annual equity investment report · source: kse source: kse average daily volume (mn) source: kse...

For important disclosure and analyst certification, kindly refer to end of the report

Annual Equity Investment Report January 7, 2012

Pakistan Investment Outlook 2012

A Year of Defensive Play

Growth will heavily depend on Industrial sector in FY12

We have scaled back our growth projections to 3.8% attributable to lackluster industrial growth, energy deficits, slowing private sector investment and benign global growth outlook. We project CPI inflation to clock in at 12.4% YoY primarily owing to increase in energy prices and PKR depreciation. In our view Pakistan rupee is likely to come under pressure (4% YoY depreciation to USD 88.7/PKR FY12 average) due to widening current account balance, upcoming IMF repayment and rising energy-based imports. Keeping these foreseen developments in mind we think, SBP will likely keep discount rate on a hold at 12% for the remaining period of FY12.

KSE100 Index has exhibited resilience in CY11

US economic recession, EU sovereign debt crisis and slowdown in major developing economies were the major concerns witnessed in global equity markets and investor sentiment likewise remained subdued. While not immune to any of the above, local bourses had to withstand additional domestic economic and political pressures. An intensifying circular debt crisis, rising gas curtailment, bleak law and order situation and widening fiscal and current account deficits have taken tool on the market. Despite these challenges, KSE remained one of the best performing markets in the region as KSE100 Index, shed only 5.6% in CY11 compared an average 12.9% drop encountered by the regional markets.

CY12 to be a year of defensive play

Our benchmark index (KSE100) target works out to 12,600 for CY12, translating into a return of 11% YoY, based on an expected earnings growth of 8.5% YoY. Trading at CY12 PE of 5.5x and offering dividend yield of 8.2%, we express a cautious optimism on KSE100’s performance as compared to regional peers. However, if FBR accepts the demand to change the collection methodology of CGT to presumptive tax regime (PTR), this can provide the market with a much needed boost. Moreover, if the year turns out to be an election year, market could get further impetus since historically market sentiment has remained positive during such periods. Nonetheless investors will remain weary of foreign outflows, downturn in Pak-US relations, stalled economic growth and the energy crisis during CY12.

Our top picks for CY12 include HUBC, KAPCO, APL, FFC, POL, APL, MCB and LUCK. E&P and IPP companies provide the best hedge against the PKR depreciation. From a dividend yield perspective, HUBC, KAPCO and FFC are likely to in the lime light as they offer more than 14% yield.

Source: KSE

Source: KSEAverage Daily Volume (mn)

Source: KSE

AnalystAHL [email protected]

KSE100 Index Performance

www.arifhabibltd.com

Top Gainers in CY11

103.19

67.06 64.1655.88 54.22

0

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40

60

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100

120

FATIMA FFC UPFL TSML NESTLE

%

0

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95001000010500110001150012000

1250013000

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

258

132 169

121 80

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50

100

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CY07 CY08 CY09 CY10 CY11

2

Pakistan Outlook 2012

Table of Content

A. The Political Outlook 3

B. Economic Outlook: 4

B1. Growth will heavily depend on Industrial sector in FY12 4

B2. Price pressures are likely to magnify in 2HFY12 5

B3. Global growth remains tentative 6

B4. Bracing for an investment squeeze 6 B5. Fiscal policy remains a fragile affair 8

C. Equity Market Outlook 10

C1. KSE100 Index has exhibited resilience in CY11 10

C2. Turnover is remained buried under the CGT 13

C3. CGT is fine - just change the collection methodology! 14

C4. CY12 Outlook: A year of defensive play 15

CY11 News Highlights and KSE100 performance 16

Top Picks of CY11 17

Hub Power Company Limited 18 Kot Addu Power Company Limited 19 Fauji Fertilizer Company Limited 20 Pakistan Oilfields Limited 21 Attock Petroleum Limited 22 MCB Bank Limited 23 Lucky Cement Limited 24

Annexure 25

3


A. Political Outlook

A1. Domestic politics is in a flux On the domestic front, the political scene remained fluid. As the year went out rumours of ousters, military coup and early elections ruled the airwaves and people’s imaginations.

The ‘memo-gate’ scandal took the nation by storm in late 2011. This issue was taken to the Supreme Court (SC) which further shook the political scene. While any civil-military clash was ruled out by all concerned stakeholders, the conflicting statements submitted in the SC by the military and government has unnerved many. The SC’s recent decision declaring the maintainability of the petition submitted in this regard and the appointment of a judicial commission to probe it will keep the matter in the limelight.

Can 2012 be an election year? The possibility of early elections cannot be ruled out. The Senate elections slated in March could be crucial period when Pakistan’s People Party Parliamentarians will attain a majority in the Upper House for the next two years. Moreover, the SC recently issued orders to the Election Commission of Pakistan to update electoral rolls before Feb 23, 2012. While the military is experiencing estranged ties with the Presidency, the meteoric rise of Pakistan Tehreek-e-Insaaf led by Imran Khan growing popularity in a short-span of time has raised many an eyebrow.

Having said that, the incumbent government has shown a remarkable ability to hold onto the reins of power during the last three years in the face of seemingly insurmountable odds, and may yet be able to wriggle out of the current stranglehold too!

A2. Pak-US relations are in a critical phase PAK-US relations have come under severe strain after NATO forces attacked a Pakistani post near Afghanistan border, killing 24 soldiers. This led to Pakistan blocking the route for NATO supplies in Afghanistan, evicting US forces from Shamsi Airbase and boycotting the Bonn Conference. Moreover, Pakistan also decided to revisit its policies on the war on terror.

To put Pakistan under pressure, US legislators have curtailed assistance by USD 700mn on the pretext of its failure to curb ammonium nitrate smuggling into Afghanistan. Pakistan has received USD 22.1bn so far, both in terms of military (USD 14.6bn) and economic (USD 8.9bn) assistance since FY02.

Hence, the previously earmarked US reimbursements of USD 2.96bn (CSF: USD ~1.75bn) for economic and military assistance during FY12 looks unlikely to materialize, given the altered relationship status. In FY11 alone Pakistan had received a total of USD 2.44bn (CSF: USD~800), which was crucial in maintaining external account stability.

Saad khan Umar Hafiz Economist Analyst [email protected] [email protected] Dir +92-21-32461106 Dir +92-21-32460717 Ext 211

4


B. Economic Outlook Economy

B1. Growth will heavily depend on Industrial sector in FY12 A combination of chronic energy shortages, weak private investment and poor law and order situation, in our view, are key risks to the country in achieving its targeted growth of 4.2%. We believe that the given the weak fiscal position in FY11, limited public expenditure in FY12 is unlikely to fully finance private-sector investments therefore putting an overall drag on aggregate demand. We believe that the deceleration in inflationary pressures along with cuts in interest rates will keep the private sector consumption moderately high. An 8.3% YoY growth during 4MFY12 in consumer durable goods production validates our contention.

Supply constraints mainly on the back of energy deficits and flattening global demand will result in a subpar economic recovery. We project a 1.8% growth (against a 7-yr average of 6.4%) in the industrial sector. The latest statistics on large-scale manufacturing (Ministry of Industries & Production Index) suggest that the sector will register a moderate growth of 0.73% YoY during 4MFY12.

In view of these latest developments, we have scaled back our GDP growth projections to 3.8% in FY12 from an earlier 4.1%. We believe that the performance of service and agricultural sectors will be the key growth contributors in FY12.

