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InterMarket Perspective

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Research Entity Number – REP‐085

16 June 2016

Abdul Samad Khanani [email protected] +92‐21‐37131600 Ext. 303

• We reinstate coverage on Lucky Cement (LUCK) – the second largest cement producer in Pakistan – with a Buy rating and a Target Price of PkR756/share (15% upside). With a 5yr EPS CAGR of 21%, LUCK offers the best exposure to construction up‐cycle in Pakistan; its international ventures and diversifications are unmatched by peers.

• Superior core operations, expansion, and international cement ventures place LUCK alongside the best cements players in the EM space. Additionally, diversification in non‐cement‐related avenues through ICI and LEPL allows LUCK with high ROE exposures in Chemical, Consumer, Pharmaceutical and Power sectors.

• Our valuation incorporates core operations (PkR506/sh), 2.3mn tons expansion (PkR39/sh), ICI (PkR70/sh), Iraq operation (PkR19/sh), DRC venture (PkR41/sh), Yunus Wind Energy (PkR7/sh), and Lucky Electric Power (PkR74/sh). We believe commencement of DR Congo plant in Oct’16 and 2.3mn tons expansion in Punjab at end of FY18 are key upcoming triggers.

Resuming Coverage with a Buy We reinstate coverage of Lucky Cement (LUCK) – the second largest cement player in Pakistan – with a Buy rating and a target price of PkR756/share. Our target price incorporates LUCK’s horizon of business ventures including core cement operations (PkR506/share); 2.3mn tons expansion in Punjab (PkR39/share); 56% stake in ICI Pakistan (PkR70/share); grinding mill JV at Iraq (PkR19/share); cement plant JV in DR Congo (PkR41/share); 20% equity stake in 49.5MW Yunus Energy wind farm (PkR7/share); and 660MW coal power plant‐Lucky Electric Power Company (PkR74/share). We believe exposure in major fast growing areas like Construction, Chemicals, Consumers, Pharmaceuticals and Power puts LUCK years ahead of its peers. Commencement of DRC plant in Oct’16, 2.3mn tpa expansion by the end of FY18, and financial close of 660MW coal CPP are the main near to medium‐term triggers. Core Operations are best in class; premium is justified LUCK remains a key participant within the cement industry due to (i) second largest capacity (7.75mn tons) post Bestway‐Lafarge merger (7.96mn tons); (ii) driver of the expansion cycle; (iii) lowest cost producer due to active cost endeavors like WHR/TDF/RDF; (iv) declining exports to turn into high‐margin local sales; and (v) geographical advantage. We believe LUCK’s US$200mn equity financed expansion planned in Punjab will not only increase local diversification but also set footprints in the hub of CPEC and other construction related activities. International Cement ventures will create alpha LUCK’s international ventures include its 0.87mn ton grinding mill at Iraq (Lucky Al Shumookh Holdings Limited) and 1.1mn tons cement plant in Democratic Republic of Congo (Lucky Rawji Holdings Limited). Contribution of Iraq project is expected to be of PkR2.46/2.68/2.69 per share (FY16/17/18), which in the context of LUCK is just 5.3%/4.9%/4.3% of consolidated NPAT, but its importance can be gauged through opening up new markets within the region for LUCK. Commencement of DRC plant will allow LUCK to compete regionally with some of the largest regional players like Dangote, PPC Africa and Lafarge in high growing African markets. Diversification history remains a success Within the broader diversification theme, LUCK has 56% stake in ICI, 20% stake in Yunus Energy wind farm and intends to build a US$1bn 660MW coal power project. Thematically, ICI supports LUCK’s historic milestones and provides exposure to growing Chemical, Consumer, and Pharmaceutical sectors. With a distinct trait of high ROE (dollarized) power projects into the portfolio, LUCK will add more sustainability to its aggressive and cyclical business model moving forward, which can lead to higher payout across the medium term. Risks: (i) Inability to pass on FED increase in FY17 budget, (ii) dumping of Iranian cement, (iii) sharp increase in coal prices and (iv) break‐down in pricing mechanism.

Best exposure to Pakistan’s construction upcycle & more; Buy!

Lucky Cement Co Ltd

Lucky Cement Limited Price (PkR/sh) 657.86TP (PkR/sh) 756.16Stance BuyUpside 14.9%Fwd D/Y 1.5%Total Return 16.4%Bloomberg / Reuters LUCK PA / LUKC.KAMkt Cap (US$mn) 2,031.152wk Hi‐Low (PkR/sh) 627.04‐448.883m Avg. Daily Vol ('000 shrs) 3073m Avg. Traded Val (US$mn) 1.63

LUCK’s Consolidated valuations Key Ratios FY15 FY16F FY17F FY18FEPS (PkR) 42.54 44.02 54.82 61.71EPS Growth (%) 16% 3% 25% 13%P/E (x) 10.76 14.94 12.00 10.66BVPS (PkR) 212 251 307 372PBV (x) 2.16 2.62 2.15 1.77DPS (PkR) 9.00 10.00 12.00 12.00DY (%) 2.0% 1.5% 1.8% 1.8% ROE (%) 23% 20% 21% 20%Debt to Equity (x) 18% 11% 36% 56%EV/EBITDA (x) 5.64 7.57 7.78 7.22Source: IMS Research

LUCK vs. KSE100 Index

‐16%

‐4%

8%

20%

Jun‐15

Jul‐1

5

Sep‐15

Oct‐1

5

Dec‐15

Jan‐16

Mar‐16

Apr‐1

6

Jun‐16

LUCK KSE100 Index

Source: IMS Research

Perspective

ROE profile of underlying businesses

0%5%

10%15%20%25%30%35%40%

FY12

FY13

FY14

FY15

FY16

F

FY17

F

FY18

F

FY19

F

FY20

F

FY21

F

FY22

F

Lucky Core ICI IRAQ CONGO Wind LEPL


Profit before tax from underlying businesses

‐

10,000

20,000

30,000

40,000

50,000

FY14 FY15 FY16F FY17F FY18F FY19F FY20F FY21F FY22F

(PkRmn)

Lucky Core ICI IRAQ CONGO Wind LEPL

Source: Company Accounts & IMS Research

Market share‐ LUCK is 2nd largest

16%

11%

17%

8%

8%

2%4%

6%LUCKDGKCBWCLMLCFFCCLCHCCPIOCKOHC

76%

24%

Local Exports

Source: APCMA, IMS Research

LUCK‐ Valuation Contribution (PkR/sh)

