL Sales Trend (mn tons) Figure 35: PSO Sales Trend (mn tons)

Source: OCAC, BMA Research

Improved GDP growth to help lift volumes; lower interest rates to curb finance cost: Recent cut in interest rates by 50bps along with a likelihood of further decline in 1HCY15 will help reduce borrowing cost for OMCs especially PSO. Pakistan's GDP growth is on the uptrend and likely to improve to 6% in FY16 (FY13: 3.5%) which will provide additional impetus to the sales of HSD and FO.

Figure 36: Break up of volume growth story (mn tons) Figure 37: OMC wise sales trend (mn tons)


Continuation of reforms to alleviate pressure on liquidity: In order to curtail the burden of energy sector subsidy, the government plans to improve the recoveries and collections in the power distribution sector through privatization/restructuring of DISCOs in 2HCY15. The elimination of inefficiencies post restructuring in the downstream sector will eventually assist the government in resolving the menace of circular debt. Falling oil prices will also reduce circular debt through i) reduction in absolute value of the lost electricity units and ii) bridging the gap between cost of generation and consumer tariffs. Furthermore, another cash injection by the government aimed at full settlement of circular debt is also possible amid overall improvement in fiscal position which can potentially turn the tides in favor of OMCs where key beneficiary shall be PSO.

-0.1

0.1

0.2

0.3

0.4

0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0


Total MOGAS

0.0

0.5

1.0

1.5

2.0

2.5

3.0

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0


Total MOGAS

0

5

10

15

20

25

30

0

2

4

6

8

10

12


Total HSD MOGAS FO

12.312.6

13.113.4

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Figure 38: Dividend Yield Figure 39: PSO mounting receivables kept payout

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Banks

Pakistan Banks' earnings are likely to grow by 20% in CY14 and the momentum shall continue with an expected CY15 earnings growth 16% despite an expected decline in interest rates. We expect another 150bps cut in interest rates in CY15 following a 50bps cut in Nov-14. Though this may potentially dent investor sentiment in the short term, the massive PIB accumulation in CY14 has helped banks lock in higher yields which will continue to support NIMs in the near term. The sector may also book gains on partial liquidation on PIB portfolios as yields have already come down markedly. PIB gains will likely buoy the sector's equity by 5%. The asset quality of the banking industry remains impressive with NPL ratio expected to remain ~9% and coverage ratio around 90%, driven by cautious lending policies and inclination towards risk-free government treasuries. Also, the non-funded income of the banking industry will also witness a healthy growth of ~12% in CY15F which is expected to further support the sector's profitability. Within Banking space, we recommend a ‘BUY’ call on UBL and BAHL with TPs of PKR225/sh and PKR60/sh offering total returns of 36% and 29%, respectively. Higher investment yields to support profitability: The yields on investments are likely to stay on the higher side during CY15 despite monetary easing as banks have piled up massive stocks in PIBs at an average yield of 12.6%. Banks have expanded PIB portfolios by PKR1.8tn, up 3.4x CYTD, to PKR2.5tn in Nov’14. Furthermore, non-funded income is likely to grow by 12%, which, along with lower provisioning and operating cost, is likely to expand sector profitability by 16% in CY15F. Further, we expect 5 year earnings CAGR to clock in at 20%.

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Figure 40: Earnings (PKRbn) Figure 41: ROE


Upbeat organic growth in the offing: The banking sector assets have been on the rising trajectory as total assets registered a CAGR of 13% in past four years. The robust growth in assets is a function of robust CAGR of 15% in industry deposits due to growing monetary base (average M2 growth of 14.2% in past four years). Going forward, we have assumed industry deposits to grow by 14%-15% CY15F-CY18. While we have continued to assume an equal allocation to advances and treasury investments (stable ADR & IDR) till CY15, we expect ADR to start rising from CY16 onwards due to revival in credit demand owing to resolution of energy and security concerns.

Figure 42: Deposits (PKR bn) Figure 43: Deposit Share


Economic recovery to revitalize credit cycle: Macro-economic indicators are consistently showing signs of recovery as evident from i) softening inflation, ii) improving energy supply and iii) exchange rate stability. This has resulted in improvement in private sector credit appetite as advances registered a growth of 12%YoY as of Sep'14. On the backdrop of economic recovery and expected lower DR, we expect a gradual uptick in private sector credit demand in CY15 and onwards where we have assumed gross advances to grow by 16% in CY15F-CY18F.

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Figure 44: Growing Advances (PKR bn) Figure 45: ADR & IDR


Risk aversion to continue propping up asset quality: Despite credit expansion, we expect asset quality of the banking sector (particularly top tier banks) will remain strong owing to stringent risk management policies which is further validated by 130bps decline in NPL ratio to 13.0% in Sep’14 from 14.3% in Sep’13. We belive bulk of the credit expansion in the early stage of economic recovery shall be of high quality and thus the next NPL cycle is atleast five years away. Going forward, we expect BMA banking space to post NPL ratio 9.4% and 8.7% in CY14F and CY15F, respectively. Also, we expect NPL coverage will remain elevated at ~89%.

Figure 46: Infection Ratio & Coverage Figure 47: Bank wise Asset Quality (CY14E)


Diversified income base to support non interest income: Consistent growth in branchless banking and expected increase in trade and remittances (foreign and domestic) will likely expand fee income where we have incorporated fee income growth of 14% and 15% in CY14 and CY15, respectively. Furthermore, banks are sitting on large stocks of unrealized capital gains on stock market investments which is likely to support earnings going forward. Thus we expect non-interest income of BMA's Banking Universe to register a growth of 12% and 11% in CY14 and CY15, respectively.

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Figure 48: Consistent growth in NFI (PKRbn) Figure 49: Bank wise share in NFI – CY14E (PKRbn)


Revaluation surpluses on PIBs to augment equity: The banking sector is all set to register massive revaluation surplus on long duration govt. securities as yields on PIBs have come down by 1.7% to 12.6% after banks expanded their PIB books by 3.4x from Dec-13 levels. Cursory calculation reveals that banks should book revaluation surplus of PKR46bn on PIB portfolio on the back of decline in PIB yields. Consequently, the banking sector CAR is likely to jump to 18% from ~15% registered in Sep’14.

Valuation: The banking sector is trading at Dec’15 P/B and P/E multiple of 1.7x and 8.1x, respectively. Within the banking space we reiterate our conviction on UBL and BAHL with TPs of PKR225 and PKR60, respectively offering total returns of 36% and 29%, respectively. Cements

Cement sector will likely witness a blend of volume growth and margin expansion in CY15, while falling interest should also help reduce finance cost in selected leveraged cement companies. Strengthening in private and public sector demand will help local dispatches to grow at a 3yr CAGR of 6%. Furthermore, reduction in coal and FO prices along with a decline in power tariffs (due to fuel price adjustments) are expected to significantly expand the industry margins, going forward. We expect another 150bps decline in interest rates in 1HCY15 which will help lower finance cost for leveraged cement plays. As such, the sector will witness 3yr earnings CAGR of 12.5% in FY14A-FY17F. We highlight LUCK, FCCL and MLCF as our preferred plays in the cement sector with total stock returns of 18%, 35% and 33% respectively.

Margins to expand owing to falling fuel and power costs: We expect the margins of the industry to expand by 400bpsYoY in FY16, owing to declining in coal prices, drop in power cost on account of downward adjustments in fuel adjustment factor and commissioning of WHR. Coal prices are currently hovering at USD67/ton, down 13% from FY14 average of USD77/ton. We have assumed current and long term coal prices at USD70/ton, which will likely lead to a 6% decline in per unit coal cost in FY15. Furthermore, decline in power cost on account of downward revision in fuel adjustment surcharge will lower the cost of purchased electricity while in-house generation cost will also come down due to lower furnace oil prices. Furthermore, growing local dispatches amid declining exports would prop up average margin of cement companies as margins on domestic sales is 41% higher than exports.

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Figure 50: COGS per ton vs Coal prices (USD/Ton) Figure 51: Growing EBITDA (PKR/ton)

Source: Company Reports, BMA Research, Bloomberg

Volume growth driven by domestic sales: The country is experiencing a revival in cement demand growth as evident from 9.4% growth in domestic dispatches during 5MFY15. While PSDP expenditure has increased only modestly, domestic demand growth is driven primarily by private sector construction activities. Further improvement in GDP growth, decline in inflation and interest rates and political stability will further augment growth in cement demand. We have conservatively assumed growth in domestic dispatches at 6%. Exports, on the other hand will fall by 2% per annum during FY15-17 and limit overall dispatches CAGR to 4% during the period.

Figure 52: Dispatch growth vs GDP Growth Figure 53: Utilization (%) vs Dispatches (mn tons)

Source: APCMA, BMA Research

Cement industry is becoming cash rich: The cement industry has been able to significantly reduce its debt levels on the back sizable margins and improving profitability. Consequently, major operators like LUCK, PIOC and KOHC have managed to buildup considerable cash reserves. The strong cash generation has enabled the small players to undertake cost efficiency projects leading to valuable cost savings while the big players are diversifying into different industries and beyond local borders. Some companies have also announced expansion plans to benefit from the next up cycle in domestic demand growth.

Falling interest rates to help lower finance cost: The recent reduction in discount rate by 50bps along with expectation of another 100bps cut in CY15 will bode well for the sector. This will significantly decrease financial cost burden on leveraged payers such as

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MLCF and FCCL. We expect FCCL's finance cost to fall by 22% in FY15 and 42% in FY16 while that of MLCF will likely fall by 22% in FY15 and 21% in FY16.

Figure 54: Sector FC % of PBT Figure 55: Cash reserves vs Debt (PKR bn)


Textiles

Textile segment is well positioned to witness a better FY15 as several factors are likely to improve the core textile operations. Cotton has shed 26% FY15TD on account of abundant supplies in the region, while fuel and power cost which constitute 1/4th of total COGS will likely fall due to 46% drop in FO prices FY15TD and reduction in electricity tariffs. Lower interest rates will help reduce finance cost as BMA's textile universe has an average debt to assets of 48%. A 50bps cut in DR will result in a positive annualized earnings impact of 3.5% to 7.5% on BMA Textile Universe. We believe concerns over Pakistan potentially losing GSP Plus status due to resumption of death penalties are overplayed and expect the GSP plus status to continue. Finally, as per IMF’s directives, GoP might increase the gas tariffs, the impact of which will depend on the energy mix of individual companies where companies with higher dependence on gas will be the biggest losers. As per our calculations, for every 10% increase in gas tariffs, the EPS of NML, NCL and GATM will have a negative impact of PKR0.33/sh, PKR0.3/sh and PKR1.2/sh. Our TPs for NML, NCL and GATM currently stand at PKR146/sh, PKR52/sh and PKR76/sh, offering total returns of 19%-21% on the last closings. Strong earnings growth on easing cost pressures: We expect gross margins of the sector to improve by 250bps in FY15F primarily driven by easing raw material and fuel/power cost. Cotton, the sector’s primary raw material, contributing ~25% to the total cost base has already shed 26%YoY. This is likely to result in the improvement of core margins, which we expect to clock in around 18%-20% in FY15 as against 9%-14% in FY14. Moreover, reduction in FO prices as well as cut in electricity rates will help increase BMA textile universe earnings by 2% to 8% on annualized basis.

