pakistan strategy 2017-1-agimtrade.biz/wp-content/uploads/2017/10/pakistan...feb 01, 2017 · these...

Research Entity Number – REP-085

June 2017 Target: 54,500 pts.

Market Snapshot

As of Year End Dec-16

KSE100 Index 47,807

Market Cap (PkRbn) 9,629

Market Cap (US$bn) 92.05

CY16 Return 45.68%

Market PE (x) 11.5

Avg. Daily Vol (mn shrs) 280.7

Avg. Daily Td Val (PkR mn) 11,638

Avg. Daily Td Val (US$ mn) 111.1

CY16 KSE100 Index - High 47,807

CY16 KSE100 Index - Low 30,565

Market Free Float 28.5%

Top Picks

Sym TP

(PkR)

2017F CY16

Return P/B

(x)

P/E

(x)

D/Y

(%)

OGDC 191 1.3 9.0 4.2% 40.9%

BAFL 42 1.0 7.3 2.6% 31.7%

NBP 89 0.9 7.2 10.3% 38.6%

UBL 260 1.6 10.1 5.7% 54.2%

LUCK *U.R 2.8 14.5 1.4% 75.0%

DGKC 254 1.3 10.0 3.2% 50.2%

ASTL 79 1.8 16.7 3.0% 10.9%

Source: IMS Research

*Under review

KSE100 price volume chart CY16

-

250

500

750

1,000

25,000

30,000

35,000

40,000

45,000

50,000

Dec-

15

Jan-1

6

Ma

r-16

Ap

r-1

6

Jun-1

6

Jul-

16

Sep

-16

Oct

-16

Dec-

16

Vol. shares (mn) - Rhs KSE100 Index


The Final Countdown

• With gains of 46%, the Pakistan Market could not have had a better 2016. MSCI upgrade tailwinds can continue to rerate the market where P/E can go from 11.5x at present to 13.0x (+1sd above LT mean). We see the KSE-100 touching 54,500pts by June 2017 at which time we would consider gradually trimming exposure. Rapid product development under new PSX operator would provide a bull case while politics stands as the main risk.

• Themes for 2017 include return of inflation and pre-election public spending. Both are near-term positives where we project IMS Universe profit growth at 18%YoY – after two years of decline. However, macro slippages may begin to hurt in 2018 and before that “sell the news” could make the Index labor in 2H2017, after EM upgrade becomes effective.

• We thus see 2017 shaping up to be a year of two distinct halves. We like Banks, Construction and Staples while Fertilizers and Textiles are least preferred. Top picks are OGDC, UBL, BAFL, NBP, LUCK, DGKC & ASTL. Outside our coverage, we find EPCL, HUMNL, SPEL, JSBL & HMB as interesting scrips.

MSCI tailwind

Despite a 27% Index return since June 2016, we do not think the MSCI upgrade has been fully priced in just yet. We base our view on large FPI outflow in CY16 (US$339mn), discounted valuations vs. CY06/07 when Pakistan was last in EM, and our recent roadshow takeaways, which suggest EM funds are only now starting to look at this market. The KSE-100 trades at a forward P/E of 11.5x and we think it can rerate to 13.0x (+1sd above LT mean; the Pakistan Market has historically peaked above 15x). This alone can generate 13% Index returns. After EM upgrade becomes effective, however, we do see room for profit taking à la the UAE/Qatar markets which shed 10-15% in the 1m after effective date even as oil prices were above US$100/bbl.

Strong domestic liquidity

In 2016, the market bucked its trend of tracking foreign flows. Domestic liquidity can continue to provide an anchor, buoyed by shifting of speculative real estate money into the stock market, greater allocation towards equities by banks and inflows to brokers post PSX sale to foreign operators. While real estate flows may have largely made their way through already, we estimate additional domestic liquidity infusion of US$200-250mn. This should be able to absorb continued foreign selling in 1HCY17 and keep the Index buoyant, before the changing of hands from local investors to new entrants (EM funds – mostly passive) in 2HCY17.

It’s not just rerating

Greater economic activity (CPEC, spate of corporate expansions) can dovetail with higher M2 growth in 2017, which has historically been good for the market, and so long as upticks in inflation/interest rates are manageable, the Index’s tilt towards commodity plays and banks is a positive. Projected IMS Universe growth of 18% in 2017 will be the highest in 3yrs and we believe this will enable the market to tolerate some fiscal indiscipline ahead of the 2018 elections. However, we do think a macroeconomic adjustment cycle over the medium-term is a realistic possibility; this could begin to dominate investor psyche towards end-2017.

Intermarket Strategy

We see 2017 shaping up to be a year of two halves. The MSCI upgrade effect, strong domestic liquidity and higher earnings growth can take the KSE-100 to 54,500pts by June 2017. However, after EM upgrade becomes effective, 2HCY17 could be a struggle on “sell the news” particularly if economic indiscipline creeps in amidst a backdrop of greater political noise. We would be overweight Pakistan in 1HCY17, but would consider gradually trimming positions in the second half. Stocks we like include OGDC, UBL, BAFL, NBP, LUCK, DGKC & ASTL, while we have Sells on POL, AGTL and HCAR.

Pakistan Strategy 2017

2 January 2017

IMS Research

[email protected]

To find our Research on Bloomberg, please type - IMKP <GO>

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 41 & 42

www.jamapunji.pk

2 | P a g e


Contents

Pakistan Strategy 2017 Page

2016 Market Review

3

MSCI tailwind

4

Year of Two Halves

7

Strong domestic liquidity

8


12

Corporate Pakistan

14

Macroeconomic adjustment over the medium-term

16

Index target of 54,500pts for Jun’17

18

Sector Outlook 19

Top Picks 22

Buy

OGDC - Best exposure to sector positives

23

BAFL - Large bank trading at medium bank valuations

24

NBP - Turnaround can sustain

25

UBL - Differentiated franchise

26

LUCK - Transforming business profile

27

DGKC - Most attractive valuations within large-cap Cements

28

ASTL - Expansion to propel growth story

29

Sell

AGTL - Premium Valuations despite less exciting prospects

31

POL - Near-term earnings/payout disguise weaknesses

32

HCAR - Valuations too stretched amid new model frenzy

33

Other Stocks 34

EPCL - Possible turnaround in fortunes

35

HUMNL - Bright prospects for growth

36

SPEL - Sustainable margins coupled with mounting topline

37

JSBL - The Cheapest Bank in Pakistan

38

HMB - Unjustifiably cheap

39

Appendix 40

Disclaimer & Disclosures 41

3 | P a g e


2016 Market Review

2016 was a year of many landmarks for the Pakistan market. A hefty 46% return for the year

was possible because of MSCI’s upgrade announcement; the successful merger of KSE with

other exchanges to form PSX and its subsequent stake sale to Chinese investors; OPEC’s

decision to balance the crude oil market; and infusion of money from the real estate market

prompted by a government crackdown. These triggers helped the KSE-100 defy noise from the

political front and incessant net FPI outflows.

MSCI upgrade to EM status: On 14th Jun‘16, MSCI announced that the Pakistani market will

be reclassified into the Emerging market index, where 7 stocks will be included in the main

index and 25 in the mid/small-cap indices.

PSX formation and stake sale: KSE was merged with the Lahore and Islamabad exchanges to

form the Pakistan Stock Exchange in Jan’16, which paved the way for stake sale in Dec’16 to a

consortium of Shanghai Exchange, Shenzhen Exchange, Habib Bank Limited, and Pak Kuwait

Investment Company.

OPEC accord on production cuts: OPEC’s meeting on 30 Nov’16 concluded that it will cut

production to ~31mn bpd in order to balance the market and support oil prices in 2017,

importantly with Russia’s blessings. Mixed expectations had preceded the meetings; hence,

global markets rallied significantly at the news.

CGT regime change in the real estate market: In an effort to crack down on the

manipulation of CGT system loopholes in the real estate market, the GoP shifted to a new

regime which will effectively increase tax collections from that market and expose black

money. The equity ma rkets’ rerating to 11.5x P/E from 9x at the beginning of 2016 is partially

attributed to the capital flows that ensued this measure.

Politics took an unusual turn: Political noise erupted during the year with the revelation of

offshore accounts of the PM’s children in the infamous Panama Leaks. Opposition has since

been reinvigorated, with PTI’s planned sit-ins temporarily stalling the market. Supreme Court

intervention and delay in hearing until Jan’17 led to a 20% rally in the last two months of the

year.

KSE - 2016 Timeline

30,000

32,000

34,000

36,000

38,000

40,000

42,000

44,000

46,000

48,000

50,000

1-J

an

27-J

an

22-F

eb

17-M

ar

12-A

pr

6-M

ay

1-J

un

27-J

un

28-J

ul

23-A

ug

16-S

ep

12

-Oct

7-N

ov

1-D

ec

27-D

ec

4-April: Panama

leaks revealed

Pakistani politicians 11- Feb: Pak-Qatar

LNG deal signed

3-Mar: Ex- MQM leader

Mustafa Kamal announced

launch of new political party

17-Aug: PSX receives

POIs for sale of stake

22-May: DR/TR cut

by 25 bps to

6.25%/5.75%

1-July: New CGT

regime on real estate

applicable

29-Sep: India

announced conducting

surgical strikes over

Pakistan

3-June: Federal

Budget FY17

announced

14- June: MSCI

reclassifies

Pakistan from FM

to EM

(announcement)

24-June:

Britain exits

EU

4-Jan: Arrests at

prominent

brokerage 11-Jan:

Consolidation of all

stock exchanges of

Pakistan into PSX

8-Nov: Donald Trump

elected as U.S

president

25-Nov: Gas

price cut by

33%

28-Nov: New Army

Chief Gen. Qamar Javed

Bajwa takes office

2-Nov: PTI

cancelled anti

govt. protest

9-Dec: Panama

Leaks hearing

adjoured till January

2017

15-Dec: FED raises

the Federal Fund

rate by 25 bps

22-Dec:

Chinese

consortium

won bid for

40% stake

in PSX at

PkR28/sh

30-Nov: OPEC

decides to cut

production


4 | P a g e


MSCI tailwind

Despite a 27% Index return since June of last year, we do not think the MSCI upgrade

has been fully priced in just yet. We base our view on large FPI outflow in CY16

(US$339mn), discounted valuations vs. CY06/07 when Pakistan was last in EM, and

our roadshow takeaways which suggest EM funds are only now starting to look at this

market.

The KSE-100 trades at a forward P/E of 11.5x and we think it can rerate to 13.0x (+1sd

above LT mean; the Pakistan Market has historically peaked above 15x). This alone

can generate 13% Index returns.

After EM upgrade becomes effective however, we do see room for profit taking à la

the UAE/Qatar markets which shed 10-15% in the 1m after effective date even as oil

prices were above US$100/bbl.

MSCI upgrade not fully priced in

The market’s returned 46% in 2016. Other than approval for EM upgrade, supportive factors

for the bull run included: (i) political stability, (ii) prospects for PSX stake sale, (iii) strong

domestic liquidity and (iv) higher oil prices improving earnings outlook for the commodity-

heavy Index. We think the EM upgrade theme has more legs based on:

EM inflows yet to commence: CY16 FPI outflow clocked in at US$339mn, bringing the

cumulative outflow over the last 2yrs to US$655mn. While FM funds engaged with the

Pakistan Market have been consistently selling the rally, EM flows will only start to come

into play from mid-2017. Bulk of these are likely to be passive flows where Pakistan’s small

weight in EM (< 0.20%) may lead active funds to bypass Pakistan, notwithstanding the KSE-

100’s 5yr return CAGR of 33% (US$ adjusted: 30%pa). This is corroborated by our recent

conversations with EM funds that are now only beginning to look at and understand this

market’s dynamics. We estimate inflows of US$400mn due to EM upgrade, i.e. less than the

previous 2yr cumulative outflow.

Based on a sample of over 2,700 EM mandated equity funds, we found that passive funds

were only about 27% of the overall population (source: Bloomberg). While active funds may

take time to understand the market and may well ignore Pakistan given its small weight,

passive money should come in as soon as Pakistan’s upgrade become effective in May

2017, in our view. This could mean a potential inflow of about US$400mn from passive EM

funds, similar to the outflow witnessed after Pakistan was removed from EM at the start of

2009. Interestingly, about two-thirds of the passive funds sampled were ETFs, which do

invest in all benchmark securities. In other words, money flowing in the 7 main benchmark

Only passive EM funds may enter Pakistan…

Active

73%

Passive

27%

Source: Bloomberg, IMS Research

…backed by high proportion of ETFs

ETFs

64%

Others

36%


We think the EM upgrade theme

has still not been fully priced in

5 | P a g e


stocks is highly likely. As for active funds, Pakistan’s strong macro backdrop, double-digits

earnings growth outlook, handsome ROEs and attractive valuations may make a strong case

for investment. That said, Pakistan’s small weight in EM (< 0.20%) may quell their

enthusiasm.

The table below compares the current Pakistan Market with the tail-end of the last macro

bull cycle when Pakistan was still classified as part of EM. Despite lower interest rates and a

manageable CA deficit, forward P/E of 11.5x is still at a 15% discount to FY06. Other than

the EM upgrade effect yet to fully play out, we venture that this discount may be

attributable to significantly better liquidity back in FY06 (daily turnover: US$592mn in FY06

vs. US$138mn in FY17TD); sale of PSX to Chinese operators may lead to swift improvements

on this front as well.