506.6 39.0

70.3

18.641.1

6.9 73.6Core

Expansion

ICI

Iraq

DRC

Yunus Wind

LEPL


Capacity and production trend

0%

20%

40%

60%

80%

100%

0

2,000

4,000

6,000

8,000

10,000

FY00

FY02

FY04

FY06

FY08

FY10

FY12

FY14

FY16

F

FY18

F

FY20

F

FY22

F

Capacity (mn tons) Production (mn tons) Utilization (Rhs)


EBITDA generation to remain strong

0%

10%

20%

30%

40%

50%

60%

70%

‐

10,000

20,000

30,000

40,000

50,000

60,000

FY13

FY14

FY15

FY16

F

FY17

F

FY18

F

FY19

F

FY20

F

FY21

F

EBITDA (PkRmn) EBITDA growth (%) ‐RhsSource: IMS Research

3 | P a g e

Perspective

LUCKY CEMENT Key Triggers: • Core business still has room to cater to medium term local demand due to

adequate capacity and exports. • Upcoming 2.3mn tons expansion in Punjab will be in the heart of CPEC

related activities, helped by presence of major vote bank for the present government.

• Widening of LUCK’s valuations from peers due to lower susceptibility of margins against major sector/cost headwinds.

• Int’l cement ventures including IRAQ and DRC are likely to add 6%/13% to earnings in FY16/17F, which further differentiates LUCK from conventional cement players.

• ICI Pakistan in LUCK’s portfolio adds PkR70/share to our valuation; providing exposure to Chemical, Consumer, Pharmaceutical sectors.

• Footprints into high ROE power businesses with 20% equity stake in wind farm and 100% stake in 660MW coal power plant to provide excellent balance to the cyclical nature of core operations.

• Exceptional track record of the management also highlights some key successes including (i) second largest cement capacity post Bestway merger with PakCem; (ii) acquisition and turnaround of ICI; (iii) exploration of high growth African markets for exports and expansion and (iv) cost competitiveness.

Company Profile: Lucky Cement Limited (LUCK) is the second largest cement producer in Pakistan with a capacity of 7.75mn tons. The company’s production capacities are located in Pezu, KPK, and Karachi, Sindh. Lucky has also planned to setup a production facilityof 2.3mn tons in Punjab. Lucky’s global expansion theme includes joint ventures (i) 0.87mn tons cement grinding facility in Basra, Iraq and (ii) 1.18mn cement plant in Democratic Republic of Congo (DRC). Besides cement operations, the company has 56% stake in ICI Pakistan, 20% stake in Yunus wind Energy and 100% stake in 660MW Lucky Electric Power Limited (LEPL). Lucky Cement is listed on the Pakistan and London Exchanges.

Source: Company Accounts

4 | P a g e

Perspective

Macro Uptick Demand trend Increasing Utilization

GDP growth rate set to cross 5%; CPEC can be game changer

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

rural

Local dispatches grew at 17%YoY in 11MFY16, which is reminiscent of high growth periods between FY03‐FY07 where dispatches grew

at an average of 16.4% p.a.

Extraordinary pace of demand has pushed capacity utilization of industry over 84%. Some plants are inefficient therefore effective

utilization is much higher.

…and then there is CPEC Lower risk of price war Upcoming capacities

The US$46bn corridor project will bring about major infrastructure

projects. Currently 3 power projects have achieved financial close while

other projects are still in the feasibility stage.

Given the current status of demand, cement players will likely not jeopardize high growth period

which has so far favored all players

Total announced: 7.6mn tons (17% of current industry capacity)

Cherat with 1.3mn tpa Attock with 1.2mn tpa DG Khan with 2.8mn tpa Lucky with 2.3mn tpa

Decline in exports Exports in 11MFY16 declined 17%YoY primarily due to entrance of Iranian Cement in Afghanistan, imposition of anti‐dumping duties in South Africa and implications of lower oil prices on oil driven economies.

Margins trend

Margins are in a sweet spot with lower Coal/FO prices and stable cement prices within the industry. Current GMs stand at 40‐47% vs. 4yr average of 34%

Bumper Profits

9MFY16 profits for the cement sector recorded 18.5%YoY improvement to PkR26.6bn (IMS Cement Universe)

Incremental taxes Government has levied additional FED on the cement sector at PkR1/kg vs. 5% of the price. Given strong status of demand, the industry is in a commanding position to pass on the impact to consumers.

Iranian Cements 450k‐500k tons of Iranian cement is imported through illegal channels in Balochistan. Post lifting of sanctions, Iran stands as a key threat. We believe exports through legal channels do not allow much of a price differential.

Cement sector is currently trading at FY17F P/E of 9.2x, at 7% discount to KSE

100 index.

Cement Sector

5 | P a g e

Perspective

Next leg of growth to come in countries with high population

0

50

100

150

200

250

300

‐100 200 300 400 500 600 700

Malaysia

Vietnam

Egypt

Algeria

Thailand

Brazil

Japan

Indo

nesia

Nigeria

Pakistan

Population (mns)‐Rhs Average/capita (Kgs)Consumption/capita (kgs)

Source: World Bank & IMS Research

Local sales to compensate for falling exports (mn tons)

‐

10.0

20.0

30.0

40.0

50.0

60.0

‐

10.0

20.0

30.0

40.0

50.0

60.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

F

FY17

F

FY18

F

FY19

F

Cement Capacity Lhs Local Cement demand Exports

Source: APCMA & IMS Research

Best exposure to Pakistan’s construction upcycle & more; Buy! • We reinstate coverage on Lucky Cement (LUCK) – the second largest cement producer in Pakistan – with a Buy rating and a

Target Price of PkR756/share (15% upside). With a 5yr EPS CAGR of 21%, LUCK offers the best exposure to construction up‐cycle in Pakistan; its international ventures and diversifications are unmatched by peers.

• Superior core operations, expansion, and international cement ventures place LUCK alongside the best cements players in the EM space. Additionally, diversification in non‐cement‐related avenues through ICI and LEPL allows LUCK with high ROE exposures in Chemical, Consumer, Pharmaceutical and Power sectors.

• Our valuation incorporates core operations (PkR506/sh), 2.3mn tons expansion (PkR39/sh), ICI (PkR70/sh), Iraq operation (PkR19/sh), DRC venture (PkR41/sh), Yunus Wind Energy (PkR7/sh), and Lucky Electric Power (PkR74/sh). We believe commencement of DR Congo plant in Oct’16 and 2.3mn tons expansion in Punjab at end of FY18 are key upcoming triggers.

