pakistan strategy outlook 2013

7/29/2019 Pakistan Strategy Outlook 2013

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Foreword

DearClient,

The2013outlookispromotedunderthenamePakistanEquityMarket2013ScalingNewHeights.In

continuationtowhatwasanexcellentyear,theKSE-100gained49%(37%in

USDterms)beatingtheleadingbenchmarkindexprovidersMSCIFrontierMarkets(5%)and

MSCIEmergingMarkets(14%).WhilethismakesPakistanoneof


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thebestperformingmarketsintheworld,thecountryisincreasinglybeingrecognizedamongglobalfrontiermarketinvestorsasatruenextgenerationemerging

market.

In2012,Pakistanhasshownthatitisnotjust

acountryaboutheadlinesbutalsoaboutbottom-lines.Inspiteofsomevery

challengingissuesonthemacroeconomicandpoliticalfront(noises


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thatinvestorsrightlyignored)thekeydriversforthisstrongperformancewere(1)resumptionanduptickinPak-U.S.bilateralrelations,(2)monetarypolicyseeing

interestratescutby250basispoints,(3)CapitalGainsTaxreformpackage,

(4)strongcorporateresultsand(5)attractivevaluationsvs.regionalmarkets(adeep

discounttopeersimpliesaforwardPriceEarningsmultipleof


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6.8andDividendYieldof8%).

2012sawstellargainsbyallkeysectorsoftheeconomyincludingBanking(+49%),Energy/Oil

&Gas(+27%),Power(+42%),Cements(+153%),Foods(+70%),

Textiles(+101%)andInsurance(+58%).

BMAisproudto

statethatourrecommendedportfoliomentionedinlastyearsreport


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titledPakistanStrategyOutlook2012:TheRightMoveshasoutperformedthebenchmarkindexby5%toprovideareturnof53%(41%inUSD

terms)comparedtoKarachiStockExchange100scumulativereturnof49%.

Thus,wehopetoadviseourclientsonhowtooutperformthebroader

marketbyinvestingwiselyin2013.

TheBMA


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economicsteamthinksthatthemostlikelypathforthePakistaneconomyinFY13willseerealpositiveGDPgrowthof3.5-4.0%andinterest

rateswillremaininsingledigits.Risinginflationexpectationsmakeequitiesanattractive

assetclassinabsoluteandrelativeterms.

Pakistanisata

crossroadofpoliticalandeconomictransition.Anefficienttransitionin


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politicalleadershipisessentialundertheprevailingeconomicconditionsandwillimpacttheeconomicgrowthin2013.Our2013year-endtargetforthePakistani

index(KSE100)is19,800,a17%upsidetopresentlevelsmarkedbystrong

corporateearningsgrowthandhigherdividendpayouts.

Theperceivedrisksin

suchinterestingtimeswillleadtovolatilitythatshouldbe


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consideredbyinvestorsasanexcellentbuyingopportunitytogeneratesoundreturns.

Inframingtheoutlookfor2013,weaskedouranalysts

tohighlight;(1)keyinvestmentthemesfor2013andbeyond;(2)stockswith

thegreatestupsidepotentialtodriveperformancein2013;(3)majoreventsor

industryriskstoconsiderand(4)hedgeagainsttheperceived


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riskstogeneraterisk-adjustedreturns.

BMArecommendsexposuretotheEnergy&Power(Oil&GasProducers,IPPs),Cements,TextilesandBanking

sectorsthroughselectivestockpicking.InthefirstinvestmentideaBMAsevenyou

willfindourtopstock&industrypicksforadiversifiedcoreportfolio.

InthesecondideaBMAthenexteightweelaborate


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onourResearchsfavouritevalueplayswhichcanbeaddedinasatelliteapproach.

Wehopethatyoufindthisnewchapter

inthe2013Research&Strategyseriesaninterestingandilluminatingread,and

welookforwardtobringingyoumoreinsightsovertheyear.

Itremainstobeseenwhethersomeofthesescenarios


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willactuallycometopass.Whateverhappens,though,Iwishyouandyourfamilygoodfortune,happinessandgoodhealthinthenewyear.

Yourssincerely,

MoazzamM.MalikChairman&Chief

ExecutiveOfficer


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TABLEOFCONTENTS

1PakEquities:Moretriggerslinedup12KSE100:Targeting19,800forCY1333Elections:A

triggerinitself!104Amplecash:Huntingforyields125IMF

re-entry:Aprobablecasewithpositivitythistime136BMAseven7

157Energy:Oil&GasPakistanOilfieldsLimited-Amix


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ofgrowthandvaluePakistanPetroleumLimited -Valuationscatchingupwithpeers168Banks:UnitedBankLimitedThepreferredplayinhardtimes

199Fertilizer:FaujiFertilizerCompanyDefensiveplaywithastoundingyields21

10Textiles:NishatMillsLimited -Mostdiversifiedandthebesthedge2311Cement:

DGKhanCementCompany Highmargins+strongportfolio=BUY!


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2512Power:HubPowerCompany Beinsafehands2713Andthenexteight29


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PakistanEquityMarketOutlook2013

Moretriggerslinedup

ResearchAnalysts

FurqanPunjani

[email protected]

MuhammadAffanIsmail

[email protected]

FaridAliani

[email protected]

ZoyaAhmed

[email protected]

FridayJanuary04,

2013

Thegoodtimesarenotyetover


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Theperiodofexceptionalperformanceisnotoveryet.Influencedbyalikelychangeinpoliticalsetup,fallingattractionofalternateinvestments,

heavyshorttermliquidityandthattoowithoutleverage,expectedbetterperformanceby

regionalmarketsandalluringlocalvaluationwillleadtheequitymarkettopost

anotheryearofattractivegains.Ourindexvaluationmatrixwhich


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comprisesofregionalaswellaslocalvaluationmethodssuggeststhatthelocalboursewillprovideafairlydecentreturnof17%toreach

19,800pointsby2013end.Though,wehaveaccountedforthemajoreconomic

risksandchallenges(bothexternalandfiscalconcerns)thatareexpectedtosurface

in1HCY13intoourindexcalculation,anyvariationaway


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fromtheexpectationsmaychangeourindextarget.

IntimesofparadoxicaleconomicvariablescharacterizedbyPKRdepreciationamiddecliningreserves,fiscal

imbalances,expectedpoliticalandeconomicshifts,lowinterestratesandstrongearningsgrowth,

werecommendinvestorstofocusonhighdividendyieldingandeconomicallyimmunestocks.

TheBMA7highconvictionideasfortheupcomingyear


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arePakistanOilfieldsLimited,PakistanPetroleumLimitedandHubPowerCompanyinenergystocks,UnitedBankLimitedfrombankingsector,FaujiFertilizerCompanyfrom

fertilizers,NishatMillsLimitedfromtextilesandD.G.KhanCementfromcementsector

universe.ApartfromthesestockswealsohavestronglikingEFOODS.PA,ENGRO.PA,NCL.PA,

FCCL.PA,FECTC.PA,NCPL.PA,NPL.PAandPTC.PA.

BMAHighConvictionIdeasPrice(PKR)TargetPriceReturnEPS(PKR)


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PEPBDiv.YieldEarningYieldPOL43147022%58.67.4x2.9x13%14%

PPL17820222%30.05.91.9X8%17%

UBL8510029%14.26.0x1.2x11%17%

FFC115

13732%15.87.3x5.9x13%14%

NML647828%

13.54.8x0.5x7%21%

DGKC5470


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33%12.04.5x0.6x4%22%

HUBC445233%7.36.0x1.8x15%17%

Source:BMAResearch

Elections:Atriggerinitself!

Theelectionyearhasalwaysbeen

atriggerinitself.Historicaltrendssuggestthatourcapitalmarkethasrallied

indoubledigitsinbothpreandpostelectionsin


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anticipationofnewfacesandpolicyshifts.Howevergiventhecrucialtimefortheeconomy,webelieveitsnotwhocomesin,buthow

strongacoalitiontheyareabletopulltogetherthatwillactas

atriggerforthemarket.Webelievethenextelectionwillyetagain

bringahungparliamentwithnomajoritylyingwithany


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singleparty.However,thegroundrealitiessuggestthatPakistanMuslimLeagueNawaz(PML-N)withsomesupportfromreligious,ethnicpartiesandindependentsmayhave

anedge.


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Amplecashhuntingforyields

WithnoincreaseindiscountratesexpectedinthefirsthalfofCY13,thehuntfor

betterreturnonreinvestmentswouldlureinvestorstowardsequitymarketsinCY13also.

MoreoverwithconcernsregardingCGTrulesaddressed,investors(especiallyindividuals)wouldcontinueto

participateheavilyinequitymarketsasseeninCY12.


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PerformanceinregiontoimprovePakistansrelativevaluation

Theultra-loosemonetarypolicyindevelopedeconomiesexpectedtobemaintainedinthe

nearfutureleavesalotofroomforPEexpansioninAsianequities.

Thoughinrecentpastthequantumofforeigninflowsintothelocalbourse

comparedtoregionalpeershasdeclineddrastically,thePEexpansion


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inthosemarketswillmakePakistansvaluationmoreenticing.Thuswebelievedespitehighermultiplesandevenshiftingfundamentalsofforeignersfavoritescripswhich

includeOGDC.PA,MCB.PA,LUCK.PA,UBL.PA,PPL.PA,NBP.PA,POL.PAandENGRO.PAwouldremainin

thelimelight.

ThethemeformarketinCY13ThemeNarration/CatalystSectorsunderfocusStockstoPlay

1PricingPowerAbilitytopassoninflationaryimpact


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toendconsumerSustainmarginsonthebackofregulatoryframeworkand/orsupply-demandgapPowerHUBCCementsEntireCementSector

OilMarketingCompaniesPSO2DevaluationPositiveCompaniesderivingtheirrevenuesin

USDorguaranteedreturnsPowerHUBC,NCPL,NPLE&PPPL,POL,

OGDCTelecomPTCCementsACPL,LUCK,DGKC


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ExportdrivenTextileNML,NCL3PoliticalSpendingIndustriescateringtobasicneedsandhedgedagainstanyslowdownorturmoilPower

HUBC,NCPL,NPLE&PPPL,POL,OGDCImpactedbypre-electionspending

CementsACPL,LUCK,DGKC,FCCL4ValuewithGrowthCheapon

multiplesSustainableGrowthPredictabledividendpayoutsUpside


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manageablerisksCommercialBanksAutosBAFL,UBL,MCBINDU,PSMCLowleveragecostforequityinvestmentBetterrisk-returnprofilecompared

tootherinvestmentavenuesEntiremarketBMAUniverse


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KSE100:Targeting19,800forCY13

Grabyourpicks

RegionalCY13PE(x)

Philippines16.0Malaysia14.1Singapore

13.8Indonesia13.7India13.3Thailand12.6SriLanka9.5China9.2Vietnam

8.6Pakistan6.8

Scalingnewheights!

