january 5, 2011 pakistan outlook 2011 eyeing an index ... · 14.6 13.8 13.3 12.2 10.4 10.1 8.5 4 8...

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

Strategy Report January 5, 2011

Pakistan Outlook 2011 Eyeing an Index Target of 13,800

KSE ending the year on 30 months high KSE has shown a staggering performance in CY10, with its benchmark KSE100 Index exhibiting a growth of 28.1% YoY. The major drivers of the market in CY10 were strong earnings growth of 17% YoY, a 54.4%YoY price surge in OGDC and a 22 times YoY increase in Foreign Investors Portfolio Investments (FIPI) to US$ 526mn compared to US$ 22mn last year.

Outperforming regional markets The benchmark KSE100 Index was amongst the top 5 best performing index in the region in CY10. During the period Srilanka’s DJSL20 Index topped the list with an exceptional return of 107.5% YoY followed by Jakarta Composite, fetching a return of 46.1% YoY. The KSE100 Index outperformed regional indices including KOSPI Index (South Korea), BSE Sensex (India) and TAI Index (Taiwan).

KSE 100 Index to reach 13,800 mark We have used earnings growth methodology to determine KSE 100 index target for CY11. On the basis of earning growth of 15%YoY in CY11 of our universe, the benchmark 100 index is estimated to reach 13,800 by year end, suggesting a return of 14.8%. In addition to this, our universe is offering an attractive dividend yield of 6.8%, taking total returns to 21.6%. The Index is expected to trade at a PER of 8.5x during the period, assuming no re-rating. Our top picks for CY11 include POL, PPL, APL, PSO, HUBC, KAPCO, LUCK, NBP, PTC and LOTPTA.

Growth prospects likely to stay subdued in FY11 With the impact of devastation caused by the floods during July – September 2010; overall economic growth to be constrained during the FY11. The biggest dent to GDP is likely to come from the agricultural sector, with an anticipated contraction of 1.4%YoY. We expect that the real GDP in FY11 to post a growth of 2.1% against the post flood government target of 2.5%. However, the growth prospects are likely to recover in FY12 with an expected growth of 3.5%.

Inflation likely to gain back momentum The CPI based inflation has started to gain momentum post floods, with 5MFY11 average of 14.42%YoY as compared to 10.27%YoY in the same period last year. Rising government borrowing, higher electricity tariffs combined with higher international commodity prices will fuel the inflationary pressures. We estimate the average CPI inflation for FY11 to be around 15.8% YoY.

Challenges ahead… Political volatility leading to economic instability and with the fall-out of collation parties the PPP led government struggles to stay above waters. While uncertainty remains on the political horizon over the formation of a new political alliance.

The security situation remains a complex mixture of internal and external threats. Pakistan has been on the forefront of the ‘war-on-terror’ and the perils of which have started to surface the domestic security, causing economic and social disruption.

Prudent fiscal restructuring will be essential in determining the course of economic recovery. The benchmark discount rate may inch up by 100bps given high inflation and government borrowing.

Source: KSE

Regional PE Comparison

Source: Bloomberg, AHL Research

Regional Foreign Inflow s (USDmn) India South Korea Taiw an Indonesia Thailand Philippines Vietnam Pakistan Source Bloomberg

AnalystAHL [email protected]