Local cement demand is reminiscent of high growth era Improvement in macros, private sector spending, easy terms on credit, increasing focus of the government towards infrastructural projects and upcoming China Pakistan Economic Corridor (CPEC) paint a favorable outlook for cement demand within the country. Within 11MFY16 local cement demand picked up 17%YoY which is reflective of high growth periods observed between FY03‐FY07 where local cement demand averaged 16.4% p.a. compelled by 6.5% GDP growth (avg).

Demand is likely to keep momentum going We foresee 5yr total dispatches CAGR of 8%, driven by local dispatches CAGR of 12% till FY20F. Primary reasons for improvement in local dispatches include (i) private positives like increased disposable income, urbanization, availability of easy credit in growing real estate market and (ii) public positives like infrastructure development, CPEC related projects and GoP’s own development spending. Pakistan has one of the lowest per capita cement consumption of 147KGs within the region when compared with developing economies of similar stature.

Private sector credit to construction sector (PkRbn)

‐40%

‐20%

0%

20%

40%

60%

‐

20,000

40,000

60,000

80,000

100,000

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Construction Credit (PkR mns) Growth (%) ‐Rhs

Source: SBP & IMS Research

6 | P a g e

Perspective

Core operations are best in class; premium is justified Lucky Cement (LUCK) is an ideal play in the cement sector with its (i) North‐South presence (7.75mn tons of capacity), (ii) idle capacity to cater to medium‐term demand (FY15/16F utilization of 88%/86%, out of which 24% are for exports), (iii) 2.3mn ton expansion in Punjab (which we value at PkR35/share), (iv) cost efficiencies from in‐house power generation, (v) continued endeavors towards cost reduction through WHR/TDF/RDF, and (vi) 5yr core driven earnings CAGR of over 6%. We believe LUCK’s core operations contributing about 70% to the earnings (FY16/17F EPS: PkR38.8/39.9) will justifiably trade at a premium to the market with a target price contribution of PkR506.5/share. LUCK has the muscle to cater to demand with the geographical edge LUCK stands to be the second largest cement producer in Pakistan post Bestway merger with PakCem and runs at 86% utilization, supplying 76/24% to the local/export markets. Besides enough capacity due to falling exports (LUCK’s 9MFY16 exports are down 34%YoY), LUCK also has room to transform exports into high margin local sales given the current status of demand (expected to grow at over 10% per annum over FY17‐21). We believe LUCK is one of the strongest candidate for increase in local market share which is currently at 16% due to: (i) inefficiencies of certain plants, (ii) enough time before the larger capacities come online by FY18 end, and (iii) industry utilization reaching over 84%. Moreover, LUCK’s regional presence both in North and South will also allow the company to participate in public and privately driven demand growth.

Expansion will further diversify domestic portfolio LUCK’s expansion in Punjab will help the company to align its other two facilities in Sindh and KPK, leading to synergies towards major demand centers within the respective provinces. Due to chronic energy issues, Punjab is also expected to be the hub of energy and infrastructural projects partially due to incumbent government’s anticipated focus towards its major vote bank.

EBITDA contribution from expansion

38%

36%

35%

34%

33%

42%

40%

39%

39%

38%

31%

29%

28%

28%

27%

FY19F FY20F FY21F FY22F FY23F

EBITDA Margins GP Margin (%) Net Margins (%)


Earnings contribution from expansion

6.34

10.34 11.54

12.99 14.17

0%10%20%30%40%50%60%70%80%90%100%

‐

4

8

12

16

FY19F FY20F FY21F FY22F FY23F

Capacity Utilization (Rhs) EPS (PkR)


LUCK’s market share is 2nd post Lafarge’s merger with Bestway

16%

11%

17%

8%

8%

2%4%

6%LUCK

DGKC

BWCL

MLCF

FCCL

CHCC

PIOC

KOHC


LUCK’s falling exports and expansion to cater to local market

‐

1,500

3,000

4,500

6,000

7,500

9,000

10,500

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

F

FY17

F

FY18

F

FY19

F

FY20

F

FY21

F

k' tons

Local Exports Capacity


7 | P a g e

Perspective The US$200mn equity financed project is expected to come online by June’18, which besides serving closeby proximities will also be eligible to avail tax benefits (investment in special economic zones of Punjab). Our valuation for LUCK’s expansion sums to PkR39/share, which is 5% of the total valuation pie.

Declining exports should not be a concern LUCK’s valuations converged to industry primarily due to (i) decline in exports post announcement of anti‐dumping duty in South Africa and availability of cheaper Iranian cement in Afghanistan; (ii) increase in margins within the industry on sharp decline in FO prices; and (iii) increasing cost efficiencies within the industry on decline in grid tariff/commencement of WHR. Although exports provide sustainability to the business model in times of slowdown in local demand, considering the current pace of demand growth we believe LUCK’s declining exports will continue to transform into high margin local sales which solidifies the case for robust medium term demand growth. Despite 34%YoY decline in exports for LUCK in 9MFY16, LUCK’s core margins and earnings have improved by 3ppts (GMs in 9MFY16: 47.5%) and 3.5%YoY.

Pricing mechanism looks stable Given high demand (11FY16: local dispatches are up 17%YoY), pricing momentum within the cement industry has remained strong since the last price war in FY10. We believe the industry is reaching toward its maximum potential before new capacities start to commence operations in 2QFY17F (CHCC). That said, increasing concentration within the industry from larger players in terms of acquisitions (Bestway Cement acquiring PakCem) and expansions (LUCK and DGKC) will further make it tough for a single/smaller players to influence the pricing mechanism. To recall, local cement demand growth within FY08‐11 averaged 1.6% (GDP growth under 2.8%) on top of 11.8mn tons of new capacities, which enticed cement manufacturers to break the pricing mechanism. While it still remains a risk, but given current pace of demand and utilization levels, breakdown in pricing mechanism will not make sense to anyone within the industry; therefore it remains a low probability event for the medium term.