Fall in investment led to subpar economic growth Cement- Local sales vs. Government development expenditure

Source: SBP, AHL Research Source: APCMA, MoF(Pakistan), AHL Research

Energy deficit is pulling back industrial production Country’s economic performance has been severely hampered by the ongoing energy crisis primarily due to widening circular debt, power shortfall, gas unavailability and ineffective energy policies. We think that government inaction vis-a-vis the resolution of the circular debt issue and limited spending capacity would continue to keep the industrial sector under stress.

Although private investment will be the foremost driver for the economy But we believe that the policy makers will face a tough time implementing policies that would stimulate private sector investment. The SBP lowered the policy rate by 2% to 12%, in 1QFY12 to kick-start the investment cycle, but rate easing has done little to revive the investment trend or boost private sector confidence.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

25%

25%

25%

26%

26%

26%

26%

26%

27%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

P

Industrial Share%GDP Growth % (RHS)

0%

1%

2%

3%

4%

5%

6%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

% YoY - Local Sales (Mn. T)

Development Exp. %of GDP (RS)

5


Fall in investment led to subpar economic growth Private & public fixed investment experienced declining trend

Source: SBP, AHL Research Source: SBP, AHL Research

Our pessimism on revival of private investments stems from high fiscal deficit position of FY11 which, in our view leaves little room for the government to adopt expansionary fiscal policy in FY12. In addition to this banking sector remained reluctant to lending due to high NPL’s, high government borrowing requirement (crowding private sector). Rising input costs, deteriorating law & order situation, weak foreign inflows and energy shortfall inculcates that private corporate sector will not been keen on capital expenditure as yet, which in our view is a key factor for revival of investment activities in the country.

Bank’s Non-performing Loans Banks WALR and private sector credit off-take

Source: SBP Source: SBP

B2. Price pressures are likely to magnify in 2HFY12 So far the headline inflation has remained manageable during 1QFY12 registering 11.5% YoY compared to 13.4% YoY 1QFY11 (post-flood era). This is attributed to high base effect, declining food prices and change in calculation methodology (from Sept’11 onwards), leaving plenty of room for rate cuts. However going forward, we do not expect declining trend in headline inflation. We estimate that the CPI inflation will likely to firm-up averaging 13.3% in the 2HFY12, where the major chunk of this price rise in our view will not be driven by food prices – high oil prices, PKR depreciation, and high govt. borrowing – bring the FY12 inflation at 12.4% YoY.

0%

1%

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6%

7%

8%

9%

10%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Investment %YoYConsumption % of GDP

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Private Sector …

100

200

300

400

500

600

700

1QFY

072Q

FY07

3QFY

074Q

FY07

1QFY

082Q

FY08

3QFY

084Q

FY08

1QFY

092Q

FY09

3QFY

094Q

FY09

1QFY

102Q

FY10

3QFY

104Q

FY10

1QFY

112Q

FY11

3QFY

114Q

FY11

1QFY

12

-15%-10%

-5%

0%

5%

10%15%

20%

25%

30%

10%11%11%12%12%13%13%14%14%15%15%

Jun-

07

Nov

-07

Apr-

08

Sep-

08

Feb-

09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug-

11

Credit to Private Sector (%YoY) (RHS)WALR

6


CPI Inflation (YoY%) yearly comparison Food and Non-food Prices, YoY% growth

Source: SBP, AHL Research Source: SBP, AHL Research

B3. Global growth remains tentative Weak global growth outlook, in our view, is likely to affect the domestic economy in two different ways: weak export earnings and a foreign investment squeeze. The 5MFY12, current account deficit stands at USD ~1.6bn, higher than what the government initially accounted for (FY12 USD 1.4bn). The possibility of further deterioration in current account balance cannot be ruled out, as long as the energy based-imports remain on the higher side and net foreign inflows remain bleak to finance this deficit. Accumulation of external debt and the cost of servicing will likely go up causing exchange rate to come under pressure.

Higher energy-based imports are causing the trade deficit to widen

Our estimates suggest that the Imports are likely to touch USD 42bn (+15% YoY) in FY12. We base this mainly at the behest of rising oil prices (FY12TD prices averaged USD 108/bbl), high energy-based import and higher agri-based demand (fertilisers). We estimate a trade deficit of USD 14.7bn, which will bring about a current account deficit of USD 3.3bn or (1.4% of the GDP) for FY12.

B4. Bracing for an investment squeeze A large current account deficit exposes Pakistan to funding risk, which in a soggy global economy presents a worrisome picture primarily due to the country’s extensive reliance on foreign flows to bridge its deficit gap. Weak developed markets are likely to further dampen the investment trend in Pakistan, subsequently paving the way for a frail capital market environment. Similar can be the case with official funding: strained Pak-US relations can cost the country another USD 2.96bn under the US economic and military aid and USD 400mn under the Kerry-Lugar Bill, funds considered crucial in bridging the shortfall in private capital inflows.

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

Jul

Aug

Sep

Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

FY10 FY11 FY12

0%

2%

4%

6%

8%

10%

12%

14%

9%

11%

13%

15%

17%

19%

21%

23%

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Food Non-Food (RHS)

7


Declining primary inflows and domestic investment growth USD/PKR during the CY11

Source: SBP, Economic Survey, AHL Research Source: SBP, Economic Survey, AHL Research Sustaining USD/PKR parity

Drying up of foreign financial inflows would put downward pressure on the PKR. In addition to this upcoming IMF debt repayments are going to drain another USD 1.4bn by the end of FY12. Even going by these modest estimates, FX reserves are likely to drop to USD 14.48bn (SBP USD 11.18bn) by the end of FY12. Moreover, the SBP timely intervened to maintain the USD/PKR parity which resulted in further pressure on the FX reserves. We estimate PKR to touch 91.63/USD by Jun’12-end, bringing FY12 average at PKR 88.7/USD (~4%YoY).

Pakistan FX reserves position and expectation IMF Debt-repayment plan (USD mn)

Source: SBP Source: IMF

Export to show a moderate growth owing to slow down in commodity prices

Export likely to show a moderate 5% YoY growth to USD 26.6bn in FY12 against 29% YoY achieved in FY11. This, we believe that the, would primarily be attributable to weak global demand and falling international commodity prices (ex-oil). Constituting a major portion of export basket, declining cotton price is also a source of concern.

Remittances will remain one the most important sources of foreign inflows

So far remittances have remained a key component in narrowing current account balance, witnessing an impressive 5-yr CAGR of 19.6%. However, given the weak global outlook, inflows may start to feel the pinch in the long-run. In the short to medium term, we expect this trend to continue which will bring total remittances to USD 12.4bn (+~11% YoY).

-5%

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25%

30%

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-20%

0%

20%

40%

60%

80%

100%

120%

140%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FDI+PI (RS)Total Invesments % …

0

0.5

1

1.5

2

2.5

3

8182838485868788899091

31-D

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0

31-J

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1

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1

3-N

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1

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1

PKRVolatility

02468

101214161820

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

F

SBPBanksTotal

521

647

514 78

4 2,

466

918

909

1,04

6 1,

103

3,97

6 68

0 64

9 56

0 37

5 2,

264

218

217

61

1 49

7

0500

1,0001,5002,0002,5003,0003,5004,0004,500

1QFY

122Q

FY12

3QFY

124Q

FY12

FY12

1QFY

132Q

FY13

3QFY

134Q

FY13

FY13

1QFY

142Q

FY14

3QFY

144Q

FY14

FY14

1QFY

152Q

FY15

3QFY

154Q

FY15

FY15

8


B5. Fiscal policy remains a fragile affair We think high fiscal deficit of 6.6% in FY11 provides a very little room for government to pursue any expansionary fiscal policy in FY12 through public investments. So far the government has budgeted development expenditure (PSDP) for FY12 at PKR 730bn (3.5% of the GDP). Precedence however, makes us view this figure with a degree of pessimism since over the last three years actual development outlay has been much lower by an average of 17%. With this in mind, we estimate actual FY12 PSDP outlay to be around PKR 540bn (2.56% of the GDP).