www.arifhabibltd.com

KSE100 Index Performance

29,183 19,657 9,577 2,345 1,919 1,232

617 526

16.114.6 13.8 13.3

12.210.4 10.1

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Pakistan Outlook 2011

Table of Content

KSE ending the year on 30 months high 3

CY11 Outlook 7

CY10 Major News Highlights and KSE Performance 9

The Political Brew 10

Economic Outlook 2011 11

Sector Outlook 18

Top Picks of CY11 19 Hub Power Company Limited 20

Kot Addu Power Company Limited 21

Fauji Fertilizer Limited 22

ENGRO Corporation 23

Pakistan Petroleum Limited 24

Pakistan Oilfields Limited 25

National Bank of Pakistan 26

Attock Petroleum Limited 27

Pakistan State Oil Company Limited 28

Lotte Pakistan PTA Limited 29

Lucky Cement Limited 30

Pakistan Telecommunication Company Limited 31

3


KSE ending the year on 30 months high KSE has shown a tremendous performance in CY10, with its benchmark KSE 100 Index depicting a growth of 28.1% YoY. Market remained lackluster during the 9MCY10, where the Index posted a modest return of 6.7%. The major reasons for this subdued performance were implementation of the Capital Gain Tax (CGT) and its procedural complexities and economic jolts caused by the floods. However, the market witnessed a turnaround post September 2010, registering a surge of 20.1% during the 4QCY10. The major drivers of the market in CY10 were 54.4%YoY price surge in OGDC coupled with 22 times YoY surge in foreign investors portfolio investments (FIPI), which were attracted by 15% earnings growth and a deep valuation discounts the KSE was offering compared to the regional markets.

KSE100 Index Performance

Source: KSE

Outperforming regional markets The benchmark KSE100 Index was amongst the top 5 performing Index in the region in CY10. During the period SriLanka’s DJSL20 Index outperformed regional indices with an unprecedented growth of 107.5% followed by Jakarta Composite Index rising by 46.1% YoY. The KSE100 outperformed regional indexes including KOSPI index (South Korea) BSE Sensex (India) and TAIindex (Taiwan)

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Regional Market Comparison CY10

Source: Bloomberg

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OGDC - The X factor of CY10 OGDC, which holds approximately 24.52% weight-age in KSE100 index, witnessed an appreciation of 54.4% in CY10 to reach PKR 170.83/share by December 31, 2010. During the period, the Stock price crossed PKR 150 mark for the first time since the market turmoil in 2005, which saw its price decline from all time high of PKR 189.75/share (March 15, 2005). The Stock outperformed the benchmark KSE100 index by 35% in CY10 contributing approximately 1000 points towards the Index rise. Resultantly, company’s weight-age in KSE100 index has increased from 19.4% (December 31, 2009) to 24.6% by December 31, 2010. The primary reason for this hike is heavy foreign flows observed in this scrip. Consequently now foreign investors hold approximately 75% of free float of the company. Due to this phenomenal price rise, the Stock is now trading at a PE multiple of 10.2x pushing market PE to 9.3x.

Relative Performance of OGDC and KSE100 OGDC rally of 2005

Source: KSE Source: KSE

Foreign interest major driver of the market Despite bleak macroeconomic fundamentals like rising interest rates and weakening rupee, the local bourse witnessed strong foreign flows of US$ 526mn during CY10, a rise of 22 times from last year. However these inflows were lowest in the region. These inflows played a pivotal role in achieving a growth of 28% YoY in the benchmark index. Consequently as per SBP, foreigners by December 14 2010 hold USD 2.9bn worth of securities under Special Convertible Rupee Account (SCRA). This is approximately 8.5% of market cap and 25% of free float.

Going forward, sustainability of these flows are crucial for the market. We believe attractive P/E valuation multiples trading at a 36% discount to regional markets emanating from earnings growth of 15% in CY11. Moreover, we believe GoP decision to issue convertible bonds of listed state owned enterprises (SoEs) on London stock exchange and listing of SoEs (distribution companies, Pakistan Steel Mill) would aid in keeping foreign interest intact. In addition to this inclusion in MSCI Emerging market could be play a pivotal role in growing foreign flows.