LUCK’s exports to fall faster due to North‐South capacities

‐

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

‐

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY10 FY11 FY12 FY13 FY14 FY15 FY16F

North (mn tons) South (mn tons) LUCK (mn tons)‐Rhs


Margin improvement on declining exports

0%

10%

20%

30%

40%

50%

0%

25%

50%

75%

100%

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

F

Local volumes (%) Export volumes (%) GMs (%) Rhs


Strong price momentum continues (Retention Price PkR/bag)

‐

100

200

300

400

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

F

Local ExportsSource: Company Accounts & IMS Research

Next leg of expansion cycle to start in 2QFY17 (mn tons)

53.27

20.83

9.67

7.184.6

2.36

45.62

0.65

1.95.1

0

10

20

30

40

50

60

STAR

T

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

END

chg in Capacity Total Capacity

Source: Company announcements & IMS Research

Province wise resource distribution FY10 FY17

Punjab 50% 52% Sindh 35% 25% KPK 10% 15% Balochistan 5% 9% Source: Budget in brief

8 | P a g e

Perspective Margins are at multi year highs… We believe gross margins within the industry have observed their highs (9MFY16 margins ranged between 34%‐49%) primarily due to sharp decline in Coal (down 17%YoY) and FO prices (down 46%YoY), coupled with stable cement pricing environment. That said, further upside in local cement prices remains limited (especially after passing on the impact of increase in FED) due to concerns over cheaper imports in South, particularly from Iran entering through legal channels. We believe margins are likely to be more a function of cost efficiencies (WHR and lower FO prices) than cement price growth, therefore we have assumed marginal cement prices growth of 0.5%‐1.0% to normalize our terminal year gross margins at 32% for LUCK (Unconsolidated: 37%). Increase in FED to be passed on: To recall, GoP has recently increased FED rates to PkR1/kg from 5% of price which can potentially have negative implications on the cement sector. We believe, given the strong momentum of demand, the industry is likely to pass on PkR35/bag both in North and South regions. However, increase in prices in South may open up pathway for Iranian cement imports which could increase the gap in retention prices by PkR60/bag. Decline in coal prices is a result of multiple factors including slowing down of major economies (China) and global movement towards more environment friendly sources of energy. Generally, coal and crude prices move in tandem but recent sharp uptick in crude prices has resulted in divergence between the two commodities which further signifies “lower for longer” case for coal prices. Decline in crude oil prices led to sharp decline in local furnace oil prices. While volatility in crude prices may sustain but due to fundamentally oversupplied global markets, outlook for crude prices hinges on some of the largest crude and shale producers. Within the cement sector, decline in FO prices has allowed local industry to operate their oil fired engines. In case of LUCK, it has 86 MWs (total power generation capacity: 198MWs) of dual and oil fired engines which potentially allows the company to meet over 40% of its power requirements from in‐house power sources, in our view.

Cost efficiency endeavors to continue Lucky has always remained the lowest cost cement producer because of its efficiencies emanating from WHR, vertical roller mills, tyre derived fuel and efficient fuel mix. Recently, with reduction in oil prices, the company has shifted focus towards Furnace Oil (FO) based power generation from gas based. LUCK owns 35MWs of WHR capacity, where it further plans to add another 10MWs at Pezu (potential before tax savings of PkR1.05/share). We believe LUCK’s power generation advantage, weak coal price outlook, regional presence and continuous efforts towards energy savings will keep margins above the industry average in the medium term.

Coal and crude showing some divergence in price movements

0

40

80

120

160

200

Jan‐84

Jan‐86

Jan‐88

Jan‐90

Feb‐92

Feb‐94

Feb‐96

Mar‐98

Mar‐00

Mar‐02

Mar‐04

Apr‐06

Apr‐08

Apr‐10

Apr‐12

May‐14

May‐16

Crude oil, Brent (US$/bbl) Coal, South Africa (US$/ton)

Point of divergence

Source: Bloomberg & IMS Research

Margins to remain upbeat on weak coal prices

20%

25%

30%

35%

40%

45%

50%

‐

20

40

60

80

100

120

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

F

FY17

F

FY18

F

FY19

F

FY20

F

Coal Prices (US$/ton) GMs (%) Rhs

Source: Bloomberg, Company Accounts & IMS Research

47%

11%9%3%

3%

26%

Coal consumption

ChinaUnited StatesIndiaRussiaGermanyOthers

Source: EIA GDP Growth Rates

‐5.0% 0.0% 5.0% 10.0%

China

US

India

Russia

Germany

2017 2016 2015 2014 Source: World Bank

Estimated Power Mix

24%

44%

32%

WHR FO Gas Source: IMS Research

9 | P a g e

Perspective

Premium over peers has shrunk over time… Due to declining exports LUCK’s core earnings are expected to remain flattish in FY16, where we project EPS of PkR39/share. LUCK’s valuation premium despite being the lowest cost producer and largest exporter shrank over time due to improved profitability of peers (industry profitability ex‐Lucky is up 21%YoY) emanating from incremental cost efficiencies driven by lower fuel/oil prices and WHR. Another reason towards convergence in valuations could be large foreign ownership in Lucky amid global pessimism. …which is yet to rebound again While the sustainability of margins for other cement manufacturers may be dependent upon sharp decline in FO prices, LUCK’s margins provide more stability and deserve valuation premium due to dedicated gas connection, lowest cost production, geographical uniqueness, expansion in Punjab, multi‐stage diversification, high proportion of export sales (24%), 5yr earnings CAGR of 21% and the only cement play in the mainstream MSCI EM eligible stocks.

Fuel and power cost (PkR/bag) is lowest for LUCK

60

80

100

120

140

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16F

Luck DGKC FCCL MLCFSource: IMS Research

…consequently GMs have been the highest

10%

20%

30%

40%

50%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16F

LUCKY DGKC FCCL MLCFSource: IMS Research

Power generation cost has gone down…

‐

3.0

6.0

9.0

12.0

15.0

18.0

21.0

FY12 FY13 FY14 FY15 FY16F Current

Gas‐PkR/KWh Grid‐PkR/KWh FO‐PkR/KWhSource: Nepra, OGRA, PSO & IMS Research

…as a result core EBITDA/ton has converged (PkR/ton)