Webelievethe

marketisallsettopostanattractivereturnin


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CY13influencedbyalikelychangeinpoliticalsetup,fallingattractionofalternateinvestmentsandheavyshorttermliquiditythattoowithnoleverage.

Moreover,continuousPEexpansionsintheregionwillfurtherlureinternationalinvestorstowards

thealreadyundervaluedPakistanequities.Accountingforthesefactors,ourvaluationmatrix

whichisacombinationofregionalaswellaslocal


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valuationtechniquessuggeststhatthelocalboursewillprovideanenticingreturnof17%toleadmarkettoreach19,771pointsbyCY13end.

ThoughtheexpectedreturnforCY13ismarginallylowerthanlast10year

CAGRof20%duetocriticaleconomicandstructuralissues,therecentunfolding

events(CGTrelaxation,lowerdiscountratesandelections)wouldbe


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enoughtoleadthemarkettopostareturnhigherthanlast20yearCAGRof14%.

MethodologyWeightIndexTargetEarningsGrowthValuation25%

19,395

PERMeanReversionMethod25%20,536

Source:Bloomberg,BMA

Research

RegionalDiscountConvergenceMethod25%19,507

TargetPrice

Mapping25%19,645

WeightedaverageIndexTarget19,771Source:BMAResearch


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CY/FY13PEof6.8xis26%cheaperthanhistoriclevels

Despitestellarperformancebythelocalmarkettooutperformallbenchmarks

(MSCIFM,MSCIEMandMSCIWorldIndices),theforwardFY13valuationsare

stillata26%discounttothelast10yearaveragePEof

9.2x.Toreachourindexleveltarget,wehavetaken


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a10%discountoverhistoricmultiplestoadjustforthecurrenteconomicandsecuritysituation.Theideaofconvergencetowardsaveragehistoricalmultiplesstems

fromthemarketscompellingearningsgrowthanddividendyieldsof15%and8%

respectivelyinFY13Ecomparedtothelast10yearaverageof14%and

6%respectively.Thiswouldfurtherreducethedifferencebetweenearning


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anddividendyieldsagainstt-billyieldsaftersuccessivecutsinthediscountrates.

Withtheindexatitsalltimehigh,there

arefearsregardingthesustainabilityoftheselevelsinthewakeofchallenges

onthemacroeconomicfront.Theriskhasfurtherintensifiedafterrunon

therupeethathasstartedtodiminishreturnsforforeign


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investorswhomaybecompelledtooffloadpositionsinlocalequities.

However,webelievethemarketwillcontinuetobedrivenby

healthyliquidityintheshortterm.Heavyinflowsfromindividualinvestorsafterclarification

onCGTrulescoupledwithfallingattractionfromalternateinvestmentyieldswilllead

localequitiestocontinuethebullrun.Itshouldalso


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bekeptinmindthattherallyintheoutgoingyeardespiteabsenceofanyattractiveleverageproducthasgiventhemarketmuchdepth

intermsofliquiditywhichwillfurtherminimizethedownsideriskandreduce

volatility.Aftergroundbreakingperformancebythemarket,manynewforeignfundmanagers

havestartedtotakeinterestinPakistanequities.Moreover,materialization


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ofadditionalflowsfromtheUSamid


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improvingUS-Pakrelationship(2ndtrancheofCSFUSD700mninJan13,KerryLugartrancheandassistanceinotherareas),wouldslowdownthepaceof

expectedPKRdepreciation,thuslockingthedownsideforforeigninvestors.Thesefactorsaside,

webelievethenextyearsexpectedreturnof17%wouldbeenoughto

compensateforeigninvestorsforPKRdepreciation(11%inCY13E)and


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tosafeguardtheirunrealizedreturninCY12(37%inUSDterms).

BMAUniverseValuationFY11AFY12A/EFY13EFY14E

P/E8.6x7.9x

6.8x6.0x

Div.Yield6%6%8%9%

Earning

Yield12%13%15%17%

P/B2.0x1.7x1.6x1.5x

Source:BMAResearch

Withultra-loosemoneysupply


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indevelopedmarketsfindingitswaytobetterreturnsavailableinregionalmarkets,theAsianequitieswillcontinuetobeatthereturnsprovidedby

theirAtlanticpeers.Recall,AsianPEmultipleshaveexpandedbyahefty14%

lastyearcomparedtoanaveragecontractionof15%in2010and2011

(pre-QEphenomenon).Despitestayingoneofthebestperformingmarkets


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inAsia,(onlyshortofPhilippinesandThailand)ourlocalequitiesarestilltradingataPEdiscountof43%comparedtolast5

yearsaveragePEdiscountof35%totheregion.Moreoverdespitebeingassociated

withchallengingmacroeconomicsituationinthecountry,thesovereignyieldsofPakistan

Eurobonds(2017)havecomedownby~520bpsto9%


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comparedto14.2%yieldsofferedinthesameperiodlastyear.ThiswillfurtherendorseforeignfundmanagersconfidenceinPakistanequitymarkets.

Withconsiderablerisksattachedtotheeconomicvariables,wedonotsee

anyimprovementfromthelast5yearaveragehistoricaldiscountof35%however,

webelievetheincreasedliquiditywouldcompelourmarketto


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convergetowardsitsaveragehistoricaldiscount.Moreover,onthebackofbetterexpectedreturn,wedownplaytheriskofheavyforeignsellingdespitethe

expecteddepreciationofPKRby11%inCY13.Hence,webelievethecurrent

paceofinflowswillcontinuetoactasatriggerinCY13too.


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highconvictionideasfortheupcomingyearincludePakistanOilfields(POL.PA),PakistanPetroleum(PPL.PA),UnitedBank(UBL.PA),FaujiFertilizer(FFC.PA),NishatMills(NML.PA),DG

KhanCement(DGKC.PA)andHubPower(HUBC.PA).Webelievethesescripshavethe

potentialtooutperformthebenchmarkKSE100index.

Moreoverwebelieveinvestors

shouldalsolookoutforEngroFoods(EFOODS.PA),EngroCorp.


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(ENGRO.PA),NishatChunian(NCL.PA),FaujiCement(FCCL.PA),FectoCement(FECTC.PA),NishatPower(NPL.PA)andNishatChunianPower(NCPL.PA),andPakistanTelecommunications(PTC.PA).

TargetPriceFY13RecommendedPortfolio21-12-201231-12-2013UpsideDiv.YieldAggressiveDefensiveBMAModelPortfolio2013OilandGasExploration21%17%

PakistanOilfieldsLtd.

4314709%13%10%12%

PakistanPetroleumLtd.178200

13%9%6%5%

Oil&GasDevelopment


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Co.1892027%6%5%0%

Fertilizers12%12%

FaujiFertilizerCo.11513719%13%7%12%

EngroCorporation9215568%0%5%0%

Oil&

GasMarketingCompanies3%0%

PakStateOil23330933%

3%3%0%

Power16%39%


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HubPowerCo.445218%15%6%15%

NishatChunianPowerLtd.212416%17%5%12%

Nishat

PowerLtd.192214%16%5%12%

CommercialBanks10%

8%

UnitedBankLtd.8510018%11%6%5%

BankAlfalahLtd.171913%15%4%3%


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Cements18%9%

DGKhanCement547029%4%6%3%

LuckyCementCo.1491608%

5%4%2%

AttockCement9911415%10%0%4%

FectoCementCo.345047%7%4%0%

FaujiCementCo.61067%0%4%0%


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FoodProducers5%2%

EngroFoods9210211%0%5%3%

Telecom6%5%

PakistanTelecom

172862%9%6%5%

Textiles9%8%

NishatMillsLimted647821%7%5%3%

NishatChunian

Limted364525%11%4%5%

Model


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PortfolioWeightage100%100%


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TechnicalPerspectivefor2013

ThereislittledoubtthatPakistanisinasecularbullmarketinwhichultimateupsidetargets

willsurpriseeventhemostoptimistic.Rightnowthemajorityofthemarket

islineduponthelongsideofthemarket.Thefirsthalf

of2013hasthepotentialtoswingthependulumin


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theotherdirectionbeforeCY13putsupstronggains.Giventhatwestarttheyearinthemidstofthestrongadvancefurthergains

canbeforthcominghowevertheDNAofthecurrentcyclicalbullmarketplaces

the100indexmuchclosertoaswinghighthanalow.

TheFMRsforthemajorityoftheequityfunds


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allshowveryhighlevelsofinvestmentgoinginto2013,levelswhichhavehistoricallycorrespondedwithmarkettops.Withthemajorityoffunds

nearmaximumallowableexposurelimitsandinterestratessettorisefromcurrent

levels,abackoftheenvelopecalculationappearstosuggestthatthereis

littlemoneyavailabletocontinuetodrivethemarkethigher.


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AverageEquityfundinvestmentlevelsin%andKSE100pricegraphAvg.%investmentlevelsforequityfundsKSE100IndexLevelSource:Source:BMAResearch/CompanyFMRsandMUFAP

Eventhestrongestadvancesareinterruptedby

periodsofregressandreversiontothemean.Thefollowingchartshowsthe

4-yrrelationshipbetweentheKSE-100andits200DMA.

SpreadbetweenKSE100and200DMASource:BMA

Research


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Themarketwasrecoveringfromabustcycleatthestartoftheperiodandthespreadshowedextremereadings,therelationshipreturned

tonormalatthestartof2010andthisistheperiodthat

weareinterestedin.WorkingwiththeassumptionthattheKSE-100isin

abullmarketyouwouldnotexpectmuchtradebelow


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therising200-DMAwhichwouldmarkaveryattractiveentrypoint.Theupperendoftherangeat+20%iswhenthemarketgets

stretchedontheupsideandrevertsbacktothemean.

The

bottomline

Currentpriceactionisshowingaspreadreadingof

+14%,muchclosertothetopthanthebottomof


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therange,indicatingthatareversiontothemeanmoveshouldbeseenmostlikelyinQ1orQ2.Interpretingthisrelationshipinto

anactionableinvestmentstrategymeansinvestorsandespeciallyspeculatorsshouldnotethatthe

optimumentrypointtogolongequitiesforCY13iswhenthespread

readingisat0ormarginallynegative.Allocatingfreshcapital


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atcurrentlevelswillexposeportfoliostoelevateddrawdownrisk.