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Change in Weights of KSE100

S.No Company CY10 CY09

1 OGDC 24.5% 19.4%

2 PPL 8.7% 7.7%

3 MCB 5.8% 6.2%

4 HBL 4.1% 4.6%

Source: KSE

Country Foreign flows (USDmn)

India 29,183

South Korea 19,657

Taiwan 9,577

Indonesia 2,345

Thailand 1,919

Philippines 1,232

Vietnam 617

Pakistan 526 Source Bloomberg

5


FIPI in CY10 KSE100 relative to SCRA

Source: NCCPL Source: SBP, KSE

Shrinking volumes are crying for leverage products Since abolishment of leverage product, CFS MK II from the market, volumes have dried up substantially. Moreover, imposition of capital gain tax from July 2010 further led to contraction in volumes, registering a drop of 38% in 2HCY10 compared to 1HCY10. The market average volume per day during CY10 dropped by 28% YoY to stand at 121mn compared to 169mn in CY09. Previously when leverage was available in the market, volumes averaged in the region of 300mn. To improve this situation, SECP and KSE, after long deliberation, have approved Margin Trading System. The rules have been forwarded to ministry of law for vetting purpose and thereafter will be forwarded to the government for promulgation. However, law ministry believes that under the 18th amendment these rules are required to be approved from Council of common interest. Under the circumstances further delay in introduction of leverage product is probable. We expect introduction of leverage product in the 1QCY11, which would increase the liquidity of the market.

Market Volumes QoQ Volume performance in CY09-10


Moving Back to MSCI Emerging Market from Frontier One of major setback for the market after implementation of floor in 2008 was its exclusion from the Emerging Market Index to the Frontier Market Index. During CY10 MSCI Pakistan underperformed majority of regional MSCI indices in Emerging and Frontier markets. However, MSCI Pakistan (17.4%) outperformed MSCI India (17.0%) and Taiwan (16.0%). The possibility of return of MSCI Pakistan to emerging market index will bode well for the market as it will significantly improve foreign inflows. MSCI

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will hold a consultation with investment community to determine markets invest-ability conditions before deciding Pakistan’s re-inclusion in MSCI Emerging index. We believe November 2011 review could be a possibility for such re-inclusion.

MSCI Pakistan with Emerging Market MSCI Pakistan with Frontier Markets

Source: MSCI Source: MSCI

Major Gainers and Laggards of CY10 During CY10 Colgate Palmolive Pakistan Ltd (COLG) and Sui Southern Gas Company (SSGC) were the top gainers while Royal Bank of Scotland (RBS) and KASB Bank (KASBB) were the laggard during the period. COLG and SSGC were up by 202.4% YoY and 99.4% YoY during the period while RBS and KASBB were down by 76.2% YoY and 66.0% YoY, respectively.

Major Gainers in CY10 Major Laggards in CY10


Top ten Volume Leaders LOTPTA came out as the most liquid stock with an average daily traded volume of 12.4mn shares in CY10 compared to turnover of 6.9mn in CY09. This extraordinary liquidity is mainly due to turnaround in the company after its acquisition by KP Chemicals, strong industry dynamics and a sizeable free float of 25%.

51.0%

32.9% 31.6% 29.7%23.7%

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99.4% 90.6% 89.6% 86.4% 84.2%

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CY11 Outlook We have used earnings growth methodology to determine KSE 100 index target for CY11. On the basis of earning growth of 15%YoY in CY11 of our universe, the benchmark 100 index is estimated to reach 13,800 by year end, suggesting a return of 14.8%. In addition to this, our universe is offering an attractive dividend yield of 6.8%, taking total returns to 21.6%. The Index is expected to trade at a PER of 8.5x during the period, assuming no re-rating. Our top picks for CY11

Lowest Multiples on the back of 17% earnings growth Local bourse has historically traded at a discount to regional markets. However, the discount has widened as blue chip companies continue to post strong earnings growth. The current market PE multiple is hovering around 9.4x, which is lowest in the region. Moreover, the PE market multiple if viewed excluding OGDC declines substantially, as the company has the highest market cap and is trading at PE multiple of 11.3x, thus pushing market multiple higher by 16%. Currently the market is trading at 12-month forward PE multiple of 8.5x, making Pakistan one the cheapest in the region. This is mainly on the back of expected earnings growth of 15% in CY11. Moreover, the market (based on our universe) is offering dividend yield 6.0%, highest in the region.