FY06A Now Comments P/E (x) 13.6 11.5 Still at 15% discount to historic highs; potential catchup can unlock significant upside

Market Cap to GDP 38% 27% Convergence implies an index level of 60k+

Volumes (mn) 321 386 Volumes are comparable to previous highs

ADTO (US$mn) 592 138 TO needs improved product development esp. leverage (possible under new PSX operators)

Earnings Growth (IMS Universe) 13.7% 18.2% FY17 growth may clock in at its highest in 3yrs

GDP Growth- Pakistan 5.8% 5.0% Likely impetus expected on the back of CPEC, corporate expansions and revival of agri cycle

Gross Capital Formation as % of GDP 19.3% 16.0% Recovering from CY11's 14.1%; set to rapidly improve

Fiscal deficit to GDP 4.0% 3.4% Fiscal indiscipline ahead of election year can be expected

CA deficit to GDP 4.4% 1.7% Deterioration likely on the back of slowdown in remittances and rising imports (FY17F: 2%)

FDI (US$mn) 3,521 460 FDI is down 45%YoY; improvement can be expected next year on the back of CPEC

Oil Price (US$/bbl) 66.13 56.82 Oil prices likely to sustain beyond US$50/bbl given OPEC's recent production cut decision

Discount Rate 9.2% 6.3% Gradual uptick likely from next year; corporate lending to offset hit on the retail front

Forex Reserves (US$mn) – SBP 12,055 18,190 Contained depletion expected given consistent rise in foreign assistance and loans

Imports (US$mn) 26,597 41,587 Growth to accelerate with rebound in oil prices and rise in machinery imports

Import Cover (m) 5.44 5.25 Comfortable until elections; deterioration thereon can bring IMF into play yet again

Fatalities in Terrorist Attacks 1,471 1,798 Incremental improvement in the security climate is pushing economic activities

Per Capita Income (US$) 890.7 1560.7 Consumer demand remains robust on the back of improved income levels Source: IMS Research, SBP, IMF

Discounted valuations vs. last EM cycle: Pakistan was previously classified as an EM

market over 1994-2008. Towards the end of this period, the KSE-100 was trading at P/E

multiples of more than 15.0x. The market currently trades at a forward P/E of 11.5x and we

believe it can rerate to +1 standard deviation above long-term mean multiples. This would

imply a P/E multiple of 13.0x, which alone can take the Index to 54,000pts (ignoring profit

growth). Rerating to 15.0x would take the Index to 62,000pts on its own, but we think this

is unlikely to happen in 2017. If market valuations do rerate to peak levels in 2017, it would

be difficult to stay bullish on the KSE-100, going by precedence.

Pakistan Market can rerate to +1sd above the mean i.e. to P/E of 13.0x

4

6

8

10

12

14

16

Jul-

05

Jul-

06

Jul-

07

Au

g-0

8

Au

g-0

9

Sep

-10

Sep

-11

Oct

-12

Oct

-13

No

v-1

4

No

v-1

5

De

c-1

6

SD - 2 SD - 1 PER (x) SD +1 SD +2 Mean

(x)

Source: IMS Research, Bloomberg

We believe the market's forward P/E

can re-rate to 13x.

6 | P a g e


Qatar & UAE rallied more ahead of upgrade: The last two examples of FM-to-EM

upgrades are UAE and Qatar. From upgrade announcement to effective date (June’13-

June’14), the UAE (DFM) and Qatar markets gained 112% and 47%, respectively. Both of

these are higher than the 27% return posted by the KSE-100 since upgrade approval

announced in mid-Jun’16 and we think further pricing-in can continue to take place over

the next 6 months.

All EM-eligible stocks have not rallied: 7 Pakistani stocks will be part of the main EM

Index. While some stocks have certainly rallied, names such as FFC and ENGRO have deeply

underperformed the Index even after MSCI upgrade announcement (Index is up 27%

announcement-to-date) due to weak sector dynamics thereof. Similarly, several names

slated to be part of MSCI EM Small Cap such as HUBCO, PSO, and PPL, have also

underperformed the broader market.

Not all stocks in the main Index have out performed

Since upgrade announcement Since upgrade announcement

MSCI EM Stock Return Sector Return MSCI EM Small Cap Stock Return Sector Return

Oil & Gas Development 16.1% 20.6% Hub-Power Co 5.5% 6.5%

Habib Bank 48.3% 36.1% National Bank Pakistan 39.9% 36.1%

MCB Bank 7.3% 36.1% Pakistan State Oil Co 14.2% 49.6%

United Bank 39.4% 36.1% Pakistan Petroleum 14.1% 20.6%

Lucky Cement 38.2% 38.7% K-Electric 15.4% 6.5%

Fauji Fertilizer Co -11.7% -1.6% Indus Motor Company 75.4% 70.3%

Engro Corporation -5.3% -1.6% Pakistan Oilfields 52.7% 20.6%

Pakistan Telecom 14.4% 21.9%

Kot Addu Power Company -7.6% 6.5%

Dawood Hercules Corp 11.0% -1.6%

Fatima Fertilizer 16.0% -1.6%

Searle Pakistan 20.3% 34.0%

Packages 42.7% 30.6%

Maple Leaf Cement 33.0% 38.7%

Source: MSCI, IMS Research

DFM & QE vs. KSE-100 - performance after upgrade announcement

-20%

0%

20%

40%

60%

80%

100%

120%

140%

1

11

21

31

41

51

61

71

81

91

101

111

121

131

141

151

161

171

181

191

201

211

221

231

241

251

261

Qatar -DSM Index UAE -DFMGI Index Pakistan - KSE100 Index

From Annoucement to Effective

--------------------------------------------# of Days----------------------------------------

Index 53,763

Index 67,532


7 | P a g e


Year of Two Halves

After the upgrade? We think MSCI upgrade tailwinds will continue to take the market

higher across the next 6 months. Based on our Jun’17 Index target of 54,500pts, FY17 Index

returns could register at 45%, with prospects for even more gains if animal spirits take

over. Following on, we believe that in 2HCY17, “sell the news” may well lead to profit

taking after EM upgrade becomes effective. This has precedence – the UAE & Qatar

markets shed between 10-15% in the first month after effective date even as oil prices

were above US$100/bbl.

“Sell the News” leads to profit taking

Performance After EM Effective Date

1M 3M 6M 1YR

Qatar -8.6% 0.3% -5.8% -10.1%

UAE -14.8% -1.7% -16.9% -22.5%

WTI 2.0% -6.4% -35.4% -40.2%

ARABLIGHT 3.8% -3.7% -37.4% -41.3%

CRUDE 2.2% -5.2% -35.5% -39.8%


We believe the exceptional price run up in CY16 (Index return: 46%) can extend into

1HCY17. If this comes to pass, we do see room for profit taking in 2HCY17 as valuations

would then be encroaching upon historical peaks and general elections on the horizon

could see noisier politics dovetail with some macroeconomic indiscipline. We would be

overweight Pakistan in 1HCY17 but look to sell the rally in the second half of the year.

What can extend the rally into 2HCY17?

Similar to the UAE and Qatar markets, we see room for a correction immediately after EM

upgrade becomes effective. After this takes place, however, another rally can develop on:

• Amicable end to the Panama Leaks saga and growing expectations of PML-N winning

the elections in 2018.

• Greater visibility of CPEC projects which will maintain expectations of strong

construction up-cycle.

• Active MSCI EM flows come in stronger than expected. We expect US$300-400mn

coming into the market after the EM inclusion in May’17, largely from passive funds;

meaningful entry of active EM funds can drive Index higher.

• Swift product development can enhance liquidity and trading dynamics at the PSX and

assist in further valuation rerating.

• Higher than expected oil prices (above US$60/bbl without reaching alarming levels)

which can unlock higher earnings growth at the PSX. We expect crude oil prices to

average between US$50-60/bbl in 2017.

• Fiscal slippages remain contained and the Balance of Payments profile remains

manageable. Government may refrain from further subsidies in order to maintain the

discipline attained during the IMF program. However, this will depend on appeasing of

political pressures.

1HCY17 2HCY17

- MSCI upgrade continue to be priced in - P/E can extend to 13x - "Sell the News" after upgrade become effective - ala UAE/Qatar

- Very strong domestic liquidity; institutional & individual - Only passive EM funds will likely come in & locals could turn big sellers

- Animal spirits driving investor sentiment - Approaching elections could unnerve sentiment on political noise

- Macro improvement underpinned by stable PkR - Election years (2008 & 2013) both coincided with sharp PkR adjustment

- Successful PSX stake sale and materialization of additional liquidity - Product development by new PSX operator can extend rally in 2HCY17 (bull case)


We see the KSE100 at 54,500 pts by

Jun-2017. UAE/Qatar show

possibility of correction upon EM

upgrade (after effective date)

8 | P a g e


Strong domestic liquidity In 2016, the market bucked its trend of tracking foreign flows. Domestic liquidity can

continue to provide an anchor, buoyed by shifting of speculative real estate money

into the stock market, greater allocation towards equities by banks and inflows to

brokers post the PSX stake sale to foreign operators.

While real estate flows may have largely made their way through already, we estimate

additional domestic liquidity infusion of US$200-250mn.

This should be able to absorb continued foreign selling in 1HCY17 and keep the Index

buoyant, before a changing of hands from local investors to new entrants (EM funds)

in 2HCY17.

Strong local buying

Historically, foreign selling has acted as a drag on the Pakistan market and vice versa. Case

in point is CY15 when the market gained just 2% amid FPI outflow of US$315mn for the

year. This relationship has not extended into CY16, however, where, despite foreign selling

of US$339mn, the Index returned a stellar 46%. The bulk of this price run up is likely

attributable to MSCI’s decision to upgrade Pakistan to EM status from 2017, but it is worth

noting that local institutions and individuals have been the key market drivers.

Real estate changes: A possible reason for strong local liquidity in the stock market could

be recent changes in the property sector where the GoP has attempted to curb speculation

by reducing the difference between notified property values and actual values. In Pakistan,

property transactions are officially conducted on district-notified valuations that are

typically much lower than the market price, the difference settled through cash. This system

can be exploited to hide wealth and has also resulted in speculative flipping of properties

for quick gains. Now, however, official valuation will take place on higher, FBR notified rates

that will close the gap with market values.

While the GoP has announced an amnesty scheme (no questions asked on source of

income if 3% tax paid on the above-mentioned differential), some speculative money

originating from the real estate sector could have made its way into the stock market

although it is difficult to gauge the quantum. This is corroborated by strong liquidity

infusion with domestic mutual funds.

Local buying drove the market higher towards end-CY16

-20%

-10%

0%

10%

20%

-150

-100

-50

0

50

100

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

FIPI Net Flows (US$mn) KSE100 Return - Rhs

Source: NCCPL, IMS Research

Local mutual funds were key buyers in CY16

58

(87) (119)

226

3

(44)

303

(120)

(60)

-

60

120

180

240

300

Ind

ivid

ual

Co

's

Banks

NBFC

Oth

ers

Bro

k. T

rad

ing

M. F

und

s

Source: NCCPL

November and December 2016

accounted for 77 % of CY16 FPI

outflow; and yet the Index rallied

20% across these two months

9 | P a g e


Local mutual funds are most bullish: Domestic mutual funds have been the single largest

category of buyers in CY16 with net buying of US$303mn. As per MUFAP data, AUMs of

pure equity funds have increased from US$1.8bn at the start of CY16 to more than

US$2.5bn by end-Nov’16, a CYTD increase of 39% (FYTD increase of 28% is eye-catching).

Continued strong flows into local mutual funds (AUMs have increased by more than

US$500mn FYTD) is a positive sign, which can extend the bull-run into 1HCY17.

It is possible that the money has flown into mutual funds from the real estate sectors.

AUMs of the industry are at the highest level since inception. Strong market returns and

aggressive marketing campaigns pulled funds as well.

Share of equity funds in overall AUMs on the rise: Based on the sample of five largest Asset Management companies, funds invested in equity funds as a share of overall AUMs (excluding retirement funds) rose from just 9% in 2012 to about 40% in 2016. This is due to the significant returns on the stock market during this period, while interest rates were declining. But this is also because of funds moving out of fixed income mutual funds as the government cracked down on the tax arbitrages for banks investing in mutual funds. Since returns of 2016 exceeded expectations, significant influx in the equity based funds can be expected for 2017, in which case mutual funds will continue to lend liquidity to the market,

Return on Investment on Plots in 5 Years

103%131%

229%

126%

0%

50%

100%

150%

200%

250%

Pakistan Lahore Karachi Islamabad

Source: PRIME Institute

Trend of Local MFs – Equity AUMs (Monthly Trend vs. Index)

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

-

50

100

150

200

250

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Equity AUMs (PkRbn) KSE100 Index - Rhs Linear (Equity AUMs (PkRbn))

Source: MUFAP, IMS Research

Share of equity funds in total AUMs

3% 9%14%

27%

34%

41%

0%

20%

40%

60%

201

1

201

2

201

3

201

4

201

5

201

6

Source: MUFAP

10 | P a g e


in our view. It is also worth noting that savings in mutual funds is about 5% of bank deposits; this ratio in India is about 15%.

Banks can up the ante: Pakistani banks are flush with liquidity given low ADRs (c. 50%) and

continuing hefty maturities of PIBs booked in CY14/15. In an environment where private

sector credit offtake is still picking up and NIMs are range-bound, channel checks suggest

banks are increasing their equity allocations, particularly towards high dividend yielding

stocks. Several names in our banking coverage have room to increase their equity portfolios

which are still smaller than what the regulator allows (30% of Tier-I Equity) in most cases.

This could turn Banks into net buyers in 2017.

All values in PkRmn UBL MCB HBL ABL NBP BAFL

Total Equity- Sep'16 (Tier-I) 126,536 119,579 167,298 74,784 119,122 47,895

Equity Investment Cap (as per SBP) 30% 30% 30% 30% 30% 30%

Equity Investment Cap (as per SBP) 37,961 35,874 50,189 22,435 35,737 14,368

Current Equity Investment 26,303 29,294 17,244 27,578 27,270 10,344

Buffer 11,658 6,580 32,946 (5,143) 8,467 4,025

Source: Company Accounts

PSX stake sale

After demutualization in 2012, the country’s three stock exchanges were successfully

merged in Jan’16 into the Pakistan Stock Exchange (PSX). This paved the way for 40% stake

divestment alongside management control to a foreign operator, where recent bid of

PkR28/sh by a consortium led by Shanghai Stock Exchange, Shenzhen Stock Exchange and

China Futures Exchange has been accepted. Following the stake sale, it is proposed that

20% of the exchange would be offered to the general public and the PSX itself would

emerge as a listed entity.

Cash headed brokers’ way: The winning bid values the PSX at about US$215mn (2.75x

P/B) and will lead to cash proceeds of US$85mn upon approval. In our view, these proceeds

are likely to be redeployed in the market through share purchases, adding to already strong

local liquidity dynamics.