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Region/MSCIMarketPerformancein(USD)Pakistanequitiesroundup:ThestarperformersinCY12

Philippines41.9%Staggeringperformanceof49%(37%in

USDterms)bylocalequitieshasmadeKSEthe3rdThailand38.1%best

performingmarketamongstregionalpeersand9thbestintheworld.Moreover,local

equitiesoutperformedtheirbenchmarksi.e.MSCIEMandMSCIFM


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byaheftymarginofSingapore27.1%23%and32%respectivelyinUSDtermstobecomethemostlucrativemarketintheregion.Hong

Kong22.4%Thiswasseendespitetheeconomicturmoil,lowerGDPgrowthcompared

toregionalpeersIndia20.2%andcontinuousdepreciationofPKRagainstallmajor

currencies.Thiscanbecreditedto1)SriLankaSouth


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KoreaVietnamMalaysia18.5%17.2%14.0%12.2%favoredandrelaxedCGTrulesprovidingliquiditytothemarket2)250bpscutindiscountrateswhich

reducedtheattractivenessofalternateinvestmentsand3)improvingrelationshipwiththeUS.

Taiwan11.1%InourlaststrategyreporttitledBMAStrategyOutlook2012:The

RightMovesourmodelIndonesia4.4%aggressiveportfoliooutperformedthe


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KSE100indexbenchmarkby4%toprovideaChina -0.8%cumulativereturnof53%(41%inUSDterms).InterestinglyourdefensiveportfoliomainlyMSCIEM

13.8%constitutingstockswithhigherdividendyieldsandrelativelylowercapitalgainshas

onlyMSCIFM4.9%underperformedthebenchmarkby4%.MSCIEurope15.6%MSCI

NorthAmerica13.2%

Pakistan37.1%BMAModelPortfolio2012outperformsKSE100Indexby4%givingreturnof53%Source:Bloomberg


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PricesReturnWeightsWeightedAv.ReturnScrip31-Dec-1121-Dec-12AggressiveDefensiveAggressiveDefensiveOGDC15218930%20%17%6%5%POL34643140%15%22%

6%9%

ENGRO719231%7%5%

2%

2%

FFC10011531%8%10%

2%3%

FATIMA232722%5%3%

1%1%

PSO18923326%5%5%

1%


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1%

APL41351236%8%10%

3%4%

HUBC344446%10%16%

5%

7%

NBP375054%4%2%

2%1%

MCB12221183%6%4%

5%3%

NRL243212 -7%4%2%

0%0%


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LUCK75149106%2%2%

2%2%

DGKC1954194%1%0%

2%0%

EFOODS2392307%3%2%

9%6%

PICT66255287%2%0%

0%

6%100%100%53%45%

Source:BMAResearch


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KeyeventsofCY12KeyeventsofCY12CommentaryonkeydevelopmentsinCY12

Thefirstandthemostimportanttriggerforthemarketprovedtobethe

financeministersacceptanceofSECPsproposalsregardingCGTrulesinJanuary.Politicaldisturbances,

notably1)continuousstrainonPak-USrelationshipsubsequenttoclosureofNATOsupply

routesand2)SupremeCourtsdisqualificationofPMGilaniin


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June,dentedtheupbeatmomentumtemporarily.However2HCY12wasmarkedbyeaseoffinUS-PaktieswhichledtoanapologyfromtheUS

onSalalaincidentandreleaseofUSD1.1bnunderCSFinAugust.Thiscoupled

withcontinuousmonetaryeasingcycle,whichculminatedinDecemberwithacumulative250bps

cut,sustainedthebullishruninthemarket.Otherpertinent


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marketspecificdevelopmentswerepassageofCorporatization,DemutualizationandIntegrationofStockExchangebillinthefirsthalfandre-compositionofKSE100indexto

free-floatbasedmethodology.


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Elections:Atriggerinitself!

Makingacaseforequities

Positivitywithcaution

Theelectionyearhas

alwaysbeenapositivetriggerinitself.Historicaltrendsuggestsourequitymarket

hasralliedindoubledigitsinexpectationofnewfacesandpolicyshifts.

Tomention,themakethasenjoyeda6monthpre-election


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averagerallyof12%inthelast5electionswhereaspostelection,dependingonthenewpartyanditsexpectedpolicies,themarkethas

ralliedbyanaverage26%inthefollowing6months.Thoughdeterioratingsecurity

situationjustaheadofelectionhasignitedfearsofsomedefermentinelection,

webelievetheelectionwillbeconductedontimeas


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thecurrentgovernmentwillcompleteitsfulltermbyMar13andaconsensusinterimgovernmentwillconductthenewelectionbyMay13.Havingsaid

that,webelievetheroadtoelectionwillbebumpy,dampeningthemarket

sentimentforsometime.

KSE100IndexhistoricalreturnsElectionDatePriorsixmonthsWinningPartySixmonthspostelection24-Oct-905%PML-N13%

6-Oct-9322%PPP80%

3-Feb-977%PML-N


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25%

10-Oct-0215%PML-Q36%

18-Feb-0813%PPP -25%

AverageReturn12%26%

Source:BMAResearch

Giventhecrucialtimesfortheeconomy,webelievenotwhobut

howstrongthecoalitionisthatwilldeterminetheextenttotherise

inmarketpostelection.Solutionstomountingcirculardebt,sorting


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outuntargetedsubsidies,increasingtaxcollectionandmanagingPKRpositioninthewakeofdecliningforeignreserves,tomentionafew,remainthekey

challengesfortheupcomingpoliticalpartyandtheeconomy.Thus,itwillbe

necessaryfortheleaderofthecoalition-basedgovernmenttogarnishsupportfromall

coalitionpartnerstoeffectivelyaddresstheeconomicdifficultiesfacedby


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thecountry.Hence,webelievetheupcomingelectionwouldnotonlybeapoliticaltransitionbutalsoaneconomictransitionwhichifsuccessfulwould

havefarreachingpositiveimpactsontheeconomyinyearsforward.

Oddsfavouringachangethistime

Achangeingovernment,especially

ifastrongcoalitionemerges,willbeawidelyrejuvenating


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factorforthemarket.Thoughwebelievethenextelectionwillyetagainbringahungparliamentwithnomajoritylyingwithanysingle

party,inthewakeofcurrentcircumstancesPakistanMuslimLeagueNawaz(PML-N)may

haveanedge.WebelievePML-Nwithmajorsupportfromdissidentsfromcurrent

coalition(PML-Q&PPP)andotherreligious/ethnicpartiesmayform


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thegovernment.

DespiteprobableseatadjustmentsamongstthetworulingpartiesPPPandPML-Q,theymaystandtolosethenextelections

duetodissatisfiedmasses.However,webelievePPPcouldcontinuetogathersupport

fromitsstrongholdSindhwhereasPML-QmaylosemajorseatstoPML-Nand

PakistanTehreek-e-Insaaf(PTI)inPunjab.


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SeatspositioninNationalAssemblyandexpectationfor2013SeatspositioninNationalAssemblyandexpectationfor20132008

2013EPML(N)PPPPML(Q)PTIInd.MQMJIANPJUIFPML(F)

Keyindicatorsduringdifferentregimes(1990todate)

(Avg.Annual)

PMLNPPPArmyPMLQGDP

4.7%3.6%3.0%6.8%

Growth

-Manufact.6.2%2.6%5.1%10.7%

Inflation9.3%12.9%


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3.8%6.5%

KSE10019.4%6.4%14.6%59.5%

Source:BMAResearch

IndicatorsduringPMLNregimes

(Avg.Annual)FirstTermSecondTermYears

1990-19931997-1999

GDPGrowth5.2%3.9%

-Manufacturing

6.5%5.5%

growth

Inflation11.0%6.8%

KSE100

41.0% -12.0%*

Performance

Source:BMA


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Research

*Nuclearblast020406080100120140

Source:NAwebsite,BMAResearch

The

newlyemergedpoliticalpartyledbyImranKhan(PTI)withasloganfor

changemayhavelostitscharmjustaheadofelectiontotheirbiggest

competitorPML-N.Thepartymaynotbeabletobring


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anyquantifiablechangeintheupcomingparliament.However,webelievethepartywillmanagetofetchsomeseatsinPunjabandKhyberPakhtunkhwa.

DespitereservationsonvoterlistverificationsanddelimitationinKarachibyMuttahida

QuamiMovement(MQM),theelectioncommissionislikelytocontinuewiththedecision

bythehighestcourts.Thisstepcouldresultinloss


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ofsomeseatstoANPandPPP,nonetheless,webelieveMQMwouldonceagainemergeasthestrongestpartyinKarachiandHyderabad.

WhyPML-Nledgovernmentwouldbepositiveforthemarket?

Knownforitsliberalandpro-manufacturingpolicieswhichincurrenteconomicscenariohave

becomethemostdesiredattributesinanypoliticalparty,the


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marketwouldrejuvenateifPML-Nformsagovernment.Recall,theaveragemanufacturinggrowthinthelasttwotenuresofPML-Nstoodat6%,compared

to2.6%inthelastthreetenuresofPPPgovernment.Ledbythe

handsomemanufacturinggrowth,theaveragerealGDPinthetenureofPML-Ngrew

byanaverageof4.6%.

Furthermore,giventhe


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strongesteconomicteamamongstallitsexpectedcoalitionpartners(religiousandethnic)itwouldberelativelyeasyforPML-Ntocarryoutstructuralreforms

thistime.Hence,webelievethenextgovernmentwillmeetconditionsnecessaryto

re-entertheIMFprogram.

Moreover,thepartysstrongpoliticalrelationshipwith

SaudiArabiamayonceagainleadthegovernmenttoenjoy


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theimportofoilondeferredpayments.Wehavenotyetincorporatedthesedevelopmentsinoureconomicmodel,butthesestepswouldreducesome

pressureonthecurrentaccount.