Higher fiscal deficit is taking its toll on the private credit off take

With revenue running short, extending government expenditure is considerably weighing on the banking sector. The government borrowing requirement has added an additional PKR 800mn (16th Dec-11) to the stock, since Jul-11. Financing of this amount has now been diverted to schedule banks, which was previously being routed through SBP. The total borrowing stock as of the latest figures stands PKR 3,796bn, (+~35% YoY) towards which schedule banks contributed ~59%. The overall implication of this has led to private sector availing a mere 35% of the total credit disbursed (Nov-11).

Share of total credit off-take skewed towards public sector

Major financier of these borrowing have been sch. banks

Source: SBP, AHL Research Source: SBP, AHL Research Increasing current expenditure is likely to widen the fiscal deficit going forward

Although the government has been able to cap fiscal deficit at 1.2% of the GDP in 1QFY12, we suspect going forward large expenditure financing on the back of increased subsidies, interest

-

500

1,000

1,500

2,000

2,500

3,000

20%25%30%35%40%45%50%55%60%65%70%

Jun-

06N

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r-07

Sep-

07Fe

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Jul-0

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Jan-

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Nov

-11

Invst. in Govt. Securities (PKRbn)% share - Loan Private Sector

25%30%35%40%45%50%55%60%65%70%

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

From SBPFrom Sch. Banks

YoY growth in remittances and exports

Source: SBP, AHL Research

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Jul-0

7

Sep-

07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

RemittancesExports

9


payments and defence has a potential to push the consolidated fiscal deficit for FY12 to 6.1% of the GDP in our view (target fiscal deficit for FY12 is 4.5% of the GDP). In addition we believe that the revenue shortfall may be more pronounced than envisaged. Our apprehensions are based on, laggard industrial growth, non-materialisation of non tax revenues (3G Licensing, CSF), lower SBP profits and petroleum levy collections.

Slashing interest rate alone would do little to revive private investment

Further monetisation of fiscal deficit would require mobilising more funds through schedule banks, which in our view is the key risk going forward. Hence we believe that the cutting the interest rates would not be enough to revive investments in a counter-cyclical manner. Further maturities on the shortest-end have now taken a bigger slice of the total floating debt, exposing the country to roll-over risk and the ramification of which are likely to be felt on the overall banking sector.

Conclusion We think SBP is likely to keep interest rates unchanged at 12% for the remaining period of FY12. While real interest rates have remained positive (+0.9%) in 5MFY12, 2HFY12 real rate is likely to turn negative (~-1.3%). However we think real interest rate needs to remain positive territory for some time in order to encourage savings (debt inflows), which may help the government to facilitate its investment funding. Moreover tighter monetary regime will also prevent inflation from overshooting thus, making room for rate cuts in FY13. We expect fiscal tightening programmes to be front-loaded given the current revenue generation initiatives. As a result, the fiscal drag in FY12 should be smaller than FY11.

Saad khan Economist

[email protected] Dir +92-21-32461106

10


C. Equity Market Outlook Strategy

C1. KSE100 Index has exhibited resilience in CY11 CY11 has been one of the worst years for the global equity markets, as growing concerns of US economic recession; EU sovereign debt crisis and slowdown in major developing economies have taken toll on the markets. Besides the global economic turmoil, local bourses had to endure intensifying circular debt, rising gas curtailment, bleak law and order situation and widening fiscal and current account deficits. Despite these challenges, KSE remained one of the best performing markets in the region as KSE100 Index, shed only 5.6% in CY11 compared an average 12.9% drop encountered by the regional markets.

KSE100 Index Performance

Source: KSE

Global economic concerns have weighed in heavily on the equity markets

In July 2011, the international capital markets went into a downward spiral as US debt ceiling was almost breached. Simultaneously, the European economies started to feel the heat from impending Greek default, which also pushed Italy, Ireland, Spain and Portugal to the brink of default. However, US markets started to recover after the debt ceiling was raised by the Congress in July-11. Except Dow Jones Industrial Average, all major indices closed the year in the red zone. European Indices on the other hand remained under pressure, closing down by approximately 15%, as EU sovereign crisis continued to intensify.

US & European Markets

Source: Bloomberg

10,000

10,500

11,000

11,500

12,000

12,500

13,000

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

5.5%

0.0%-1.8%

-5.6%

-11.9%-14.5%

-17.0%-20%

-10%

0%

10%

Dow Jones S&P 500 NASDAQ FTSE 100 AEX OMX STKH30 CAC 40

11


On the regional front, Asian markets plummeted during the year as the fear of stalled economic growth due to lower investment flows and contraction in exports to US and EU amplified. Moreover, high inflation due to soaring oil prices further worsened the already dwindling investor confidence.

Political and economic concerns are causing capital flight from Pakistan

Foreign Investor Portfolio Investment (FIPI) witnessed an outflow of USD 126mn in CY11 compared to an inflow of USD 497mn in CY10. After enjoying an inflow of USD 52mn in 1QCY11, local bourse witnessed an outflow of USD 180mn in the following three quarters out of which USD 111mn was in 4QCY11 alone. This situation primarily arose from worsening global economic crisis inducing higher risk aversion amongst foreign investors. This was further exacerbated with the Pakistan’s exit from IMF loan, leading to foreign apprehension over a weak domestic economy and depreciating PKR. By CY11 end, as per Special Convertible Rupee Account (SCRA), foreigners’ holding in securities were approximately USD 2.32bn (7.1% of the market cap) compared to USD 2.9bn (8% of the market cap) last year.

In CY12, flows from foreign investors could remain under stress as PKR losses value when repayment of IMF loans commences in 2HFY12. Moreover, we believe that the that further foreign pressure could arise as regional markets’ multiples slide more relative to the local market, subsequently resulting in lower discount being offered by the regional market. Foreigners in CY11 offloaded their holdings in fertilizer and banking sectors while continued to hold a big chunk in OGDC.

Regional Market Comparison CY11

Source: Bloomberg

Foreign Portfolio Investment in CY11 KSE 100 relative to SCRA

Source: NCCPL Source: SBP

4.1% 3.2%

-0.7%-6%

-11.0%

-18.7% -20.0% -21.2%-24.6% -27.5%-30.0%

-20.0%

-10.0%

0.0%

10.0%

PSEi InexJakarta Comp

Stk Exch Thai

KSE 100 Index

KOSPI Index DJSL20

Hang Seng Tai Index

Sensex 30

Vet INDEX

63

5

-16 -7

26

-41-30

-12 -5

-82

-4-25

-120

-80

-40

0

40

80

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

USDmn

3000

5000

7000

9000

11000

13000

15000

17000

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Dec

-07

Mar

-08

Jun-

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Apr

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Jul-0

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n-11

Apr

-11

Jul-1

1S

ep-1

1D

ec-1

1

SCRA (RHS)KSE Index (LHS)

12


Major Gainers and Laggards of CY11

Chemical sector remained in the limelight with FATIMA, Fauji Fertilizer Company Limited (FFC), FFBL and Arif Habib Corporation Limited being amongst the Top 10 Gainers during CY11. The stock of FATIMA yielded a handsome return of 103.2% during CY11. Investors favored FATIMA due to commencement of commercial operations, relatively lower gas curtailment and above expectation profitability. FFC and Unilever Pakistan Foods Limited (UPFL) were second and third biggest gainers, yielding returns of 67.1% and 64.2% respectively. Media Times Limited (MDTL) and TRG Pakistan Limited (TRG) were the worst performers during CY11, declining by 68.2% YoY and 65.8% YoY, respectively.