600

1,600

2,600

3,600

4,600

FY12 FY13 FY14 FY15 FY16FLUCK DGKC FCCL MLCF


Earnings growth of IMS Cem. Universe 5yr CAGR

CHCC 25% LUCK 21% DGKC 11% FCCL 9% PIOC 8% MLCF 6% Source: IMS Research

LUCK vs.IMS Cement Universe & KSE100 Index

‐40%

‐20%

0%

20%

40%

60%

80%

Jan‐15

Jan‐15

Feb‐15

Mar‐15

Mar‐15

Apr‐1

5

May‐15

May‐15

Jun‐15

Jul‐1

5

Jul‐1

5

Aug‐15

Sep‐15

Oct‐1

5

Oct‐1

5

Nov‐15

Dec‐15

Dec‐15

Jan‐16

Feb‐16

Feb‐16

Mar‐16

Apr‐1

6

Apr‐1

6

May‐16

Jun‐16

KSE100 Index IMS Cement Univ. Ex ‐ LUCK LUCK


10 | P a g e

Perspective

International Cement ventures will create alpha Besides LUCK’s local regional expansions, it was prudent enough to explore international ventures in shape of 0.87mn ton grinding mill at Iraq (Lucky Al Shumookh Holdings Limited) and 1.1mn tons cement plant in Democratic Republic of Congo (LuckyRawji Holdings Limited). We believe both of these projects are value additive (valuation of DRC and Iraq project is worth PkR19/sh and PkR41/sh) besides providing sustainability towards earnings. We estimate LUCK’s foreign cement ventures to add 5%/13%/18% to earnings in FY16/17/18F respectively, where the jump in earnings is attributable to commencement of DRC plant in 2QFY17.

DR Congo plant to put LUCK years ahead of its local peers High growth and attractive African market are dominated by some of the biggest players namely Dangote, PPC and Lafarge. We believe LUCK’s participation in exploring undersupplied markets/regions will put LUCK in the league of some of the largest African cement players. We believe Congolese market remains virtually untapped with extremely low per capita cement consumption (16Kgs), low internal cement production capacity (0.6mn tons), import of cement, high local cement prices (US$220‐250/ton), proximity to coal, and one of the centers within the African region to observe phenomenal economic growth. This venture will open up new markets for LUCK.

Demand and GDP growth looks promising DR Congo has been one of the fastest growing economies within the African region. With population at 82mn, DRC stands to have one of the lowest per capita cement consumption, which is estimated at 16Kgs vs. the average of 125Kgs of regionally comparable economies. Moving forward, despite security concerns, economic growth is expected to remain upbeat with (i) continuous government reforms; (ii) improved private spending and (iii) increasing mining, manufacturing and agricultural activities. High regional prices to be offset by upcoming capacities Our analysis suggest that DRC has installed cement capacity of 0.6mn tons vs. demand of over 2mn tpa.

GDP growth in DRC is consistently high

0%

3%

5%

8%

10%

13%

15%

2010 2011 2012 2013 2014 2015

DRC South Africa Zimbabwe Bostwana Rwanda Ethiopia

Source: World Bank & IMS Research

Highest population with lowest/capita cement consumption

‐

20

40

60

80

100

‐50

100 150 200 250 300 350

DRC

Rwanda

Etho

pia

Zimbabw

e

RSA

Bostwana

Cement Consumption KGs/capita Population‐mns (Rhs)

Source: PPC, World Bank & IMS Research

Gross margin trend of some large players….

20%

30%

40%

50%

60%

70%

80%

2010 2011 2012 2013 2014 2015

Dangote PPC Lafarge Zambia


Share of capacities in DRC

Local, 22%

Lucky, 42%

PPC, 36%


11 | P a g e

Perspective Resultantly, retail cement prices in DRC range between US$220‐240/ton, (which translates to net retention prices of US$150‐$160/ton) due to high inland freight charges, and 16% VAT. Regionally, due to proximity of coal and high cement prices, gross margins in the region range between 40%‐60%, varying among various cement manufacturers and their cost efficiencies. Capacity risks are not worrying at the moment; demand to overweigh We believe aggressive nature of some of the largest cement players including Dangote (intends to add 30.7mn tons in Africa in next 4yrs, which is 70% of its current capacity) may increase the risk of imports from adjoining countries including Zambia, Tanzania and Uganda. However, since local capacities will be enough to meet the internal demand, importers would have to compromise on margins due to high inland transportation cost. Contribution may surpass 13% to LUCK’s profit pie We value the US$270mn project on LUCK’s books at PkR38/share, which is expected to contribute PkR3.9/7.4/8.9 in FY17/18/19F (7%/12%/13% to LUCK’s EPS). Besides hefty margins, the plant will likely enjoy tax holiday status till FY20F. In scenarios of undisciplined pricing mechanism within the local industry, DRC plant will continue to provide decent contribution to LUCK. Lucky setting footprints in Africa

Current and Upcoming Capacities Timeline Current 0.60 Lucky 1.18 PPC 1.00 Source: IMS Research

DRC Capacity Utilization (%)

FY17F FY18F FY19F FY20F

65% 79% 90% 95%

DRC to make healthy contribution in LUCK’s pie…

0%

2%

4%

6%

8%

10%

12%

14%

0.0

2.0

4.0

6.0

8.0

10.0

FY17F FY18F FY19F FY20F

EPS (PkR) Earnings contribution ‐Rhs


Margins projections for DRC plant

39%

39%

38%

36%

33%

31%

28%

54%

55%

53%

51%

49%

46%

43%

29% 34

%

35%

34%

21%

20%

18%

FY17F FY18F FY19F FY20F FY21F FY22F FY23F

EBITDA Margins (%) GP Margin (%) Net Margins (%)


Source: footprint2africa

12 | P a g e

Perspective Iraq operations have opened a new market LUCK’s cement ventures abroad were initiated with Iraq where its 0.9mn tpa grinding facility was setup as a JV with Lucky Al Shumookh. The venture contributed earnings of PkR1.87/share in 9MFY16 vs. PkR1.59/share in full FY15. The profitability improved due to increased utilization and increase in import tariff from US$13/ton from US$4/ton to limit Iranian exports in Iraq.

Economic outlook Iraq’s economy derives largely around oil, which nearly contributes 90% to government revenues and 80% of foreign exchange. Thus, due to sharp decline in oil prices (US$45/barrel is budgeted for 2016) and the resurgence of ISIS within the region, the economy may continue to face fiscal and external challenges. According to World Bank however, the economy might grow considerably due to low base factor.

Ban on Iranian exports to help the cause Iraq’s cement demand stands at 19mn tons of which 10‐12mn tons is produced locally while rest is imported from Iran. Reportedly, a ban has been imposed on import of Iranian cement in Iraq, which will help the local industry.