The consortium has bought the exchange at a P/E of 104x which shows that buyers

perceive significant potential of scalability. The exchange, though in existence since 1949, is

fairly “plain vanilla” by global standards. Largely a cash market, derivative products are

scant and market participants as a percentage of overall population is extremely low. A

comparison of PSX with other exchanges in Asia and beyond depicts the sheer under-

penetration of the market relative to its market cap. This can be partly attributed to the

2008 market crash, for which many quarters blame the leverage in that market. The latter

was significantly diminished when trading resumed on the exchange but there is now a

case for meaningful reintroduction. Taking an average ADTO to market cap ratio of 0.5%,

we think the PSX should trade close to US$425mn per day at its full potential i.e. 3 times

higher than current levels.

One of the key differences between now and FY06/07 is significantly higher trading activity

at the bourse than 10yrs ago, and we believe this partly explains why current valuations are

still not as high as historical peaks. If the new operator fast-tracks product development e.g.

by introducing a viable market leverage mechanism, it could push the case for further

rerating and open bull-case prospects of the Pakistan Market rerating to 14x-15x (vs. 11.5x

at present).

Details of PSX stake sale

Total number of

shares

Shares

(mn) 801

Percentage Divested

40%

Divested number of

shares 320

Per share bid price

28

Total proceeds US$mn 85

Shenzen & Shanghai

Stock Exchange 30% 64.3

HBL 5% 10.72

Pak-China

Investment co. ltd 5% 10.72


We believe daily turnover at the PSX

can cross US$400mn at full potential

11 | P a g e


Countries Index 6m Avg Traded Val

(US$mn) Mkt Cap (US$bn)

America S&P 500 119,262 20,026

China SHCOMP 29,708 4,096

Japan NKY 225 12,784 2,911

UK FTSE 5,441 2,379

Hong Kong HSI 3,165 1,795

Germany DAX 3,295 1,154

Korea KOSPI 3,540 1,041

Taiwan TWSE 2,033 840

India SENSEX 1,022 671

Indonesia JCI 416 425

Thailand SET 1,393 420

Singapore FSSTI 494 318

Malaysia FBMKLCI 212 222

Philippines PCOMP 111 165

Pakistan KSE-100 98 80

Source : Bloomberg

Product development can assist rerating: Market/PSX data indicates that while traded

volumes have doubled in the last 5yrs, the market has traded US$138mn/day in FY17TD vs.

US$592mn/day in FY06. The exchange’s trading fee corroborates this; FY16 trading fee of

PkR221mn is less than half the average trading fee of more than PkR500mn pa across FY04-

FY08.

Introduction of derivative products like options will significantly reduce costs of trading and

price discovery, albeit at the expense of much higher volatility. Key triggers include the

MSCI EM upgrade, the potential of which can be fully tapped through product

development. Another high potential product that the exchange can introduce is ETFs. This

may help beckon greater passive EM inflows. Having said that, results from product

development may be visible at the end of 2017, as the new operators may undertake

infrastructural changes in the beginning, in our view.

Other ways to enhance trading fees, can include (i) increase in exchange trading and listing

fees, (ii) greater incentives for listing of securities, and (iii) regulatory changes to encourage

companies to increase free float. This will be in addition to increased marketing to promote

greater retail participation in the market. Possible privatization of SOEs over the medium-

term and ensuing uptick in volumes will further help the exchange on this front, in our view.

Traded value still much lower than FY06 peak

-

150

300

450

600

750

-

100

200

300

400

500

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY17

td

Vol (Shrs mn) - Lhs Mkt Td. Val (US$mn)

Source: IMS Research, PSX

PSX revenues have room to jump

0

100

200

300

400

500

600

700

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Trading Fee (PkRmn)

Source: IMS Research, PSX

After PSX sale to Chinese operators

( transaction expected to conclude

in 1HCY17), the next round of

market reforms will be critical

12 | P a g e



Greater economic activity (CPEC, spate of corporate expansions) can push M2 growth

in 2017, which has historically been good for the market, and so long as upticks in

inflation/interest rates are manageable, the Index’s tilt towards commodity plays and

banks is a positive.

Projected IMS Universe growth of 18% in 2017 will be the highest in 3yrs and we

believe this will enable the market to tolerate some fiscal indiscipline ahead of the

2018 elections.

However, we do think a macroeconomic adjustment cycle over the medium-term is a

realistic possibility; this could begin to dominate investor psyche towards end-2017.

Greater real activity

Rerating is not the only theme for 2017; uptick in the global commodity cycle implies

positives for profitability growth particularly as Corporate Pakistan is entering an expansion

phase. From a top-down perspective, CPEC & greater public spending ahead of elections

have the capacity to push GDP growth higher than the projected 5% for FY17. Greater

economic activity/higher M2 growth have understandably had a positive impact on the

market before and we expect this effect to materialize in 2017 as well.

GDP growth can surprise: Despite a poor cotton crop, FY16 GDP growth came in at 4.7%.

Now, with Agriculture sector growth set to improve and Manufacturing sector accelerating,

the IMF’s GDP growth projection of 5% for FY17 may well be exceeded. This would be the

highest pace of growth in 10yrs where impetus can arise from (i) early harvest CPEC

projects and (ii) greater public spending on infrastructure development ahead of the 2018

general elections. Greater economic activity may dovetail with higher M2 growth which has

historically proved to be beneficial for the market.

Corporate Pakistan doing its bit: The KSE-100 gained 27% in 2HCY16. Other than the

impetus provided by EM upgrade, investor sentiment could also have been buoyed by

accelerated corporate developments where several industries have entered expansion

mode. These include Cements & Allied sectors, Energy, Autos etc. In our view, the last time

Corporate Pakistan was in such a bullish mode was back in CY06/07 which, not surprisingly,

coincided with the market’s historical peak valuations.

GDP growth vs. private sector credit offtake growth

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

-20%

-10%

0%

10%

20%

30%

Jun

-07

Ap

r-08

Feb

-09

Dec-

09

Oct

-10

Aug

-11

Jun

e-1

2

Ap

r-13

Feb

-14

Dec-

14

Oct

-15

Aug

-16

Pvt Sector Credit Gr. GDP Growth- Rhs


Chg in M2 growth vs. chg in KSE-100 Index

-60%

-40%

-20%

0%

20%

40%

60%

0%

5%

10%

15%

20%

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17T

D

M2 Change KSE-100 Index Return


2017 will see a blend of re-rating

and earnings growth

13 | P a g e


Many sectors in expansion mode

Capacity Value (US$mn)

Cement Sector Expansions 21mn tons 2,080

Coal Power Projects 12,480 MW 21,910

Wind Power Projects 350MW 780

Hydro Power Projects 2,690 5,620

Road Infrastructure Projects 832km 3,690

Railway Projects 960km 3,690

Gwadar Port Project 793

Hascol Storage Capacity 334k tons n.a.

Amreli Steel 300k tons 36

Atlas Honda 600k units 100

K-Electric (SEPL) 9,000

Pak Suzuki Motors (Possible) 50-60K units 460


Highest profit growth in 3yrs: The turnaround in the global commodity cycle, led by

international oil prices, bodes well for the commodity-heavy Index provided upticks in

inflation/interest rates remain manageable and keep the overall macro picture in balance.

Specifically, E&P, Fertilizer and Banks together contribute close to 50% of the KSE-100’s

market capitalization where the oil-led rebound in inflation is a positive for headline

profitability growth.

After a 11%YoY decline in 2016, we estimate that the IMS Universe will register 18%YoY

growth in 2017, which will be the highest in 3yrs. Sectors contributing to this growth will

include E&Ps, Cements, OMCs and Autos while Banks will look to join the fray from 2018

onwards.

Earnings yield suggest market has room for upside

The forward E/Y of KSE-100 of 9% is about 3bps higher than the 12m T-Bill (5.98%). Over

the past five years, the average spread between the market’s yield and the benchmark

security has been 100-150bps. In 2016, it went as high as 5%. Therefore, we think the

present spread suggests that the market still has room to go up further.

In light of the next year’s interest rate lift off, the spread will converge and thus may reach

levels where profit taking will be warranted. If we use the average spread of 120bps

between the market’s earnings yield and 12m T-Bill, then we say that the market should be

yielding 7.7% in 2017 (assuming average 12m T-Bill rate of 6.5%). This leads to an Index

level of about 55,000pts.

Market’s E/Y vs. T-bill Yield

-20%

0%

20%

40%

60%

80%

0%

5%

10%

15%

20%

25%

Jan

-09

Sep

-09

Jun-1

0

Feb

-11

No

v-11

Jul-

12

Ap

r-1

3

Dec-

13

Sep

-14

Ma

y-1

5

Feb

-16

No

v-16

Earning Yield T-bill Yield KSE100 - Rhs

2009

2010

2012

2015

2016

2011

2013

2014


The market's earnings yield

suggests room for further upside,

notwithstanding expectations of

rate hikes from 1QCY17

14 | P a g e


Corporate Pakistan

Higher GDP growth

Commodity prices

Increased LSM and recovery of agriculture amid rising commodity prices

and lower crop damages will yield higher GDP growth.

Oil prices are likely to find balance in 2017 with other commodities like iron

ore, steel, milk powder etc following suit. This will propel higher product

prices following strong volumetric growth in past couple of years.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

FY12 FY13 FY14 FY15 FY16

GDP Growth vs. LSM Growth

GDP Growth (%) LSM Growth (%)


-40%

0%

40%

80%

120%

Jan

-16

Feb

-16

Ma

r-1

6

Ap

r-16

Ma

y-1

6

Jun

-16

Jul-

16

Aug

-16

Sep

-16

Oct

-16

No

v-1

6

De

c-16

Commodity Price Change

Brent Coal Milk CRC


Interest rates

Curtailment of Power shortage

Inflation will be skewed on the upside amid rise in commodity prices and

aggregate demand. This, coupled with pressures on the exchange rate from

the external account, will trigger lift-off in interest rates. We do not think

this will reduce appetite for corporate loans

Since FY13, the country has added 1,400MW of electricity which has

triggered higher industrial utilization. Industries also capitalized on low coal

prices and installed in-house captive power plants. Gas availability through

LNG imports has increased production of Fertilizer & Chemical plants.

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jan

-11

Jul-

11

Dec-

11

Jun

-12

Dec-

12

Jun

-13

Dec-

13

Jun

-14

Dec-

14

Jun

-15

Dec-

15

Jun

-16

Dec-

16

Discount Rate (CY11 to date)


60,000

70,000

80,000

90,000

100,000

110,000

FY11 FY12 FY13 FY14 FY15 FY16

Energy generation (overall) - GWh


15 | P a g e


Deleveraging has trimmed D/E

Fiscal stimuli ahead of elections

Amid low interest rates and rising profitability many sectors have deleveraged,

which in present environment can reverse.

These include GST reduction for tractors, gas price cuts for industries and

potential GST reduction for select consumer products.

0.0%

4.0%

8.0%

12.0%

16.0%

-

1.0

2.0

3.0

4.0

CY0

1

CY0

3

CY0

5

CY0

7

CY0

9

CY1

1

CY1

3

CY1

5

D/E (Lhs) DRSource:

IMS Research

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

Fiscal deficit has risen prior to election year

Fiscal deficit % GDP


ROEs recovery

Cash balances on a high

After bottoming out in FY16, IMS Universe’s cluster ROE is set to rise from FY17

onwards.

IMS Universe’s cash balance has risen 11% over FY13-16, indicating

significant room for expansions or inorganic growth ahead.

0%

5%

10%

15%

20%

25%

2013 2014 2015 2016A/F 2017F

ROE (%)


0

400

800

1,200

1,60020

11

20

12

20

13

20

14

20

15

2016

A/F

20

17

F

20

18

F

20

19

F

20

20

F

(PkRbn)Cash & other liquid assets


CPEC activity commences According to PPIB, about 7,000MW of new generation is targeted to come online before elections.

Sponsor/Co. Name Location Fuel Capacity (MW) Exp COD Remarks

National Power Parks Mgt Co Haveli Bahadur Shah, Punjab RLNG 800 May'17 FCP

National Power Parks Mgt Co Balloki, Punjab RLNG 800 Jul'17 FCP

Quaid-e-Azam Thermal Power Pvt Ltd Bhikki, Punjab RLNG 1,180 Dec'17 FCA/UC

Huaneng Shandong Ruyi (Pak) Energy (Pvt) Ltd* Shahiwal, Punjab Coal (I) 1,320 Dec'17 FCP/UC

SINOHYDRO/Al Mirqab Capital* Port Qasim, Karachi Coal (I) 660 Dec'17" FCA/UC

National Power Parks Mgt Co Balloki, Punjab RLNG 423 Jan'18 FCP

National Power Parks Mgt Co Haveli Bahadur Shah, Punjab RLNG 430 Jan'18 FCP

SINOHYDRO/Al Mirqab Capital* Port Qasim, Karachi Coal (I) 660 Jun'18"" FCA/UC

Engro Powergen Thar Limited* Thar Block-II, Sindh Coal (L) 330 Dec'18" FCA/UC

Hub Power Company Ltd* Thar Block-II Sindh Coal (L) 330 Dec'18 LOSI

Thal Nova Power (Pvt) Ltd* Thar Block-II Sindh Coal (L) 330 Dec'18 LOSI

* CPEC Project "1st Unit/"2nd Unit I (Imported) FCP (Fin Close in progress)

FCA (Fin Close Achieved) UC (Under Construction) L(Local) LOSI (Letter of Support Issued)


16 | P a g e


Macroeconomic adjustment over the medium-term

Higher commodity prices/inflation are typically positive for the Pakistan Market provided

they do not erode the Balance of Payments profile. Despite the emergence of some pressure

points, we remain comfortable on the macroeconomic picture for 2017 but flag potential for

an adjustment cycle in the medium-term, in the aftermath of 2018 elections. In our view,

while the economy will continue to support a bullish stance on the Pakistan Market in 2017,

some deterioration towards end-2017/early 2018 in connection with anticipated pre-election

indiscipline could begin to influence investor sentiment.

No imminent macro concerns for 2017: We are broadly comfortable with the 2017 macro

picture; GDP growth will accelerate, inflation will rise but will likely stay within manageable

levels (c. 4.5%YoY) and interest rates will only increase gradually. While there are nascent

concerns on the Current A/C (deficit has widened by 64%YoY in 4MFY17) and the fiscal

deficit is likely to deteriorate on pre-election profligacy, we believe ample Fx reserves (import

cover: 5m) will keep the PkR in a tight band across 2017.