MSCI: Pakistan continues to remain in the Frontier Market Index

MSCI, in its latest review (November 2011) has decided to keep Pakistan in its Frontier Market Index. Pakistan was downgraded from Emerging Market Index as a consequence of imposition of floor in the market in 2008. According to MSCI, at the time of evaluating Pakistan’s reclassification, only 3 companies met the minimum (capital) size requirements of the MSCI Emerging Markets. Consequently (keeping in line with MSCI’s requirement that any reclassification should be an irreversible process) it opted not to promote Pakistan to the Emerging Market. However, MSCI invited feedback for reviewing Pakistan’s reclassification from Frontier Market (FM) to Emerging Market (EM) in its June 2011 review. The outcome of this feedback has not been disclosed yet by MSCI. In the last review, MSCI added FATIMA in Pakistan MSCI Index, taking the total companies to 13. Moreover, it is reviewing to upgrade UAE and Qatar from FM to EM; this could subsequently result in higher weightage for Pakistan Index in Frontier Markets.

In CY11, MSCI Pakistan Index, declined by 17.1% compared to a decline of 34.3% in Fortier Market Asia Index. Against major regional MSCI indices (India, China and Taiwan) Pakistan performed comparably better however it underperformed against Indonesia, Philippines and Thailand.

Major Gainers in CY11 Major Laggards in CY11

Source: Bloomberg

103.2

67.1 64.255.9 54.2

0

20

40

60

80

100

120

FATIMA FFC UPFL TSML NESTLE

%

-54.9-60.2 -63.0 -65.8 -68.2

-80

-60

-40

-20

0

NETSOL BWCL JSCL TRG MDTL

%

13


C2. Turnover is remained buried under the CGT During CY11 average daily volume contracted to mere 80mn shares compared to 121mn shares traded in CY10, a decline of 35% YoY. The share turnover since CY07 continued to shrink in the absence of leverage product and was aggravated by the implementation of Capital Gain Tax (CGT) in CY10 as investors’ apprehension regarding filing of returns did not fade away. The introduction of new leverage product was expected to improve traded volumes, however due to stringent requirements and high interest cost, MTS was unable to boost the liquidity of the market. In order to provide much needed impetus to the market, SECP on December 28, 2011 amended rules for MTS, allowing individual investors to act as financiers and relaxing margin requirement (of 25%) from cash only basis to certain portion in the form of shares (of selected companies with haircut margin).

Lotte Pakistan PTA Limited (LOTPTA) once again stood out as the most liquid stock with an average daily volume of 8.3mn shares as the company posted earnings growth of 148% YoY. It was followed by Fauji Fertilizer Bin Qasim Limited (FFBL) and Fatima Fertilizer Company Limited (FATIMA) with an average daily turnover of 4.4mn and 3.4mn, respectively.

MSCI Pakistan with Frontier Markets MSCI Pakistan with Emerging Market

Source: MSCI Source: MSCI

Shares Turnover QoQ shares turnover performance

Source: KSE Source: KSE

-17.1%

-28.9%-34.3%

-39.7% -44.2%-50%

-40%

-30%

-20%

-10%

0%

Pak

ista

n

Sril

anka

FM A

sia

Inde

x

Vie

tnam

Ban

glad

esh

4.0%

-2.9%-3.2%-5.6%-12.8%

-17.1%-20.3%-23.3%

-38.0%-50%

-30%

-10%

10%

Indo

nesi

a

Mal

aysi

a

Phi

lippi

nes

Thai

land

Kor

ea

Pak

ista

n

Chi

na

Taiw

an

Indi

a

258

132 169

121 80

-

50

100

150

200

250

300

CY07 CY08 CY09 CY10 CY11

mn

123

7459 62

169

132

61

124

0

50

100

150

200

250

1Q 2Q 3Q 4Q

CY11 CY10mn

14


C3. CGT is fine - just change the collection methodology! To arrest the declining volumes, a number of steps are being envisaged by the regulator (SECP) and KSE. Though we do not concur with the suggestion of removing CGT, however conversion of collection methodology to Presumptive Tax Regime (PTR) could bear fruit for the market. The KSE management is currently working with SECP to change the collection methodology of FBR. We believe that the non-disclosure of source of income under PTR could be an issue of contention for FBR. According to latest reports, SECP is expected to propose FBR in first week of Jan-12 on collection mechanism of CGT. As per intimated slabs by FBR at the time of imposition of CGT, the rates are to increase from 7.5% to 8.0% for disposal of securities whose holding period is more than 6-months but less than 12-months while for less than 6-months rate will remain at 10%.

C4. CY12 Outlook: A year of defensive play CY12 is bound to start with uncertainty as foreign outflows, which were around USD 111mn in 4QCY11 are poised to continue, as downturn in Pak-US relations and stalled economic growth with growing energy crisis play themselves out. FBR’s acceptance of the demand to change the collection methodology of CGT to presumptive tax regime (PTR) could provide the market much needed impetus and depth in the form of rising volumes, which dropped by 34% to a mere 80mn/day in CY11. Additionally, any prolonged political uncertainty would further aggravate economic slowdown consequently effecting market sentiment. If CY12 ends up being an election year it could provide market with a much needed boost, as historically market sentiment has remained positive during such periods. In CY12, we expect earnings (our universe) growth to be around 8.5% compared to CY11 anticipated growth of 19%.

Average daily share turnover in CY11

Source: KSE

Regional PE Comparison Regional Dividend Yield Comparison

Source: Bloomberg

8.3

4.43.4 3.2 3.0 2.6 2.5 2.5 2.3 2.0

0.0

2.0

4.0

6.0

8.0

10.0

LOTPTA FFBL FATIMA JSCL NBP DGKC AHCL ENGRO FFC PTC

mn

5.5

8.1 8.710.7

11.7 12.4 12.8 13.0

4

8

12

16

KS

E10

0

VN

IND

EX

KO

SP

I

SE

T

Sen

sex

30

TAIE

X

Jaka

rta

PS

Ei

X8.2%

5.5%4.1%

3.3% 3.1% 2.6% 2.0% 1.6%

0%

2%

4%

6%

8%

10%

KS

E10

0

TAIE

X

SE

T

VN

IND

EX P

SE

i

Jaka

rta

Sen

sex

30

KO

SP

I

15


Index is targeted at 12,600 by CY12 end

Based on expected earnings growth of 8.5% YoY in CY12, our benchmark index (KSE100) works out to 12,600 for CY12, translating into a return of 11%. KSE 100 Index is currently trading at CY12 PE of 5.5x and offering dividend yield of 8.2%. Our top picks for CY12 are HUBC, KAPCO, APL, MCB, POL, LUCK and FFC. E&P and IPP companies provide the best hedge against the PKR depreciation. From a dividend yield perspective, HUBC, KAPCO and FFC are likely to in the lime light as they offer more than 14% yield.

Faisal Khan Deputy Head of Research

[email protected] Dir +92-21-32460742

16


0

50

100

150

200

250

300

10500

11000

11500

12000

12500

13000

13500

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

Volumes KSE100

FX Reserves &Remittances hit all time high

Govt decides to deregulate oil prices

IMF turns down SBA review request

Governor SBP resigns

US raises debt ceiling

US loses AAA rating

FBR exceeds target by PKR 15.4bn

India announces support for EU duty waiver

MGCL discovers big reserve in Karak

PKR 300bn fund to be launched to end circular debt crisis

GoP takes over PKR 391bn circular debt from banks

NA approves gas infrastructure development cess

Governor Punjab assasinated

Raymond Davis issue strains Pak-US ties

UK announces doubling of economic assistance

MTS launched

Flood tax imposed; SED increased

MPS unchanged at 14%

SBP leaves rates unchanged at 14%

SBP cuts rate by 50bps

OBL killed by US forces in Abbotabad

Moody's gives assurance on Pak's sovereign debt

SBP leaves rates unchanged at 14%

Discountrate unchanged

SBP cuts rate by 150bps

OMCs margins increased by 50 paisas per litre

Zardari leavesfor Dubai.