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Figure 56: Strong margins on PKR depreciation and declining cotton prices

Figure 57: Fuel Mix of Textiles

Source: PPIS, Company Accounts, BMA Research

GSP+ starting to yield benefits: After posting dull exports numbers in the opening months of FY15, the benefits of GSP+ have started becoming visible, particularly within the value added segments. Pakistan’s value added textile exports depicted a growth of 10%-17%YoY in 5MFY15 which is an impressive performance given FY12A-14A CAGR of 8%-9%. With strengthening exports of value added products, we believe GATM and NML, with 70% and 75% of their total sales coming from value added segments, are likely to be the key beneficiaries. NCL, with 45% of its sales comprising of value added segment, will continue to remain the laggard.

Figure 58: Textile exports and growth Figure 59: Sales composition of BMA Textile Universe


Healthy investment portfolio: BMA Universe companies (NML, NCL) hold a diversified portfolio of subsidiary companies. The investments not only hedge the textile companies against textile sector's volatility through healthy dividend income (3 year CAGR of 12%) but also provide investors an indirect exposure to their respective portfolio companies (NML: MCB, DGKC, NPL, NCL and NCPL). Improvement in the dividend income (constituting 43%-45% of profitability) will continue to add to the bottom-line growth.

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Value added segments to outperform; Prefer NML and GATM: Given low cotton prices and substantially higher growth in value added segment's exports, we prefer the value-added textile sector over spinning units. NML is our top pick in the sector as it receives 75% of its sales from the value added segments. Our Dec-15 TP for NML stands at PKR146/sh, which translates into an upside of 17% along with a dividend yield of 4%. GATM's TP stands at PKR76/sh, which translates into total return of 19%. Our TP for NCL stands at PKR52/sh, translating into a total return of 17%.

Chemicals (Fertilizer)

The Fertilizer sector has returned an impressive 23% on average over the past 5 years, however, performance in CY14 remained tepid as the sector returned 17%YoY, underperforming the market by 10%. Concerns over gas supply and chargeability of GIDC were the prime reasons for the muted performance. Moving ahead, we portend earnings growth of 44% in CY15F, primarily led by the growth within the Engro group companies (ENGRO & EFERT). That said, declining trend in global oil price and its potential fallout on petrochems, coupled with rising costs in the local market (gas) may lead to pressure on urea price. While sector dynamics are likely to remain fickle, we flag ENGRO as an outperformer given group developments.

With Agriculture being the backbone of the country, the Fertilizer sector has historically been one of the best performing sectors at the Karachi Stock Exchange (KSE). Going forward, we expect sector profitability to rise by 44%YoY, however, growth remains contingent on i) continued supply of feed gas to the industry and ii) initiation of concessionary gas rate for Engro Fertilizer (EFERT).

Figure 60: Relative Performance Figure 61: Earnings Trend

Source: BMA Research, Company reports, KSE, Bloomberg

Local urea players have steadily increased their market share against imported urea as they offloaded 4.6mn tons urea during 11MCY14 compared to just 394k tons imported urea (down 55%YoY). The increase came amid increased production owing to improved gas supply situation to the industry.

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Figure 62: Local production vs Imports (000tons) Figure 63: Sales and EBITDA (PKR mn)

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ENGRO stands out as our top pick within the sector with a TP of PKR272/sh. At current levels, the scrip offers an upside of 17% and trades at undemanding CY15F and CY16F P/E of 6.2x and 6.0x, respectively. For risk averse investors, we also flag FFC given continued high dividend with the scrip currently offering a D/Y of 12%. Dividend yield looks particularly impressive given our view of decreasing interest rates.

Figure 64: Dividend Yields Figure 65: Steady Margins

Source: BMA Research, Company reports

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Conviction Calls

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5 Jan 2015


Oil and Gas Development Company (OGDC) is one of our preferred plays in the E&P space owing to i) least earnings sensitivity to oil prices on diversified revenue base, ii) vast exposure to exploration assets in Pakistan and iii) low risk production profile amid geographically diversified producing assets. Though near term prospects may remain dim on account of sharp decline in oil prices (down 51%FYTD) leading to 9%YoY decline FY15F earnings; however, long term prospects of the stock remain upbeat owing to an expected 3-year production CAGR of 7% and potential upside in reserves on an aggressive exploration program. Thus, we maintain our liking for the stock with a Dec’15 TP of PKR261/sh, translating into a total return of 32% (capital gain: 27% + dividend yield: 5%). Our conviction on the stock is based on i) an aggressive development program likely yielding results in 2HFY15, ii) exploration drilling in high prospect areas, iii) strong cash generation and iv) potential upside from addition of shale and tight gas. With current market price implying an oil price of USD55/bbl, we believe OGDC has absorbed the negative impact of oil prices. Expected 14% growth in oil production and 16% growth in gas production in CY15F will likely be the key triggers for the stock. Concerns pertaining to oversupply have now settled due to indefinite postponement in GDR offering. At current levels, the scrip trades at FY15F and FY16F PER of 8.0x and 8.1x, respectively. ‘BUY’

Momentum in production growth to continue: The relentless decline in oil prices appears to have overshadowed the potential upside in earnings and valuations owing to materialization of a spree of development projects expected in CY15. The company targets to lift its production base through i) completion of Phase-II of KPD TAY (by Jan’15) and Sinjhoro, ii) ramp-up of production from Uch-II and iii) Jhal Magsi and Nashpa development projects (expected in 1HFY16). These projects are estimated to add ~5,600bpd of oil and ~203mmcfd of gas to the production base of the company, depicting an impressive increase of 14% and 16% over the existing oil and gas production, respectively.

Strong exploration potential: With highest number of exploration concessions (62 licenses) located across the country, OGDC will continue to remain the main beneficiary of ongoing aggressive exploration activity in the country. The company has highlighted an aggressive exploration program aimed at drilling 11 new exploratory wells in FY15 compared to 5 wells drilled last year. The company also plans to initiate seismic activity in new blocks during CY15 with wellhead gas price of USD6.0/mmbtu, 2.0x higher than current realized gas price of OGDC. Moreover, OGDC’s exposure to hydrocarbon rich and relatively unexplored Baluchistan and Kohat Basin will keep success ratio above 50% and help achieve +100% reserve replacement, going forward.

Product and fields diversification - low risk to future earnings growth: The balanced revenue mix (oil: gas revenue mix at 45%:50%) with capped gas prices will continue to keep OGDC least sensitive in BMA E&P Universe to further slide in oil prices. Moreover, the company’s development leases and exploration licenses are spread across the country thus providing exposure to the vast untapped hydrocarbon resources in Pakistan. OGDC has managed to achieve significant geographic diversification in production thus making it less prone to reserve downgrades in a single field.

Strong cash generation to continue: Despite the resurgence of circular debt, the payout and capex target of the company remained on track in FY14. Going forward, the cash generation of the company will further strengthen in FY15F and FY16F owing to reduction in the intensity of circular debt pile-up and stable earnings. This will enable the company to smoothly pursue its development and exploration plan thus maintaining the growth in production. We foresee FY15F and FY16F FCFE at PKR13/sh and PKR14/sh thus allowing the company to payout PKR11.0 in DPS during both years.

Valuation: Based on our reserve based Dec’15 TP of PKR261/sh, the stock offers an upside of 27% coupled with a dividend yield of 5% translating into a total return of 32%. At current levels, the scrip trades at FY15F and FY16F PER of 8.0x and 8.1x, respectively.

Oil and Gas Development Company (OGDC)

Developments meriting a second look!

Stock Data

Share Price Performance

OGDC: BUY

Target Price: 261

Current Price: 206

Price (PKR/Share) 206 Reuters Bloomberg Website OGDC.KA OGDC PA www.ogdcl.com.pk 52-weeks High/Low (PKR) 272.0 / 200.4 Dividend Yield 5% Market Cap (PKR bn) 888 Market Cap (USD mn) 8,840

Avg Daily Turnover (PKR mn) 189 Avg Daily Turnover (USD mn) 2.0 Shares Outstanding (mn) 4,301 KSE-100 Index Weightage (%) 7.6 Free Float 15

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OGDC KSE100 Index

Company Description Oil and Gas Development Company Limited explores, develops and sells oil and gas resources in Pakistan. As of July 31, 2013, the company had 287 exploratory wells drilled; and 379 appraisal wells and development wells. The company also offers drilling, logistics, and well services. Oil and Gas Development Company Limited was founded in 1961 and is headquartered in Islamabad, Pakistan.