The post 2017 macro picture: Pressure points that will build in 2017 could impinge on the

market in 2018 – the last two general elections (in 2008 & 2013) have coincided with

macroeconomic adjustments amidst a return to IMF programs. Although the economy is

much better managed than before, there is room for this cycle to repeat in 2018 albeit at a

more measured clip where we do see above-average PkR weakness in the aftermath of

elections. In sum, we believe that the market will not mind the initial macro indiscipline

where sectors such as Banks, Food, Tractors, Autos etc. can benefit ahead of elections; post-

elections, however, we think macros will hurt. Already, recent placement of regulators such

as NEPRA and OGRA under ministerial control points towards potential loss of autonomous

decision making. Smart money could therefore look to trim positions in the Pakistan Market

towards end-CY17.

Fiscal deficit can widen: Historical evidence suggests that fiscal indiscipline tends to take

center stage prior to election year, with FY17 expected to paint a similar picture. Popular

measures like the Punjab Yellow Cab & Green Tractor Scheme proved to be success stories

for the PML-N government (provincial) last time, with similar measures expected in the next

budget as well, especially given the growing political pressure of late and conclusion of the

IMF program. Other measures, which could potentially hurt fiscal balance includes GST

adjustments of local petroleum products and subsidies to Power sector to limit the impact

of higher oil prices.

No imminent concerns on Fx reserves &

hence the PkR

0

20

40

60

80

100

120

0

5,000

10,000

15,000

20,000

25,000

30,000

Jan

-04

Ma

r-05

May-

06

Jul-

07

Se

p-0

8N

ov-

09

Jan

-11

Ma

r-12

May-

13

Jul-

14

Se

p-1

5N

ov-

16

Reserves (US$ mn) PkR/US$- Rhs

Source: Company Reports & IMS Research

BoP crises have historically hurt the Pakistan Market

-

10,000

20,000

30,000

40,000

50,000

-

5,000

10,000

15,000

20,000

25,000

30,000

Jun-0

4

Ma

y-0

5

Ap

r-0

6

Ma

r-07

Feb

-08

Jan

-09

Dec-

09

No

v-10

Oct

-11

Sep

-12

Aug

-13

Jul-

14

Jun-1

5

Ma

y-1

6

Reserves (US$ mn) KSE-100- Rhs


Nascent risks emanating from Remittances

-

500

1,000

1,500

2,000

2,500

Jun

-04

Ap

r-0

5

Feb

-06

De

c-0

6

Oct

-07

Au

g-0

8

Jun

-09

Ap

r-1

0

Feb

-11

De

c-1

1

Oct

-12

Au

g-1

3

Jun

-14

Ap

r-1

5

Feb

-16

De

c-1

6

-

10,000

20,000

30,000

40,000

50,000

KSE-100- Rhs Remittances (US$mn)


17 | P a g e


Potential fiscal incentives ahead of elections

Nascent concerns on the external front: Macro recovery has been swift since

commencement of the IMF program, with leading indicators suggesting acceleration of

growth rate in the medium term. In particular, (i) GDP growth has touched at an 8yr high,

(ii) fiscal deficit has narrowed to around 4% of GDP, and (iii) import cover has surpassed the

5m mark. That said, risks on the external front are now rising, especially with current

account deficit expected to deteriorate to 2% of GDP in FY17F (vs. 1% in FY16),

underpinned by lackluster exports, uptick in machinery and oil related imports, and

slowdown in remittances. Fx reserves are at an all-time high right now, with continuation of

support from foreign loan and assistance likely to contain its depletion next year. This

should help provide support to the PkR prior to elections but adjustment is a case of “when

not if”. This further feeds into our bullish call for 1HCY17 and Neutral outlook for 2HCY17.

No immediate concerns on import cover: SBP reserves are at US$18.2bn, implying an

import cover of more than 5m, despite a slowdown in remittances and a 9%YoY rise in

imports FYTD. Recent rebound in commodity prices and an acceleration in machinery

imports could deteriorate CA deficit-to-GDP from 1% in FY16 to 2% in FY17F. Support to

currency is emanating from a rise in external debt, which is masking the deterioration of

BoT deficit (20%YoY 5MFY17). According to GoP’s Medium Term Debt Strategy, Pakistan is

expected to receive US$6bn through foreign loans, which should limit depletion of Fx

reserves, in our view. 3yr PkR depreciation CAGR has been 2.5%pa vs. average 6.0%pa since

the 1990s. We expect currency weakness to be contained in 3-4% pa range over FY17-18F,

with potential slippage post-election.

Measure Impact (PkRbn)

Maintaining petrol prices at current levels 65

Power Subsidies to maintain current FO power cost 59

Fertilizer Package 46

Apna Rozgar Scheme (similar to 2016) 30

Tractor Scheme 5

Concessional electricity tariff for Agriculture Tube Wells 27

Total impact on fiscal state 231

Total impact on fiscal state as % GDP 1.0%


Debt repayment commences in 2017 (In US$mn) 2017 2018 2019 2020

IMF principal repayments

209 584 917

Interest charges 78 76 67 53

Total IMF repayments 78 285 650 970

Paris Club principal repayments 500 500 500 500

Eurobonds 750 0 2,000 0

Others (including IMF) 2,272 2,007 366 1,713

Total external debt repayments 3,600 3,000 4,100 4,100


Import cover in comfortable zone for now

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-

4

8

12

16

20

Jan-1

3

Aug

-13

Mar-

14

Oct

-14

May-

15

De

c-1

5

Jul-

16

Feb

-17

Sep

-17

Ap

r-18

No

v-1

8

SBP Reserves (US$mn) -Lhs

SBP Import Cover (mths) Source: SBP, IMS Research

18 | P a g e


Index target of 54,500pts for Jun’17

Our index target for Jun’17 is 54,500pts, which will mean a market return of about 16% in

FY17. We arrive at our target using a blend of the following three methodologies:

• Index level based on IMS Universe target prices which leads to an index level of

54,500pts

• Target P/E of 13x based on our expectation that the market will trade at 1 standard

deviation above its historical mean P/E of 10.5x. This leads to an index level of

54,000pts

• Earnings yield of 7.7% would mean an index level of 55,000pts. This is based on the

average 120bps spread of market’s yield over the expected benchmark 12m T-Bill rate

of 6.5%.

Methodology Index Target Weightage

Method 1 Based on IMS Universe Target prices 54,500 33%

Method 2 Targeted P/E of 13x 54,000 33%

Method 3 Earning yield of 7.7% 55,000 33%

Index Target 54,500 Source: IMS Research

In our view, the strong end to CY16 (18% returns in 4QCY16) may well spill over into

1HCY17, pushed by the EM upgrade euphoria, which can lead to our Index target being

met by mid-year. However, 2HCY17 could turn out to be a relative struggle where the Index

could remain range-bound on possible uptick in political noise and anticipated weakness of

some macroeconomic pressures.

Risks to our target:

• The major risk facing the Pakistan Market is politics, specifically the Panama Leaks case

that the Supreme Court is hearing. A decision against the incumbent PML-N

government may lead to uncertainty and could erode confidence in the economy. This

could lead to a sharp correction in the KSE-100 after CY16’s strong 46% return.

• On the global front, US policy towards Pakistan can witness a reorientation after

President-Elect Trump’s election. While the Republican Party’s manifesto calls for

continued engagement with Pakistan, it also hints at a “do more” setting.

• Pakistan currently trades at a 15.5% discount to the MSCI EM Index and we expect this

discount to continue narrowing. That said, we do not expect Pakistan to trade at a

premium to the broader EM space where a global equities correction could trigger

selling pressure at the KSE-100 as well.

• Local liquidity dynamics are strong and should continue to absorb foreign selling

pressure. However, if domestic sentiments are unnerved, perhaps due to political

volatility or macroeconomic deterioration, it could lead to a correction at the PSX.

• China A shares were not included in the MSCI EM Index last year but can potentially

make the grade going forward. This would further shrink Pakistan’s weight in the EM

Index and may cause Active funds to continue ignoring the market.

• Sector-specific threats include: (i) Oil prices coming under pressure – potentially from

shale production diluting effect of any production cuts by the OPEC and (ii) potential

Chinese entry in several industries, particularly in the Construction space.

Upside risks include: (i) Amicable end to the Panama Leaks hearing, (ii) greater CPEC

visibility, (iii) greater than expected FPI inflow post EM upgrade, (iv) swift product

development at PSX under new operators, (v) better than expected macroeconomic

performance and (vi) higher than expected corporate profitability growth.

19 | P a g e


Sector Outlook

20 | P a g e


E&Ps: (Market Weight)

We expect E&Ps to post earnings growth of 25-30% in FY17F on the back of significant growth in oil production, complemented by

higher oil prices and conversion of many key gas fields to newer pricing policies. We are also optimistic about the prospects of

exploration for Pak E&Ps (except POL) which are ramping up activity in high potential areas in Baluchistan and KPK. That said, only

OGDC is trading at attractive valuations. POL and PPL are both trading close to regional peer average EV/EBITDA of about 7.0x.

Banks: (Market Weight)

Pakistan Banks enter 2017 in the most supportive backdrop; interest rates are poised to inch higher, loan growth is accelerating with

credit costs moving in the opposite direction, and further regulatory clampdown on spreads appears unlikely. Earnings growth,

however, will come with a lag on account of reinvestment of high yielding PIBs at lower rates. MSCI EM and a growing economy

should keep Banks in the limelight. For the IMS Banking Universe, CY17F Tier-I PB/PE of 1.8x/9.5x drops to 1.6x/8.8x on CY18F.

Cements: (Market Weight)

We expect Cements to post earnings growth of 14-15% in FY17F on the back of rising local demand and continuous energy

efficiencies. With rising utilization levels (+90%), ability of passing on coal prices has increased within the industry. Moreover,

increasing government focus towards development expenditure and initial CPEC led demand can keep local dispatches growth in

double digits; only CHCC would be able to enjoy above industry demand growth on commencement of its line II in Dec’16.

Fertilizers: (Under Weight)

We expect Fertilizer dynamics to remain weak during CY17 amid weak pricing power and substantial inventory at hand. Availability

of subsidy on Urea and DAP would keep demand robust but at the expense of restricted pricing power amid tough competition. To

recall, GoP announced MRP of PkR1,400/bag for Urea fertilizers in FY17 budget. We project restricted earnings growth within IMS

Fertilizer Universe to the tune of 3-4%. Later half of CY17 would be dependent upon allowance of Urea exports.

Power: (Under Weight)

IPPs’ main attraction of dividend yield remains high (9-12%), but this will likely diminish in 2017 as soon as interest rate lift off

commences. Growth element is only present in NPL and HUBC which may warrant further upside. In case of Hubco, its final tariff on

330MW plant and clarity on stake in CPHGCL will create further room; NPL’s tariff determination and financial close are awaited.

Rising oil prices will also be positive for Nishat IPPs but may create cash flow issues for the larger IPPs, and inefficiency losses of

Lalpir/Pakgen will increase. Details of Kapco’s privatization is the most crucial element for that IPP.

Oil Marketing: (Over Weight)

Volume growth will continue into 2017 because of greater economic activity and robust consumer demand, not to forget superb

auto sales in 2016. Investment in storage will be a key determinant of market share gains/attritions where the incumbents are most

aggressive. Rising oil prices will have a profound effect on earnings through big inventory gains because of large volume sales in last

two years and increased storage. In case of PSO, cash flow constraints may build up in the face of rising oil prices and its effect on

circular debt. Pre-election fiscal slippages will also put pressure on the buildup, in our view.

Autos: (Market Weight)

We expect Pakistan Autos to continue to post double digit volumetric growth on a cumulative basis amid conducive environment for

Auto Sales (rising rural incomes and auto financing). On the margins front, Auto OEMs should be able to sustain the current GMs

given the JPY weakness and pricing power. Having said that, Pakistan Autos are trading at a forward P/E of 12x at a slight premium

to the market (KSE100 PE: 11.5x) leaving little room for upside, in our view. We expect PSMC to remain under limelight ahead of a

likely announcement for expansion.

21 | P a g e


Tractors: (Market Weight)

Pakistan Tractors are expected to continue to leverage the decrease in retail price of Tractors as a result of decrease in GST. Although

we expect the current volumetric growth momentum to taper off, the growth will still remain impressive amid pro-agri policies ahead

of 2018 elections. The sector is likely to remain in limelight on the expectations of incentives for farmers before elections where the

possibility of a Tractor Scheme cannot be ruled out (Tractor scheme was introduced by Punjab Govt. before last elections, any repeat

scheme is not built in our estimates for either MTL or AGTL).

Textiles: (Under Weight)

We expect continuation of current composition of Textile exports where value added segment constitutes 70%. Moderate

improvement in exports revenue is expected in both segments amid better quality cotton production estimates for FY17, which will

translate into competitive quality product and hence premium prices. But the quantum of benefit will be restrained as we expect only

moderate depreciation (5%) of PkR against US$ for FY17. Margins are expected to stay range bound given higher costs of production

on account of higher fuel cost and volatile cotton prices. The much awaited GoP’s proposed textile package worth ~PkR70bn

(effectively doubling exports rebate and issuance of sales tax refunds) might not pull the exports to great extent as it does not seem

to eradicate the key depressants of textile manufacturers; intra-province gas price disparity and inflated PkR against US$.

Consumer: (Over Weight)

Rising commodity prices and improving outlook for farmer income will lead to rebound in demand for consumer products, which

have had a tough time over the past couple of years. They are likely to enter into a high sales growth period with higher inflation

pushing revenues. In light of the Pakistan market’s upgrade to the EM index, Consumer Staple stocks will find greater interest in

2017, where we believe valuations will not be a major concern for investors.

Pharma: (Market Weight)

The sector is expected to perform well on the back of volumetric gains, despite DRAP allowing a very meager increase in prices. The

volumetric growth in the upcoming year is fueled by the growing demand amid uptick in economy. The high GMs (average 36%)

would continue to post favorable earnings growth in the year ahead but an increasing trend in the input prices could pose a threat

to margins. We see a concentration in the product portfolios as a hindrance to growth in the industry but recent attempts to diversify

the portfolios could mitigate that. The sector currently trades at a trailing PE of around 30x but this may compress owing to earnings

growth ahead. Key risk is government crack down on pricing ahead of elections.