Zardari returns

CY11 Major News Highlights and KSE Performace

17


Top Picks CY12

Target Price

Closing Price (31 Dec-11) Upside

EPS (FY12/CY12)

DPS (FY12/CY12) P/Ex

Dividend Yield (%)

LUCK 119.1 75.0 59% 18.1 5.0 4.2 6.7% FFC 194.6 149.5 30% 22.8 22.0 6.6 14.7% POL 480.0 346.7 38% 57.3 40.0 6.1 11.5% MCB 211.1 134.6 57% 25.5 12.0 5.3 8.9% APL 496.0 412.5 20% 64.2 45.0 6.4 10.9% HUBC 51.4 34.2 50% 5.9 5.9 5.8 17.3% KAPCO 52.7 41.3 28% 6.9 6.1 6.0 14.8%

Source: AHL Research

18


Hub Power Company Limited Electricity A striking combination of growth and defense

Recommendation We have a Buy stance on Hub Power Company Limited (HUBC) with our Dividend Discount Model (DDM) based Dec-12 target price of PKR 51.4/share. At the closing price of PKR 34.20/share, the scrip offers an upside potential of 50.3%. We expect HUBC to pay a cash dividend of PKR 5.9/share and PKR6.2/share in FY12E and FY13F, translating into a dividend yield of 17.3% and 18.1%, respectively.

An 11% rise in PCE and PKR depreciation will drive profitability in FY12 Project Company Equity (PCE), which determines company’s returns and is part of tariff, as per PPA will augment by 11% in FY12 compared to a rise of mere 3% in FY11. This rise will ensure higher returns for the company is FY12. Moreover, since IPPs returns are hedged against PKR depreciation, any increase in USD/PKR parity will result in earnings growth for the company in PKR basis. PKR is likely to remain under pressure due to bleak external account outlook losing 4.7% since FY12TD.

Dividend Payout is sustained even with intensifying circular debt The issue of circular debt continues to haunt the power sector and according to the latest reports has accumulated to PKR 350bn. Though this issue has been in the limelight for more than 3 years, HUBC with better cash management has been able to maintain dividend payouts. We expect the company to pay PKR 5.9/share dividend in FY12. By the end of 1QFY12, the company has to pay PKR 81bn to PSO on account of fuel supply whereas its receivables stood at PKR 97.4bn from WAPDA.

Narowal Project commences operations from April-11 Narowal Project commenced commercial operations in Apr-11. The company is calculating Narowal returns on the basis of reference tariff since NEPRA is yet to notify post CoD tariff. Consequently, the company returns from the project are under reported, while financing cost including interest cost for loans acquired to finance equity portion are yet to be recognized.

Financial Highlights (PKR mn) FY10A FY11A FY12F FY13F

Turnover (PKRmn) 99,694 123,310 155,537 160,501

Net Profit (PKR mn) 5,556 5,425 6,805 7,461

EPS (PKR) 4.80 4.69 5.88 6.45

DPS (PKR) 5.00 5.50 5.90 6.20

P/E (x) 7.12 7.29 5.82 5.30

Div Yield (%) 14.6% 16.1% 17.3% 18.1%

ROE 19.2% 18.3% 22.9% 25.2%

Source: Compa ny Accounts , AHL Res earch

Target Price (PKR/share)

Last Closing (PKR/share)

Upside

KSE CodeBloomberg CodeReuters Code HUBC KA

Outstanding Shares (mn) 1,157 Market Cap (US$ mn) 440 Market Cap (PKR mn) 39,569 Free Float 70%12M Avg. Daily Turnover 1.46mn12M High/Low (PKR) 42.51/34.11

Source: Company accounts

Source: KSE

AnalystUsman [email protected]

Stock Performance


BUY51.434.250.3%

HUBCHUBC PA

Key Data

Shareholding

Int. Power17.4%

Allied Bank4.8%

Xenel12.1%

Fauji Foundat

ion8.5%

Others57.2%

80%

90%

100%

110%

120%

Jan-

11Fe

b-11

Mar

-11

Apr-1

1M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1D

ec-1

1

HUBC

KSE100

19


Kot Addu Power Company Limited Electricity

Offering a striking yield of 14.8% in FY12

Recommendation Our Dividend Discount Model (DDM) based target price for Dec-12 works out to be PKR 52.7/share, which offers an upside potential of 27.5% from its closing price (December 30, 2011) of PKR 41.3/share. We expect the company to post an earnings of PKR 6.87/share in FY12E and PKR 7.19/share in FY13F. Company is also expected to pay dividend of PKR 6.10/share and PKR 6.80/share in FY12 and FY13 respectively. This translates into a strong dividend yield of 14.8% for FY12 and 16.5% for FY13.

Higher returns with rising PKR devaluation Returns of Independent Power Producers (IPPs) under the power purchase agreement (PPA) are hedged against the PKR devaluation. Therefore, KAPCO’s earnings are likely to boost from the widening USD/PKR parity, which since FY12 has depreciated by 4.7%. Pakistan will start paying back the IMF loan from Feb-12, which is likely to put further strain on the USD/PKR parity going forward. As per our estimates every 0.5% increase in USD/PKR parity improves KAPCO’s earnings by PKR 70mn (PKR 0.08/share).

Higher financial charges is likely to be offset by other income The growing gap between receivables (WAPDA: PKR 75bn) and payables (PSO: 45bn) by end of 1QFY12 has provided a cushion to the company as penal interest charged to WAPDA is higher than the penal interest paid to PSO (payment to PSO at 6 month T-Bill rate plus 6%, from WAPDA at SBP discount rate plus 4%). Although the company has to bear a negative spread on penal interest payments however this rising gap between receivables and payables are effectively resulting in higher income.

Maintenance cost will decline in coming quarters of FY12 Due to the gas shortage in last couple of quarters, KAPCO’s plant was mainly operated at furnace oil which led to 72% rise in maintenance and renewal cost. During 1QFY12, company’s three gas turbines went through major over hauling, while steam turbine went through minor inspection, resulting in gas overhaul cost to rise by 217% YoY. This we believe is likely to keep the cost on the lower side in the remaining 3Q of FY12.

Financial Highlights (PKR mn) FY10A FY11A FY12F FY13F

Turnover (PKRmn) 85,935 74,351 92,699 99,579

Net Profit (PKR mn) 5,089 6,527 6,047 6,331

EPS (PKR) 5.78 7.41 6.87 7.19

DPS (PKR) 5.00 6.50 6.10 6.80

P/E (x) 7.15 5.57 6.01 5.75

Div Yield (%) 12.1% 15.7% 14.8% 16.5%

ROE 44.1% 44.7% 45.7% 45.5%

Source: Company Accounts , AHL Research



Upside

KSE CodeBloomberg CodeReuters Code KAPCO KA

Outstanding Shares (mn) 880 Market Cap (US$ mn) 404 Market Cap (PKR mn) 36,372 Free Float 20%12M Avg. Daily Turnover 0.37mn12M High/Low (PKR) 48.4/39.0


Source: KSE

AnalystUsman [email protected]

KAPCO PA

Key Data

Shareholding

Stock Performance


KAPCO

BUY52.741.327.5%

Wapda 45.7%

National Power36.0%

Others18.3%

80%

90%

100%

110%

120%

130%

Jan-

11Fe

b-11

Mar

-11

Apr-1

1M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1D

ec-1

1

KAPCOKSE100

20


Fauji Fertilizer Company Limited Chemicals

Let’s not overplay the Cess issue

Recommendation We recommend a Buy stance on Fauji Fertilizer Company Limited (FFC) with December 2012 target price of PKR 194.6/share, providing an upside potential of 31%. Besides this sizeable upside potential, the stock is offering an attractive dividend yield of 14.7% based on CY12 earnings estimates.