Regional PE Comparison Regional PE Comparison (Pakistan Ex OGDC)

Source: Bloomberg, AHL Research Source: Bloomberg, AHL Research

16.114.6 13.8 13.3

12.210.4 10.1

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Top Volume Leader in CY10

Source: KSE

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Regional Dividend Yield Comparison Regional Price/Book Comparison

Source: Bloomberg, AHL Research Source: Bloomberg, AHL Research

Capital Gain Tax (CGT) – not an issue? The Capital gain tax was imposed on the capital market effectively from July 2011 by the government. However, its implementation modalities continue to face the delay. According to latest reports (December 21, 2010), FBR has sent the draft of CGT Rules 2010 to law ministry for vetting. As per the procedures, CGT will be applicable on transaction of securities whose holding period is less than 12months. Moreover, adjustment of losses resulting from Wash sales, cross sales and tax swap sale transactions will not allowed. Another major concern could be placing of tax liability on the broker in case of investors default. We believe that the rules once notified and implement, it may create some hurdle for investors

Challenges ahead ….

RGST – an issue Implementation of RGST, which was to be implemented from January 2011, is now expected to be delayed till June 2011. However, news reports suggest that the government is working on a plan B, which entails modifying current GST. Under the plan, GoP is set to remove zero ratings and exemptions from the Sales Tax Act, which would result in product prices to rise for effected industries (mainly Textile, fertilizer, Pharmaceutical sector) to sustain their margins. While GST rate will remain unchanged at 17% compared to 15% being proposed under RGST

Challenges ahead… Political volatility leading to economic instability and with the fall-out of collation parties the PPP led government struggles to stay above waters. While uncertainty remains on the political horizon over the formation of a new political alliance.

The security situation remains a complex mixture of internal and external threats. Pakistan has been on the forefront of the ‘war-on-terror’ and the perils of which have started to surface the domestic security, causing economic and social disruption.

Prudent fiscal restructuring will be essential in determining the course of economic recovery. The benchmark discount rate may inch up by 100bps given high inflation and government borrowing.

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Volume Index

Senate passes RGST and Finance Amendment Bill 2010

Discount rate remained unchanged at 12.5%

Maulana Fazlur Rehman JUIF Quits Government

Flood hits Pakistan

Budget was announced

Hafeez Sheikh as Finance Minister

IMF releases a tranche of US$ 1.13bn

NA approved 18th Amendment

Hafeez & Rabbani appointed advisers by PM

GoP & KSE reach accord on CGT

RGST may be deferred to July 2011

China, Pakistan ink trade deals

WTO rejects EU concessions to Pakistan

EU to suspend duties on 75 Pak Products

SECP approves MTS paper

SBA extended by 9 months

Discount rate changes to 14%

Discount rate changes to 13.5%

Discount rate changes to 13%

Discount rate remained unchanged at 12.5%

Shaukat Tareen resigns as Finance Minister

President Zardari signs NFC Award

US announced USD 2bn millatry aid package

CY10 Major News Highlights and KSE Performance

10


The Political Brew Politics Fluxed Political Environment

Optimism is hard to come by given the on going political volatility, owing much to the economic instability and internal security concerns. Pakistan Peoples Party Parliamentarians (PPPP) led coalition in the Center was formed with the support of Awami National Party (ANP), Jamiat Ulema-e-Islam (JUI-F) and Muttahida Quami Movement (MQM).

Political factionalism Last month the frictions among the collation parties resulted in cracks in the government coalition. First to fall out was JUI-F on the issue of removal of its minister followed by MQM leaving the treasury benches to protest against government’s decision of raising petroleum prices.

MQM spurs the change With the fall-out of MQM from the collation the PPP led government has lost its majority in the National Assembly (Lower House of the Parliament). The PPPP led government is now left with the support of 163 parliamentarians against an opposition strengthen of 177. In order for the house to keep it’s Prime Minister (Yousuf Raza Gilani) the government need for another 12 seats. However under the constitution the PM Gilani is not bound to take a ‘Vote of Confidence’ from the lower house, but losing the majority puts moral pressure on him to take a confidence vote from the NA.