Thedeadlineapproachingfast

With2014deadlineloomingaroundthecornerforwithdrawalofcoalitionforces,things

arechangingquiterapidly.Inthewakeofthis,we


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believePak-USrelationswillcontinuetoimproveirrespectiveofwhoeverformsthegovernmentuntilconsensusonmajorissueslikeNATOsuppliesandpeaceprocess

withTalibanremains.TheimprovementinrelationshipcanbeendorsedbyrecentCSF

paymentsofUSD1.88bnindifficulttimeswhenPakistaniswitnessingpersistentpressureon

forexreservesanditscurrency


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Amplecash:Huntingforyields

HeadingforEquities

KSE100vsOtherAssetClasses

KSEUSDDSCTbills200366% -2%9%

2%

200439%4%8%2%

200554%1%

8%7%

20065%2%10%8%

200740%

1%10%7%

2008 -58%28%11%11%


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200960%7%12%13%

201028%2%12%13%

2011 -6%5%13%13%

2012TD48%8%

12%11%

CAGR20%5%11%9%

Source:KSE,

NSC,SBP,BMAResearch

CY12TDNetFIPI(USDmn)

India

23,170

S.Korea14,812Amplecashasother


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investmentavenuesdisappear

Thereinvestmentriskhasconsiderablyincreasedasbaseratesforfixedincomeinvestmentshavecomedownbyapprox250bps

inthelast12months.Withthisthedifferentialofdividendyieldsagainst

t-billshascomedownto150bpscomparedtolast5yearaverageof

500bps.Moreover,thedifferencebetweenearningsyieldsandt-billhas


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alsogoneupby530bpscomparedtolast4yearaverageof160bps.Thuswithlessermagnetismtowardsfixedincomeasinterestratesare

expectedtoremainsubduedin1HCY13,onlyequitiesprovidetheopportunitytobeat

coreinflationlevels(~10.5%inFY13E).Hence,webelievefreshflowsintothe

marketwillleadthemarkettoprovideadecentreturn


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inCY13aswell.

Yields:EarningsvsDividendsvsTreasurybillsDividendYieldT-BillYieldEarningsYield15%

12%

9%

6%

3%

0%2003200420052006200720082009

2010201120122013E

Taiwan4,460Source:BMAResearchPhilippines

2,483ThetroublesomeclauseofCapitalGainsTax(CGT)to


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disclosethesourceofincomeandThailand2,384cumbersomefilingdroveindividualinvestorsawayfromthemarketasapproximatelyhalfIndonesia1,649ofthe

economyissaidtobeunregistered.SincethepromulgationofCapitalGainsTax

SriLanka287ordinancewhereFBRsauthoritytoaskforsourceoffunding

wasdeferredtillJun14hasPakistan132ledthemarket


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torallyby49%inCY12YTD.ThisisfurtherendorsedbythefactthatVietnam116individualsshareindailytrading,whichhadfallen

toaround55%inJun11,hasreboundedto61%in2HCY12TDandthat

toowithhighervolumesandnegligibleleverage.Toquantify,Source:Bloombergtheshare

indailytradingvolumesofindividualshasdoubledto107mn


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from46mnin2011.Thuswebelieve,themomentumwillcontinueintothenextyeartooandthusfreshinflowswillkeeppouringinto

themarketamidapplicabilityofCGTrelaxationtillJun14.

ShareofIndividualsindailytrading(byvalue)Dec-12

Jun-11

7%10%

IndividualsInstitutionsForeign

32%

35%

55%61%

Source:


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NCCPL


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IMFRe-entry:Aprobablecasewithpositivity

WithpersistentpressureontheexternalaccountandresultantimpactonthePKR,the

countryislikelytoheadbacktotheIMFforanotherprogram.Though

thecurrentaccountdeficitisexpectedtolowerbyapprox54%(1.1%of

GDP)inFY13,itsfinancinghasbecomeadifficulttask


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andthattoowithrepaymentslinedupforFY13.ThishasstartedtotakeitstollonlocalcurrencyasPKRhasdepreciatedby

3%inthelastthreemonthswhichisnotidealforaneconomy

whosemajorportionofimportsisoil.

Tobespecific,we

believePakistanwouldhavetoheadbacktoIMFin


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2HCY13slowingdowntheimpactofPKRdepreciationwhichweexpecttobe11%inCY13wheremajorimpactwouldbeseenin1HCY13.

AndgiventherepaymentstoIMF(USD3.4bninCY13)coupledwithminimalinflows

intotheeconomy,theofficialforexreservesareexpectedtodeclinetoUSD7.2-7.5bn

(mere2monthsofimportcover)bytheendof


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FY13E.Thoughwedownplay,theexpectedPKRdepreciationin1HCY13mayslowdownifUSD800mnfromEtisalat,USD900mnfor3Gauctionsandsomecomponent

ofKerry-LugararerealizedinFY13.

Inthisscenario,webelieve

re-entryintotheIMFprogramwouldbeapositiveandprobablecasefor

theeconomyhowevertherewouldbeconditionalitiesattached.Webelieve,


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thepaceofcurrencydepreciationwouldbereducedandwithslowerimpactoffiscalborrowingoninflationlevels,webelievetheincreaseindiscount

ratesadvisedbythefundwouldbelowifany.Tomention,we

expectCPIinflationtoaveragearound8.75%inFY13andevenatcurrent

discountrates(9.5%),realinterestratesof~0.75%-1%wouldprevail.


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Thus,withminimalincreaseindiscountratesexpectedandslowerPKRdepreciation,theattractivenessinlocalequitieswouldremainintact.

ExternalAccountandReserveAssumptions(USDbn)CurrentAccountFY12AFY13E

Exports24.7

Imports39.7

TradeDeficit -15.0

ServiceDeficit

3.0

IncomeDeficit3.2

NetDeficit -21.2

Remittances13

OtherCurrent

4.03.8Transfers


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C/ADeficit4.6

asofGDP2.0%1.1%

FinancialAccountFY12AFY13EIMFPrincipalRepayments

-0.9 -2.7

ParisClub

CSF-

3GAuction-

OGDCExchangeableBonds--

EtisalatPayments-

SBPReserves(opening)

14.810.1

SBPReserves(end)10.17.2-7.5

Source:BMAResearch


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IMFrepaymentschedulefor2013and2014IMFrepaymentschedulefor2013and2014USDmn

1,903

2,0001,6001,2008004000

1,6081,106739

1HCY132HCY13

1HCY142HCY14

Source:IMF

Therisktoourexternal

accountassumptionsstemfromhighercrudeoilpriceswhichseemmorelikelyafter

extraordinarysocialexpendituresplannedbyoilproducingcountries(SaudiArab,


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Russia,Qatar,IranandotherMENAcountries),resultantlyincreasingthebasepriceforoilexploration.AUSD5perbarrelincreaseinoilpricesincreases

PakistanscurrentaccountdeficitbyUSD600mn.Webelieve,higheroilpriceswouldbe

arisktoourC/Adeficittargetswhichwoulderodethesupportprovided

tothefinancialaccount.

Onthefiscalside,


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thecurrentturbulencewaswidelyanticipatedaswemoveintotheelectionyearandthegovernmentsspendingspreeshowsapre-electionhangoverwhichcannot

betermedasextraordinary.Withmajorsubsidies(powerwhichis26%oftotal

expectedfiscaldeficit)alreadybeenutilizedinfullduringjust5MFY13,webelieve

thetargeted4%fiscaldeficitforFY13wouldbeeasily


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crossedandwouldhit6.5%ofGDPbyyearend(FY13).

PakistankeyeconomicindicatorsFY12FY13E

GDP%3.73.5

Inflation%10.88.75

ReservesUSDbn10.87.5

PKR/USD94.6103

RemittancesUSDbn13.314.3

Interest

rates%12.59.5

C/ADeficit%2.0


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1.1

FiscalDeficit%6.66.5

Source:EconomicSurvey,BMAResearch


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BMAseven7

CompanyNameSymbolPriceTargetPriceUpsideDiv.YieldGrossReturnPakistanOilfieldsPOL4314709%13%22%

PakistanPetroleumPPL17820213%8%21%UnitedBankUBL85100

18%11%29%

FaujiFertilizerFFC11513719%13%32%NishatMillsLtd.NML647821%

7%28%

D.G.KhanCementDGKC547029%4%33%HubPowerCompanyHUBC445218%15%

33%


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Energy:Oil&Gas

Overweight

Oil&GasSectorPerformance

1M3M12M

Absolute%

1%4%15%

RelativetoKSE% -3% -6%-34%

BMA

UniverseVal.SummaryFY13E

EPS

PriceUpsidePERD.Yield

Growth

OGDC1897%7.4x6%14%


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PPL17814%5.9x8%21%

POL4319%7.4x13%17%

RelativeOil&GasvsKSE100

Index

PakistanOilandGasE&P:Robustfundamentals;attractivevaluations

Drivenbysignificantincreaseinhydrocarbonproduction,steadytrendinoiland

gasprices,aggressiveE&Dactivityinbothown/JVoperatedhydrocarbon


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richareasandcompellingregionalvaluation,PakistanOilandGasE&Psectorwillcontinuetodepictstellarperformance.Furthermore,withinvestorfriendlypolicies,being

majorrecipientofforeigninvestmentandrelativeinvulnerabilitytolocalfundamentalsfurtherstrengthens

ourinvestmentthesisonthesector.

Giventheunfoldingofmacro

eventslikesteepdepreciationinPKRandnotablereductionin


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rateofreturnonalternateinvestments,webelieveE&PstogaingreaterattentiononaccountoftheirnaturalhedgeagainstPKRvalueandattractive

dividendyields

ProductiongrowthinCY13willbeagaindrivenby

appraisal/developmentdrillingatTAL,Nashpa,Mela,KPD-TAY,SinjhoroandUchblocks/fields.Ongoingdevelopment

activityinJhalMagsi,Dakhni,ChakNaurangandAdhimay


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furtherunlockupsideinsectorsfundamentals.RevampatSui,KandhkotandQadirpurwillalsoremaincriticaltoproductionoutlook.

Arablightcrude

oilpricesFY13TDhaveaveragedatUSD109/bbl(lowerby2%thanFY12average

oilprice)howeverstillhigherby9%thanourlongtermoilprice

assumptionthusposingnodownsiderisktoourvaluationestimates.


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Despite2%YoYreductioninbenchmarkperiod(Jun12-Nov12)oilprices,weforeseeYoYimprovementinwellheadpricesmainlydueto9%depreciationinPKR

duringthecomparableperiod.

OurTPofOGDC,PPLandPOL

standsatPKR202,PKR202andPKR470translatingintoatotalreturnof13%,

23%and22%respectively.AmongourE&PUniverse,POLoffers


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thehighestdividendyieldof13%.