Negatives are overplayed The stock has been hammered since Nov-11, losing 22.7% of its vigor and underperforming the benchmark index by 18.3%. All this negativity was on account of uncertainty regarding the possible pass through of the Gas Infrastructure Development Cess (the Cess). We are of the view that the market has overplayed the Cess issue as positives like strong dividend yield, relatively lower risk of gas curtailment and upward revision in urea prices due to persistence of gas curtailment are still intact.

Cess will be passed through; but how much? The government has imposed the Cess of PKR 197/mmbtu on the old fertilizer plants effective from January 1, 2012, increasing their feedstock and fuel stock gas prices by 207.1% and 17%, respectively. Whereas feedstock price of new fertilizer plants (Enven and FATIMA) has increased by a mere 1.81%. FFC, having an old plant, requires to increase its urea price by PKR 275/bag (excl. GST) to completely pass on this gas price increase. However we believe that the that it may be difficult for FFC to pass this cost push completely as it is already enjoying windfall gains following the urea price increases by ENGRO. This is evident from 57.1% gross margins in 9MCY11 compared to 44.6% in 9MCY10. Thus we are of the view that FFC may increase its urea price by the same quantum as of ENGRO, which requires an increase of only PKR 150/bag (excl. GST) to fully pass on the impact of this gas price hike.

Still attractive at PKR 100/bag pass through of the Cess Our CY12 earnings incorporate a conservative urea price increase of PKR 100/bag to PKR 1,448/bag (excl. GST), yielding an EPS of PKR 22.81. It is pertinent to mention here that every PKR 50/bag change in our base case urea price assumption causes an EPS impact of PKR 1.4/share to our CY12 earnings estimates. At last closing price of PKR 149.5/share, the scrip is trading at a PER of 6.7x, which is still at a 6.9% discount to the last 4 years average PER of 7.2x.

Financial Highlights (PKRmn) CY10A CY11E CY12F CY13F

Revenues 44,874 59,574 70,756 74,158

Net prof it 11,029 19,505 19,344 19,946

EPS (PKR) 13 24.9 22.81 23.52

DPS (PKR) 14 24 22 23

PER 11.5 6.01 6.56 6.36

Div. Yield 9.36% 16.05% 14.71% 15.38%

ROE 77% 133% 117% 117%

Source: Company accounts & AHL esti mates



Upside

KSE CodeBloomberg CodeReuters Code FAUF KA

Outstanding Shares (mn) 679 Market Cap (US$ mn) 1,127 Market Cap (PKR mn) 101,467 Free Float 55%12M Avg. Daily Turnover 2.34mn12M High/Low (PKR) 198.35/98.81


Source: KSE

AnalystSyed Abid [email protected]

FFC

Buy194.6149.5

30.1%

FFC PA

Key Data

Shareholding

Stock Performance


Fauji Foundat

ion44.3%

NIT & ICP

4.8%

Financial Inst.24.5%

Othrs26.3%

80%

120%

160%

200%

Jan-

11Fe

b-11

Mar

-11

Apr-1

1M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

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ov-1

1D

ec-1

1

FFCKSE100

21


Pakistan Oilfields Limited Oil and Gas Production is paving the way for 20% earnings growth in FY12

Recommendation Our top pick among E&P companies is Pakistan Oilfields Limited (POL). Our call primarily emanates from production growth of Oil and Gas as new development wells from Tal block come online and higher oil price leading to earnings growth of 25% YoY in FY12. At December 30, 2011 closing price of PKR 346.7/share, the scrip is offering potential upside of 38.5% to Dec-12 Target Price of PKR 480/share. The stock is currently offering a dividend yield of 11.5% and 13.0% in FY12E and FY13F, respectively.

Rise in production is propelling the earnings growth Oil and gas production augmented by a phenomenal 12.7%YoY and 39.3% YoY, respectively in FY11. The production is expected to further improve by approximately 12% for oil and 14% for gas in FY12 as Makori East-1(Tal Block) comes online in 2HFY12 and full year impact of Domial-1 (Ikhlas block) production flows. This rise would translate into earnings growth of 25% YoY to PKR 57.27/share in FY12.

New wells coming online will drive sentiment in FY12 Makori East 2 (appraisal well) and Dhulian Deep-01 (exploratory well) are close to achieving their target drilling depth, any positive news from these highly prospective areas could be potential price triggers for the company. However, we believe that any production flows from Makori East-2 will be dependent on completion of Makori Gas Processing Facility. Moreover, drilling activity at Domial-2 is under completion after achieving its target depth. As per estimates, flows from this appraisal well are expected to be similar to Domial-1, which had an EPS impact of PKR 4.5/share.

Oil Revenues Oil Prices in FY12TD has averaged at USD 108.6/bbl compared to last year’s average of USD 93.3/bbl and is currently hovering at USD 107.95/bbl. During CY11, Arab Light crude oil price has remained highly volatile trading in a range of USD 122.0/bbl and USD 89.0/bbl. This volatility does create uncertainty for the company as around 48% of its revenues are driven from oil. As a base case, we have assumed crude price USD 100/bbl for FY12 and USD 90/bbl for FY13.

Financial Highlights (PKR mn) FY10A FY11E FY12F FY13FNet revenue 19,306 27,102 30,850 32,630 Net prof it 8,763 10,815 13,544 14,534 EPS (PKR) 37.05 45.73 57.27 61.46 DPS (PKR) 25.93 35.00 40.00 45.00 BV 115.63 141.30 152.96 165.20 P/E (x) 9.35 7.58 6.05 5.64 P/B (x) 3.00 2.45 2.27 2.10 Div Yield (%) 7.5% 10.1% 11.5% 13.0%

Source: Company Accounts, AHL Research



Upside

KSE CodeBloomberg CodeReuters Code PKOL KA



Source: KSE

AnalystFaisal [email protected]

POL PA

Key Data

Shareholding

Stock Performance


BUY480.0346.7

38.5%

POL

Attock Group53.9%

Financial Inst

24.5%

Individuals

10.6%

Others11.0%

85%

95%

105%

115%

125%

135%

Dec

-10

Jan-

11M

ar-1

1Ap

r-11

May

-11

Jun-

11Ju

l-11

Aug-

11Se

p-11

Oct

-11

Nov

-11

Dec

-11

POL

KSE100

22


Attock Petroleum Limited Oil and Gas Volumetric growth will lead the way

Recommendation Attractive dividend yield of 10.9% and strong volumetric growth of 12.4% in FY12 offers flair of both defense and growth in the stock of Attock Petroleum Limited (APL), making it one of our top picks for CY12. Our Dec-12 target price for the scrip works out to PKR 496/share, offering a upside of 20.2%.

Strong payout is likely to continue going forward Despite higher working capital requirement in FY11, APL distributed a healthy cash dividend of PKR 41.5/share, translating into a payout of 67.4%. We are of the view that this payout trend to continue in FY12 as well, with expected dividend of PKR 45/share, translating into an attractive dividend yield of 10.9%. This strong dividend paying ability of APL makes it our top pick among the listed OMCs, a sector categorized by the cash constraints due to the uncertainty of circular debt shrouding the whole energy chain.