Shareholding Structure

Govt. of Pakistan

75%

OGDCL employess empowerment trust

10%

Foreign Cos.13%

Others2%

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5 Jan 2015


Profit & Loss FY12A FY13A FY14A FY15F FY16F

Net Sales 197,839 223,365 257,014 237,802 240,109

Cost of Sales 65,781 82,314 92,629 90,686 94,735

Operating Profit 132,058 141,051 164,385 147,117 145,374

Other Income – Net 9,660 15,799 19,240 21,378 22,440

EBITDA 148,183 162,924 197,106 182,719 182,073

Profit Before Tax 132,996 146,809 172,350 158,127 157,462

Net Profit 96,818 91,273 123,914 110,689 110,224

Cash Flow

CF from Operations 48,583 49,293 50,390 81,863 85,335

CF from Investing (14,662) (28,407) (25,468) (26,870) (29,808)

CF from Financing (30,612) (33,922) (27,222) (45,160) (47,310)

Net Change in Cash 3,309 (13,036) (2,301) 9,833 8,217

Ending Cash Balance 55,451 42,415 40,114 49,947 58,164

FCF to Equity 41,313 162,105 22,889 54,993 60,214

Balance Sheet

Current Assets 214,876 134,329 194,160 217,581 267,155

Long Term Assets 123,445 279,682 302,073 321,856 333,368

Total Assets 338,321 414,011 496,233 539,437 600,522

Current Liabilities 32,214 58,377 48,046 23,780 24,011

Non-Current Liabilities 42,694 43,286 52,516 54,457 56,397

Total Liabilities 74,908 101,663 100,562 78,237 80,408

Total Equity 263,383 312,266 395,671 461,201 520,114

Key Ratios

EPS (PkR) 22.5 21.2 28.8 25.7 25.6

DPS (PkR) 7.3 8.3 9.3 11.0 11.0

BVS (PkR) 61.2 72.6 92.0 107.2 120.9

PER (x) 9.2 9.7 7.2 8.0 8.1

Dividend Yield 3.5% 4.0% 4.5% 5.3% 5.3%

P/BVS(x) 3.4 2.8 2.2 1.9 1.7

EV/EBIDTA 5.7 5.2 4.3 4.6 4.7

Asset Turnover 0.6 0.5 0.5 0.4 0.4

Sales Growth 27.1% 12.9% 15.1% -7.5% 1.0%

Op. Profit Margin 66.8% 63.1% 64.0% 61.9% 60.5%

Net Profit Margin 48.9% 40.9% 48.2% 46.5% 45.9%

EBITDA Margin 74.9% 72.9% 76.7% 76.8% 75.8%

35


5 Jan 2015


We maintain our conviction on Pakistan Oilfields Limited (POL) owing to i) an attractive yield of 13% coupled with a decent 3-years earnings CAGR of 9% despite lower oil prices, ii) 3-year oil production CAGR of 11%, iii) robust cash generation and iv) exploration efforts being concentrated in high impact TAL and Margala blocks. POL’s earnings remain the most vulnerable to oil with every 10% decline in oil prices trimming EPS by 9% given ~60% contribution of oil sales in total revenue. However, we believe the stock seems to have already priced in the negative impact of lower oil prices (down 51%FYTD) as the current market price of POL is factoring in an oil price of roughly around USD45/bbl. Though FY15F earnings will remain lackluster (down 3%YoY) on account of continued weakness in oil prices, we foresee earnings to recover beyond FY15 posting FY16-FY18 CAGR of 9% owing to strong volumetric additions from TAL block. The growth in production will be mainly driven by an active development plan concentrated in JV operated TAL block (POL stake: 21%) where the operator has highlighted to drill 3 development wells in high prospect Makori East and Maramzai fields. Also, the company has planned to keep its exploration drilling focused in high impact JV operated TAL and Margala & Margala North blocks (3 wells in drilling/testing phase). We continue to flag POL as our top pick in the E&P chain with a Dec’15 TP of PKR550/sh based on reserve based DCF valuations. Our long term Arab Light oil price assumption is USD75/bbl. The stock offers a total return of 57% (capital gain: 44% + dividend: 13%). At current levels, the scrip trades at FY15F and FY16F PER of 7.2x and 6.9x, respectively.

Strong production additions to keep earnings growth steady: Marked by completion of ongoing and planned development drilling in partner operated TAL block, POL is all set to deliver 3-year CAGR of 11% in oil production, highest in the E&P space. Consequently, the company will deliver decent 3 earnings CAGR of 9% as against mere 4% in FY12A-FY14A, despite 30%YoY lower average oil prices in next three years. The growth in production and earnings will be primarily driven by potential output additions from Makori East (ME-4 and ME-5) and Maramzai (M-3) fields which currently contribute a cumulative ~60% share in POL’s total oil production.

Drilling in high prospect areas bolsters exploration outlook: Given the lackluster exploration track record of the company in own operated areas, POL has now shifted all its focus and resources towards exploration drilling in JV operated areas TAL and Margala & Margala North blocks (operated by MOL). The company is exposed to 3 exploratory wells MGN-01, Malgin-01 and Mardan Khel-01 wells which are in drilling/testing phase while another well Makori Deep-1 has also been finalized for drilling in CY15.

Attractive yield of 13% on strong cash flows: In the context of declining interest rates on fixed income instruments, POL, with an attractive yield of 13%, will continue to attract increased investors’ interest going forward. The strong cash generation of the company owing to steady trend in earnings and immunity against circular debt will allow the company to maintain its track record of impressive payouts along with timely progress on partner led development projects. We foresee payout of the company to remain healthy at PKR50/sh-PKR53/sh in FY15F and FY16F, respectively.

Oil price decline overplayed: The market seems to have overreacted to the recent decline in oil prices as the current market price of the stock suggest an oil price assumption of USD45/bbl which is USD10/bbl or 18% lower than prevailing oil prices. Going forward, we expect notable additions in oil production and a lucrative yield of 13% will bring the stock back into limelight and trigger price discovery.

Attractive valuation on solid fundamentals: We reiterate our liking for POL with a TP of PKR550/sh based on reserve based DCF methodology. The stock offers a total return of 57% (capital gain: 44% + dividend: 13%). At last closing, the stock is trading at FY15F and FY16F P/E of 7.2x and 6.9x, respectively.

Pakistan Oilfields Limited (POL)

Negatives already priced in!

Stock Data


POL: BUY

Target Price: 550

Current Price: 382

Price (PKR/Share) 382 Reuters Bloomberg Website PKOL.KA POL PA www.pakoil.com.pk 52-weeks High/Low (PKR) 560.7 /361.9 Dividend Yield 13% Market Cap (PKR bn) 90

Market Cap (USD mn) 899 Avg Daily Turnover (PKR mn) 134 Avg Daily Turnover (USD mn) 1.4 Shares Outstanding (mn) 237 KSE-100 Index Weightage (%) 2.4 Free Float 46

‐40%‐30%‐20%‐10%0%10%20%30%40%50%

Dec‐13

Jan‐14

Feb‐14

Mar‐14

Apr‐14

May‐14

Jun‐14

Jul‐14

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‐14

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Nov‐14

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POL KSE100 Index


Company Description Pakistan Oilfields Limited is engaged in the exploration, development, and production of crude oil and gas in Pakistan. It operates nine development and production leases and a network of pipelines for transportation of crude oil. Pakistan Oilfields Limited is a subsidiary of The Attock Oil Company Limited.

Banks & DFIs17%

Associated Cos53%

Mutual Funds

6%

Insurance Cos7%

Individuals12%

Others5%

36


5 Jan 2015



Net Sales 28,624 28,878 35,540 32,971 34,144

Cost of Sales 11,811 14,502 18,361 16,677 17,035


Other Income – Net 2,547 1,954 1,823 2,113 2,190

EBITDA 19,782 17,269 23,336 20,995 21,503


Net Profit 11,860 10,831 12,888 12,453 13,039

Cash Flow

CF from Operations 15,268 12,560 18,248 18,596 18,509

CF from Investing (3,004) (5,202) (4,276) (4,976) (5,176)

CF from Financing (9,614) (12,690) (10,395) (12,419) (12,419)

Net Change in Cash 2,650 (5,332) 3,577 1,201 914

Ending Cash Balance 12,581 7,249 10,827 12,028 12,941

Free Cash Flow to Eq. 12,160 8,208 14,529 13,619 13,333

Balance Sheet

Current Assets 19,226 16,613 21,098 23,482 26,095

Long Term Assets 33,025 37,026 36,771 34,869 33,186

Total Assets 52,251 53,639 57,869 58,350 59,281




Total Equity 35,153 32,948 35,196 35,230 35,850

Key Ratios

EPS (PkR) 50.1 45.8 54.5 52.6 55.1

DPS (PkR) 52.5 45.0 52.5 50.0 52.5

BVS (PkR) 148.6 139.3 148.8 148.9 151.6

PER (x) 7.6 8.3 7.0 7.2 6.9

Dividend Yield 13.8% 11.8% 13.8% 13.1% 13.8%

P/BVS(x) 2.6 2.7 2.6 2.6 2.5

EV/EBIDTA 4.0 4.6 3.4 3.8 3.7

Asset Turnover 0.5 0.5 0.6 0.6 0.6

Sales Growth 14.7% 0.9% 23.1% -7.2% 3.6%

Op. Profit Margin 58.7% 49.8% 48.3% 49.4% 50.1%


EBITDA Margin 69.1% 59.8% 65.7% 63.7% 63.0%

37


5 Jan 2015


Pakistan State Oil Limited (PSO), the largest oil marketing company in Pakistan, is expected to witness an eventful CY15 owing to i) potential improvement in liquidity position due to reduction in circular debt, ii) decline in interest rates, iii) increasing sales of petroleum products, iv) diversification into LNG import business and v) upside from higher margins. After witnessing a dismal CY14 with an underperformance of 16% against KSE-100 FYTD, we forsee CY15 to fare better on account of reduction in the intensity of circular debt pile-up owing to i) narrowing of differential between cost of generation and final tariff and ii) improvement in recovery ratio of DISCOs due to privatization. PSO, being the biggest fuel importer, will also benefit from a stable PKR/USD in terms of minimal exchange losses. Moreover, prudent inventory management by the company will further protect the company against inventory losses, going forward. The company’s diversification plan of venturing into LNG import business is expected to commence from 1QCY15 and will further strengthen the fundamentals of PSO through increased bottomline and reduced dependence on cash starved FO product. At last closing, the stock is trading at FY15F and FY16F P/E of 6.2x and 5.5x. Based on our Dec’15 of PKR463/sh, the stock offers a total return of 31% (capital gain: 28% + dividend: 3%) – BUY.

Completion of power sector reforms remains the prime trigger: Amid persistent pressure from IMF to curtail energy sector subsidy, the government is expected to kick start the second leg of power sector reforms aimed at reducing line losses and power thefts in CY15, the primary cause behind reemergence of circular debt. To recall, the government failed to complete the reforms in CY14 as it remained focus on privatization and bond issues in the international market. Going forward, we expect the government to direct all its efforts towards improving the financial position of the DISCOs in order to generate privatization interest in 2HCY15. PSO, being the most affected by circular debt, will emerge as prime beneficiary with significant improvement in its liquidity position.