OilandGasKSE100Index160140120100

RelativeValuationsTickerNameP/E(x)Div.YieldEV/EBITDA(x)POLPAEquityPakistanOilfieldsLtd7.413%3.7OGDCPAEquityOil&GasDevelopmentCoLtd7.46%

4.2PPLPAEquityPakistanPetroleumLtd5.98%3.2PMOLNEquityPremierOilPlc12.20%5.4

80

STOAUEquitySantosLtd19.54%7.7

60

Dec-11Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12


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Aug-12Sep-12Oct-12Nov-12Dec-12

JPEquityJapanPetroleumExploration12.11%3.5

ONGCINEquityOil&NaturalGas

CorpLtd7.91%4.3

CAIRINEquityCairnIndiaLtd

7.52%3.8

WPLAUEquityWoodsidePetroleumLtd18.95%

11.5

OXYUSEquityOccidentalPetroleumCorp10.9


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3%5.1

NBLUSEquityNobleEnergyInc23.41%8.5

Source:Bloomberg,BMAResearch


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BUY

TargetPriceJun-13:PKR470CurrentPrice:PKR431

BloombergPOL.PA

ReutersPKOL.KA

Capital

Gain9%

DividendYield13%

MCAP(USDmn)1,045

12MADT(mnsh.)0.5

POLvs.KSE100Relative

Chart

KSE100IndexPOL

160140


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12010080

Dec-11Jan-12Feb-12Mar-12Apr-12May-12Jun-12

Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12

Shareholding

PatternasofJun-12

PakistanOilfields:Amixofgrowth&

value

Investmenttheme:Upcomingvolumetricadditions,shieldagainstcirculardebt,exposure

tohighprofileTALregionandhighestdividendyieldof


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13%inthesectorcomposesourinvestmentthemeforPakistanOilfieldsLimited(POL)asapreferredplayintheE&Psector.Also,relativelystable

wellheadpricesofkeyproductionfields(78%oftotalgasproduction)andhigher

sensitivitywithdepreciatingPKRvaluefurthersstrengthensourconvictiontowardsthestock.

Morefluidinthepipeline:Volumetricadditionsfromtie


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inofrecentlydrilledwellsinTALblockmainlyMaramzai-2,Mamikhel-2andManzalai-9(cumulativelyadd~3500bpdoiland~70mmcfdgas)plusthecommencementof

MakoriEastEPFfacilityfrommidDec(added5000bpdoiland25mmcfd

gas)willmorethanoffsetthenaturaldeclinefromownedoperatedfields(mainly

Pariwali,PindoriandDomial)thusresultinginrobustproductiongrowth.


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TALblock -yettoreflectitsfullpotential:AlargescaleGasProcessingPlant(MakoriCPF)isalsoplannedtocommissionoperationsfrom

2HFY14increasingtheproductioncapacityofMEfieldto20,000bpdgasand150mmcfd

gaswhichwillleadtoaremarkablegrowthinearningsofthecompany.

Inlongterm,furtherE&Dactivityinthehighprofile


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TALblock,MargallablockandIkhlasblock(Sidrial-1well)mayunlockfurtherupside.

Oil/gaspricestoremainsteady:Giventhe62%share

ofoilrevenueinrevenuemix,anyupwardrevisioninouroilprice

assumptions(9%lowerthancurrentoilprices)byUSD10/bblwillresultinan

upsideof7%toourbasecaseEPSestimates.At


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currentoilpricelevels,thecompanywillcontinuetoenjoystablewellheadpricesonitsTALblock(capped)fields(~3/4thoftotalgasproduction)

thusposingnodownsiderisktogasrevenues.

Robustcashflows,

attractiveyields:Thecompanyenjoysakeyedgeoveritslocal

peersintermofitsinvulnerabilityfromcirculardebtdue


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towhichthecompanyhasNITOthersmanagedtomaintainasteadypayoutratioof85%(onaverage)inlastfouryearsMutual

comparedto43%ofitslocalpeers.Thestrongcashgenerationcapacity

alsoreducesany

Funds

4%riskofexploration/developmentdelays

onaccountofcashshortage.Moreover,robustdividendstreamfrom


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associatesNRLandAPLfurtherstrengthensthebottomline.

Banks&Fis

Valuation:Basedonourreservebasedvaluationmethodology,our

TPforPOLstandsat

Associted12%Cos.PKR470pershare

translatingintoatotalreturnof22%.Atcurrenttradinglevels,thestock

53%istradingatPERof7.4xand7.0xto


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ourFY13EandFY14EEPS.

InsuranceCos.7%10%1%Individuals13%

POL:FinancialSummaryFY11AFY12AFY13EFY14EEPS(PKR)45.750.158.661.2

Price

toEarnings9.4x8.6x7.4x7.0x

POLProfile:POLisprimarily

engagedinexplorationanddevelopmentofoilandgas.TheDividendYield8%

13%13%14%companyoperatesastheonlyupstreamoil


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&

EPSGrowth45%10%17%4%

gascompanyundertheumbrellaofAttock

Group.Thecompanycurrentlyowns

9developmentand4explorationlicenses.TheReturnonEquity32%34%39%

41%shareofcompanyintotaloilandgasproductionReturnonAssets

23%23%22%24%asofJune2012stoodat


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7%and2%respectively.Source:BMAResearch,CompanyReports


134/284

BUY


BloombergPPL.PA

ReutersPPL.KA

Capital

Gain13%

DividendYield8%

MCAP(USDmn)2,976

12MADT(mnsh.)0.7

PPLvs.KSE100Relative

Chart

KSE100 Index PPL

160150140130120


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1101009080

Dec-11Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12Aug-12Sep-12Oct-12

Nov-12Dec-12

PakistanPetroleum:Valuationcatchingupwiththe

peers

Keyvaluedrivers:Ourstrongconvictionforthestockis

basedon1)thecheapesttradingmultiplesinthesector,


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2)aggressiveE&Dactivityplusexpandingoperationsbeyondnationborders,3)increasingshareofcrudeoilinrevenuemixand4)upcomingvolumetricadditions.

Theuncappedwellhead-pricesofkeygasproducingfields(contributing~70%intotal

gasproduction)providekeyadvantagetothecompanyinaneventofsteady

trendinoilprices.

Attractivemultiples:Thestock


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istradingatFY13EPERandEV/EBITDAof5.9xand3.2xreflectingadiscountof20%and19%respectivelytolocalpeersdespiterobust

fundamentaloutlook.Webelievethatthegradualfadingawayofconcernsonsecondary

offerandpositiveoutcomeondomestic/foreignventureswillleadtore-ratingofthe

stock.

Shiftingrevenuemix:Increaseinshareof


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oilsalesinrevenuemixfromlastfiveyearaverageof16%to30%inFY12willnotonlyprovideexposuretosteadyoil

pricesbutalsoimproveprofitabilityprofile(atcurrentoilpricelevels).Thesignificant

additionofcrudeoilfromNashpaandTalblockshasprovidedstronglycounter

thenaturaldeclinefromheavyweightSuifield(35%oftotal


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revenue)

Impressiveproductiongrowthtounlockfurtherupside:ThetieinofTalblockfields(Maramzai-2,Mamikhel-2,Manzalai-9andMakoriEastEPF)

plusNashpa-3willcumulativelyaddaconsiderable~11,700bpdoiland~110mmcfdgasresulting

inanupsideof40%and3%inoil/gasproductionrespectively(postadjusting

forPPLstake).SuccessfuldrillresultatNashpa-4,MECPF


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(expectedfrom2HFY14)anddevelopment/workoveractivityatAdhiandLatiffieldswith39%and33%stakerespectivelywillfurtherstrengthentheproductionprofile.

ShareholdingPatternasofJun-12

GeneralFinancialIns.Public

5%3%AssociatedCos.7%

Others

14%

Govt.ofPakistan

Exploitingunconventionalreserves:With


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2xhigherwellheadpriceofferedundertightgaspolicy,thecompanywillalsostandtobenefitfromexploitationofitstightgasreservoirsin

HalaandKirtharblocks.AgassalepurchaseagreementforKirtharisalready

signedwithgovernment.

Valuation:BasedonourreservebasedTPof

PKR202,thestockrepresentsanupsidepotentialof13%plus


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adividendyieldof8%translatingintoatotalreturnof22%.ThestockistradingatPERof5.9xand5.7xtoour

FY13EandFY14EEPSrespectively.

PPL:FinancialSummaryFY11AFY12AFY13EFY14E71%

EPS

(PKR)

19.124.930.031.4PricetoEarnings9.3x7.1x5.9x

5.7x

DividendYield7%6%8%8%


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PPLProfile:PPLisprimarilyengagedinEPSGrowth35%30%21%4%explorationanddevelopmentofoilandgas.PPL,beingthe

pioneernaturalgasproducerinReturnonEquity33%32%32%28%the

country,ownssixproducingfieldsand18ReturnonAssets25%24%24%

22%explorationblocks.Theshareofcompanyintotaloil


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andgasproductionasofJune2012Source:BMAResearch,CompanyReportsstoodat13%and24%respectively.CurrentlyGovernmentofPakistanholds71%

shareinthecompany.


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Banks

Underweight

BanksSectorPerformance

1M3M12M

Absolute%2%2%-6%


BMAUniverseVal.SummaryCY13E

EPS


Growth

MCB

211 -7%9.1x7%14%

NBP5010%5.5x


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14%-10%

HBL118 -4%6.6x10%-12%

UBL8518%6.0x11%-5%

RelativeBanksvsKSE100Index

PakistanBanks:Inaclassiccatch22

Withforeign

inflowsdryingtoall-timelowlevelsandIMFsconditiontoprintlessmoney

(borrowingfromSBP),thegovernmenthadnooptionexceptto


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approachcommercialbankspostCY09.Thisledlocalbankingsectortorouteentiredoubledigitdepositgrowthtogovernmentpapersandthattooon

doubledigitreturns.Thusthecumulative250bpscutinDRto9.50%in

CY12,coupledwithimpositionofminimumsavingsfloorrateat6%,hasput

thebankingsectorinacatch22positionrecord


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lowprivatecreditofftakedespitemonetaryeasingtogetherwithshrinkingyieldsonriskfreepapers.Resultantly,thedilemmahasstartedtoshowon

thebooksalreadyasspreadshavecomedowntotheirlowestsinceJul05

to6.67%inNov12comparedto7.37%justayearearlier.

Weseelittleimprovementincreditoff-takeespeciallyfromindustrial


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circlesamidworseningenergyshortagesinthecountry,thustheNIMswillcontinuedeterioratingasthefullscaleimpactofeasingcyclematerializesin

CY13.Andthesituationwillbemoreworrisomeforsmallbankshavinghigher

costofdepositsleavingverylittleroomforthemtokeeppre-2012strategy

intact.Thesameisallsettodragthesector


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bottom-linedownby4-12%inCY13whereastheimpactofexpectedmonetarytighteningwouldcomeintoplayin1HCY14.Allisnotlostthough.

Ontheupside,lesserprovisioningandreversalsstemmingfromimprovingassetqualitywould

bethethemestoryforbanksduringCY13.