Insurance: (Market Weight)

Similar to Banks, Pakistan’s Insurance sector is also well leveraged to the growth cycle, with execution of CPEC and materialization of

the corporate expansion phase to support premiums growth in the medium term. Moreover, improved security environment and

macro dynamics should also keep claim ratio in check, leading to an uptick in core profitability of non-life insurance companies

across the board. Imposition of stringent tax measures in the last budget, however, are a dampener.

Steel: (Over Weight)

We expect the steel sector (especially the rebar space) to duplicate the growth of cement sector. Once the expansions (ASTL) come

live, it will unlock the real potential and post growth of more than 40% in terms of EPS . The cheap Chinese imports are expected to

diminish given both regulatory and anti-dumping duty in place. Moreover, heavy investments in the power sector will settle low-

utilization predicament which has been a concern for the Northern producers until now.

22 | P a g e


Top Picks

23 | P a g e

Oil & Gas Dev Co Ltd Rating: Buy TP- PkR191

Muhammad Saad Ali, CFA

[email protected]

Oil & Gas Development Company Limited

Price (PkR/sh) 165.35

TP (PkR/sh) 191.00

Stance Buy

Upside 15.5%

Fwd D/Y 4.2%

Total Return 19.7%

Bloomberg / Reuters OGDC PA / OGDC.KA

Mkt Cap (US$mn) 6,799.5

52wk Hi-Low (PkR/sh) 166.53-95.58

3m Avg. D. Vol ('000 shrs) 2,793

3m Avg. Td Val (US$mn) 4.10

Oil production growth underpins earnings growth

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OGDC KSE-100 Index


Best exposure to sector positives

Earnings growth rebound after two red years

We estimate OGDC to post earnings growth of 32% in FY17F, which is driven largely by an expected 47%YoY rise in oil production this year, complemented by rising oil prices (assumed US$50/bbl). KPD-TAY Phase II, Nashpa, Makori East, Mardankhel will be the major oil additions. Moreover, migration of discoveries between FY08-12 to newer policies will enhance gas prices, though the impact will be relatively modest compared to peers (we estimate PkR0.60/sh on a recurring basis).

Well positioned amid strong exploration trends

OGDC has the largest exploration acreage, which is favorable because dynamics

on that front have improved tremendously. Particularly, security concerns have

eased and service costs have fallen 20-25% in recent years. This has encouraged

OGDC to ramp up activity in high risk areas – Baluchistan and KPK specifically,

which are home to some of the largest hydrocarbon assets in Pakistan. Still,

OGDC has had a better track record at reserve replacement and success rate

than listed peers.

Discount to peers overlook merits

OGDC is presently trading at a 32%/29% discount of local/regional peers. While

PPL and POL have been propelled by Sui and oil prices respectively, we believe

market has overlooked the superior risk/reward profile of OGDC based on low

concentration risk, aggressive exploration program and superior reserves life.

Triggers

• Frequency and size of discoveries may improve going forward

• Potential acquisition of foreign assets given low costs thereof

• OGDC taps into its large undeveloped reserves (Zin, for instance)

Risks

• Lower than expected oil prices

• Large dry well costs as OGDC heads into high risk/cost areas

• Imposition of windfall levy on oil production of Nashpa field

• Continued foreign selling in the name

OGDC - Financial Snapshot

(PkR mn) FY15A FY16A FY17F FY18F FY19F

Sales 210,625 162,867 226,475 255,976 258,390

Sales growth -18.0% -22.7% 39.1% 13.0% 0.9%

Npat 87,249 59,971 79,304 99,977 103,509

Npat growth -29.6% -31.3% 32.2% 26.1% 3.5%

EPS (PkR) 20.29 13.94 18.44 23.25 24.07

PER (x) 8.15 11.86 8.97 7.11 6.87

DPS (PkR) 7.75 5.20 7.00 9.00 14.00

DY (%) 4.7% 3.1% 4.2% 5.4% 8.5%

PBV (x) 1.61 1.49 1.35 1.21 1.12

ROE (%) 19.7% 12.5% 15.0% 17.0% 16.4%

EV/EBITDA (x) 5.0 7.3 4.9 3.9 3.6

Gross Margin 74.2% 68.7% 69.8% 71.1% 71.4%

Net Margin 41.4% 36.8% 35.0% 39.1% 40.1%


24 | P a g e

Bank Alfalah Limited Rating: Buy TP- PkR42

Abdul Ghani Fatani

[email protected] Large bank trading at medium bank valuations

Better positioned for the next credit cycle

BAFL missed out on the last credit cycle (CY03-07) as it was undergoing an expansion phase. Given the bank is now fully geared up with a network of 655 branches, it is set to capitalize on the upcoming fresh credit cycle by catering to both the big ticket projects and the lower strata (SMEs/commercial). We conservatively expect BAFL to post loan growth of 12-13% in the next 2 years. That said, with CAR at 13.5%, scalability and aggressiveness to lend can be contained.

Right ingredients for a top-tier bank

BAFL has emerged as one of the top quality banks in the country given its

transformation in the past few years. In particular, (i) ROEs are now in the

process of converging to top tier levels, (ii) CASA has touched a decade high

(75%), and (iii) asset quality has improved significantly despite having a sizeable

SME exposure (NPL ratio: 5.4%). On the flipside some of the shortcomings, not

alarming though, include (i) high Cost/Income as part of efforts to

technologically upgrade and integrate branch network, and (ii) lower payouts

with CAR at 13.5% (lower than peers).

Valuation discount is unjustified

BAFL currently trades at a P/B of 0.93x and P/E 7.18x (CY18F: 6.95x), implying a

discount of 50% to the larger private banks. With potential convergence of

ROEs and key metrics, valuation discount should narrow down, in our view. Our

Dec’17 TP of PkR42/sh offers potential upside of 11% (total return; 16%), with

possible push beyond this on account of the MSCI rerating effect.

Triggers

• Active participation in the upcoming fresh credit cycle.

• Quicker than expected interest rate increases.

• Limited international exposure (Pakistan centric).

Risks

• Contained loan growth given CAR at 13.5%.

• High Cost/Income with no turnaround expected in the next year.

BAFL – Financial Projections

(PkR mn) CY14 CY15 CY16F CY17F CY18F

NII 21,873 28,614 28,505 29,508 31,932

NII growth 29.5% 30.8% -0.4% 3.5% 8.2%

Npat 5,641 7,503 7,966 8,269 8,540

Npat growth 20.6% 33.0% 6.2% 3.8% 3.3%

EPS (PkR) 3.54 4.70 4.99 5.18 5.35

PER (x) 10.72 8.08 7.61 7.33 7.10

DPS (PkR) 2.00 1.00 1.00 1.00 1.25

DY (%) 5.3% 2.6% 2.6% 2.6% 3.3%

BVPS (PkR) 28.10 33.91 36.52 39.87 43.75

PBV (x) 1.35 1.12 1.04 0.95 0.87

ROE (%) 14.7% 15.2% 14.2% 13.6% 12.8%

Loan growth 11.0% 15.0% 12.0% 12.5% 13.0%

Deposit growth 15.3% 5.6% 7.6% 11.0% 11.8%


Bank Alfalah Limited


TP (PkR/sh) 42.00

Stance Buy

Upside 10.6%

Fwd D/Y (CY16+CY17) 5.3%

Total Return 15.9%

Bloomberg / Reuters BAFL PA / BAFL.KA

Mkt Cap (US$mn) 579.0

52wk Hi-Low (PkR/sh) 38-23.88

3m Avg. D. Vol ('000 shrs) 2,663


Operational efficiencies are coming into play

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25 | P a g e

National Bank of Pakistan Rating: Buy TP- PkR89

Abdul Ghani Fatani

[email protected]

NBP – Financial Projections


NII 30,305 35,104 32,504 34,612 36,057

NII growth 16.8% 15.8% -7.4% 6.5% 4.2%

Npat 16,085 20,043 20,664 22,144 24,151

Npat growth 204.9% 24.6% 3.1% 7.2% 9.1%

EPS (PkR) 7.56 9.42 9.71 10.41 11.35

PER (x) 9.91 7.95 7.71 7.19 6.60

DPS (PkR) 5.50 7.50 7.50 7.75 8.00

DY (%) 7.3% 10.0% 10.0% 10.3% 10.7%

BVPS (PkR) 85.82 80.68 83.61 85.52 88.70

PBV (x) 0.87 0.93 0.90 0.88 0.84

ROE (%) 9.4% 11.3% 11.8% 12.3% 13.0%

Loan growth 2.0% -8.0% 11.0% 12.0% 13.0%

Deposit growth 12.0% 16.0% 10.0% 12.0% 11.0%


Turnaround can sustain

On a higher growth trajectory

NBP continues to outperform the other large peer banks in terms of profitability growth (21%YoY vs. flat for Big-6 ex. NBP) in 9MCY16. This is a function of the ongoing turnaround, substantiated by (i) improved asset quality (NPL ratio has come off by 2.3ppt to 17.8%, with coverage of 88% to limit credit costs, going forward), (ii) enhanced cost efficiencies (with impetus from possible net retirement of 5,000 employees over the next few years), (iii) robust growth in fee income (support to come from introduction of bancassurance in over 600 branches, introduction of debit/credit cards, increasing footprint of tax and GoP fee collection beyond 600 branches to over 100,000 agents and ATMs.

ROEs on an uptick

Given NBP’s sufficient capital buffer (CAR: 18%), NBP can participate in the

upcoming fresh credit cycle (especially in public sector project) without

compromising on the impressive payout. ROEs will continue to notch up to

12.3%/13.0% in CY17/18F, in our view.

Valuation should catch up

NBP currently trades at a P/B of 0.88x (CY18F: 0.84x) and P/E of 7.19x (CY18F:

6.60x), where (i) classification into the MSCI EM Small Index, (ii) faster rerating

potential given the widening valuation discount, and (iii) standout dividend

yield (10%+), could lead to stock outperformance next year. Our Dec’17 TP of

PkR89/sh offers an upside of 19%.

Triggers

• Active participation in the upcoming fresh credit cycle.

• Significant capital gains buffer.

• Improved asset quality (contained credit costs).

Risks

• Possible politically influenced lending.

• High deposit costs.

• Operational inefficiencies.

National Bank of Pakistan


TP (PkR/sh) 89.00

Stance Buy

Upside 18.8%

Fwd D/Y (CY16+CY17) 20.4%

Total Return 39.2%

Bloomberg / Reuters NBP PA / NBPK.KA


52wk Hi-Low (PkR/sh) 76.11-51.17

3m Avg. D. Vol ('000 shrs) 1,959


NBP's turnaround

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26 | P a g e

United Bank Limited Rating: Buy TP- PkR260

Abdul Ghani Fatani

[email protected] Differentiated franchise

Fundamentals heading right

Rebound in interest rates, bottoming out of NIMs, and improved cost efficiencies could lead UBL to experience a gradual uptick in ROEs beyond CY17F. Surprises can occur on higher capital gains and lower-than-expected loan provisioning as seen in the last few quarters (e.g. MCB has posted reversals in 7 out of the last 10 quarters).

Recent uptick in ME loan book implies growing confidence, as substantiated by no further build up in NPLs internationally. With domestic NPL recoveries (PkR2bn CYTD) trend likely to extend, prospects for loan provisioning reversals next year can support ROEs. We feel concerns on Yemen exposure do not hold weight, supported by high coverage and book cleanup exercise.

Upbeat on loan growth prospects

Loan growth has clocked in at 10%YoY, driven majorly by domestic

commodities and international operations (majorly trade), with likely impetus

(14% in the next 1-2 yrs) from participation in the macro up cycle and growing

CPEC related activities.

Upside remains despite recent bull run up

UBL currently trades at CY17F P/B of 1.62x (CY18F: 1.53x) and P/E of 10.1x

(CY18F: 9.5x), where valuations look attractive yet again as the bank is at a 5%

discount to peer banks despite standout 9MCY16 performance. Our TP of

PkR260/sh offers a total return of 16%, implying a Buy stance with a potential

MSCI rerating effect to unlock further valuation upside

Triggers

• Improvement in int’l operations (asset quality & profitability).

• Robust loan growth.

• Sizeable capital gains potential.

Risks

• Deterioration in overseas asset quality.

• Further deceleration in remittances from the ME.

UBL – Financial Projections


NII 46,914 57,859 58,333 60,328 63,856

NII growth 18.7% 23.3% 0.8% 3.4% 5.8%

Npat 23,648 26,154 27,591 28,826 30,660

Npat growth 22.6% 10.6% 5.5% 4.5% 6.4%

EPS (PkR) 19.32 21.36 22.54 23.55 25.05

PER (x) 12.37 11.18 10.60 10.14 9.54

DPS (PkR) 11.50 13.00 13.00 13.50 14.00

DY (%) 4.8% 5.4% 5.4% 5.7% 5.9%

BVPS (PkR) 112.30 127.10 140.38 147.59 156.09

PBV (x) 2.13 1.88 1.70 1.62 1.53

ROE (%) 19.0% 17.9% 16.9% 16.4% 16.5%

Loan growth 13.0% 4.0% 11.9% 14.0% 16.0%

Deposit growth 7.0% 18.0% 9.9% 12.0% 13.0%


United Bank Limited


TP (PkR/sh) 260.00

Stance Buy

Upside 8.8%

Fwd D/Y (4Q16+CY17) 7.3%

Total Return 16.2%

Bloomberg / Reuters UBL PA / UBL.KA


52wk Hi-Low (PkR/sh) 240.17-143.69

3m Avg. D. Vol ('000 shrs) 972


Loan Provisions trend

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27 | P a g e

Lucky Cement Limited Rating: Under-Review

Abdul Samad Khanani

[email protected] Transforming business profile

Best exposure to construction up-cycle

LUCK being the second largest cement player by capacity has announced dual expansions both in North (2.3mn tons) and South (1.2mn tons). Moreover, it has announced its intention to acquire DCL’s North plant which may allow the company to re-locate its North expansion. Besides highest cost efficiencies, we believe LUCK is set to regain its spot of largest cement player in Pakistan.

Massive diversification plans

Besides best in class cement operations, LUCK has announced JV with Kia

Motors, doubling of grinding capacity in Iraq, and 660MW coal fired IPP. LUCK’s

1.1mn ton DRC plant has already commenced operation. Exposure in ICI (56%

owned subsidiary) allows LUCK to capitalize on other market segments like

chemicals, consumers and pharmaceuticals.