Declining FO prices – a blessing or just a dent on margins?: The recent decline in FO prices (down ~40% FYTD) may bode negative in short term due to weakening FO margins; however, the same would translate into savings for PSO in long term owing to reduction in exposure to the financial cost of circular debt. The resultant narrowing down of gap between cost and final tariff will significantly reduce the intensity of pile-up in circular debt which is currently estimated at PKR11bn-PKR12bn per month, due to decrease in the fuel component of consumer electricity tariffs. We believe the government may conduct another cash injection to clear the stock of circular debt given ample fiscal space owing to privatization and bond proceeds

Improvement in product profile: PSO is also expanding its footprint in the LNG import business expected to commence from 1QCY15. Though details are not yet revealed, we believe the venture will further strengthen the earnings and balance sheet position through reduced exposure to circular debt. This coupled with increased product margins on HSD and MOGAS will allow PSO to increase its share in cash based products. As per our estimates, with a 3 year CAGR of 8% in MOGAS sales coupled with 5%-26% higher margins on HSD and MOGAS, we foresee that the share of cash based products (MOGAS and HSD) in gross profit will increase to ~43% in FY15 and onwards from last 3 year average of 36%.

Falling interest rates to help reduce finance cost: With a Debt to Equity of 1.2x, PSO will stand to significantly benefit from the decline in interest rates as well. As per our estimates, a 50bps reduction in interest rates translates into an annualized EPS impact of PKR1.24/sh (2.1% of FY15F EPS).

Attractive valuations: PSO currently trades at an undemanding FY15F P/E of 6.2x, depicting a notable discount of 32% over its local peers. On P/E basis, the current multiple reflects a discount of 38% and 30% over pre-circular debt P/E of ~10x and BMA Universe P/E of 8.9x, respectively. The wide valuation discount over the market and peers provides ample space for the stock to re-rate in an event of gradual reduction in exposure to circular debt.

Pakistan State Oil Limited (PSO)

Gaining momentum on recovery in energy chain

Stock Data

Banks & DFIs6%

Federal Govt26%

Mutual Funds15%

Insurance Cos8%

NIT & ICP15%

Individuals15%

Others15%

PSO: BUY

Target Price: 463

Current Price: 362

Price (PKR/Share) 362 Reuters Bloomberg Website

PSO.KA PSO PA www.psopk.com 52-weeks High/Low (PKR) 444.5 /295.0 Dividend Yield 3% Market Cap (PKR bn) 98 Market Cap (USD mn) 979 Avg Daily Turnover (PKR mn) 751

Avg Daily Turnover (USD mn) 7.8 Shares Outstanding (mn) 272 KSE-100 Index Weightage (%) 2.7 Free Float 47


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5%

20%

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50%

Dec

‐13

Jan‐14

Mar‐14

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Apr‐14

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Jun‐14

Jul‐1

4

Aug‐14

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PSO KSE100 Index


Company Description Pakistan State Oil Company Limited engages in the procurement, storage, distribution, and marketing of petroleum and related products in Pakistan. The company offers motor gasoline, furnace oil, jet fuel, kerosene and high speed diesel oil. It operates a retail network of 3,557 outlets; 150 convenience stores; 251 CNG facilities; 24 mobile quality testing units; and refueling facilities at 9 airports and 2 sea ports.

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5 Jan 2015



Net Sales 1,024,424 1,100,122 1,187,639 1,068,875 1,122,319

Cost of Sales 990,101 1,065,961 1,150,815 1,147,899 1,203,190


Other Income – Net (1,506) (1,081) 10,515 3,048 3,743

EBITDA 25,991 27,375 43,441 33,069 34,913


Net Profit 9,056 12,638 21,818 15,812 17,773

Cash Flow

CF from Operations (21,327) 79,444 (57,326) 21,348 12,666

CF from Investing 5 (46,107) (760) (1,469) (1,572)

CF from Financing 22,737 (11,698) 63,682 (15,062) (4,594)

Net Change in Cash 1,415 21,639 5,596 4,817 6,500

Ending Cash Balance (18,116) 3,524 9,120 13,937 20,438

Free Cash Flow to Eq. 3,759 23,231 7,325 7,262 9,217

Balance Sheet

Current Assets 337,795 224,356 313,514 301,953 306,947

Long Term Assets 10,469 57,593 58,637 58,722 58,833

Total Assets 348,264 281,949 372,151 360,675 365,780




Total Equity 48,334 60,643 78,621 91,988 107,045

Key Ratios

EPS (PkR) 33.3 46.5 80.3 58.2 65.4

DPS (PkR) 5.5 5.0 8.0 10.0 12.0

BVS (PkR) 177.9 223.2 289.4 338.6 394.0

PER (x) 10.9 7.8 4.5 6.2 5.5

Dividend Yield 1.5% 1.4% 2.2% 2.8% 3.3%

P/BVS(x) 2.0 1.6 1.3 1.1 0.9

EV/EBIDTA 6.5 6.2 3.9 5.1 4.9

Asset Turnover 2.9 3.9 3.2 3.0 3.1

Sales Growth 24.8% 7.4% 8.0% -10.0% 5.0%

Op. Profit Margin 1.7% 2.1% 2.1% 2.1% 2.2%


EBITDA Margin 2.5% 2.5% 3.7% 3.1% 3.1%

39


5 Jan 2015


United Bank Limited (UBL) is all set to post stellar earnings CAGR of 16% during next five years underpinned by strengthening net interest income (5yr CAGR: 15%). UBL offers a unique banking play with exposure to the vastly underpenetrated Pakistan market as well as the GCC. The bank has a de-risked balance sheet as evident from consistently improving infection ratio to 11.6% in Sep’14 from previous peak of 14.0% in CY12. Going forward, we expect infection ratio to further decrease to 9.3% in CY18 (considering tight lending policies) along with increase in coverage to 91.7%. Despite concerns on financial position of GCC operation post significant melt down in oil prices, we expect UAE operations to remain strong owing to Expo 2020 which will further add value to the bank’s overall prospects. UBL's non-interest income shall remain strong with a CAGR of 12% during CY14-CY18. UBL trades at a CY15F P/B of 1.8x, P/E of 8.2x and D/Y of 7.4% where our target price of PKR225/share offers a total return of 36%.

Earnings to remain strong despite monetary easing: UBL’s profitability is expected to continue heading northwards despite expected monetary easing in early CY15F where we expect the bank’s earnings for CY14E and CY15F to clock in at PKR22.7bn (EPS: PKR18.5) and PKR26.3bn (EPS: PKR21.5), posting growths of 22%YoY and 16%YoY, respectively. The notable growth in profitability can be attributed to i) higher Net Interest Income (NII) due to heavy investment in PIBs during 9MCY14 offering 2.5%-3.0% higher yields than 6M T-bills, ii) growing focus on low cost deposits as current account deposits are forecasted to register a 5-year CAGR of 15%, iii) strong non-interest income driven by UBL Omni, higher trade and remittances and efficient fx and capital market trading, and iv) subdued cost pressures on softening inflation in CY15F.

Adequately placed to capitalize on revival in credit demand: With expected macro-economic recovery, as evident from improvement in key economic parameters (inflation, external account, exchange rate), we foresee a strong prospect of recovery in credit demand going forward. In such a scenario, we believe UBL is ideally placed given current ADR at just 48%. Over the next 5 years, we expect UBL’s advances to grow at a CAGR of 15% in stark contrast to previous 5 year CAGR of just 2%.

Asset quality to remain strong: Prudent lending policies post CY08 led consistent improvement in NPLs ratio to 11.6% in Sep’14 from the previous peak of 14.0% in CY12. With growing concerns on GCC operations post significant melt down in oil prices, we have accounted higher accretion in NPLs of overseas loan book (comprising of 29% to total loans). That said, we expect asset quality to remain strong due to vigilant risk management policies thus gross infection ratio is expected tp further reduce to 9.3% by CY18F. At the same time, the bank also increased its NPL coverage to 85% in Sep’14 compard to just 78% in CY12. We expect the management will further extend coverage ratio to ~91.7% by CY18F.

Growing non-core business to provide competitive edge: UBL dominates branchless banking through its stronghold UBL Omni across Pakistan which remains a major contributor in non-funded income. Going forward, we expect fee and commission income to register a 5-yr CAGR of 16% on the back of expanding branchless banking, trading volumes and rising foreign and domestic remittances. Alongside higher fee income, the bank’s investment in equity/associates will further strengthen the bottom line through steady dividend income and capital gains.

Investment Perspective: With strong fundamentals, we recommend a ‘BUY’ on UBL with a TP of PKR225/sh, implying an upside of 29%. The recent correction in the scrip price post DR cut in Nov’14 and overly assumed weakness in GCC operation has brought UBL to attractive levels where the stock is currently trading at an undemanding P/B of 1.8x. With strong ROE of 26.1% (CY14F-18F) and attractive valuations given Dec15 P/B and P/E 1.8x and 8.2x, respectively, we recommend UBL as our top pick in banking space.

United Bank Limited (UBL)

Banking on diversified revenue base

UBL: BUY

Stock Data


Target Price: 225

Current Price: 175

Price (PKR/Share) 175 Reuters Bloomberg Website UBL.KA UBL PA www.ubldirect.com 52-weeks High/Low (PKR) 196.7 / 123.8 Dividend Yield 7% Market Cap (PKR bn) 214

Market Cap (USD mn) 2,133 Avg Daily Turnover (PKR mn) 226 Avg Daily Turnover (USD mn) 2.6 Shares Outstanding (mn) 1,224 KSE-100 Index Weightage (%) 5.0 Free Float (%) 40

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Dec‐13

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Apr‐14

May‐14

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UBL KSE100 Index

Bestway Group51%International

GDRs11%

Others38%


UBL is engaged in commercial banking and related services. The bank operates over 1,200 branches inside Pakistan including 14 Islamic Banking branches, making it the third largest bank in Pakistan. The bank also operates 17 branches outside Pakistan. UBL’s GDRs are traded at London Stock Exchange. The bank was established in 1959 as a local private sector bank but was nationalized in 1974 by the GoP. It was sold off to a consortium of Abu Dhabi Group of UAE and Bestway Group in 2001 under a privatization program.