Ourlikingleans

towardbankswithhigherdepositgrowththattoowithan


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152/284


153/284

30.10.6

ICICIBCINEquityICICIBANKLTD2.116.91.5

23HKEquityBANKOFEASTASIA1.213.2

3.2

MAYMKEquityMALAYANBANKINGBHD1.912.77.5

Source:Bloomberg.BMAResearch


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BUY

TargetPriceDec-13:PKR100CurrentPrice:PKR85

BloombergUBL.PA

ReutersUBL.KA

Capital

Gain18%

DividendYield11%

MCAP(USDmn)1,071

12MADT(mnsh.)1.0

UBLvs.KSE100Relative

Chart

KSE100 Index UBL200180160140120100


155/284

80

UnitedBank:Thepreferredplayinhardtimes

7ppshigherdepositgrowthcomparedtoindustry:Thethirdlargestbank

intermsofdepositsize,UnitedBankLimitedhasbeenthemostprominent

intermsofdepositgrowthcomparedtothesamesizedpeersinthe

industry.Thankstoaggressivebranchnetworkexpansion,thebanksdeposit


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growthhassurpassedtheindustrysby7ppsto25%in9MCY12andweexpectthedoubledigitgrowthtrendtocontinueinCY13as

well.Mostimportantlythebankenjoyslowcostdeposits;as80%oftotal

localdepositsareCASA.

Minimalgrowthinadvancesbodespositive:Low

growthinadvancesdespiteslidingdiscountratescouldbetaken


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asnegativeforthebankhoweverthingsaredifferentinlocaleconomy.Theriskofnon-performingloansamidenergycrisisandexpectationofincrease

inbaseratesin2HCY13haskeptbanksawayfromaggressivelendingstrategy.

DespiteshrinkingNIMs(6.5%in9MCY12),UBLsloangrowthhasremainedat9%

during9MCY12.Themajorcontributiontothegrowthofloan


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bookwasseenfromlesserriskypubliclending.WebelievethetrendtocontinueinCY13aswell,however,withexpectedincreaseindiscount

ratesin2HCY13thespreadswillimproveinCY14.

Lesserexpected

declineintop-linecomparedtopeers:Withgreaterexposuretowardshighyieldingrisk

freePIBs(22.5%oftotalinvestments)comparedtoanaverage


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18.6%oftoptierbanks,thedeclineintop-linewillbelimitedforthebank.Moreover,thebankalsoenjoysanedgeoverpeers

throughitslessriskyinternationalloanbookwhichaccountsfor25%ofnet

lendingasof3QCY12.ApartfrominsulationfromNPLs,thebank

Dec-11Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12


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Aug-12Sep-12Oct-12Nov-12Dec-12

UBL:FinancialSummaryCY11ACY12ECY13ECY14EwillalsoenjoygainsfromPKRdepreciation.

Non-interestincometo

continuetoprosper:Thefeeincomeduring9MCY12hasincreasedby47%to

PKR13.2bncomparedtoPKR8.9bninthesameperiodlastyear

Shareholding

PatternasofDec-11

thankstoserviceincome


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onremittancesandOMNI.Wecontinuetobelievethatnon

FI's

Others

3%

7%JointStock

Cos.

ForeignCo.

8%

37%

GeneralPublic(Foreign)13%

Govt.

Director,

owned

CEOetc.

Co/Banks

13%


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interestincomewillcontinuetoboostthebanksbottom-line;absorbingtheimpactoffallingNIMs.

Outlook:Withlowestdeclinein

earningsduetosupportfromdoubledigitgrowthindepositsthattoolow-cost,

highernoninterestincomeandstabledividendstream,weleanourlikingtowards

UBL.PA.ThescripisavailableatPBvof1.2xcompared


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tolast5yearaverageof1.7xwithdividendyieldof11%forCY13.Weexpectstocktoprovideacapitalgainof18%

byCY13end.

EPS(PKR)12.715.014.217.7

19%

PricetoEarnings6.7x5.7x6.0x4.8x

UBL

Profile:UBLisengagedincommercialDividendYield7%10%


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11%12%bankingandrelatedservices.Thebankoperates

EPSGrowth39%18% -5%24%

over1,200branchesinsidePakistanincluding14

IslamicBankingbranches,makingitthethirdlargestbankinPakistan.

Thebankalsooperates17branchesoutsidePakistan.UBLsGDRsaretradedat

LondonStockExchange.Thebankwasestablishedin1959as


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alocalprivatesectorbankbutwasnationalizedin1974bytheGoP.ItwassoldofftoaconsortiumofAbuDhabiGroup

ofUAEandBestwayGroupin2001underaprivatizationprogram.

ReturnonEquity20%23%19%21%

ReturnonAssets2%

2%2%2%

Source:BMAResearch,CompanyReports


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Fertilizer

Overweight

ChemicalsSectorPerformance

1M3M12M

Absolute%2%2%-6%


BMAUniverseVal.SummaryCY13E

EPS


Growth

FFC

11519%7.3x13%2%

ENGRO9269%


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12.2x0%179%

FFBL3825%7.2x12%14%

FATIMA2758%6.5x9%21%

PakistanFertilizers:Have

seentheworst

AscottonpricesbottomedtoUSD0.8/lbcomparedto

CY11highofUSD2.4/lb,highfertilizerandenergycoststooktheirtollon

farmereconomicsandthusCY12Elocalureademandisset


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tofallby10%YoYto5.3mntons.ThiscoupledwithuntimelyandhighureaimportsbytheGoPledtoinventorypileup

forlocalureaplayersandcontinuouspressureonlocalureaprices.Incompletepass-on

ofgascess,negligiblegassupplytofourSNGPLbasedplantsandsqueezing

marginscompleteastoryoftheworstyearinthe


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historyforPakistanFertilizers.

Thesectorhasincreasinglyfallenpreytoregulatoryscrutinyduringthelasttwoyearsasureapricespeaked

atPKR1,789/baginJan12(upby126%comparedtoJan10levelofPKR790/bag).

ThepricehikesweremandatedbyGSTimpositioninMar11,continuousremovalgas

subsidiesintheformofcessandgassupplydeficit


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toSNGPLbasedplants.Thatsaid,influxofimportedureahaseffectivelycurtailedthepricingpowerofthesector,previouslytheonlyhedgeagainst

gassupplydeficit.Ureapriceshavethusbeenconstantlyunderpressure,keepingall

SNGPLbasedplantsunderheavylossesinCY12.

Goingforward,inventory

situationisexpectedtobemuchrelaxedamidrationalimport


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targets.VariousgassupplyplansunderconsiderationmayalsoimprovefortunesforSNGPLbasedplayers.Amidlowinterestrates,wepreferattractivedividendplays

inthesector!

RelativeValuationsRelativeChemicalsvsKSE100Index

ChemicalsKSE100Index

TickerNameP/E(x)Div.YieldEV/EBITDA(x)FFCPAEquityFaujiFertilizerCompanyLtd7.313%3.8ENGROPAEquityEngroCorporationLtd12.20%6.1FATIMAPAEquityFatimaFertilizerCoLtd6.59%5.8FFBLPAEquityFaujiFertilizerBinQasim7.212%4.7160140120100

8060

RMPHINEquityRamaPhosphates


173/284

Ltd3.70%2.7

CHMBINEquityChambalFertilisers&Chem17.63%7.2

RCFINEquityRashtriyaChemicals&

Fert12.52%9.0

DPMVNEquityPetrovietnamFert&Chemical

4.07%2.0

HDRINEquityLibertyPhosphateLtd4.11%

2.5

TNHUSEquityTerraNitrogenCompanyLp


174/284

13.38%6.8


Jul-12Aug-

12Sep-12Oct-12Nov-12Dec-12

Source:Bloomberg,BMA

Research


175/284

BUY

TargetPriceDec-13:PKR137CurrentPrice:PKR115

BloombergFFC.PA

ReutersFAUF.KA

Capital

Gain19%

DividendYield13%

MCAP(USDmn)1,499

12MADT(mnsh.)2.3

FFCvs.KSE100Relative

Chart

KSE100IndexFFC

160140


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12010080

FaujiFertilizer:Defensiveplaywithastoundingyield!

Thebestperformerintheworstyear:Welike

thelargestfertilizerplayer,FFC,asthesafestfertilizerbetbecausethecompany

facestheleastsalesrisk(strongdistributionnetwork)andgassupplyrisk(Mari

fieldbasedplant)amongcompetitors.Beingtheonlyplayerto


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haveanationwidedistributionnetworkisakeycompetitiveadvantageforFFC.Also,itsSonabrandcommandsthehighestloyaltyinfarmersbeingone

oftheoldestandwellestablished.

Yieldingover13%forCY12-14E:

Withdiscountrateatafiveyearlowof9.5%,defensiveinvestorslooking

forhigh-yieldopportunitiestoredeploycashmayfindFFCone


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ofthemostlucrativeequityplays.Thestockyields13%asoflastclose,withafurtherupsiderisktoearningsiflowerimports

allowsalesforthecompanytogobackupto2.4mntons(from2.3mn

tonsexpected)forCY13.

FFCEnergy(FFCEL)toprovidefurtherupside:

FFCs100%owned50MWwindpowerprojectcommencedoperationsin


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Dec12.Wehavenotbuiltintheimpactoftheprojectintoourmodelsyetasweawaitfullyearfinancials,butinitialestimates

suggestanannualimpactofPKR1.1bn(PKR0.9/sh).Thispresentsyetanotherupsidepotential

toourCY13andonwardsestimatesforthecompany.

Slashin

ureapricemayposeadownside:Onedownsideriskto


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ourestimatescomesfromthepossibilityofregulatorypressureonureapricescoupledwithfurtherimpositionofgascess,especiallyifthegovt.provides

gastoSNGPLbasedplayers.

Dec-11Jan-12Feb-12

Mar-12Apr-12May-12Jun-12

Jul-12Aug-

12Sep-12Oct-12Nov-12Dec-12


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ShareholdingPatternasofDec-11

OthersForeign6%Investors

7%

Charitable

FI's

Trust

&

13%

Others49%

InsuranceCos.10%

Individuals15%

FFCProfile:FFCisheadquarteredinRawalpindi

andisengagedinmanufacturing,purchasingandmarketingoffertilizers.


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Thecompanyhasratedureacapacityof2.0mntons.FFCalsoholds51%stakeinureaandDAPmanufacturerFaujiFertilizerBinQasim(FFBL),

whichhasratedcapacitiesof550ktonsand650ktonsofureaand

DAPrespectively.

Valuationspose20%gainspotential:OurDec13TPfor

FFCstandsatPKR137/sh,providing20%upsidepotentialalongwith


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13%dividendyieldforCY13.UpsidepotentialfromFFCELandhighervolumetricsalesmayunlockgreaterreturnswhileureapriceriskposesadownside

BUY!