Conglomerate profile demands premium

We have not incorporated LUCK’s South expansion and recently announced

ventures with Kia Motors and DCL plant. While we have an under review stance

on the stock, incorporation of such ventures would take our TP higher by about

PkR100-140/sh (our last TP stood at PkR817/sh). LUCK is currently trading at

FY17/18F P/E of 14.5/12.1x, where premium valuations are a function of (i)

diversified portfolio operations (ii) best in class cement operations, and (iii)

regional diversification.

Triggers

• Incorporation of JV with Kia motors. ROEs are expected at +15%.

• Dual expansion would further increase LUCK’s contribution from cement operations.

• ICI’s continuous diversification to help in LUCK’s re-rating.

Risks

• Delay in execution of cement expansions.

• Delay in financial close of Lucky Electric.

• Disruption in local cement pricing mechanism.

• Political volatility in international markets (especially in DRC)

LUCK- Financial Snapshot


Sales 82,118 82,150 86,976 92,608 102,853

Sales growth 1.2% 0.0% 5.9% 6.5% 11.1%

Npat 14,655 15,991 19,338 23,232 25,572

Npat growth 16.6% 9.1% 20.9% 20.1% 10.1%

EPS (PkR) 45.32 49.45 59.80 71.84 79.08

PER (x) 19.11 17.52 14.49 12.06 10.95

DPS (PkR) 9.00 10.00 12.00 13.00 15.00

DY (%) 1.0% 1.2% 1.4% 1.5% 1.7%

PBV (x) 4.09 3.44 2.82 2.28 1.87

ROE (%) 21.4% 19.6% 19.5% 18.9% 17.1%

EV/EBITDA (x) 10.87 9.93 8.26 7.79 7.75

Gross Margin 31.3% 34.0% 35.4% 36.1% 35.1%

Net Margin 17.8% 19.5% 22.2% 25.1% 24.9%


Lucky Cement Limited


Stance Under-Review

Bloomberg / Reuters LUCK PA / LUKC.KA


52wk Hi-Low (PkR/sh) 871.64-448.88



Valuation Contribution

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28 | P a g e

DG Khan Cement Co Ltd. Rating: Buy TP- PkR254

Abdul Samad Khanani

[email protected] Most attractive valuations within large-cap Cements

Multiple expansions to lead the way

We expect DGKC’s earnings to grow at 5yr CAGR of 14%. Converging exports, staggering growth in the local market and energy efficiencies through coal fired plant would play a key role, in our view. Upcoming expansion in South would make DGKC second player after LUCK to have regional diversification.

Blended portfolio keeps sizeable bottom-line intact

DGKC’s portfolio contribution from various sectors like banking, financial

services, textile, dairy and packaging accumulates to PkR73/sh (29% of our

target price). It also contributes ~21% to the bottom-line (EPS: PkR4.8) which

remains a distinctive feature against industry headwinds. We have applied a

30% conglomerate discount on DGKC’s listed portfolio.

Unmatched discount to peers

DGKC is currently trading at an unjustified discount of around 30% on core

EV/EBITDA vs. cement sector. We believe regional diversification, energy

efficiencies, top of the line gross margins, sizeable export contribution and

portfolio earnings support are major reasons demanding premium over

industry valuations. DGKC remains most attractive in terms of its valuations with

forward P/E of 10.0x vs. 13.4x of IMS Cement Universe (Ex. FCCL).

Triggers

• Upcoming expansion in South by FY18 and its tax credits.

• Converting export to high margin local sales.

• Planned expansion at DG Khan site of 2.1mn tons currently not incorporated in our estimates.

Risks

• Delay in execution of South expansion.

• Disruption in cement pricing mechanism.

• Difficulty in passing-on the impact of increasing coal prices.

DGKC- Financial Snapshot


Sales 26,105 29,704 32,235 33,312 49,335

Sales growth -1.6% 13.8% 8.5% 3.3% 48.1%

Npat 7,625 8,790 9,727 10,486 13,002

Npat growth 27.8% 15.3% 10.7% 7.8% 24.0%

EPS (PkR) 17.40 20.06 22.20 23.93 29.68

PER (x) 12.74 11.05 9.99 9.26 7.47

DPS (PkR) 5.00 7.00 7.00 7.00 7.00

DY (%) 2.3% 3.2% 3.2% 3.2% 3.2%

PBV (x) 1.56 1.48 1.27 1.15 1.03

ROE (%) 12.2% 13.4% 12.7% 12.5% 13.8%

EV/EBITDA (x) 6.43 5.42 5.12 5.59 3.34

Gross Margin 36.2% 42.6% 42.4% 42.1% 36.6%

Net Margin 29.2% 29.6% 30.2% 31.5% 26.4%


D.G. Khan Cement Company Limited


TP (PkR/sh) 253.81

Stance Buy

Upside 14.5%

Fwd D/Y 3.2%

Total Return 17.6%

Bloomberg / Reuters DGKC PA / DGKH.KA


52wk Hi-Low (PkR/sh) 221.73-143.77

3m Avg. D. Vol ('000 shrs) 2,680


Core & Non-core earnings contribution

0%

10%

20%

30%

40%

50%

0

10

20

30

40

FY14 FY15 FY16 FY17F FY18F FY19F

Core EPS Portfolio EPS GMs (Rhs)

PkR



-25%

0%

25%

50%

75%

Jan

-16

Feb

-16

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-16

Ap

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6

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DGKC KSE-100 Index


29 | P a g e

Amreli Steels Limited Rating: Buy TP- PkR79

Syed Waqas Imam

[email protected] Expansion to propel growth story

Expansion to drive volumetric growth

The green-field expansion to add 300,000tons to existing capacity is the major impetus coupled with a construction uptick prevalent in the economy. The expansion at Dhabeji brings about a set of operational cost-savings of about PkR1500/ton to further elevate the Gross margins. Moreover, the earnings are expected to take a considerable jump on the back of tax rebates specified on equity financed new plants.

2HFY17 to fare well in comparison to 1HFY17

The run-up in the coal prices has finally settled which brings down the unusual

rally in the scrap prices. Generally, winter season prompts a rise in scrap prices

but it was aggravated due to soaring coal prices. Moreover, the sluggish real

estate activities negatively contributed to the 1QFY17 results. Now that the

amnesty scheme is sanctioned by GoP, the demand revival could provide

support to earnings beyond 2nd half. Furthermore, the company might have

room to increase prices by PkR2500/ton in the upcoming months.

Premium valuations but compresses once expansion kicks in

ASTL currently trades at a FY17F PE of 16.65x but this compresses to 9.26x in

FY18. However, ASTL justifiably commands a premium due to its prized brand

equity and smooth power supply advantage against Northern producers. Our

Jun’17 TP of PkR 79/sh offers a potential upside of 18.6% along with D/Y of 3%.

Triggers

• Expansion at Dhabeji of 300,000tons to bring multiple cost-savings

• Tax rebates to propel the earnings

• Additional 15% regulatory duty on the imports

• A potential price increase beyond Jan’17

Risks

• Withdrawal of 15% additional RD on imports

• Further delays in COD of expansion

• Rise in scrap prices due to global demand uptick

ASTL- Financial Snapshot


Sales 14,414 12,400 11,978 19,994 23,976

Sales growth 20.5% -14.0% -3.4% 66.9% 19.9%

Npat 1,012 1,279 1,188 2,137 2,615

Npat growth 300.9% 26.4% -7.1% 79.9% 22.4%

EPS (PkR) 3.41 4.31 4.00 7.19 8.80

PER (x) 19.54 15.47 16.65 9.26 7.56

DPS (PkR) - 2.00 2.00 3.00 3.52

DY (%) 0.0% 3.0% 3.0% 4.5% 5.3%

PBV (x) 3.37 1.85 1.75 1.58 1.40

ROE (%) 17.2% 12.0% 10.5% 17.1% 18.5%

EV/EBITDA (x) 10.75 9.49 9.36 6.09 4.99

Gross Margin 19.2% 25.2% 22.5% 20.7% 20.0%

Net Margin 7.0% 10.3% 9.9% 10.7% 10.9%


Amreli Steels Limited


TP (PkR/sh) 79.00

Stance Buy

Upside 18.6%

Fwd D/Y 3.0%

Total Return 21.6%

Bloomberg / Reuters ASTL PA / AMST.KA


52wk Hi-Low (PkR/sh) 76.92-44.21



Capacity Utilization

0%

25%

50%

75%

100%

-

100,000

200,000

300,000

400,000

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY16F

FY17F

FY18F

FY19F

FY20F

Total Capacity Total ProductionUtilization rate (Lhs)

'000'ton



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-25%

0%

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Jan

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Ap

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ASTL KSE-100 Index



Sells

31 | P a g e

Al-Ghazi Tractors Limited Rating: Sell TP- PkR448

Muneeb Naseem

[email protected] Premium Valuations despite less exciting prospects

Sales Growth likely to normalize going forward

IMS Tractor universe has observed remarkable sales growth (up 52% YoY) as a result of decline in market price of tractors after GOP reduced GST on tractors in FY17 budget. Al-Ghazi Tractors (AGTL) maintained its market share at 39% keeping pace with the growth in industry by posting growth of 75%. Although the sales growth has been higher than our expectation, we believe that the current trajectory will normalize going forward as seen in 2013.

Dividends still attractive but not as much

AGTL paid a hefty dividend of PkR75/sh in CY15 utilizing its cash rich balance

sheet and favorable credit cycle; this was followed by an interim dividend of

PkR50/sh in CY16, gradually replenishing lowering the huge cash of the

company (last reported cash is PkR495mn). We believe that the possibility of

such high dividend payout going forward seems thin given the normal cash

cycle of the company. Despite attractive D/Y of 7.1%, the reason for historical

premium assigned to the company due to high payout ratio (CY15: 309%) does

not exist anymore.

Relatively unexciting prospects warrant discount instead of premium

AGTL is currently trading at a CY17F PE/PS of 13.0x/2.2x, shedding 19% from its

CY16 high. We believe AGTL should trade at a discount to MTL because of

dependence on local agri-dynamics and relatively lesser brand equity than MTL.

Our Dec’17 TP of PkR492/sh offers a 21.5% downside to the current price

implying a Sell stance. However, any announcement of provincial tractor

scheme ahead of elections would lead us to revise our estimates and stance.

Triggers

• Prospects for exports.

• Diversification in other areas.

• Release of Government refunds.

• Announcement of provincial tractor scheme.

Risks

• Unfavorable change in GST Regime.

• Natural Disaster or Crop damage.

AGTL- Financial Snapshot

(PkR mn) CY15A CY16F CY17F CY18F CY19F

Sales 9,636 12,298 15,348 17,868 20,623

Sales growth 9.7% 27.6% 24.8% 16.4% 15.4%

Npat 1,592 2,069 2,552 2,856 3,089

Npat growth 1.1% 29.9% 23.4% 11.9% 8.2%

EPS (PkR) 27.47 35.69 44.02 49.28 53.29

PER (x) 20.78 15.99 12.96 11.58 10.71

DPS (PkR) 85.00 50.00 40.36 45.77 49.24

DY (%) 14.9% 8.8% 7.1% 8.0% 8.6%

PBV (x) 5.72 6.67 7.18 6.81 6.81

ROE (%) 27.5% 41.7% 55.3% 58.8% 63.6%

EV/EBITDA (x) 15.27 10.53 8.76 7.84 7.34

Gross Margin 25.9% 26.3% 26.2% 25.5% 24.2%

Net Margin 16.5% 16.8% 16.6% 16.0% 15.0%


Al-Ghazi Tractors Limited


TP (PkR/sh) 448.00

Stance Sell

Upside -21.5%

Fwd D/Y 7.1%

Total Return -14.4%

Bloomberg / Reuters AGTL PA / ALGH.KA


52wk Hi-Low (PkR/sh) 702.29-378.08



Depleting cash reserves...

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0

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Se

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(PkRmn)

Cash - Lhs Cash/sh



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AGTL KSE-100 Index


32 | P a g e

Pakistan Oilfields Limited Rating: Sell TP- PkR461

Muhammad Saad Ali, CFA

[email protected] Near-term earnings/payout disguise weaknesses

Valuation premium is not warranted

POL is trading at 35% premium to OGDC (EV/EBITDA) based on its high sensitivity to oil prices and thus better earnings growth prospects in the near term, in addition to its attractive dividend yields of 9-11% over FY17-19F. This, however, discounts POL’s high concentration risk, and combination of low reserve life and unimpressive exploration plans, in our view. These can manifest in steep production decline as growth in Tal block slows in future. The stock offers a potential downside of 14% to our target price.

Less focus on exploration is a dampener

POL is the most passive E&P among the listed peers, with recent success

derived mostly from that of MOL’s activity in Tal. In the last 10 years, for

instance, it has drilled about 7 exploratory well in its operated fields. Tal block,

though one of the most lucrative finds in the past decade, constitutes over 70%

of POL’s revenue; which itself is concentrated among three fields only. Such

high concentration risk manifested twice in the past decade – Pindori and

Manzalai. POL’s reserve life of about 9 years is also the lowest among peers.

These factors paint a weak outlook for production sustainability in the long run.

Near term earnings/payout may limit downside

POL’s dividend yields of 9-11% over FY17-19F will remain attractive in the face

of rising interest rates likely in 2017. Also, OGDC/PPLs’ DY not only are low at 4-

7%, but also may come under pressure if circular debt rears its head again in

2017; GoP may halt power sector reforms ahead of elections, in our view.