Company Description

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5 Jan 2015


Profit & Loss CY11A CY12A CY13A CY14E CY15F CY16F

Interest Income 70,451 73,507 72,846 85,312 92,180 106,183

Interest Expense 31,026 34,948 34,910 39,729 37,885 42,698

Net Interest Income (NII) 39,425 38,560 37,936 45,583 54,295 63,485

Provisions 7,291 4,137 1,303 1,825 3,326 6,397

NII after provision 32,134 34,423 36,633 43,758 50,969 57,088

Non Interest Income 12,718 17,131 18,114 20,119 22,458 24,870

Non Interest Expenses 20,629 24,703 26,940 29,542 33,609 37,608

Profit before tax 24,223 26,851 27,807 34,335 39,819 44,350

Profit after tax 15,500 17,891 18,614 22,661 26,280 29,271

Balance Sheet

Investments 294,411 349,590 423,777 524,028 607,643 690,019

Advances 325,347 364,364 390,813 432,520 503,223 582,179

Total Assets 779,207 896,535 1,009,739 1,151,357 1,308,788 1,490,369

Borrowing 49,953 68,720 40,574 47,272 54,026 61,743

Deposit and other accounts 612,980 698,430 827,848 945,435 1,080,525 1,234,869

Total Liabilities 698,779 804,296 908,825 1,041,487 1,190,146 1,359,993

Net Assets 80,428 92,238 100,914 109,870 118,642 130,376

Share Capital 12,242 12,242 12,242 12,242 12,242 12,242

Core Equity 71,898 78,702 88,558 97,514 106,286 118,020

Total Equity 80,428 92,238 100,914 109,870 118,642 130,376

Key Ratios

EPS (PKR) 12.7 14.6 15.2 18.5 21.5 23.9

Earnings growth 38.9% 15.4% 4.0% 21.7% 16.0% 11.4%

DPS (PKR) 7.5 8.5 10.0 11.1 12.9 14.3

DY 4.3% 4.9% 5.7% 6.3% 7.4% 8.2%

BVS (PKR) 65.7 75.3 82.4 89.8 96.9 106.5

P/B 2.7 2.3 2.1 1.9 1.8 1.6

P/E 13.8 12.0 11.5 9.5 8.2 7.3

ROE 20.8% 20.7% 19.3% 21.5% 23.0% 23.5%

ROA 2.1% 2.1% 2.0% 2.1% 2.1% 2.1%

Net Interest Margin 6.5% 5.7% 4.8% 5.0% 5.1% 5.2%

Cost to Income 46.0% 47.9% 49.2% 46.2% 45.8% 45.9%

ADR 59.8% 58.6% 52.8% 50.8% 51.3% 51.8%

IDR 48.9% 49.5% 51.0% 55.3% 56.1% 55.8%

CASA 70.7% 71.3% 70.6% 71.1% 71.1% 71.1%

Infection Ratio 14.0% 14.0% 12.1% 11.3% 10.4% 10.0%

Provision Coverage 80.1% 78.0% 87.3% 87.7% 88.4% 89.6%

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5 Jan 2015


Bank Al-Habib Limited (BAHL) is our second pick from the banking universe with a forecasted 3 year earnings CAGR of 13% between CY14-CY17. This growth in earnings will likely be a factor of i) a healthy CAGR of 18% in NII between CY14F-CY17F, ii) 3 year CAGR of 14% in the non funded income between CY14F-CY17F and iii) muted provisioning expense due to impressive asset quality. BAHL is expected to park PKR142bn in high yielding PIBs by Dec’14 (32% of total deposits) thereby locking in higher returns thus keeping the NII of the bank robust. Also given the ultra conservative lending approach (gross ADR: 41% in 9MCY14) that the bank adheres to and resultantly impressive book quality (infection ratio 2.35%), we expect the provisioning expense of the bank to remain muted. Finally, with a CAR ratio of 14.6% against statutory requirement of 10%, we expect the bank to maintain its payout profile where we expect the bank to maintain a long term payout of ~45%. At current levels, the scrip trades at a forward CY15 P/E and P/B of 8.1x and 1.7x, respectively.

Earnings to continue heading northwards: Bank Al Habib (BAHL) is likely to post an earnings growth of 15%YoY in CY15 despite the monetary easing that is likely in CY15. In this regards, we expect the bank to post CY14 and CY15 earnings of PKR6.7bn (EPS: PKR5.97) and PKR7.6bn (EPS: PKR6.86) up 29%YoY and 15%YoY respectively with a 3 year earnings CAGR of 18% between CY14-CY17. The earnings growth is likely to come about due to i) 12%YoY higher NII as a result of heavy subscription of high yielding PIBs (PIB to deposit ratio expected to reach 32% of deposits, amongst highest in the mid tier banks) ii) 14%YoY growth in non funded income due to higher trade and remittances and efficient fx and capital market trading and iii) muted provisioning expenses on back of supreme asset quality (infection ratio 2.4% and coverage ratio 143%)

Conservative approach yielding fruits: BAHL has an un-satiable appetite for risk free government securities and operates on very conservative lending policies where its current ADR stands at ~ 41% (against industry average of 48.2%) and IDR at 66.4% (against the industry average of 53.9%). The majority of bank’s investments are risk free government securities which comprise 64% of the bank’s investment portfolio. The prospects of another DR cut might increase the credit off-take from private sector in the country and the bank is ideally placed to increase its ADR in that scenario. However, given the conservative nature of the bank’s lending policies, we do not expect any abrupt increase in ADR, we expect ADR to improve from its current levels (9MCY14 ADR: 39.5%) to 44% by CY20 .

Robust deposit growth and improving CASA: BAHL’s deposits base posted a healthy growth of 13% during 9MCY14 to clock around PKR436bn, improving the bank’s share of industry deposits from 5.13% in CY13 to 5.20% by 9MCY14. However, this increase in market share came about at a cost as bank’s fixed deposit base inched up to ~22% in 9MCY14, an increase of 0.5% (additional fixed deposits of PKR12.5bn), resultantly the CASA of the bank contracted to 78.2% in 9MCY14 from 78.61% in CY13. The costly deposits raised by the bank will likely limit NIMs accretion going forward. Given the aggressive branch expansion (bank likely to add 17-20 branches each year), we expect the bank to grow its market share of deposits slightly from its current level of 5.2% to 5.3% by CY20 and at the same its CASA to improve to 80% by CY20.

Best cost to income ratio amongst midsized banks: The bank has always been able to keep the administrative cost in check where its cost to income ratio traditionally has remained between 50%-55% over the last many years. We expect the trend to continue in CY15 and beyond as we expect inflation to remain muted and the bank is likely to see a healthy growth in funded and non funded income. The bank has adequately expanded its branch network over the last five years which has allowed it to distribute its cost to a larger base and kept administrative expenses per branch at a manageable level. We expect the bank to expand the branch network even further, adding 17-20 branches each year going forward. Consequently, we expect the cost to income ratio to remain at current levels.

Bank Al- Habib Limited (BAHL)

The Safe Banking Haven

BAHL: BUY

Target Price: 60

Current Price: 48

Price (PKR/Share) 48

Reuters Bloomberg Website BKEQ.KA BAHL PA www.bankalhabib

.com 52-weeks High/Low (PKR) 50.1 / 33.4 Dividend Yield 5% Market Cap (PKR bn) 54 Market Cap (USD mn) 536

Avg Daily Turnover (PKR mn) 28 Avg Daily Turnover (USD mn) 0.3 Shares Outstanding (mn) 1,111 KSE-100 Index Weightage (%) 1.9 Free Float 60

Stock Data


Individuals, 57%Mutual

Funds, 10%

Insurance Co., 9%

Joint Stock

Cos., 7%

Foreign Cos., 3%

Others, 14%


Company Description Bank AL Habib Limited provides commercial banking services in Pakistan and the Middle East. The company operates in the Retail Banking, Commercial Banking, and Retail Brokerage segments. The company offers personal banking products, such as current, savings, and foreign currency accounts; housing, personal, and car loans; credit cards; and home remittances and MoneyGram, as well as e-banking services,

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5 Jan 2015


Profit & Loss CY11A CY12A CY13A CY14E CY15F CY16F

Interest Income 36,503 41,468 37,256 43,636 46,655 52,054

Interest Expense 22,374 26,106 22,994 24,999 25,691 28,776

Net Interest Income (NII) 14,129 15,362 14,261 18,637 20,964 23,279

Provisions 1,821 466 480 533 730 992

NII after provision 12,308 14,896 13,782 18,103 20,234 22,286

Non Interest Income 2,594 2,967 3,908 4,097 4,671 5,327

Non Interest Expenses 7,747 8,994 10,177 12,264 13,500 15,077

Profit before tax 7,155 8,869 7,513 9,937 11,406 12,537

Profit after tax 4,533 5,447 5,155 6,658 7,642 8,400

Balance Sheet

Investments 222,959 249,754 239,753 298,254 350,255 402,261

Advances 114,872 147,869 167,579 182,544 204,512 235,298

Total Assets 384,282 453,106 460,727 535,648 618,810 710,767

Borrowing 43,442 69,622 29,480 35,376 44,220 48,642

Deposit and other accounts 302,099 340,393 386,161 448,237 514,267 590,645

Total Liabilities 364,429 429,175 435,445 504,348 583,657 671,860

Net Assets 19,854 23,931 25,282 31,300 35,153 38,907

Share Capital 8,786 10,104 10,104 11,114 11,114 11,114

Core Equity 17,837 21,175 23,227 27,602 30,346 33,138

Total Equity 19,854 23,931 25,282 31,300 35,153 38,907

Key Ratios

EPS (PKR) 4.07 4.89 4.62 5.97 6.86 7.54

Earnings growth 25.85% 20.14% -5.36% 29.16% 14.78% 9.92%

DPS (PKR) 2.50 3.00 2.00 2.50 3.00 3.50

DY 5.16% 6.19% 4.13% 5.16% 6.19% 7.22%

BVS (PKR) 22.60 21.47 22.68 28.08 31.54 34.91

P/B 2.14 2.26 2.14 1.73 1.54 1.39

P/E 11.91 9.92 10.48 8.11 7.07 6.43

ROE 25.24% 24.88% 20.95% 23.53% 23.00% 22.68%

ROA 1.32% 1.30% 1.13% 1.34% 1.32% 1.26%

Net Interest Margin 5.23% 4.70% 3.96% 4.54% 4.21% 3.92%

Cost to Income 50.89% 53.49% 60.89% 58.81% 56.95% 57.02%

ADR 38.02% 43.44% 43.40% 40.72% 39.77% 39.84%

IDR 73.80% 73.37% 62.09% 66.54% 68.11% 68.11%

CASA 60.22% 71.77% 78.62% 76.80% 77.80% 78.50%

Infection Ratio 2.67% 2.41% 2.13% 2.44% 2.40% 2.42%

Provision Coverage 160.17% 150.96% 164.41% 143.37% 139.47% 133.86%

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5 Jan 2015


Lucky Cement Limited (LUCK) remains a strong ‘BUY’ based on its ambitious expansion and diversification plans coupled with strong cash generation. Our investment case on the stock is premised on i) improving core profitability backed by steady volumetric growth and cost efficiency projects, ii) commercialization of cross border projects in Congo and Iraq, iii) strong cash flows creating space for funding existing and future potential projects, iv) 660MW coal power project being added in the business portfolio and v) exponential growth in earnings of subsidiary company ICI. Our Dec'15 TP of PKR596/sh, offers an upside of 16%. The scrip trades at FY15/16 PER of 12.5 x and 10.5x respectively and offers a dividend yield of 2%. BUY

Dispatch growth and cost efficiency projects; driving core profitability growth: Given strong demand growth in the country, we expect the company’s dispatches to experience a 3-year CAGR of 2% leading to growth in revenue stream of the company. Implementation of cost efficiency projects is expected to prop up margins, further compounded by lower coal prices. We expect LUCK’s earnings to grow at a CAGR of 17% during FY14-17.