Contribution remains small; but a potential new market is there We have assumed steady increase in utilization to 100% in the terminal year (FY24F), which translates to EPS contribution of PkR2.4/2.6/2.7, in FY16/17/18F (10 yr tax‐holiday). Our valuation for the project on LUCK translates to PkR18/share (2.5% of the total valuation). Due to disparity in cement demand supply within Iraq and better cash generation, possibility of further expansion cannot be ignored.

Relative contribution of IRAQ JV…

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0%

5%

10%

15%

20%

25%

30%

35%

FY15 FY16F FY17F FY18F FY19F FY20F

EPS (PkR)‐Rhs ROE (%) EBITDA Margins (%)


Smaller share in a bigger pie in FY20F earnings…

2.68

55.13

IRAQ LUCK


13 | P a g e

Perspective

Diversification history remains a success Within the broader diversification theme, LUCK has 56% stake in ICI, 20% stake in Yunus Energy wind farm and intends to build a US$1bn 660MW coal power project. Thematically, ICI fits into the group’s long history with textile and provides exposure to growing chemical, consumers and pharmaceutical segments. With a distinct trait of high ROE power projects into the portfolio, LUCK will add more sustainability towards its cyclical business model, moving forward, which can lead to higher payout across the medium term. We have valued ICI at PkR70/share (using FCF), Yunus Energy at PkR7/share (discounting future ROEs) and Lucky Electric Power Company Limited at PkR74/share (discounting future ROEs). The diversified portfolio of LUCK will add sustainability to earnings and valuations (contributing 20% to the TP); separating it from the headwinds of the cement sector.

ICI‐ The Soda ash factor Since ICI’s acquisition at PkR205/share, ICI has made a significant turnaround (2.1x return to current market price) in terms of profitability. With 150k tons Soda Ash expansion (already contributing 86% to operating profits) to kick from FY18, ICI will further expand its footprints in neighboring export market. Initiatives in the consumer sector in shape of Nutrico (infant milk) have borne well for the company, which contributes 16% to the profitability (9MFY16 EPS: PkR3.3/share of ICI and PkR0.53/share of LUCK). However, PSF segment mostly weighs down on company’s profitability due to low margins and dumping allegations from China. Besides energy savings emanating from coal boilers, ICI also offers exposure to high growth areas like Consumers, Life Sciences and Soda Ash, which justifies its premium valuations. We value ICI at PkR571/share after applying 30% conglomerate discount which translates to PkR70/share of LUCK (56% effective stake). Yunus Wind Energy‐ Not ignoring any investment opportunity The project includes LUCK’s 20% equity investment in the group financed 49.5MW wind farm; which, in our view, will add PkR7/share to LUCK’s valuation. The project offers an attractive IRR of 17%, which in turn will likely contribute over PkR1.5/share as earnings (ROE: PkR0.8/share). Lucky Electric Power to povide highest ROEs among all businesses… LUCK plans to set up coal based 660MW power plant for which financial close is expected by Jun’16. Given hefty internal cash generation, 25% equity for the project is expected to be financed internally for which 27.2% ROE (Indexed at 3% PkR depreciation) has been allotted. The project will not only add incremental valuation of PkR74/share, but also provide sustainability to LUCK’s group earnings (potential EPS impact: PkR38‐45). The project is expected to entail 50%/50% foreign and local financing for the 75% debt portion. Defensive attributes of the power business will provide sustainable US$ hedged earnings contribution to LUCK, to temper aggressive and cyclical nature of other businesses including core cement operations, international cement operations and ICI.

ICI business segments profitability (PkR mns)…

‐1,000

‐500

0

500

1,000

1,500

2,000

2,500

FY12 FY13 FY14 FY15

Polyester Soda Ash Life Sciences Chemicals


…led to impressive price performance

‐100%

0%

100%

200%

300%

400%

500%

Jul‐1

0Oct‐10

Jan‐11

Apr‐11

Jul‐1

1Oct‐11

Jan‐12

Apr‐12

Jul‐1

2Oct‐12

Jan‐13

Apr‐13

Jul‐1

3Oct‐13

Jan‐14

Apr‐14

Jul‐1

4Oct‐14

Jan‐15

May‐15

Aug‐15

Nov

‐15

Feb‐16

May‐16

ICI KSE100 IndexSource: IMS Research

14 | P a g e

Perspective

Coal Power Projects waiting in line Gross Capacity (MW) Levelized Tariff (PkR/kwh) ROE (%) Benchmark Efficiency

Lucky Imported Coal Power Project 660 8.12 27.2% 39.0% China Power Hub Generation 1,320 8.12 27.2% 39.0% Port Qasim Imported Coal Power Projects 1,320 8.12 27.2% 39.0% SSRL Thar Coal Fired Power Project 1,320 8.26 34.5% 39‐39.5% Jamshoro Coal Power Project ‐Petition 1,320 8.43 N/A 43.4% Engro Thar Coal Power Project 660 8.26 30.7% 37.0% Siddique Sons Imported Coal Power Project 350 9.34 26.5% 39.0% Source: NEPRA & IMS Research

LEPL to offer PkR ROE of over 30%

14%

18%

29%

17%

30%

0% 10% 20% 30% 40%

Lucky Core

ICI

IRAQ

CONGO

LEPL


Earnings contribution in FY21F

49.7%

17.7%1.8%

4.3%

0.6%

26.0%

Lucky Core

ICI

IRAQ

CONGO

Wind

LEPL


15 | P a g e

Perspective

Premium Valuations are justified LUCK’s premium valuations are a function of (i) early expansions; (ii) exploration of new export markets; (iii) cost efficiencies; (iv) acquisition and turnaround of ICI; (v) international cement ventures in Iraq & DRC; and (vi) balancing the profit profile by entrance into power ventures. We believe valuations within the cement sector converged due to (i) imposition of anti‐dumping duties on exports in South Africa; (ii) foreign outflows post closure of a foreign fund and (iii) increase in profitability of the overall cement sector. Our Dec’16 target price for LUCK comes to PkR756.2/share, which emanates from Core operations (PkR506.5/share), ICI (PkR70.3/share, after 30% discount), 2.3mn tons cement expansion in Punjab (PkR39.0/share), Iraq grinding facility (PkR18.6/share, with 4% CRP), upcoming 1mn ton DRC cement plant (PkR41.1/share, with 4% CRP), Yunus wind energy (PkR6.9/share) and LEPL (PkR73.6/share).

Valuation Table FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F Stake Valuation Cong.