Triggers

• Production surprises from Tal block and fresh discoveries

• Exploration success in Ikhlas block

• Imposition of windfall levy on oil production of Nashpa field

Risks

• Earlier than expected production decline

• Lower oil prices than forecasted

• Dry wells

POL- Financial Snapshot


Sales 30,881 24,848 28,808 35,196 35,972

Sales growth -13.1% -19.5% 15.9% 22.2% 2.2%

Npat 8,459 7,234 8,886 13,299 14,046

Npat growth -34.4% -14.5% 22.8% 49.7% 5.6%

EPS (PkR) 35.76 30.58 37.57 56.22 59.38

PER (x) 14.95 17.48 14.23 9.51 9.00

DPS (PkR) 40.00 35.00 38.00 53.00 56.00

DY (%) 7.5% 6.5% 7.1% 9.9% 10.5%

PBV (x) 3.91 4.19 4.21 4.10 4.00

ROE (%) 26.1% 24.0% 29.6% 43.2% 44.4%

EV/EBITDA (x) 5.40 7.46 6.62 4.94 4.62

Gross Margin 66.5% 60.7% 61.0% 65.2% 65.9%

Net Margin 27.4% 29.1% 30.8% 37.8% 39.0%


Pakistan Oilfields Limited


TP (PkR/sh) 461.00

Stance Sell

Upside -13.8%

Fwd D/Y 7.1%

Total Return -6.7%

Bloomberg / Reuters POL PA / PKOL.KA


52wk Hi-Low (PkR/sh) 559.58-189.67



POL's reserve life (yrs) is the shortest among peers

8.94

4.64

7.00

0.00

4.50

7.31

Overall

Manzalai

Makori

Mamikhel

Maramzai

Makori East

Source: PPIS, IMS Research


-50%

-25%

0%

25%

50%

75%

100%

125%

Jan

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Ap

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POL KSE-100 Index


33 | P a g e

Honda Atlas Cars Pak Ltd Rating: Sell TP- PkR505

Muneeb Naseem

[email protected] Valuations too stretched amid new model frenzy

Impressive growth likely to be followed by sharp decline in sales

Honda Atlas Cars (HCAR) has shown tremendous sales growth following the launch of new 10th generation Civic with a 48% YoY growth in 5MFY17. This growth trend is inline with our expectations where we have seen similar uptick in sales in the past after introduction of the new model (118% growth was observed in the first 7 months when New Civic model was launched in Sep’12 followed by 20% YoY decline in volumes next year). On a similar trend, we expect the sales to normalize as the new model frenzy ends and hence forecast a decline in earnings in MY18 (EPS: MY17F: PkR48.2, MY18F: PkR41.6).

Premium to peers unjustified

HCAR is currently trading at MY17F P/E of 13.9x, at a 17% premium to Auto

sector and broader market. This premium overlooks the likelihood of a

declining earnings going forward as well as relatively greater vulnerability to the

competition beyond 2018 when competitors like Renault, Audi etc. potentially

start rolling out in the local market. Moreover HCAR has the lowest localization

levels among the Auto OEMs (close to 30%) and hence the most volatile

margins as has been observed in the past which raises concerns on the

sustainability of current margins in the long run as well.

What can justify current valuations

HCAR’s current valuations can be justified by more frequent introduction of

newer models, which have fetched premium valuations historically. Moreover,

efforts to improve localization can lift confidence on sustainability of margins

amid greater competition post 2018 may also result in higher valuations for the

company.

Triggers

• Launch of new City model.

• Delay of new entrants.

Risks

• Depreciation of PkR against THB and JPY.

• Earlier than expected entry of new competitors.

HCAR- Financial Snapshot


Sales 37,764 40,085 72,481 60,675 59,873

Sales growth -3.5% 6.1% 80.8% -16.3% -1.3%

Npat 2,930 3,564 6,886 5,947 4,834

Npat growth 199.3% 21.7% 93.2% -13.6% -18.7%

EPS (PkR) 20.52 24.96 48.22 41.64 33.85

PER (x) 32.59 26.79 13.87 16.06 19.75

DPS (PkR) 5.00 7.00 14.00 12.00 10.00

DY (%) 0.7% 1.0% 2.1% 1.8% 1.5%

PBV (x) 18.65 12.02 9.18 6.53 5.29

ROE (%) 57.2% 44.9% 66.2% 40.6% 26.8%

EV/EBITDA (x) 19.75 15.26 7.98 9.72 11.65

Gross Margin 12.6% 15.1% 15.1% 15.1% 12.8%

Net Margin 7.8% 8.9% 9.5% 9.8% 8.1%


Honda Atlas Cars (Pakistan) Limited


TP (PkR/sh) 505.29

Stance Sell

Upside -24.4%

Fwd D/Y 2.1%

Total Return -22.3%

Bloomberg / Reuters HCAR PA / HATC.KA


52wk Hi-Low (PkR/sh) 678.63-231.9



Civic Sales

0

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1,000

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-14

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No

v-15

Temporary uptick

in sales after

launch of new

model



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HCAR KSE-100 Index



Other Stocks

35 | P a g e

Engro Polymer & Chem. Rating: Not Covered

Engro Polymer & Chemicals Limited


Bloomberg / Reuters EPCL PA/EPCL.KA


52wk Hi-Low (PkR/sh) 18.63-8.31

3m Avg. D. Vol ('000 shrs) 7,900


PVC ethylene delta trend

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PVC-Ethylene Core Delta Crude Oil (Rhs)

US$/bblUS$/t



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EPCL KSE-100 Index


Abdul Samad Khanani

[email protected] Possible turnaround in fortunes

PVC margins are on the rise

Post rebound in oil prices, PVC margins have spiked to as high as US$490/ton, up 2xYoY. This is mostly attributable to better PVC demand and improved crude oil outlook. We believe these are highest PVC margins recorded in last 10 years, which may lead to substantial increase in profitability of EPCL. Though margins are not likely to settle at US$490/ton, but anything above US$330/ton would keep EPCL profitable over the medium term, in our view.

Planned de-bottlenecking of PVC plant

EPCL has recently announced to increase its PVC capacity by 17k tons to 195k

tons through debottlenecking. The company has estimated a capex of US$9mn

which would be financed through internal cash generation. We believe

improved downstream petrochemical dynamics and favorable demand in the

local industry are key reasons for an expansion. Moreover, financing of the

project through internally generated cash reflects positive outlook on future

profitability.

Profits remained restricted in 9MCY16

During 9MCY16, EPCL reported EPS of PkR0.05 vs. -PkR1.23 in 9MCY15, led by

better PVC margins, curtailment in exchange losses and better cost efficiencies.

During the 9m, PVC-ethylene core delta stood at US$257/ton which lead to

break-even margins. Moreover, improved cash flows and deleveraging led to

25%YoY decline in finance costs.

Triggers

• Debottlenecking of PVC capacity.

• Increasing PVC demand in construction up-cycle.

• Increasing PVC margins and improved global downstream demand.

Risks

• Steep decline in PVC margins.

• Change in duty structure on raw materials and end products.

• Increasing demand captured by imports.

EPCL- Financial Snapshot

(PkR mn) CY11A CY12A CY13A CY14A CY15A

Sales 16,886 20,466 24,592 23,819 22,264

Sales growth 15.4% 21.2% 20.2% -3.1% -6.5%

Npat (729) 50 717 (1,016) (649)

Npat growth -4.3% N.M N.M N.M -36.1%

EPS (PkR) (1.10) 0.07 1.08 (1.53) (0.98)

PER (x) N.M N.M 16.47 N.M N.M

DPS (PkR) - - - - -

DY (%) - - - - -

PBV (x) 1.92 1.91 1.70 1.99 2.23

ROE (%) -11.2% 0.8% 10.9% -15.8% -11.5%

ROA (%) -3.0% 0.2% 2.9% -3.9% -2.6%

Gross Margin 12.3% 16.9% 20.0% 7.6% 12.5%

Net Margin -4.3% 0.2% 2.9% -4.3% -2.9%


36 | P a g e

Hum Network Limited Rating: Not Covered

Tanveer Ahmad

[email protected] Bright prospects for growth

Diversified portfolio to sustain revenues

HUMNL stands among the key Media players where revenue, gross and net

profitability grew at 5yr-CAGR (FY11-16) of 23%, 24%, and 29%, respectively.

HUMNL carries a broadcasting portfolio of satellite channels, namely, HUM TV,

HUM Sitaray, HUM Masala and HUM World. Apart from satellite channels,

HUMNL has growing SBUs in Films, Digital Media as well as Print Media.

Expanding global reach

HUMNL’s competitive products are well recognized over the globe where (i) it is

ranked among the top ranked South Asian channels in the UK, competing with

Zee and Colors etc (Broadcasters Audience Research Board ratings), (ii) it has

syndicated more than 150 programs to international channels in Europe, North

America, and Middle East etc, so far, and (iii) NETFLIX (the premier VOD Global

platform) has launched HUMNL’s content for viewing through its global

streaming service, making it first and only Pakistani network to have such

contract with NETFLIX.

Potential for rally

FY16 earnings implied a trailing P/E of 23x but this trims to less than 12x based

on 1QFY17 performance. This is keeping in mind a volatile recent past trend in

revenues/margins; if 1QFY17 continues in future it can set forth a rally.

Triggers

• Suspension of Indian content in Pakistan could turn out to be a catalyst for HUMNL to expand viewership of its own shows.

• HUMNL plans to launch HUM MASALA in the UK in the near future. License for the channel has already been obtained.

Risks

• Rationalization of marketing budgets given sluggish corporate profitability.

• Suspension of Indian movies could hurt HUM Films revenue.

HUMNL- Financial Snapshot

(PkR mn) FY12A FY13A FY14A FY15A FY16A

Sales 1,742 2,293 2,887 3,721 3,943

Sales growth 21.3% 31.6% 25.9% 28.9% 6.0%

Npat 196 388 592 747 537

Npat growth 3.7% 98.0% 52.6% 26.3% -28.1%

EPS (PkR) 0.21 0.41 0.63 0.79 0.57

PER (x) 72.32 36.53 23.94 18.96 26.38

DPS (PkR) 2.00 6.00 6.00 5.25 -

DY (%) 13.3% 40.0% 40.0% 35.0% -

PBV (x) 12.66 9.73 10.14 8.48 6.93

ROE (%) 17.5% 26.6% 42.4% 44.7% 26.3%

ROA (%) 11.8% 21.9% 30.3% 26.8% 16.4%

Gross Margin 37.1% 43.5% 48.4% 49.6% 39.1%

Net Margin 11.2% 16.9% 20.5% 20.1% 13.6%


Hum Network Limited


Bloomberg / Reuters HUMNL PA/HUMN.KA


52wk Hi-Low (PkR/sh) 15-9.4

3m Avg. D. Vol ('000 shrs) 1,655


HUMNL - Sales Trend (PkRmn)

0

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FY12A FY13A FY14A FY15A FY16A

Sales



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HUMNL KSE-100 Index


37 | P a g e

Synthetic Products Enterprises Rating: Not Covered

Synthetic Products Enterprises Limited


Bloomberg / Reuters SPEL PA/SYNT.KA


52wk Hi-Low (PkR/sh) 74.38-38.28



SPEL ROE vs. ROA

0%

5%

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15%

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25%

FY12A FY13A FY14A FY15A FY16A

ROE (%) ROA (%)



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50%

Jan

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Fe

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6

Mar

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Ap

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SPEL KSE-100 Index


Tanveer Ahmad

[email protected]

SPEL- Financial Snapshot

(PkR mn) FY12A FY13A FY14A FY15A FY16A

Sales 1,399 1,416 1,719 2,166 2,322

Sales growth 17.4% 1.2% 21.4% 26.0% 7.2%

Npat 71 60 122 230 356

Npat growth 26.8% -15.5% 103.3% 88.5% 54.7%

EPS (PkR) 0.92 0.78 1.58 2.97 4.60

PER (x) 70.14 83.00 40.82 21.65 14.00

DPS (PkR) - - 1.00 1.00 1.50

DY (%) - - 1.6% 1.6% 2.3%

PBV (x) 10.87 9.61 6.03 3.20 2.71

ROE (%) 15.5% 11.6% 14.8% 14.8% 19.4%

ROA (%) 6.1% 4.5% 8.0% 9.7% 14.3%

Gross Margin 18.2% 16.4% 20.1% 22.8% 25.1%

Net Margin 5.1% 4.2% 7.1% 10.6% 15.3%


Sustainable margins coupled with mounting topline

Packaging growth remains robust

Synthetic Products Enterprises Ltd (SPEL) derives a sizeable chunk ((FY16: 54%) of its revenue from its FMCG food packaging segment. SPEL’s product line ranges from various plastic cups to bottles for the food industry, catering to UPFL, NESTLE, Coca Cola Beverages and Riaz Bottlers (Pepsi). In addition to seasonal uptick in demand, Pakistan’s beverage industry (Ex-tea) has grown at a swift double digit pace, driven by rising consumption patterns and increasing urbanization.

AIDP-II to unlock value

SPEL continues to hold a strong position in the auto parts manufacturing space

(revenue: 46% FY16), catering to all three OEMs in the sector (INDU, PSMC,

HCAR). Sector tailwinds on potential entry of new auto OEMs into the industry,

courtesy Auto Industry Policy (AIDP-II), may provide immense upside potential

in the LT. AIDP-II, under Category-A, allowed imports of CKD kits on

concessionary rates for new investors vs. incumbents (10% vs. 30% on non-

localized parts).

Premium multiples justified

SPEL uses cost plus pricing, where profitability is driven by higher volumes,

keeping margins stable. That said, despite dynamic outlook of the packaging

industry and elasticity in demand, SPEL continues to trade at a discount to the

broader packaging space (P/E: 14.0x vs. 14.8x). Moreover, given higher sales

exposure towards packaging segment, SPEL continues to trade at a premium to

the larger auto space (P/E: 14.0x vs. 12.0x).

Triggers

• 25% production capacity expansion post completion of Rahim Yar Khan plant.

• 44% tax credit for the five years (Sec 65E of the Income Tax Ordinance): SPEL utilized 10% of Tax Credit in FY16.

Risks

• Volatility in int’l polypropylene and polystyrene prices

• Steep appreciation of the Yen against PkR

38 | P a g e

JS Bank Limited


Bloomberg / Reuters JSBL PA / JSBL.KA


52wk Hi-Low (PkR/sh) 11.04-5.65

3m Avg. D. Vol ('000 shrs) 4,112


Asset quality has improved

0.0%

4.0%

8.0%

12.0%

16.0%

0%

20%

40%

60%

80%

100%

CY

11

CY

12

CY

13

CY

14

CY

15

CY

16

Coverage NPL Ratio-Rhs



-50%

-25%

0%

25%

50%

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

De

c-1

6

JSBL KSE-100 Index


JS Bank Limited Rating: Not Covered

The Cheapest Bank in Pakistan

Improved fundamentals

JS Bank is in the midst of a transformation, backed by improved performance over the past few years- (i) asset quality has enhanced to the extent that the bank currently has one of the lowest NPL ratio in the sector (down 10ppt to 4.1% since CY12), (ii) ROEs are on the rise despite pressure of reinvestment of PIBs at lower rates (11.2% in 9MCY16; annualized), and (iii) coverage is close to 80%, which will limit credit costs going forward. Drawbacks, however, include (i) exceptionally low CASA (45%), possibly to push balance sheet growth after recent branch expansion cycle, (ii) very high exposure in PIBs (70%+ of investments), (iii) scale inefficiencies (branches: 278; C/I: 73%), and (iv) absence of dividend.