LUCK is en-route to become multinational: Post commercialization of Congo project. LUCK will stand out as the only multinational company in the cement sector with two operational overseas projects. The grinding mill in Basra, Iraq achieved commercial production in Feb’14 and has already become profitable with an estimated annualized earnings impact of PKR673mn (PKR2.0/sh). Furthermore, the Congo project is expected to become operational by end of FY16 where prevailing margins of USD80-USD100 per ton are expected to add PKR2.3bn (PKR7.0/sh) to LUCK’s bottom-line at an 80% utilization.

Big pockets; all projects to be financed through internal financing: The operating cash generation of LUCK for the next 5yrs stands at ~PKR91bn against the cumulative CAPEX requirement of PKR30bn (announced projects) resulting in surplus cash balance of PKR61bn. The strong cash position will enable the company to pursue more projects financed through internal cash generation. Another consequence of this healthy cash generation could be that the company may ramp up its dividend payouts ratio which currently stands at 25%.

660MW power projects; to augment earnings from 2019: LUCK is undertaking a 660MW coal based power project on its own books which will provide a sizeable uplift to the company earnings from FY19 onwards. Based on the cost and financing structure of the project, we believe the project would add PKR4.6bn (PKR14.2/sh) to the bottom line of LUCK based on a 17%IRR.

ICI booming; LUCK is beneficiary: The LUCK’s subsidiary business ICI, is expected to witness substantial earnings growth in the years to come as the company is becoming self reliant on power and fuel requirement by shifting its reliance from furnace oil and gas to coal leading to roughly 12% savings in fuel and power cost. Furthermore, the company also plans to spread its footprint in life sciences (healthcare) and chemical business which is expected to add further to the bottom line. With increasing share of revenues being derived from consumer related segments post commercialization of aforementioned projects, ICI may emerge as a potential candidate for re-rating.

Valuation: We maintain our conviction on LUCK with a TP of PKR596/sh, translating into total return of 18%. At last closing, the stock is trading at FY15F and FY16F P/E of 12.5x and 10.5x, respectively.

Lucky Cement Company Limited (LUCK)

The emerging conglomerate!

LUCK: ACCUMULATE

Target Price: 596

Current Price: 513

Price (PKR/Share) 513 Reuters Bloomberg Website LUKC.KA LUCK PA www.lucky-cement.com 52-weeks High/Low (PKR) 513.9 / 292.9 Dividend Yield 2% Market Cap (PKR bn) 166

Market Cap (USD mn) 1,653 Avg Daily Turnover (PKR mn) 273 Avg Daily Turnover (USD mn) 2.8 Shares Outstanding (mn) 323 KSE-100 Index Weightage (%) 3.9 Free Float (%) 40

Stock Data


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LUCK KSE100 Index

Lucky Cement Limited manufactures and markets cement primarily in Pakistan. It offers ordinary Portland cement that is used in general constructions, concrete mortars and grouts, etc; sulphate resistant cement for use in foundations near seashore and canal linings; clinker; and block cement. The company also exports its products. Lucky Cement Limited was incorporated in 1993 and is headquartered in Karachi, Pakistan

Company Description

Dir, CEOs & Spouse

24%

Associated Cos13%

Mutual Funds

4%Local13%

Foreign41%

Others5%


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5 Jan 2015


Income Statement FY12A FY13A FY14A FY15F FY16F FY17F

Net Sales 33,323 56,050 81,148 84,594 89,866 95,595

Cost of Sales 20,601 37,655 58,021 59,781 62,171 66,984

Operating profit 8,577 12,447 16,852 18,597 22,102 23,680

Other Income – Net 5 374 1290 1,523 2,321 3,422

EBITDA 10,299 14,909 20,288 20,813 24,429 26,112

Profit Before Tax 8,324 11,883 15,773 17,626 21,228 22,893

Net Profit 6,782 9,818 12,573 14,019 16,709 20,265

Cash Flow

CF from Operations 9,375 12,239 13,495 14,246 16,071 19,248

CF from Investing (1,030) (8,094) (4,949) (5,887) (2,077) (2,140)

CF from Financing (7,851) (2,833) (2,833) (3,248) (3,549) (4,376)

Net Change in Cash 493 1,961 5,713 5,111 10,445 12,732

Ending Cash Balance 844 2,806 8,519 13,630 24,076 36,808

Balance Sheet

Current Assets 9,555 13,013 19,600 25,018 35,588 48,776

Long Term Assets 31,077 37,183 40,198 43,869 43,619 43,327

Total Assets 40,631 50,196 59,798 68,887 79,207 92,103

Current Liabilities 3,624 3,846 4,484 4,532 4,566 4,781

Non-Current Liabilities 3,745 5,315 5,521 5,521 5,521 5,521


Total Equity 33,262 41,035 49,792 58,834 69,120 81,801

Key Ratios

EPS 21.0 30.4 36.8 41.2 49.1 59.5

DPS 6.0 8.0 9.0 10.0 11.0 11.0

BVS 103.0 127.0 154.2 182.1 214.0 253.3

PER 24.5 16.9 14.0 12.5 10.5 8.7

Dividend Yield 1.2% 1.6% 1.7% 1.9% 2.1% 2.1%

P/BVS(x) 5.0 4.1 3.3 2.8 2.4 2.0

Sales Growth 28.1% 68.2% 44.8% 4.2% 6.2% 6.4%

Operating Profit Margins 25.7% 22.2% 20.8% 22.0% 24.6% 24.8%

Net Profit Margin 20.4% 17.5% 15.5% 16.6% 18.6% 21.2%

EBITDA Margins 30.9% 26.6% 25.0% 24.6% 27.2% 27.3%

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5 Jan 2015


Fauji Cement Company Limited (FCCL) offers a unique blend of high yield and earnings growth emanating from a decline in input cost and rising operating efficiencies. FCCL's dividend yield at 7.5% remains the highest in the cement sector. We expect the company to post 3yr earnings CAGR of 23% during FY14-17. The company is expected to witness strong margin expansion to 39.6% by FY16F from current 34.7% owing to declining fuel and power cost, and expected commissioning of 9MW Waste Heat Recovery (WHR) unit in Apr’15. The latter shall augment EPS by 19% on annualized basis. The company's volume growth will likely outperform the sector while balance sheet deleveraging and falling interest rates would deliver saving in finance cost. Our target price for the company stands at PKR34/sh offering a total return of 35%. Given i) highest dividend yield in the sector on robust payout and ii) strong earnings outlook, we believe FCCL (FY15F P/E of 10.5x) will continue to trade at a premium over its comparables with BMA Cement sector FY15F P/E at 9.6x (ex LUCK).

Highest Yield in the sector: FCCL's dividend yield at 7.5% remains the highest in the cement sector, as the company maintains a strong payout of ~80%. With growing earnings of the company backed by volumetric growth and margin expansion, we expect the payout of the company to reach PKR2.75/sh by FY17 which translates into FY17 dividend yield of 10.3%.

Decreasing power tariffs; margin growth ahead: The recent cut in power tariffs by NEPRA by PKR2.32/unit is expected to expand the company’s margins by 230bps. The cut is expected to add PKR0.38/sh or 17% to the bottom-line of the company.

Low utilization; a trigger for future: Given major cement producing companies are operating close to maximum utilization and growing cement demand in the country, companies with low utilization levels are expected to be the biggest beneficiaries of the growth. FCCL, with current utilization levels of 73% and located close to major infrastructural projects, will likely benefit the most from the expected infrastructure development in the country. FCCL currently has an idle capacity of 0.85mn tons which would likely be used up by FY20, assuming a 6% p.a. growth in dispatches. Thus, the company is not likely to pursue an expansion in the near future.

Cost savings on WHR commissioning: Being entirely dependent on national grid, FCCL will significantly benefit from installation 9MW WHR, which is expected to commission by Apr’15. The unit is expected to prop up the company’s profitability by PKR0.42/sh or 19% on annualized basis.

Deleveraging and DR cut to reduce burden of financial cost: With FY15-FY17 average operating cash flow expected at PKR7.3bn, strong cash generation amid rising profitability will help FCCL in comfortably retiring its entire debt of PKR8.6bn by FY17 end. Furthermore, decline in interest rates by 150bps will reduce the burden of finance cost by PKR0.04/sh or 2% on annualized basis. Furthermore, the expiry of swap on foreign debt is also expected to contribute PKR300mn (PKR0.23/sh) since the company would now have to pay LIBOR + 0.8% as compared to KIBOR + 0.9%, previously.

Valuation: Our DCF based target price for FCCL stands at PKR34/sh, offering an upside of 27% from current levels. While FY15F P/E at 10.5x appears expensive, we believe the valuation is justified given PEG of 0.45x and an impressive dividend yield of 7.5% in FY15. BUY!

Fauji Cement Company Limited (FCCL)

Yielding higher returns

FCCL: BUY

Target Price: 34

Current Price: 27

Stock Data Price (PKR/Share) 27 Reuters Bloomberg Website FAUC.KA FCCL PA www.fccl.com.pk 52-weeks High/Low (PKR) 26.8 / 14.3 Dividend Yield 7% Market Cap (PKR bn) 36 Market Cap (USD mn) 355

Avg Daily Turnover (PKR mn) 130 Avg Daily Turnover (USD mn) 1.3 Shares Outstanding (mn) 1,331 KSE-100 Index Weightage (%) 1.1 Free Float (%) 55


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FCCL KSE100 Index

Company Description Fauji Cement Company Limited manufactures and sells ordinary Portland cement in Pakistan. It offers cement for the construction of various projects, such as dams, bridges, highways and motorways, commercial and industrial complexes, residential housing societies, and other structures. The company also exports its products to Afghanistan, as well as to Tajikistan, India, the Middle East, Sri Lanka, East Africa, and South Africa. Fauji Cement Company Limited was incorporated in 1992 and is headquartered in Rawalpindi, Pakistan.