Disc. Country Risk

Terminal growth

Core FY24‐FCF 3.21 34.23 9.67 13.73 28.02 25.65 25.91 19.65 100% 506.56 ‐ ‐ 3%

Expansion FY24‐FCF (5.64) (16.54) 2.52 4.11 4.58 5.11 5.52 5.42 100% 39.03 ‐ ‐ 3%

ICI FY24‐FCF 1.90 1.20 0.82 3.74 1.99 7.83 8.45 9.09 56% 70.33 30% ‐ 4%

Iraq FY24‐FCF 1.40 1.38 1.68 1.52 1.68 1.82 1.89 1.66 50% 18.64 ‐ 4% 3%

DRC FY24‐FCF 1.20 2.72 2.71 4.25 3.33 4.51 4.91 4.66 50% 41.10 ‐ 4% 3%

Yunus Wind FY36‐ROE 1.27 1.31 1.35 1.39 1.43 1.47 1.52 1.56 20% 6.87 ‐ ‐ ‐

LEPL FY50‐ROE (9.64) (9.93) (4.09) (2.02) 8.85 9.12 9.39 9.67 100% 73.64 ‐ ‐ ‐ Target Price‐ PkR/share 756.2

EM cement players‐ (P/Ex) FY17F

6.411.41212.612.613.31416.1

20.721.422.222.322.522.8

29.132.5

0 10 20 30 40

PPC SJMRDIN TILUCK PA ICEM ININTP IJ

2233 HKSCCC TBARNA IJSMCB IJWTON IJACEM INDTEX3 BZ

ACC INLMC MK

UTCEM INGLOBAL TB

Source: Bloomberg & IMS Research

Company Bloomberg. Ticker Country Mkt

P/E (x) P/E (x) PBV (x) EV/EBITDA

(x) DY (%) ROE (%) (Disc.) /Prem.*

16F 17F 16F 17F 16F 17F 16F 16F L‐Mkt EM Lucky Cement LUCK PA Pakistan 9.9 14.9 12.0 2.6 2.1 7.6 7.8 1.50 20.0 21% ‐2% Siam Global House PCL GLOBAL TB Thailand 15.4 36.8 32.5 2.9 2.8 19.9 17.7 0.7 7.9 110% 164% Wijaya Karya Beton Tbk PT WTON IJ Indonesia 15.3 28.1 21.4 3.3 3.0 16.5 12.5 0.6 12.4 40% 74% Mardin Cimento Sanayii ve Ticaret MRDIN TI Turkey 8.7 12.2 11.4 2.0 2.0 9.5 8.6 8.0 17.9 31% ‐7% Arwana Citramulia Tbk PT ARNA IJ Indonesia 15.3 22.5 16.1 4.1 3.4 12.5 9.5 0.5 19.8 5% 31% West China Cement Ltd 2233 HK Hongkong 11.1 21.5 13.3 1.3 1.2 9.2 6.6 1.0 3.0 20% 8% Holcim Indonesia Tbk PT SMCB IJ Indonesia 15.3 30.4 20.7 0.9 0.8 9.4 8.5 1.8 3.7 35% 68% Lafarge Malaysia Bhd LMC MK Malaysia 16.0 25.8 22.8 2.1 2.1 12.6 11.7 3.7 8.1 42% 85% PPC Ltd PPC SJ S. Africa 17.1 13.3 6.4 1.5 1.0 9.7 5.9 3.0 32.2 ‐62% ‐48% Siam City Cement PCL SCCC TB Thailand 15.4 15.1 14.0 3.1 2.9 10.1 9.5 5.0 19.6 ‐9% 14% India Cements Ltd/The ICEM IN India 17.2 23.6 12.6 0.9 0.9 5.9 5.9 1.5 6.9 ‐26% 2% Indocement Tunggal Prakarsa Tbk INTP IJ Indonesia 15.3 13.3 12.6 2.3 2.1 8.0 7.4 4.4 17.6 ‐18% 3% Duratex SA DTEX3 BZ Brazil 12.7 49.9 22.3 1.1 1.1 8.6 7.3 2.2 2.8 76% 82% Ambuja Cements Ltd ACEM IN India 17.2 29.2 22.2 3.3 3.0 15.8 12.7 1.7 11.3 29% 80% UltraTech Cement Ltd UTCEM IN India 17.2 28.8 29.1 4.1 3.9 19.0 16.0 0.4 12.9 70% 137% ACC Ltd ACC IN India 17.2 31.4 22.5 3.4 3.2 16.1 12.9 1.7 10.8 31% 83% Source: IMS Research •

16 | P a g e

Perspective

Risks Iranian Cement simulation Approximately 450k‐500k tons of Iranian cement is imported through illegal channels in Balochistan. We believe exports through legal channels do not allow much of a price differential. Our analysis suggests that Iranian cement just offers a differential of PkR20‐25/bag and that too at a cost of quality (imported cement is of 32.5 grade). That said, due to probable pass on of increase in FED by PkR35/bag in North and South, threat of Iranian cement imports through official channels may increase in South. Iranian Cement Simulation Cement Price (US$/ton) 30.00 35.00 40.00 Freight 8.00 8.00 8.00 Duty (20%) 7.60 8.60 9.60 Landed Cost (US$/ton) 45.60 51.60 57.60 Margin (10%) 4.56 5.16 5.76 Retention Price (US$/ton) 50.16 56.76 63.36 PkR/ton 5,267 5,960 6,653 Retention (PkR/bag) 263.34 297.99 332.64 Local Retention (PkR/bag)‐South 350.00

Local Cement Pricing/margins, chances of a weigh down Although we do not consider any price war scenario in our financial model, but any change in retail cement prices by PkR50/bag would impact LUCK’s earnings by 10%. That said due to bumper profits within the sector, levy of marginal incremental taxes in the next fiscal budget cannot be ignored. Price Scenario 1 Scenario 2 Base Scenario 3 Scenario 4 Retail Price (PkR/bag) 455 505 555 605 655 EPS (PkR) 44.0 49.4 54.8 60.2 65.6 GMs (%) 32.1% 34.4% 36.5% 38.5% 40.2%

Government Policy Change Due to increasing profitability of the cement sector, government’s stance of increasing taxes has been evident with increase in FED to PkR1/kg and from 5% of the price in FY17. Continuation of that trend may limit the pricing power of the cement manufacturers in the longer term.