FFC:FinancialSummaryCY11ACY12ECY13ECY14EEPS(PKR)17.715.515.816.5


DividendYield12%

13%13%13%

EPSGrowth104% -12%2%5%


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ReturnonEquity97%79%82%86%

ReturnonAssets41%42%42%43%

Source:BMAResearch,Company

Reports


185/284

Textile

Marketweight

PersonalGoodsSectorPerformance

1M3M12M

Absolute%10%29%89%

RelativetoKSE%6%20%40%

BMAUniverseVal.

SummaryFY13E

EPS


Growth

NML6421%4.8x7%35%


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NCL3625%3.1x11%197%

RelativePersonalGoodsvsKSE100Index

PakistanTextile:Reboundingcoreoperationswarrantattention

1)Robustgrossmarginsonaccountoflowcostcottonandstable

pricesoffinishedgoods(rangingfromcottonyarntohometextiles),2)lower

financingratesand3)betterexportprospectswillremainthe


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keyvaluedriversforthesector.

CottonpricesinFY12witnessedasteepdeclinewhichcausedsignificantinventorylossesforthedownstream

companiesthusinflictingaseveredentonthegrossmargins.However,cottonprices

nowseemtohavebottomedoutandstabilizedatcurrentlevels.Lowvolatility

inrawmaterial(cotton)pricescoupledwithsteadytrendin


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pricesofcottonyarnandvalueaddeditemswillenablethesectortoenjoyrobustgrowthingrossmargins.

Thesectoris

alsoreapingthebenefitsofrecentboomincottonyarnimportsfromChina/Hong

owingtosignificantlyhigherminimumsupportpriceofcottoninChinacomparedto

internationalpricesthusmakingin-houseproductionofyarnunfeasiblefor


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Chinesemanufacturers.ThishassignificantlyimprovetheutilizationandmarginsofthePakistanspinningsector.

TherecentlygrantedofEUdutyfree

access(effectivefromJan13)willfurtherbolstertheexportprospectsforthesector.

GivennominalcottonyarnimportsfromEU,webelievetheweavingandhome

textile/garmentsegmentstoremainthemajorbeneficiary.

Moreover,


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PakistanisalsopursuingtoacquiretheGSPplusstatus(effectivefromJan14).Giventhecurrenthighimporttariffsimposedontextileandclothing,

webelievethevalueaddedsegment(mainlygarmentsandhometextile)willremain

themajorbeneficiaryofthescheme.

Thetextilemanufacturershavebeen

aggressivelypursuingtoinstallcoalfiredandbio-massfuelbased


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boilersandpowerplantstocombattheenergycrisis.Thiswillenablethemanufacturerstonotonlycurtailmountingpowercostbutalsoto

avoidproductionlossesonkeyexportorders.

PersonalGoodsKSE100Index

200180160140120

RelativeValuationsTickerNameP/E(x)Div.YieldEV/EBITDA(x)NMLPAEquityNishatMillsLtd3.97%4.8NCLPAEquityNishatChunianLtd3.811%3.1

200726CHEquityLuthaiTextileCoLtd -B6.45%5.1


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100

TTTMTBEquityThaiTorayTextileMillsPcl6.12%3.5

80

60

1476TTEquityEclatTextileCompanyLtd15.13%11.4

Dec-

11Jan-12Feb-12Mar-12Apr-12May-12Jun-12

Jul-12Aug-12Sep-12Oct-12


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Nov-12Dec-12

VTEXINEquityVardhmanTextilesLtd10.92%6.8

HDMVNEquityHueTextileGarmentJsc

6.45%3.5

002394CHEquityJiangsuLianfaTextileCo-A9.7

3%7.8

TPCORP-RTBEquityTextilePrestigePcl-Nvdr15.54%4.8



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BUY


BloombergNML.PA

ReutersNISM.KA

Capital

Gain21%

DividendYield7%

MCAP(USDmn)232

12MADT(mnsh.)2.6

NMLvs.KSE100Relative

Chart

KSE100IndexNML

180160


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14012010080

NishatMillsLimited:Themostdiversifiedandthebesthedge

Concretefundamentals:Drivenbyrobust

coreoperationonaccountofstellarperformancesunderalldivisionscoupledwitha

healthyportfolio,NishatMillsLimited(NML)isallatsettopostanother

yearofrobustgrowthasweforeseethecompanyto


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postearningsgrowthof35%and15%respectivelyinFY13andFY14.Atcurrentlevels,thestockistradingatPEof4.8and

4.1xtoourFY13andFY14EPSestimates.

Keyvaluedrivers:

Oncoreoperationsfront,1)robustcoremarginsamidlowercottonpricesand

steadydownstreamdemand,2)betterexportsprospectspluspersistentweakening


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ofPKR,3)improved/initiationofdividendpayoutbyassociates4)lowinterestratesand4)costreductionfromalternatefuelprojectswillremainthe

keyvariablesofcoreearningsgrowth.

Energyefficientmeasures:Moreover,the

recentlyimplementedandupcomingenergyefficientalternativestocurtailtheburgeoningfuel/powercost

(notincludedinourmodel)willnotonlyresultin


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valuablecostsavingsbutwouldalsoenablethecompanytotimelyprocessanddelivertheexportorders.

Healthyportfolio:Thecompanyalso

holdsawelldiversifiedportfolioinvestedingroupcompanies.Thehealthypayoutand

strongcapitalappreciationpotentialintheseholdingcompaniesfurtherstrengthensthefundamentalposition

ofthecompanythusprovidingastrongguardagainstvolatility


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incoreoperations.

Capacityexpansioninhighmarginvalueaddedsegment:Thecompanyispursuing

Dec-11Jan-12Feb-12Mar-12Apr-12

May-12Jun-12Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12

ShareholdingPatternas

ofJune-12

tofurtherexpanditsproductioncapacitiesinprocessingand

hometextilesegment(alreadyoperatingatfullcapacity)amidheavy


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influxoforders.Giventherobustdownstreamdemandandstrongpresenceinexportmarkets,webelievetheupcomingcapacityadditionwillfurtherboostthe

revenuesinthelongterm.

AssociatedCos.Others9%21%

Fis28%

GeneralPublic42%

Limiteddownside

risk:TheupcomingChinesecottonpolicymayendtheongoing


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boomofcottonyarnexports.Unlikelocalpeers,NMLholdsadiversifiedproductportfoliowhichwillkeepitrelativelyimmuneintheoutcomeof

suchaneventcomparedtoitspeers(highlyexposedtononvalueitems)

Valuations:OurTPisbasedonSOTPvaluationtechniquewitha

portfoliovalueofPKR51pluscoreoperationsvalueofPKR27


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translatingintoaTPofPKR78shareforthecompany.Atcurrentlevel,ourestimatedTPrepresentsatotalreturnof28%

NML:FinancialSummary

FY11AFY12AFY13EFY14EEPS(PKR)13.810.013.515.5

PricetoEarnings4.7x

6.4x4.8x4.1x

NMLProfile:NishatMillsLimited,thelargestvertically

integratedtextilecompany,is

DividendYield5%5%


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7%8%

EPSGrowth66% -27%35%15%

primarilyengagedinspinning,weaving,printing/dyeingandstitchingoperations.The

Returnon

Equity14%9%11%12%

companyoperatesundertheumbrellaof

NishatgroupwhichhasstrongpresenceinallmajorReturnonAssets9%

6%8%9%sectorsincludingTextiles,Cement,Banking,Insuranceand


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PowerGeneration.TherevenueSource:BMAResearch,CompanyReportsmixofthecompanyiscomposedof49%localsalesand51%exportsales.


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Cements

Overweight

Construction&MaterialSectorPerformance

1M3M12M

Absolute%1%15%143%

RelativetoKSE% -2%6%94%

BMAUniverseVal.

SummaryFY13E

EPS


Growth

LUCK1498%5.4x5%31%


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DGKC5429%4.5x4%28%

ACPL9915%5.3x10%29%

PakistanCements:Gearingupforanotherfruitfulyear

Robustretentionlevels,considerabledeclineincoalpricesandbetterdispatches

fromhigherPSDPutilizationwillremainthekeyvaluedriversforthesector.

Thesefactorscoupledwithnotablereductionfinancecost,healthyother


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income(owingtoimprovedcashposition)andvaluablecostsavingsfromalternatefuelprojectswillfurtherstrengthenthemargins.

Followingadifficult

threeyearhiatusofpricewars,shrinkingmarginsandalltimelowcapacity

utilization,FY12sawfortunesreverseforthesectorandtheresnostoppingthe

momentumfromthere.FY13alsostartedonahighnote


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asthesectorwitnessedaremarkable3.6xYoYhigherearningsintheoutgoing1QFY13.

Goingforward,high-marginlocaldispatcheswilldepictnotable

improvement(alreadyupby7%YoYin5MFY12)onaccountofbetterPSDP

utilizationandupliftinprivatesectorconstructionactivity.Thoughexportsvolumewillremain

weak;betterexportpricescoupledwithnotabledeclineinPKR


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valuewillcontinuetoprovidestrongsupporttothetopline.Thatsaid,robustdownstreamdemandwillcontinuetokeepthepricesdownwardsticky.

Maincostdrivercoalhasstayeddepressed(averaging18%lowerinFY13TD

comparedtoFY12average).Bearishtrendincoalpricesandresultantimprovementin

marginswillremainthekeydriverofearninggrowthin


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FY13.

PakistanCements:OfftakesreboundingamidincreasingmarginspostFY11RelativeConstruction&MaterialvsKSE100Index

LocalDespatchesExports

CapacityCoal(LHS)LocalCement

Price(RHS)

50

200

500

Construction

andMaterials

KSE100Index

mntons

USD/

tonFY08FY09FY10FY11FY12

160

400


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PKR/bag

40

120

300

30

250200

80

200

20

150

40

100

10

100

0

-

0

-

Jan-08May-08Sep-08Jan-09May-09Sep-09Jan-10May-10Sep-10


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Jan-11

May-11Sep-11Jan-12May-12Sep-12



Source:BMAResearch

RelativeValuationsTickerNameP/E(x)Div.YieldEV/EBITDA(x)DGKCPAEquityD.G.KhanCement4.54%3.2LUCKPAEquityLuckyCement5.45%4.1ACPLPAEquityAttockCementPakistanLtd5.310%3.4ACEMINEquity

AmbujaCementsLtd24.92%14.1

TKYOXSL


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EquityTokyoCementLanka-NonVotin13.57%4.3

1110TTEquitySoutheastCementCoLtd61.41%42.7

002030KS

EquityAsiaCementCoLtd14.41%6.4

JKCEINEquity

JkCementLtd13.52%6.2

UTCEMINEquityUltratechCement

Ltd22.70%13.9

LMCMKEquityLafarge


214/284

MalayanCementBhd21.94%12.2

Source:Bloomberg,BMAResearch


215/284

BUY


BloombergDGKC.PA

ReutersDGKC.KA

Capital

Gain29%

DividendYield4%

MCAP(USDmn)245

12MADT(mnsh.)9.1

DGKCvs.KSE100Relative

Chart

KSE100 Index DGKC

320280240200160


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12080

Dec-11Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12

DG

KhanCement:Risingcoremargins+slidingleverage=Outperform!