Improved fundamentals

Loan growth has clocked in at 23%YoY in 9MCY16 with potential for further acceleration, underpinned by revival of Textile & Trade financing related activities. To recall, Trade financing has made a strong comeback this year (up 8%YoY vs. down 7% during same period last year), with likely impetus from an uptick in macro and CPEC related activities. JSBL’s CAR stands at roughly 15%, enough to support loan growth, going forward.

Valuations & Stance

JSBL is the cheapest bank in Pakistan with a trailing P/B of 0.59x, much lower than its historic highs of more than 0.7x in CY12/13, despite improved balance sheet quality and ROEs. Given the widening discount to the top and mid-tier banks, JSBL could potentially outperform given its discounted valuations.

Triggers

• Revival of Textile sector; supported by GoP support ahead of election year.

• Acceleration in Trade financing.

• Materialization of better cost efficiencies.

Risks

• High cost of funds.

• Substantial reinvestment risk.

JSBL – Historic Financials

(PkR mn) CY12 CY13 CY14 CY15 9MCY16

NII 2,437 2,457 4,069 5,784 4,464

NII growth 40.4% 0.8% 65.6% 42.1% 6.6%

Npat 723 474 1,446 2,252 1,222

Npat growth 100.4% -34.3% 204.7% 55.8% -5.0%

EPS (PkR) 0.67 0.44 1.35 2.10 1.14

PER (x) 16.04 24.43 8.02 5.15 9.49

DPS (PkR) - - - - -

DY (%) - - - - -

BVPS (PkR) 10.21 10.54 15.10 17.72 18.31

PBV (x) 1.06 1.03 0.72 0.61 0.59

ROE (%) 6.6% 4.2% 8.9% 11.8% 8.3%

Loan growth 10.4% 69.6% 84.9% 22.8% 22.6%

Deposit growth 54.2% 29.3% 34.2% 30.6% 47.5%


Abdul Ghani Fatani

[email protected]

39 | P a g e

Habib Metropolitan Bank Limited


Bloomberg / Reuters HMB PA / HMB.KA


52wk Hi-Low (PkR/sh) 38.38-27



Loans by sector

4%

41%

16%6%

5%

28% Chemicals & Pharma

Textile

Power

Commodity Finance

Exports/Imports

Others



-25%

0%

25%

50%

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

De

c-1

6

HMB KSE-100 Index


Habib Metropolitan Bank Ltd Rating: Not Covered

Unjustifiably cheap

Widening discount should draw attention

Habib Metropolitan Bank (HMB) is trading at a trailing P/B of 1.0x, which implies

a discount of 44% to the Big-5 banks and a 38% discount to BAHL, its closest

peer. The stock is up 21% CYTD, underperforming the broader index, on the

back of lackluster profitability performance in 9MCY16. Going forward, we can

expect valuation potential to unlock given the widening discount to peer banks

and follow through of the rerating rally beyond top tier names.

Rebound in Textile sector can push loan growth

Advances are up 13.5%YoY; with impetus going forward from revival of the

Textile sector (42% exposure of loan book) on the back of populist measures

from GoP ahead of election year. With adequate capital buffer (CAR: 18.5%) in

place, HMB has the potential to capitalize on the loan growth prospects ahead,

especially in the Power sector (given its low exposure of 16%). Drawbacks to the

investment case, however, includes (i) high cost of deposits (CASA: 55%), (ii)

relatively high cost/income (51%), and (iii) ROEs much lower compared to top-

tier levels.

ROEs could bottom out next year

HMB posted a consolidated NPAT of PkR3.82bn (EPS: PkR3.65) in 9MCY16,

down 36%YoY, on account of reinvestment of high yielding PIBs at lower rates

and realization of capital gains lower than that of last year. Among the positives,

loan provisioning came off by PkR964mn, and fee income rose by 6%YoY. We

think these two aspects can continue into CY17F while the reinvestment factor

will normalize.

Triggers

• Revival of Textile sector leading to improved asset quality

• Rebound of Trade financing activities.

• Sizeable capital buffer to support loan growth.

Risks

• High cost of deposits.

• High cost to income.

HMB – Historic Financials

(PkR mn) CY12 CY13 CY14 CY15 9MCY16

NII 8,913 9,072 11,210 14,399 8,788

NII growth 15.3% 1.8% 23.6% 28.5% -18.1%

NPAT 3,396 3,527 4,942 7,673 3,823

Growth 3.3% 3.8% 40.1% 55.3% -36.5%

EPS (PkR) 3.24 3.37 4.72 7.32 3.65

PER (x) 11.42 10.99 7.84 5.05 10.14

DPS (PkR) 2.00 2.00 2.50 4.00 0.00

DY (%) 5.4% 5.4% 6.8% 10.8% 0.0%

BVPS (PkR) 26.90 26.71 33.18 35.18 37.02

PBV (x) 1.38 1.39 1.12 1.05 1.00

ROE (%) 12.0% 12.6% 14.2% 20.8% 13.1%

Loan Growth -2.6% 17.6% 3.8% -1.6% 13.5%

Deposit Growth 17.5% 13.7% 29.3% 26.0% 25.8%


Abdul Ghani Fatani

[email protected]

40 | P a g e


APPENDIX

IMS Universe

PER (x)

EPS Growth

(%) PBV (x) DY (%)

ROE

(%)

EV/EBITD

A (x)

M- Cap

(US$bn)

Price

(PkR)

TP

(PkR)

Return

(%) Stance 17F 18F 17F 18F 17F 18F 17F 18F 17F 17F

OGDC 6.80 165.4 191.0 19.7 Buy 8.97 7.11 32.2% 26.1% 1.35 1.21 4.2% 5.4% 15.0% 4.94

PPL 3.55 188.2 183.0 1.0 Neutral 11.49 8.28 56.7% 38.7% 1.67 1.50 3.7% 5.3% 14.5% 5.85

POL 1.21 534.6 461.0 (6.7) Sell 14.23 9.51 22.8% 49.7% 4.21 4.10 7.1% 9.9% 29.6% 6.62

PSO 1.13 434.2 500.0 19.1 Buy 7.78 7.00 47.5% 11.2% 1.09 0.94 3.9% 4.4% 14.0% 8.22

APL 0.54 684.6 726.0 14.1 Neutral 11.74 10.93 26.4% 7.4% 3.89 3.75 8.0% 8.2% 33.2% 9.58

DGKC 0.93 221.7 253.8 17.6 Buy 9.99 9.26 10.7% 7.8% 1.27 1.15 3.2% 3.2% 12.7% 5.12

LUCK 2.68 866.3 U-R - U-R 14.49 12.06 20.9% 20.1% 2.82 2.28 1.4% 1.5% 19.5% 8.26

MLCF 0.64 127.6 122.9 0 Neutral 11.72 9.36 17.7% 25.1% 4.02 3.30 3.1% 3.1% 34.3% 6.62

CHCC 0.29 174.0 174.0 2.8 Neutral 12.82 8.92 70.6% 43.7% 2.72 2.27 2.9% 4.6% 21.2% 8.17

FCCL 0.59 45.1 45.0 4.3 Neutral 22.84 9.18 -49.3% 148.8% 3.07 2.74 4.4% 10.0% 13.4% 16.06

PIOC 0.31 142.1 137.0 (0.1) Sell 10.29 9.60 24.6% 7.2% 2.70 2.27 3.5% 2.8% 26.3% 6.13

NPL 0.22 64.1 U-R - U-R 7.25 6.73 9.8% 7.7% 1.71 1.60 10.9% 9.4% 23.6% 5.50

HUBC 1.37 123.5 120.0 6.1 Neutral 9.19 9.65 23.2% -4.7% 3.85 3.73 8.9% 8.9% 41.9% 9.25

NCPL 0.19 55.5 50.6 3.7 Neutral 6.65 6.21 11.3% 7.0% 2.65 2.43 12.6% 12.6% 39.8% 5.53

PSMC 0.48 612.8 595.9 - Neutral 12.58 10.91 32.5% 15.4% 1.67 1.49 1.7% 1.9% 13.3% 6.07

HCAR 0.91 668.6 505.3 (22.3) Sell 13.87 16.06 93.2% -13.6% 9.18 6.53 2.1% 1.8% 66.2% 7.98

INDU 1.21 1,614.5 1,587.8 4.5 Neutral 10.64 9.70 4.2% 9.6% 4.00 3.59 6.2% 7.4% 37.6% 6.68

ABL* 1.31 119.2 134.9 21.1 Buy 8.39 7.83 4.5% 7.1% 1.25 1.18 6.3% 6.7% 14.9% n.a

MCB* 2.53 237.8 250.7 14.0 Neutral 10.79 9.59 7.8% 12.6% 1.72 1.64 6.9% 7.1% 15.9% n.a

NBP** 1.52 74.9 89.0 39.2 Buy 7.20 6.60 7.2% 9.1% 0.88 0.84 10.3% 10.7% 12.2% n.a

HBL* 3.83 273.3 290.3 13.0 Neutral 10.63 9.66 8.8% 10.0% 1.86 1.72 5.5% 6.0% 17.5% n.a

UBL* 2.80 238.9 260.3 16.3 Buy 10.15 9.54 4.5% 6.4% 1.62 1.53 5.7% 5.9% 16.0% n.a

BAFL** 0.58 38.0 42.0 15.9 Buy 7.32 7.09 3.8% 3.3% 0.95 0.87 2.6% 3.3% 13.0% n.a

FFC 1.27 104.4 99.5 3.0 Neutral 11.22 10.77 10.7% 4.1% 4.70 4.48 7.7% 8.3% 41.9% 8.16

EFERT 0.86 68.0 69.3 11.6 Neutral 9.41 9.51 5.0% -1.0% 2.06 2.06 9.6% 10.7% 21.8% 5.68

FATIMA 0.74 36.9 37.2 4.8 Neutral 9.17 9.11 -4.4% 0.6% 1.50 1.36 4.1% 4.1% 16.3% 6.23

NML 0.51 152.3 155.5 5.4 Neutral 9.24 8.83 17.7% 4.6% 0.62 0.59 3.3% 3.3% 6.7% 5.99

TGL 0.07 100.5 118.4 22.3 Buy 8.83 7.54 70.5% 17.2% 2.11 1.81 4.5% 5.5% 23.9% 5.20

MTL 0.38 904.7 887.0 4.1 Neutral 14.35 11.00 37.1% 30.5% 6.31 5.49 6.1% 6.6% 44.0% 8.55

AGTL 0.32 570.8 448.0 (14.4) Sell 12.96 11.58 23.4% 11.9% 7.18 6.81 7.1% 8.0% 55.3% 8.76

AICL 0.25 74.1 69.0 (1.5) Sell 7.90 7.56 1.9% 4.5% 1.34 1.22 5.4% 5.7% 16.9% n.a

ASTL 0.19 66.6 79.0 21.6 Buy 16.65 9.26 -7.1% 79.9% 1.75 1.58 3.0% 4.5% 10.5% 9.36

MUGHAL 0.11 88.2 102.2 19.9 Buy 8.86 8.29 40.1% 6.9% 2.47 2.09 4.0% 4.0% 27.9% 6.82

*Return (DY for 4Q16+CY17)

**Return (DY for CY16+CY17)

IMS Universe - Sectors

PER (x) EPS Growth (%) PBV (x) DY (%) ROE (%) EV/EBITDA (x)

17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F

E&P 10.0 7.6 37% 31% 1.5 1.4 4.4% 5.9% 15.4% 18.2% 5.3 4.1

Banks 9.5 8.8 7% 9% 1.5 1.4 6.4% 6.7% 15.2% 15.6% n.a n.a

Cement 13.2 10.5 11% 27% 2.4 2.0 2.4% 3.1% 18.2% 19.6% 7.6 6.5

Fertilizer 10.1 9.9 4% 1% 2.4 2.3 7.3% 7.9% 24.1% 23.2% 6.8 6.5

Power 8.6 8.7 19% -1% 3.2 3.1 9.6% 9.4% 37.4% 35.3% 8.0 7.6

OMCs 8.7 7.9 42% 10% 1.4 1.2 5.3% 5.6% 16.3% 15.7% 8.5 7.3

Autos 12.0 11.5 26% 4% 3.8 3.3 3.9% 4.4% 31.6% 28.2% 7.0 6.9

Tractors 13.7 11.3 30% 22% 6.7 6.0 6.5% 7.3% 48.7% 53.5% 8.6 7.2

Textiles 9.2 8.8 18% 5% 0.6 0.6 3.3% 3.3% 6.7% 6.7% 6.0 5.4

Engineering 12.7 8.9 12% 42% 2.0 1.7 3.4% 4.3% 15.5% 19.5% 8.1 6.0

Glass 8.8 7.5 71% 17% 2.1 1.8 4.5% 5.5% 23.9% 24.0% 5.2 4.7

Insurance 7.9 7.6 2% 4% 1.3 1.2 5.4% 5.7% 16.9% 16.1% n.a n.a Source: IMS Research

41 | P a g e


We, IMS Research Team, certify that the views expressed in the report reflect our personal views about the subject

securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the

specific recommendations made in this report. We further certify that we do not have any beneficial holding of the

specific securities that we have recommendations on in this report.

Ratings Guide* Total Return

Buy More than 15%

Neutral Between 0% - 15%

Sell Below 0%

*Based on 12 month horizon unless stated otherwise in the report. Total Return is sum of any Upside/Downside (percentage difference

between the Target Price and Market Price) and Dividend Yield.

Valuation Methodology: We use multiple valuation methodologies in arriving at a Target Price including, but not limited to, Discounted Cash Flow (DCF), Dividend Discount Model (DDM) and relative multiples based valuations.

Risks: Not applicable

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

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

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42 | P a g e


NOTICE TO US INVESTORS

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43 | P a g e


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