Coal prices and margins Globally due to environmental concerns and slowdown in demand, international coal prices are expected to remain bearish in the medium term. That said, our sensitivities suggest that with US$10/ton change in int’l coal prices, LUCK’s earnings are expected to change by 1.6%.

Price Scenario 1 Scenario 2 Base Scenario 3 Scenario 4 Coal Price (US$/ton) 29.0 39.0 49.0 59.0 69.0 EPS (PkR) 56.5 55.7 54.8 53.9 53.0 GMs (%) 38% 37% 37% 36% 35%

17 | P a g e

Perspective LUCKY Cement Company Limited – Financial Snapshot (Consolidated)

(PkRmn) FY15 FY16F FY17F FY18F FY19F FY20F

Net Revenue 82,118 81,392 87,061 95,975 106,540 140,983

Cost of sales (56,430) (51,644) (55,268) (61,452) (68,996) (94,731)

Gross profit 25,687 29,748 31,793 34,523 37,544 46,252

Admin & Sell. Exp. (5,221) (6,819) (8,090) (8,804) (9,728) (10,700)

EBITDA 24,864 27,006 27,986 30,129 32,956 42,961

Dep & Amortization 4,397 4,076 4,284 4,410 5,139 7,409

EBIT 20,467 22,930 23,703 25,719 27,817 35,552

Financial Charges (1,016) (1,252) (715) (654) (734) (2,806)

Other income 1,341 1,359 1,822 2,660 2,205 3,316

Other charges (1,667) (1,830) (2,066) (2,394) (2,609) (2,819)

Share of Profit 718 797 2,344 3,532 4,013 4,171

NPBT 19,842 22,003 25,087 28,863 30,691 37,412

Taxation (3,770) (6,669) (5,959) (7,021) (6,214) (6,062)

NPAT (Owners) 13,758 14,235 17,728 19,955 22,391 29,073

Balance Sheet


Non‐Current Assets 67,708 73,733 118,719 151,655 173,590 196,288

Total Current Assets 38,757 36,819 37,997 60,279 77,596 103,155

Total Assets 106,465 110,553 156,715 211,935 251,186 299,443

Share capital 3,234 3,234 3,234 3,234 3,234 3,234

Reserves 58,191 70,291 85,539 103,500 124,096 150,596

Surplus on revaluation

Total Equity 68,496 81,244 99,156 120,380 144,610 174,908

Long Term Debt 8,854 4,910 31,838 60,623 71,721 86,834

Total Non‐curr. Liabilities 18,354 14,865 41,888 71,950 84,368 103,396

Short term Debt 3,630 4,281 4,147 6,770 7,770 5,200

Total Current Liabilities 19,615 14,444 15,672 19,605 22,209 21,138

Total Liabilities 37,969 29,309 57,559 91,555 106,576 124,534

Cash Flow Statement


CF from Oper. Activities 24,342 12,425 23,231 25,870 28,951 38,755

CF from Inv. Activities (16,843) (10,102) (49,269) (37,346) (27,074) (30,106)

CF from Fin. Activities (1,067) (5,425) 25,673 32,067 13,171 15,407

Net dec./inc. in cash 6,432 (3,102) (365) 20,590 15,048 24,056

cash at beginning 11,723 18,156 15,053 14,689 35,279 50,327

Cash at end of year 18,156 15,053 14,689 35,279 50,327 74,383

Key Ratios FY15 FY16F FY17F FY18F FY19F FY20F

EPS (PkR) 42.54 44.02 54.82 61.71 69.24 89.90

EPS Growth (%) 16% 3% 25% 13% 12% 30%

P/E (x) 10.76 14.94 12.00 10.66 9.50 7.32

BVPS (PkR) 212 251 307 372 447 541

PBV (x) 2.16 2.62 2.15 1.77 1.47 1.22

DPS (PkR) 9.00 10.00 12.00 12.00 12.00 15.00

DY (%) 2% 2% 2% 2% 2% 2%

ROE (%) 23% 20% 21% 20% 18% 20%

ROA (%) 15% 14% 14% 12% 11% 11%

Debt/Equity (%) 18% 11% 36% 56% 55% 53%

EV/EBITDA (x) 5.64 7.57 7.78 7.22 6.62 4.84

EBITDA Margin 31% 34% 35% 35% 34% 34%

Gross Margin 31% 37% 37% 36% 35% 33%

LUCK Shareholding Pattern

14.4%

39.3%23.4%

12.4%

5.7%4.8%Local

Foreign

Directors

Associated cos.

Modarabas & MFs

Others


LUCK P/E Band


18 | P a g e

Perspective

I, Abdul Samad Khanani, certify that the views expressed in the report reflect my personal views about the subject securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this report. I further certify that I do not have any beneficial holding of the specific securities that I have recommendations on in this report.

Ratings Guide* Total Return Buy More than 15% Neutral Between 0% ‐ 15% Sell Below 0% *Based on 12 month horizon unless stated otherwise in the report. Total Return is sum of any Upside/Downside (percentage difference between the Target Price and Market Price) and Dividend Yield.

Valuation Methodology: Please refer to page 15.

Risks: Please refer to page 16.

Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information, opinions and estimates herein are not direct at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject Intermarket Securities Limited to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable where such information has not been i

ndependently verified and we make no representation or warranty as to its accuracy, completeness and correctness. This report makes use of forward looking statements that are based on assumptions made and information currently available to us and those are subject to certain risks and uncertainties that could cause the actual results to differ materially. No part of the compensation of the author(s) of this report is related to the specific recommendations or views contained in this report.

This report is not a solicitation or any offer to buy or sell any of the securities mentioned herein. It is meant for information purposes only and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this report, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. Neither Intermarket Securities Limited nor any of its affiliates or any other person associated with the company directly or indirectly accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein.

Subject to any applicable law and regulations, Intermarket Securities Limited, its affiliates or group companies or individuals connected with Intermarket Securities Limited directly or indirectly may have used the information contained herein before publication and may have positions in, or may from time to time purchase or sell or have a material interest in any of the securities mentioned or may currently or in future have or have had a relationship with, or may provide investment banking, capital markets and/or other services to, the entities mentioned herein, their advisors and/or any other connected parties.

This document is being distributed in the United States solely to “major institutional investors” as defined in Rule 15a‐6 of the US Securities Exchange Act of 1934, and may not be furnished to any other person in the United States. Each US person that receives this report by its acceptance thereof represents and agrees that it: is a “major institutional investor” as so defined, and understands the whole document.

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