DGKC

ispoisedtorealizehighcoremargins:Withcementpricessustainingupwardtrend

despitecapacityaddition(pricesfurtherupbyPKR5-10/baginFY13TD


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toPKR445/bagintheNorth),thesecondlargestcementproducerinthecountry,DGKC,iswellpoisedtorealizehighercoremarginsinFY13-14E.

1QFY13grossmarginsroseby8ppsto38%,alsohelpedby25%softer

coalprices.Thecompanycontinuestooperateat100%utilizationlevel,comparedto

70%industryutilization.

Costsavingprojectstobear


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fruits:ThecompanyhasundertakenmultipleenergyefficientmeasureswhichincludesWasteHeatRecovery(WHR-2)plant(from2QFY13),fullyearimpactofRDF-2plant

(commencedin4QFY12)andpossiblestart-upofTDFplant(furtherreplacementofcoal

requirementby10%).Thesecostsavingmeasurescoupledwithlowerpricesofcoal

willfurtherunlockupsideingrossmargins.

Softening


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interestcosttofurthercushionthebottomline:DGKCisallsettoretireoverPKR2.0-PKR1.5bninlongtermdebtinFY13-14Eamidsteadycash

flowgeneration(owingtorobustprofitability).Lowerleveragecoupledwith250bpsreductionin

interestrateswillsignificantlyreducethefinancecostprovidingstrongcushiontothe

bottom-line.

HealthyportfoliosetsDGKCapart:DGKCholds


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adiversifiedportfolioofNishatGroupcompanieswithstrongpresenceintextileandfinancialsectors.Goingforward,improveddividendpayoutfromsubsidiaries(particularlytextile

companies)willfurtherstrengthen

theearnings.

Valuations -Lookingat30%

upsidefromhere:OursumofpartsvaluationforDGKCleadsto29%

upsidefromheretoourJun13TPofPKR70,with


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coreoperationscontributingPKR41/shandportfolioaddingPKR29/sh(valuedat30%discounttomarketprice)tothetargetprice.WeexpectFY13earningsto

growby28% -BUY!

ShareholdingPatternasofJune-12

Others

4%Associated

DGKC:FinancialSummaryFY11AFY12AFY13EFY14EEPS(PKR)0.49.412.012.4



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Cos.

General

32%

Public40%

Fis24%

DGKCProfile:DGKCisengagedin

productionandsaleofOrdinaryPortland,SulphateResistantCementandClinker.Thecompany

hasratedclinkercapacityof4.0mntons,makingitthesecondlargestcement

producerinPakistan.DGKChaslongterminvestmentportfolioof


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overPKR5.0bninrelatedpartiesprimarilyinPakistansfinancialandtextilesectors.ThecompanyisheadquarteredinLahore.

DividendYield0%3%

4%4%

EPSGrowth-27%2305%28%3%

Return

onEquity1%12%13%12%

ReturnonAssets0%8%

10%9%



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Power

Overweight

ElectricitySectorPerformance

1M3M12M

Absolute%5%3%38%

RelativetoKSE%1% -6%-11%

BMAUniverseVal.SummaryFY13E

EPS


Growth

HUBC4418%6.0x15%3%

KAPCO49


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5%6.4x14%24%

NCPL2116%3.4x17%11%

NPL1914%3.1x16%8%

PakistanPower:

Governmentsdarlingintheelectionyear!

Circulardebt -thesectorsbiggestapprehension:

PowersectorinPakistanisknownforitsassociationwiththecirculardebt

issue.Thephenomenonhassnowballedextensivelyasrisingoilprices


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alongwithgovernmentsinabilitytopassonthetariffentirelytoconsumershavestrainedthecashpositionofcompaniesandhasputaquestion

markonthedividendpayoutcapacities.Additionally,linelosses,inefficientdistributionnetworkshave

continuedtoballoontheoutstandingamount.Hencedespitegovernmentscommitmenttoresolvethe

issue,theoutstandingnetamountisstillestimatedtobe


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aroundgrossPKR370bn.Asaconsequence,IPPscontinuetofaceliquiditycrunchresultinginfurnaceoilsupplyshortageleadingtolowerloadfactorand

electricaloutput.WhilereturnsareguaranteedforIPPinvestors,financialchargesonshort

termborrowingarenormallynotapass-throughitem.Inaddition,liquidityshortagehas

alsoraisedflagsontheabilityofIPPstocontinue


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topayoutgenerousdividends.

Webelievetheproblemwillcontinuetonagtheentireindustryuntilanyconcretestructuralresolutionhowever,considering

thecurrentpoliticalsituationinPakistan(upcomingelections),westronglybelievethatsome

reliefwouldbegiventothepowersectortosettlethepoweroutcry

countrywide.

Theultimatedefenseagainstmacro-evils:Despitehuge


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concernsoncirculardebt,wehaveanoverweightstanceonthesectorwhichisallsettobenefitfromthecurrenteconomicscenario(depreciating

PakRupeeandincreasinginflation).Furthermore,theinterestratescenariolocallyisexpected

tokeeptheinvestorshookedtothesectorprovidinganaverageyieldof

15%apartfromthecapitalgains.

RelativeValuationsRelative


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KSE100vsElectricitySector

TickerNameP/E(x)Div.YieldHUBCPAEquityHubPowerCompany6.015%ElectricityKSE100Index

160140120100

KAPCOPAEquityKotAdduPowerCompanyLtd6.414%NPLPAEquityNishatPowerLtd3.116%NCPLPAEquityNishatChunianPowerLtd3.417%

RPWRINEquityReliancePowerLtd29.70%

80

NTPCINEquityNtpcLtd12.33%

60

600509CHEquityXinjiangTianfuThermoele-A13.43%


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KHPVNEquityKhanhHoaPowerJsc5.015%

Dec-11Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12Aug-12Sep-12Oct-12

Nov-12Dec-12

EPWAUEquityErmPowerLtd9.87%

APISPEquityAsiaPowerCorpLtd17.40%



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BUY


BloombergHUBC.PA

ReutersHPWR.KA

Capital

Gain18%

DividendYield15%

MCAP(USDmn)522

12MADT(mnsh.)2.2

HUBCvs.KSE100Relative

Chart

KSE100IndexHUBC

160140


234/284

12010080

HubPower:Beinsafehands

ProfitabilityinnodangerHUBCstandsasourfavoritepickin

theelectricitysectorastheincreasingrevenuestreamfromNarowaland~1.5%increase

incompanysProjectCompanyEquity(PCE)componentisexpectedtoreflectwellon

theearnings.Furthermore,thecontinueddevaluationofPakRupeeagainst


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dollarwherethelocalcurrencyhasdepreciatedby9%YoYin1HFY13toaveragearoundPKR95.4perUSDagainstlast3yeardepreciationaverageof

4%inthesameperiod,willfurtherstrengthentheprofitabilityindexedtoUSD/PKR

andUSCPIinflation.

butcashflowsare!TheCODofNarowal

broughtaboutariseincompanysprofitabilityhowever;alldid


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notgoasplanned.TheprojectfacessevereliquidityproblemsasNationalTransmissionandDispatchCompany(NTDC)continuestofallshortofitsobligations.

Furthermore,itismandatoryfortheplant(establishedunderthe2002policy)to

payinadvanceforthefuelsupply,failingtodosoresultsin

plantclosure,furtheraddingtotheliquiditywoesofHubco.


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Worsecumworse:Therecentnewsstoryhighlightingmanagementsconcernsovernon-paymentofdueshasraisedmanyquestionsoverthecompanyscapacity

fordividendpayoutthisyear.However,wekeepourassumptionsintactandexpect

thecompanytopayPKR6.5/shinFY13withthehelpofshort-termborrowings

andfundsreleasedfromNTDC.Evenifthecompanyskips


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itshalf-yearpayout,itwillcompensateitsinvestorsinthefullyearandtheresultantdepressioninstockpricewouldpresentawonderfulbuying

opportunitytotheinvestors.



ShareholdingPatternasofJun-12

Others

Prov.Fund,

4%


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Gratuityetc.5%JointStockCos

Invest.

32%

Insur.Mod.&Mut.Funds13%

Individuals

FI's

17%

29%

Laraib:theother

Narowal?LaraibPowerproject(84MW),thesecondexpansionproject(Hubcosstake:75%)is

expectedtocomeonlinesoonerthanscheduled(midCY13),according


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tosources.Astheprojectishydel-based,webelievetheexpansiontobodewellforthecompanyduetoitsrelativeimmunityfromcircular

debtunlikefurnaceoilbasedNarowal.Nottoforget,thegovernmenthaslaid

outanevenhigherindicativeUSDIRRforhydelgenerationat17%;where

currentlyHUBCOistheonlycompanythatissettingup


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ahydelplant.However,wehavenotincorporatedtheearningsfromLaraibinourfinancialmodelasweawaitCODandfinalizationoftariff.

Valuations:Hubcoemergesasourfavoritepickinthepowersector

asitcombinesanirresistibledividendyieldwithatremendousgrowthstory.Our

TPforthescripworksouttoPKR52/shproviding


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anupsideof18%fromthecurrentlevels.Andthisisnotall!Thestockfurtherpromisesacompellingdividendof15%takingthe

totalreturnstoahefty33%.

HUBC:FinancialSummaryFY11AFY12AFY13EFY14EEPS(PKR)4.7

7.17.37.8

HUBCProfile:TheHubPowerCompanyLtd.



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wasincorporatedinPakistanonAugust1,1991.TheprincipalactivitiesofthecompanyaretoDividendYield13%14%15%16%develop,own,operate

andmaintainpower

EPSGrowth-2%51%3%7%

stations.

TheCompanyownsanoil-firedpowerstationof1200MW(net)inBalochistan(Hub

ReturnonEquity18%27%29%31%Plant)anda


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214MW(net)oil-firedpowerstationinPunjab(NarowalPlant).Thecompany

ReturnonAssets4%4%5%5%

alsohasa

75%controllinginterestinLaraib


EnergyLimited,asubsidiarycompanywhichownsanunderconstructionhydelpower

pakistan strategy outlook 2013

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