Retail fuel segment continues to remain the growth engine Aggressive market penetration strategy of APL in the retail fuel segment (an average 35 stations added per year since FY08) has started to pay dividends. Market share of the company in Motor Gasoline (MS) and High Speed Diesel (HSD) has improved to 7.2% and 11.1% respectively in 5MFY12 compared to 4.9% and 6.2% in FY10. The company achieved strong YoY growth of 41.2% and 7.2% in MS and HSD during FY11 and we expect this momentum to continue in FY12 as well with YoY growth of 40% and 8%, respectively.

Furnace Oil sales are back on track APL had been shying away from the circular debt plagued FO segment, evident from a volume contraction of 12.9% YoY in FY10, with its market share reducing to 4.5%. However with commencement of supply to Attock Power Gen, the company market share has jumped to 6.8% and volumes by 51.6% in FY11. We expect these volumes to further grow by 15%YoY in FY12.

Higher working capital requirement may dent the interest income Cash and short term investment of the company suffered a decline of 38.3% YoY to PKR 6.2bn in FY11. This was mainly on account of higher working capital requirement to facilitate the retail fuel expansion leading to a 5.3x YoY increase in stock in trade to PKR 5.2bn in FY11. This higher working capital requirement coupled with a 200 basis points drop in the discount rate is likely to cause 15.5% decline in the interest income from bank deposits in FY12.

Financial Highlights (PKR mn) FY10A FY11A FY12E FY13F

Net Revenues 82,792 109,395 134,589 130,447

Net Earnings 3,594 4,257 4,438 4,595

EPS (PKR 52.00 61.58 64.21 66.48

DPS (PKR) 30.00 41.50 45.00 50.00

PER (x) 6.63 5.59 5.37 5.18

Dividend Yield 7.3% 10.1% 10.9% 12.1%

ROE 44.0% 41.0% 36.3% 34.1%

Sources : Company fi nancia l s a nd AHL estimates



Upside

KSE CodeBloomberg CodeReuters Code APL KA



Source: KSE


APL

BUY496.0412.5

20.2%

APL PA

Key Data

Shareholding

Stock Performance


Attock Oil

2.2%

Pharaon Invst. Group34.4%

ATRL21.9%

POL7.0%

CEO7.0%

Others27.6%

80%

90%

100%

110%

120%

130%

140%

Jan-

11Fe

b-11

Mar

-11

Apr-1

1M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

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1

APL

23


MCB Bank Limited Bank Safest bet amidst contracting spreads

Recommendation MCB Bank (MCB) is our top pick among the banks in our universe. The bank is currently offering potential upside of 57.1% to our Dec-12 target price of PKR 211.4/share. The scrip is trading at CY12 P/B of 1.1x and offers a dividend yield of 8.9%. In CY12, earnings are likely to witness flattened growth as Net Interest Margins (NIMs) are likely to contract due to declining spreads following a reduction in policy rate from 14% to 12%. Despite this the bank, with low infection to gross advances, the highest coverage ratio through subjective provisioning and the best ROE amongst the peers makes it stand out even during period of contracting NIMs.

Offering the highest ROE with lowest infection ratio In declining interest environment, MCB Bank is perfectly placed to use its lowest Advance to Deposit Ratio (ADR) of 54.6% to counter fledging Net Interest Income as spreads decline. The bank maintains the highest NIMs in the industry as it has been able to sustain its CASA deposits at 80%. Despite contracting spreads, the bank will be able to leverage on its extensive branch network and superior asset quality to maintain highest ROE in the sector.

Best asset quality is shielding from rising NPLs The asset quality of the bank is one of the best in the industry with NPL ratio (infection ratio) hovering around 8.3% compared to the industry average of 14%. Moreover, the bank, with prudent policies and decision to opt for subjective provisioning has been able to achieve a coverage ratio of 83% compared 76.6% in CY10. This has resulted in provision reversals since last year. Moreover, the bank with prudent management has been able to keep rising NPLs in check, evident from an 8% rise in NPLs since start of CY11 compared to industry’s rise of 12%.

Pension Fund Reversals will continue the declining trend MCB continues to benefit from pension fund reversals, although the amount of reversals during the last few years has contracted, resulting in Administrative cost to augment by 20% during 9MCY11. In CY12, we have incorporated a reversal of PKR 2.0bn. Going forward, we believe that the magnitude of these reversals is likely to shrink further to PKR 1bn.

Financial Highlights (PKR mn) CY10A CY11F CY12F CY13FNet Prof it 16,873 21,541 21,355 22,416 EPS (PKR) 20.18 25.76 25.54 26.81 DPS (PKR) 11.50 12.50 12.00 12.00 P/E (x) 6.67 5.23 5.27 5.02 P/B (x) 1.42 1.24 1.10 0.98 Div Yield (%) 8.5% 9.3% 8.9% 8.9%ROE (%) 22.7% 25.3% 22.1% 20.6%

Source: Company Accounts, AHL Research

Target Pr ice (PKR/s hare )

Las t Clos ing (PKR/s hare )

Upside

KSE CodeBloomberg CodeReuters Code MCB KA

Outs tanding Shares (mn) 836 Market Cap (US$ mn) 1,251 Market Cap (PKR mn) 112,558 Free Float 41%12M A vg. Daily Turnover 1.36mn12M High/Low (PKR) 390.34/282.50


Source: KSE

Analys tFaisal Khanfaisal.khan@arif habibltd.com021-32462589

MCB PA

Ke y Data

Share holding

Stock Pe rform ance

w w w .arifhabibltd.com

MCB

BUY211.4134.6

57.1%

60%

80%

100%

120%

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

M C B

KSE100

CEO & Directors, 7 .55

%

Associates, 49.

87%Insuran

ce Comp, 6.58%

Public, 14.55%

Fore ign Comp

, 16 .10%

Others,5 .35%

24


Lucky Cement Limited Construction and Materials Well, it’s Dirt Cheap now!

Recommendation We recommend buy stance on Lucky Cement Limited (LUCK) with Dec-12 target price of PKR 119.1/share, offering an upside potential of 58.7% from December 30, 2011 price of PKR 75.04/share. Besides this sizeable upside potential, the stock is trading at FY12E PER of 4.2x, which has been the cheapest since FY09. Our positive stance is stemmed from downwards sticky cement prices, cooling off coal prices and cost saving measures like Waste Heat Recovery Plant and Tyre Derived Fuel (TDF) Plant.

Strong cement pricing scenario is hinting a 47% YoY earnings growth in FY12 Despite subdued demand in the domestic market and a supply glut of approximately 12.8mn tons, cement prices continue to hold firm around PKR 400/bag in the domestic market. We expect this downward stickiness in prices to continue at least till FY12 as major cement manufacturers are avoiding a price war. Being the lowest cost producer (13.5% lower COGS compared to peers), LUCK is likely to benefit the most from this downward sticky price. We expect FY12 gross margin to reach 5 years high of 38% translating into a 47% YoY earnings growth to PKR 18.1/share.

Cooling off coal price is likely to provide relief After peaking around USD 120/ton, coal in the international markets has been mapping a declining trend where it has shed more than 12% to USD 103/ton in December 2011. Coal prices in 2QFY12TD have averaged USD 107/ton, an 8% QoQ drop, when compared with the average USD 117/ton during 1QFY12.