Opposition has a mind of its own… Despite the fact the opposition now holds 177 seats but there exits an air of rift amongst these parties as well. The chances of PML-N and MQM to join hands in oppositional stands are very slim and same can be said about the PML-N and the PML-Q. Therefore a chance of opposition to form a mutual consensus over government also looks grim.

Likelihood of election before term-end The perplexed political situation is very likely to bode negative sentiments for the market. For instance the KSE100 stayed negative as of 3rd January, 2010 the day after MQM left the collation. Understanding the buoyant political stance of collation parties, the PPP seems desperate in getting other parties such as PML(Q) headed by Chaudhry Shujaat Hussain, on board along with other independent parliamentarians. Sentiments regarding a prior then term election are brewing, which would further intensify the political uncertainty. Considering these events much of the anticipated reforms at the political level will remain in pending.

Reforming tax fiasco… Take for instance the RGST. Under the IMF SBA program the government has been issued stern stance to implement the RGST. While the government was unable to enact RGST in the Lower House due to extensive contest of the opposition. The execution of such reforms hangs in the remaining two SBA tranches, which are vital for fiscal consolidation.

Security Concerns… The security situation remains a complex mixture of internal and external threats. Pakistan has been on the forefront of the ‘war-on-terror’ and the perils of which have started to surface the domestic security. This has taken its toll on the economy with declining investment in the real sector, which is hindering economic growth and employment level of the country. Although the government has been receiving inflows under the Coalition Support Fund (CSF) but it would hardly cover up for the social and economic damage done.

Analyst Saad Khan [email protected] 021-32462589

National Assembly Members Party Seats Treasury Benches 163 PPP 127 ANP 13 PML-F 5 BNP-A 1 NPP 1 PPP-S 1 Ind+Fata 15 Opposition Benches 177 PML-N 91 PML-Q 50 MQM 25 JUI-F 8 FATA 3 Vacant 2 Total 342 Source:ECP

11


Pakistan Economic Outlook 2011 Economy Challenging Year Ahead

Overview The economy was able to make quick corrections during the 1HFY11, despite the catastrophic floods, which caused severe disruptions to overall economic activity. Current account registered a surplus for three consecutive months. This was facilitated by record high remittances received along with descending trade deficit, stemming from contracting import quantity and while witnessing a moderate growth recovery in exports. However, these silver linings were over shadowed by rising inflation, catered through domestic and international dynamics. Further the government budgetary borrowings surged in order to finance its expenditure. All in all these fragile macroeconomic imbalances led to central bank taking an aggressive monetary stance, where by increasing the discount rate by 150bps.

Growth prospects likely to stay subdue for FY11 With the impact of devastation caused by the floods during July – September 2010; overall economic growth is likely to be constrained during the FY11. The biggest hit came from the agricultural sector, which almost contributed 21% towards the GDP in FY10. Further the manufacturing and services sectors are expected to feel some pressure due to heavy reliance on agricultural industry in the short-term. Whereas in the medium term, industrial output is likely to rebound based on post-flood need for reconstruction and rehabilitation. However severe power shortages and upward inflationary pressure are likely hurdles that would hamper the growth. Ongoing security and political uncertainty will remain pressing issues. We expect the real GDP in FY11 to post a growth of 2.1% against the post floods government target of 2.5%. While the growth prospects are likely to recover in FY12 with an anticipated GDP growth of 3.5%.

GDP components growth GDP sector-wise Distribution

Source: SBP, AHL Research Source: SBP

Agricultural sector to register a 1.4% contraction The floods of 2010 have had devastating impact on agricultural sector and damaging rural infrastructure. However, due the timing of flood during the ‘Kharif’ season, major cash crop (e.g. wheat, rice) remained less affected, which is sowed during the ‘Rabi’ season. Better soil fertility (slit deposits) after floods is likely to result in bumper wheat production but significant damages to livestock, water-logging and non-availability of machinery will offset this encouraging growth prospects. Therefore, going forward we estimate agricultural sector is likely to register a 1.4% YoY contraction in FY11 against growth of 2.0% YoY experienced during FY10.