Associated Cos49%

FIs & Joint Stock Cos

5%

Gen Public26%

Others20%

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5 Jan 2015



Net Sales 11,523 15,968 17,532 18,872 19,644 20,720

Cost of Sales 8,455 10,887 11,448 12,123 12,033 12,817

Operating profit 460 2,792 4,598 5,552 5,282 6,980

Other Income – Net 27 95 152 152 157 278

EBITDA 3,862 5,872 6,836 7,432 8,327 8,697

Profit Before Tax 966 3,086 4,510 5,481 6,716 7,195

Net Profit 553 2,097 2,626 3,595 4,366 4,677

Cash Flow


CF from Investing (125) (54) (800) (1,000) (250) (250)


Net Change in Cash (315) 1,373 (386) 102 1,451 1,725

Ending Cash Balance 169 1,542 1,316 902 2,248 3,974

Balance Sheet

Current Assets 4,160 5,039 5,188 4,687 6,027 7,867

Long Term Assets 26,544 25,266 24,193 23,144 22,037 20,919

Total Assets 30,703 30,305 29,383 28,631 28,660 29,177




Total Equity 13,905 15,936 15,788 16,201 16,824 17,494

Key Ratios

EPS 0.3 1.4 1.8 2.5 3.1 3.4

DPS - 1.25 1.50 2.00 2.50 2.75

BVS 10.4 12.0 11.9 12.2 12.6 13.1

PER 101.5 18.9 14.8 10.5 8.6 8.0

Dividend Yield 0.0% 4.7% 5.6% 7.5% 9.3% 10.3%

P/BVS(x) 2.6 2.2 2.3 2.2 2.1 2.0

Sales Growth 143% 38.6% 9.8% 7.6% 4.1% 5.5%



EBITDA Margins 33.5% 36.8% 39.0% 39.4% 42.4% 42.0%

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5 Jan 2015


We highlight MLCF as our preferred play in the Cement Universe with a TP of PKR62/sh, an upside of 33%. Our investment case on MLCF is premised on a re-rating theme as the scrip is trading at an FY15 P/E of 6.9x which implies a discount of 28% to the average industry multiple of 9.6x. Declining fuel and power cost and reduction in transportation expenses will ensure consistent growth in gross margin, which is expected to reach 37.2% in FY16F from 34.4% in FY14. Capacity utilization for MLCF is expected at 78% capacity which will allow the company to capture substantial share in domestic dispatch growth. We believe there is a high possibility of dividend initiation in FY15 owing to improving cash flows and deleveraging of balance sheet. With debt to asset at 35%, MLCF is also ideally placed to benefit from the decline n interest rates.

Valuation discount: The scrip is currently trading at a discount of 28% over its comparables as FY15F P/E of the company stands at 6.9x compared to industry average of 9.6x. Going forward, we believe a potential cut in interest rate in 2HFY15 (projected at ~100bps) is expected to further re-rate the industry thus unlocking further upside in the scrip. Given decreasing financial risks associated with the company due to falling debt levels, we expect MLCF’s discount over peers to narrow.

Cost Savings Initiatives to Expand Margins: MLCF shifted its mode of inland coal transportation to railway services in 1QFY15 from trucks. Based on management guidance, the initiative is expected to result in cost savings of PKR0.7/share or 10% on annualized basis. Furthermore, falling power tariffs and decreasing cost of power generation amid ~40%FYTD decline in FO prices is expected to substantially increase the company’s margins. Moreover, decline in coal prices will further expand margins. Resultantly, we forecast the company’s GMs to increase to 37.2% by FY16 from 34.4% in FY14.

Lower Utilization – An opportunity to grow without expanding: MLCF’s low utilization level at 78% offers the company with ample space to cater to the increasing demand of cement in the Northern region of Pakistan. We believe the growth momentum in cement sales in the Northern region, up 10%YoY in 5MFY15, is expected to continue where we project Northern demand to grow by ~6%p.a over the next 5 years. MLCF, one of the major operators in North, will stand to benefit from the overall growth in domestic sales. Additionally, initiation of any major developmental projects i.e. dams and motorways may provide further impetus to demand growth. Moving ahead, we portend MLCF to depict an FY14A-FY20F production CAGR of 4%, taking utilization level to 93% by FY20F.

Improving cash flows to help the company re-initiate dvidends: Given strengthening margins and improving profitability, the company’s debt will likely be retired earlier than scheduled. This shall not only decrease the financial charges but will also improve the company’s risk profile. Furthermore, given strong operating cash flows with FY15 operating cash flow at PKR5.4bn, the company will also be in a position to re-initiate dividend payouts by end FY15. Dividend announcement remains the key upside trigger for the company and will help in re-rating of the scrip to industry multiples.

Prime beneficiary of DR Cut: MLCF, being one of the most leveraged players in the industry, is expected to be the prime beneficiary of the recent monetary easing cycle. The company has a debt of PKR11bn with debt to asset standing at 35%. A 100 bps decline in discount rate is expected to reduce financial charges by PKR0.14/sh or 2% on annualized basis. Furthermore, falling finance cost will also assist the company in accelerating its debt payments.

Investment Perspective: The steep discount on multiples available with the company as compared to the industry makes MLCF an attractive investment opportunity coupled with consistent growth. Furthermore, a prospective dividend in FY15 may increase the total return of the company while diluting the risks associated with the scrip. Thus at our target price of PKR62 the scrip offers a total return of 33%.

Maple Leaf Cement Limited (MLCF)

De-risking with growth

MLCF: BUY

Target Price: 62

Current Price: 46


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MLCF KSE100 Index


Dir, CEOs & Spouse

1%

Associated Cos58%

Banks & DFIs4%

Ins Cos0%

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Cos0%

Others37%

Stock Data

Company Description Maple Leaf Cement Factory Limited produces and sells cement primarily in Pakistan. The company primarily offers ordinary Portland cement and white cement. Maple Leaf Cement Factory Limited also exports its products to African, Gulf, and other Asian countries. The company was founded in 1956 and is based in Lahore, Pakistan. Maple Leaf Cement Factory Limited is a subsidiary of Kohinoor Textile Mills Limited.

Price (PKR/Share) 46 Reuters Bloomberg Website MPLF.KA MLCF PA www.kmlg.com 52-weeks High/Low (PKR) 46.4 / 25.3 Dividend Yield 0% Market Cap (PKR bn) 25 Market Cap (USD mn) 244 Avg Daily Turnover (PKR mn) 260 Avg Daily Turnover (USD mn) 2.6 Shares Outstanding (mn) 528 KSE-100 Index Weightage (%) 0.64 Free Float (%) 45

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5 Jan 2015



Net Sales 15,461 17,357 18,968 19,327 20,209 21,133

Cost of Sales 11,447 11,312 12,445 12,088 12,492 13,195


Other Income – Net 34 41 81 197 383 592

EBITDA 4,516 7,329 8,493 20,813 24,429 26,112

Profit Before Tax 444 3,162 3,593 4,992 5,752 6,287

Net Profit 496 3,225 2,832 3,495 3,854 4,212

Cash Flow


CF from Investing (207) (497) (768) (852) (894) (939)


Net Change in Cash 140 3 (791) 2,602 2,658 2,987

Ending Cash Balance 463 524 207 2,809 5,467 8,454

Balance Sheet

Current Assets 5,886 6,683 7,144 9,490 12,343 15,641

Long Term Assets 26,842 25,690 24,765 23,927 23,036 22,138

Total Assets 32,728 32,373 31,909 33,417 35,379 37,780




Total Equity 9,128 11,823 14,641 18,136 21,989 26,202

Key Ratios

EPS 0.7 5.9 5.4 6.6 7.3 8.0

DPS - - - - - -

BVS 17.3 22.4 27.7 34.4 41.7 49.6

PER 61.8 7.8 8.6 6.9 6.3 5.8

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

P/BVS(x) 2.7 2.1 1.7 1.3 1.1 0.9

Sales Growth 18.3% 12.3% 9.3% 1.9% 4.6% 4.6%



EBITDA Margins 29.2% 42.2% 44.8% 107.7% 120.9% 123.6%

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5 Jan 2015


Nishat Mills Limited (NML) is expected to witness an eventful FY15 on account of i) reduced raw material prices, ii) lower fuel and power cost due to declining international oil prices and iii) easing interest rates due to low inflation. Moreover, the benefits of the GSP+ program have also started to flow in as evident from recent export numbers where value added textile segments' exports have grown by 10-17%YoY in 5MFY14. With a 3% share in total exports and 25% of its topline comprising of exports to EU region, NML is likely going to be the key beneficiary of GSP plus. That said, the depreciating EUR remains a key downside risk to exports with the EUR already down 10.3% FY15TD against the PKR. Our Dec-15 TP for NML stands at PKR146/sh. The stock offers a total return of 21% (capital gain: 17%; D/Y: 4%). The scrip currently trades at FY15F and FY16F P/Es of 7.2x and 5.3x, respectively – ‘BUY’

Improving margins on plummeting cotton: Average local cotton procurement prices are expected to have declined to PKR5,200/maund compared to last year’s procurement price of PKR6,600/maund, resulting in significant margin expansion for Textile companies in Pakistan. With cotton comprising 66% of NML’s COGS, this is expected to result in GMs expanding to 16.8% in FY15F and 19.8% in FY16F from 14.4% in FY14. Every PKR100/maund decline in the cotton price yields an annualized EPS impact of PKR0.35 or2% of FY15 EPS.

Decline in fuel and power cost: The notable decline in both i) power tariffs and ii) cost of in-house power generation following 40% FYTD decline in FO prices will significantly reduce the fuel and power cost which has a 12% share in total cost of NML. Decline in fuel and power cost will yield a benefit of PKR2.2/sh or 13% on annualized earnings and will more than offset the impact (PKR0.33/share) of an expected 14% increase in gas tariffs from Jan-15. Going forward, the improvement in gas supply to the textile sector will further improve the productivity of NML.

Benefits of GSP+ Starting To Trickle-in: The sector has started realizing the benefits of GSP+ scheme as evident from the monthly export numbers. Country’s textile exports to the EU posted a jump of 19%YoY in 9MCY14 to USD5.7bn compared to a muted growth of 6% last year. NML, the country’s biggest textile unit, contributing ~3% to the total textile exports of Pakistan is likely to be the biggest beneficiary of rising exports to EU. We expect the company’s sales of Home Textiles and Garments to witness a growth of 20%YoY in FY15.