Zero rating on shredded tyres import will dilute the cost further The company is in advance stage of installing a TDF plant at its Karachi site, which is expected to come online in 2HFY12. This plant will be operated on used imported tyres @20% custom duty. However, the company has been contesting zero rating for shredded tyre imports for which National Tariff Commission (NTC) has issued a favorable recommendation in Dec-11. Assuming a 90% capacity utilization of the southern plant in our calculations, TDF is likely to have an after tax annualized savings of PKR 2.4/share.

Financial Highlights (PKRmn) FY10A FY11A FY12F FY13F

Net Revenues 24,509 26,018 29,880 29,304

Net Earnings 3,137 3,970 5,842 5,035

EPS (PKR 9.70 12.28 18.07 15.57

DPS (PKR) 4.00 4.00 5.00 6.00

PER (x) 7.73 6.11 4.15 4.82

Div Yield (%) 5.3% 5.3% 6.7% 8.0%

ROE 8.2% 10.0% 13.8% 11.3%

Sources : Company financia l s and AHL es timates



Upside

KSE CodeBloomberg CodeReuters Code LUKC KA



Source: KSE


LUCK

BUY119.10

75.0458.7%

LUCK PA

Key Data

Shareholding

Stock Performance


Directors

29.7%

Associated

Comp.9.7%

General Public31.7%

Others28.9%

80%

90%

100%

110%

120%

130%

Jan-

11Fe

b-11

Mar

-11

Apr-1

1M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1D

ec-1

1

LUCKKSE100

25


Annexure

26


Pakistan Macroeconomic Indicators FY08 FY09 FY10 FY11R FY12T FY12E

Real

Real GDP Growth 3.7% 1.2% 4.1% 2.4% 4.2% 3.8%

GDP(PKRbn) MP 9,922 12,739 14,668 18,063 19,209 20,305

Service Sector 6.0% 1.6% 4.6% 4.1% 5.1% 4.8%

Industrial Sector 4.8% -3.7% 5.2% -0.1% 3.7% 1.8%

Agricultural Sector 1.0% 4.0% 2.0% 1.2% 3.4% 3.5%

Prices

CPI(YoY) 12.00% 20.80% 11.70% 13.70% 12.00% 12.40%

M2 Growth 15.40% 9.60% 12.50% 15.80% 12.80% 16.30%

Policy Rate (period end) 12.00% 13.50% 13.90% 14.00% - 12.00%

6-month KIBOR (period End) 14.00% 12.70% 12.30% 13.10% - 11.70%

External Sector

Exports(US$bn) FOB 20.4 19.1 19.6 25.4 25.9 26.6

Imports(US$bn) FOB 35.4 31.7 31.1 35.7 39.1 41.3

Trade Deficit (US$bn) -15 -12.6 -11.4 -10.3 -13.2 -14.7

Remittances(US$bn) 6.5 7.8 8.9 8 12 12.4

FDI(US$bn) 5.4 3.7 2.2 1.1 3.1 -

Fx Reserves (US$bn) 8.6 9.1 13 17.1 17.8 14.5

Exchange Rate (year average) 68.2 81.3 85.3 85.5 91.5 88.7

CAB (US$bn) -13.9 -9.3 -3.5 437 -3.7 -3.3

Public Finances

Total Revenue (PKRtrn) 1.4 1.7 2 2.11 2.07 2.01

Tax (PKRtrn) 1 1.2 1.5 1.68 1.95 1.88

Expenditure (PKRtrn) 1.9 2.1 2.5 2.56 3.02 3.25

Total Tax Revenue (% of GDP) 9.9% 9.8% 10.1% 12.2% 9.7% 9.9%

Expenditure (% of GDP) 17.3% 14.8% 15.9% 14.8% 15.0% 16.0%

Consolidated Deficit 4.9% 5.0% 4.4% 5.7% 4.5% 6.1%

Total Public Debt (PKRbn) 6,044 7,835 9,107 10,860 - 12,808

Public Debt (%of GDP) 60.9% 61.5% 62.1% 60.1% - 61.0%

Expenditure on GDP at Market Prices PKRbn FY05 FY06 FY07 FY08 FY09 FY10 FY11P FY12E FY13E FY14E FY15E

Private Consumption 5,001

5,720

6,544 7,835 10,338 12,245 15,584 17,321 19,298 22,003 25,099

Public Consumption 510

824

796 1,278 1,029 1,179 1,481 1,820 1,895 2,155 2,466

Total Consumption 5,511

6,545

7,340 9,114 11,367 13,424 17,065 19,140 21,192 24,157 27,565

Fixed Investment 1,135

1,566

1,815 2,095 2,114 2,042 2,132 2,585 3,202 3,488 3,938

Stock 105

122

139 164 204 237 289 327 370 419 477

Total Investment 1,240

1,688

1,953 2,259 2,318 2,280 2,421 2,912 3,571 3,907 4,415

Exports (G&S) 1,020

1,161

1,231 1,316 1,636 2,011 2,149 2,502 2,827 3,174 3,524

Imports (G&S) 1,272

1,770

1,851 2,446 2,597 2,878 3,573 4,248 4,646 5,253 6,010

Net Exports (252)

(609)

(620) (1,130)

(961)

(867) (1,424) (1,746) (1,819) (2,079) (2,487)

Expenditure on GDP (MP)

6,500

7,623

8,673 10,243 12,724 14,837 18,063 20,305 22,945 25,985 29,493

Source: SBP, MoF, FBS, IMF, AHL Research

27


Disclaimer and Related Information

Analyst certification The analysts for this report certify that all of the views expressed in this report accurately reflect their personal views about the subject companies and their securities, and no part of the analysts’ compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Disclosures and disclaimer This document has been prepared by investment analyst at Arif Habib Limited (AHL). AHL investment analysts occasionally provide research input to the company’s Corporate Finance and Advisory Department.

This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to current and potential clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities.

The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries.

Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report.

We and our affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, company (is) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor to such company (is) or have other potential conflict or interest with respect to any recommendation and related information and opinions. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. AHL generally prohibits it analysis, persons reporting to analysts and their family members from maintaining a financial interest in the securities that the analyst covers.

© 2011 Arif Habib Limited, Corporate Member of the Karachi, Lahore and Islamabad Stock Exchanges and Pakistan Merchentile Exchange Limited. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited.

28


Contact infor Contact information mation

Equities Research Email Telephone

Faisal Khan

Syed Abid Ali

Usman Saeed

Saad Khan

Umar Hafiz

Ovais Shakir

Deputy Head of Research

Research Analyst

Research Analyst

Research Analyst

Research Analyst

Database Officer

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

+92-21-3246-0742

+92-2132460717-19 Ext : 211

+92-2132460717-19 Ext : 211

+92-2132460717-19 Ext : 248

+92-2132460717-19 Ext: 248

+92-2132460717-19 Ext : 211

Domestic sales Email Telephone

Mohammed Imran, Head of Equity Sales [email protected] +92-21-3246-2596

M. Yousuf Ahmed

Farhan Mansoori

Syed Farhan Karim

Afshan Aamir

Faraz Naqvi

Furqan Aslam

Senior Vice President

Vice President

Vice President

Vice President

AVP

AVP

[email protected]

[email protected]

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[email protected]

+92-21-3242-7050

+92-21-3247--3268

+92-21-3244-6255

+92-21-3244-6256

+92-21-3244-6254

+92-21-3244-6256

Corporate finance and advisory Email Telephone

M. Rafique Bhundi

Kashif Suhail

Ahmad Zeeshan

Vice President

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Senior Analyst

[email protected]

[email protected]

[email protected]

+92-21-3246-0741

+92-21-3246-2597

Ext : 229

Management email Telephone

Bilal A Moti CEO [email protected] +92-21-32460717-9

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