Projects Coming Online in FY15: NML has invested heavily to increase its production capacities across the high margin segments of the value chain which will further strengthen the earnings of the company. NML is expected to add another 28,800 spindles, which will augment earnings by 2.7%, with the capacity having commenced operations towards the tail end of 2QFY15. Moreover, NML’s new garments production facility, with a capability to produce 4.8mn garment pieces per annum, is also expected to come online in 2HFY15. This will have an EPS impact of PKR2.1 (12% of FY15F EPS).

Monetary easing to reduce financial cost: SBP decided to cut the DR by 50bps in its last monetary policy in wake of low inflation in the country. The continuation of low inflation raises likelihood of additional 100 bps cut in DR in 1HCY15. This cut in DR would bode well for the company with debt/asset of 26%. For every 50bps cut in DR, the company’s earnings increase by PKR0.33/sh or 2%.

Valuation: Our Dec-15 TP for NML stands at PKR146/sh. The scrip offers an upside of 17% coupled with a dividend yield of 4%. Valuations remain undemanding with NML trading at FY15F and FY16F PER of 7.2x and 5.3x, respectively. – ‘BUY’

Nishat Mills Limited (NML)

Core operations turning the corner

NML: BUY

Target Price: 146

Current Price: 124

Stock Data Price (PKR/Share) 124 Reuters Bloomberg Website NISM.KA NML PA www.nishatmillsltd.com 52-weeks High/Low (PKR) 136.5 / 93.0 Dividend Yield 4%

Market Cap (PKR bn) 44 Market Cap (USD mn) 435 Avg Daily Turnover (PKR mn) 257 Avg Daily Turnover (USD mn) 2.6 Shares Outstanding (mn) 352 KSE-100 Index Weightage (%) 1.3

Free Float (%) 50


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Company Description Nishat Mills Limited is engaged in the textile manufacturing business primarily in Pakistan. The company is involved in spinning, weaving, processing and manufacturing garments. In addition, it operates a fuel powered station with a gross capacity of 200 The Company also operates in Europe, Africa, Australia, Canada, the United States, and other Asian countries.


Directors, CEO & Others25%

Modaraba & MF9%

Individual26%

Foreign 16%

FI's7%

Associated Cos9%

Insurance5%

Others3%

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5 Jan 2015


Profit & Loss FY12A FY13A FY14A FY15F FY16F FY17F

Net Sales 44,924 52,426 54,444 56,673 63,386 65,762

Cost of Sales 38,134 43,381 46,580 47,237 50,723 52,093

Operating Profit 6,174 8,384 7,585 8,332 11,063 12,019

Other Income – Net 2,445 2,672 2,739 3,653 3,241 3,325

EBITDA 7,101 9,335 9,128 10,084 12,993 14,198


Net Profit 3,529 5,847 5,513 6,081 8,190 9,317

Cash Flow

CF from Operations 2,760 492 4,887 5,832 7,625 8,931

CF from Investing 37.3 -2,695 -7,909 -6,500 -5,500 -5,500

CF from Financing -1,572 974 4,695 -1,500 -2,000 -2,000

Net Change in Cash 1,226 -1,230 1,674 -2,168 125 1,431

Ending Cash Balance 2,359 1,129 2,803 635 759 2,190

Free Cash Flow to Equity 4,689 -868 -47 957 1,049 1,911

Balance Sheet

Current Assets 19,848 31,567 28,775 35,774 39,329 44,049

Long Term Assets 36,779 49,067 68,274 79,625 96,289 113,268

Total Assets 56,626 80,634 97,049 115,399 135,618 157,316




Total Equity 37,763 58,917 68,589 73,162 79,358 86,524

Key Ratios

EPS (PkR) 10.0 16.6 15.7 17.3 23.3 26.5

DPS (PkR) 3.5 4.0 4.0 4.5 7.0 7.5

BVS (PkR) 107.4 167.6 195.2 208.2 225.8 246.2

PER (x) 12.4 7.5 7.9 7.2 5.3 4.7

Dividend Yield 2.8% 3.2% 3.2% 3.6% 5.6% 6.0%

P/BVS(x) 1.2 0.7 0.6 0.6 0.6 0.5

EV/EBIDTA 5.8 4.9 4.5 4.8 4.3 3.9

Asset Turnover 0.8 0.7 0.6 0.5 0.5 0.4

Sales Growth 9.0% 16.7% 3.8% 4.1% 11.8% 3.7%

Operating Profit Margin 13.7% 16.0% 13.9% 14.8% 17.6% 18.6%


EBITDA Margin 16.8% 18.7% 16.8% 17.8% 20.5% 21.6%

51


5 Jan 2015


Positive developments abound as Engro Corporation (ENGRO) makes the cut as our top pick, providing a varied exposure between agri and energy related investments. CY15 will likely mark the start the recovery period for ENGRO’s as subsidiary Engro Fertilizer’s (EFERT) earnings gain traction owing to continued feed supply to the base plant throughout the year and likely chargeability of USD0.7/mmbtu rate for the Enven plant. CY15 expected earnings at PKR19.7bn (fully diluted EPS: PKR37.7) are 2.5x full year CY14 earnings expected at PKR7.7bn (fully diluted EPS: PKR14.8), with CY14 disappointment due to the Foods and Rice businesses. Moving ahead, key triggers for Engro’s price discovery are likely to include i) initiation of chargeability of concessionary rate for the Fertilizer business, ii) impact of improved dairy margins likely in CY15 on EFOODS’ earnings, iii) initiation of the LNG re-gasification project (Engro Elengy) by Feb’15 and v) news flow regarding strategic asset sales as management looks to consolidate its position in the agri and energy businesses. ENGRO has already rallied by 42% over the past 3 months, outperforming the broader market by 33%. At current levels, we continued to have an ‘Accumulate’ stance on ENGRO with a TP of PKR272/sh, an upside of 17%.

Bright prospects on fertilizer business: ENGRO has garnered much attention of-late owing to news related to continued supply of feed gas to the EFERT’s base plant as well as anticipated initiation of concessionary rate chargeability for the Enven plant. Given management guidance, we factor in concessionary rate for 11 months in CY15 (starting Feb’15) while maintaining operations for both plants throughout the year. Consequently, urea production in CY15 is expected to increase ~12%YoY to 2.1mn tons with EFERT’s profitability expected to jump 2.0x. While CY16 earning remain tricky, given non-supply of gas to the base plant, we have conservatively assumed only Enven to operational at 110% (CY15: 97%) with production ramp up due to additional supplies from Reti Maru and Mari SML (~30mmcfd) already with the company.

EFOODS’ set for a rebound! CY15 will also likely yield broad improvements in other businesses, prominently EFOODS. The company has already sold off its loss making Canadian subsidiary while improvement in margins should support bottomline growth in the new year. In this regard, margin expansion will likely be aided by twofold improvement in retail milk prices as well as lowering cost pressures. Street sources indicate EFOODS’ management has already loaded up on powdered milk given current low international price resulting in GMs likely picking up by 1QCY15. To note, international milk powder price has fallen from USD5,125/ton at the beginning of the year to current USD2,862/ton, a decline of 44%.

Other businesses to add value: Other business lines are expected to add value to ENGRO with the power business having already successfully listed, thereby resulting in consequent price discovery. Moving into CY14, we believe a key trigger for price discovery will be the initiation of the company’s LNG re-gasification project where the company will likely have a sovereign guarantee under a similar structure to IPPs. Tolling structure agreed upon is USc6.6/mmbtu with first year imports at 200mmcfd and 400mmcfd thereafter.

Investment Perspective: While the scrip has already rallied by 42% over the past three months, we believe ENGRO remains primed for continued investor interest as check points for price discovery are ticked. At current levels, ENGRO trades at undemanding CY15F and CY16F P/Es of 6.0x and 6.2x, respectively and offers an upside of 17% to our TP of PKR272/share – Accumulate!

Engro Corporation Limited (ENGRO)

Gaining traction!

ENGRO: ACCUMULATE

Target Price: 272

Current Price: 232

Price (PKR/Share) 232

Reuters Bloomberg Website EGCH.KA ENGRO PA www.engro.com 52-weeks High/Low (PKR) 239.9 / 164.7 Dividend Yield 0% Market Cap (PKR bn) 122 Market Cap (USD mn) 1,212 Avg Daily Turnover (PKR mn) 680

Avg Daily Turnover (USD mn) 6.6 Shares Outstanding (mn) 524 KSE-100 Index Weightage (%) 3.1 Free Float 44

Stock Data


0%

15%

30%

45%

60%

Dec

‐13

Jan‐14

Mar‐14

Mar‐14

Apr‐14

May‐14

Jun‐14

Jul‐1

4

Aug‐14

Sep‐14

Oct‐14

Nov

‐14

Dec

‐14

ENGRO KSE100 Index

Company Description

Engro Corp. (ENGRO) is a holding company with subsidiaries and a joint venture operating in fertilizer, food, polymer, energy, and chemical storage & handling businesses. The company has annual production capacities of over 2.2mn tons of urea (2 plants), 100k tons of NPK fertilizer, 150k tons of PVC Resin, 127k tons of EDC, 106k tons of caustic soda, 220k tons of VCM, 275MW of power, 500mn liters of dairy products, 134k tons of rice and 35mn liters of ice cream.

52


5 Jan 2015


Income Statement CY12A CY13A CY14F CY15F CY16F CY17F

Net Sales 125,151 155,360 151,526 185,192 183,826 206,120

Cost of Sales 96,631 114,763 112,625 126,724 128,196 144,425

Gross Profit 28,520 40,597 38,901 58,468 55,631 61,695

Operating expenses 11,636 13,784 12,756 15,292 16,014 18,800


Other Income – Net 2,028 2,686 1,421 2,434 2,914 2,880

EBITDA 26,330 34,153 34,715 51,294 48,072 51,128


Net Profit 1,333 8,183 7,727 19,735 20,355 23,750

Key Ratios

EPS 2.5 15.6 14.8 37.7 38.9 45.3

DPS - - 2.00 5.00 5.50 6.50

PER 91.3 14.9 15.8 6.2 6.0 5.1

Dividend Yield 0% 0% 1% 2% 2% 3%

Sales Growth 9% 24.1% -2.5% 22.2% -0.7% 12.1%



EBITDA Margins 21.0% 22.0% 22.9% 27.7% 26.2% 24.8%

1


21 Oct 2014

BMA Capital Management Limited | Pakistan

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2


21 Oct 2014

Disclaimer

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