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Analyst Saad Khan [email protected] 021-32462589

12


…domestic constraint to restrict industrial output to 3.4% The industrial sector witnessed a healthy YoY growth of 5.2% in FY10 as compared to a contraction of 3.7% YoY in FY09. However, with the start of FY11, the industrial output remained on the downside. The Large-Scale Manufacturing (LSM) endured a deceleration of 2.07% YoY in 4MFY11. This short-falling came from production halt in industrial units such as at the Pak-Arab Refinery Corporation (PARCO), which remained closed due to infrastructural damages caused by the floods.

We expect the industrial output to register a growth of 3.4% YoY in FY11, as a result of recovery in domestic demand and start ups of industrial units after floods. Power shortages, infrastructural damages and high interest rate environment will be possible hindrances towards sector recovery process. While the service sector prospects look steady with an expected growth of 4.2% against 4.6% during FY10.

Circular debt back to square one The problem of circular debt stems from the disparity emanating from higher generation cost and lower energy tariffs. This issue has surface since FY07 and gained intensity with rising oil prices. This had a considerable impact on the refineries throughput, which decline by a CAGR of 8% since FY08 and power generation in the country. The accumulated circular debt as of Dec’10 stands at PKR 225bn, despite issuance of TFC worth PKR 162.4bn in two phases during FY09. To lower the burden of circular debt, the government is phasing out power subsidies by increase power tariff. Going forward, we believe that such policy would gradually ease off the intensity of circular debt in long-term but will subsequently increase the inflationary pressures.

Inflation likely to gain back momentum The CPI based inflation has started to gain momentum post floods, with 5MFY11 average of 14.42% YoY as compared to 10.27% YoY in the same period last year. Rising government borrowing, higher electricity tariffs combined with higher international commodity prices will fuel the inflationary expectations. We estimate the average CPI inflation for FY11 to be around 15.8% YoY.

CPI inflation downward trend YoY CPI comparison

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

Inflation and RGST We believe the implementation of RGST to have more of a deflationary impact on most of the commodities rather than inflationary. This is due to their downward tax revision from 17-25% to a uniformed tax rate of 15%. Whereas commodities that might post a hike merely occupies 8-9% space in the CPI basket.

Food prices threat eases off Country-wide food shortages primarily emanating from agricultural damages caused by floods, evident from the average food inflation of 35% YoY rise in perishable items.

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l-08

Sep

-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep

-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep

-10

Nov

-10

CPI(YoY)

5%

10%

15%

20%

25%

5%

8%

11%

14%

17%

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

CPI(YoY)

SPI(YoY)RHS

Circular Debt

Date PKRbn %chg

Jun-09 216 May-10 120 -44.4%

Dec-10 225 87.5%

Source: Economic Survey, AHL Research

13


Going forward, we believe the worst is behind us. We therefore see a food inflation reversal in 2HFY11, which is already visible from Oct’10 food inflation figures. However, international food prices have played considerable dynamics in raising inflationary expectations. Global food prices have remained on the upper scale and will be fundamental in determining domestic food inflation trajectory.

Distribution of food commodities in inflation basket Intl. food prices against Domestic food inflation

Source: SBP Source: SBP

Power driven inflation likely to resurface Inflationary pressure is likely to bounce back due to government decision to reduce power related subsidies, which will have a considerable impact on electricity tariff. So far a 2% monthly incremental tariff starting from Nov ’10 to Jun ’11 will inflate fuel & lightning commodities which has surged by on average 22.5% YoY during 1HFY11 from 17% observed in 2HFY10.

Government borrowing inflating prices Excessive bank borrowing by government has put an upward pressure on overall consumer prices. FY11 YTD, the government borrowing for budgetary concerns stood at PKR 400bn against PKR 272bn same period last year, depicting a change of 47% YoY. Higher government borrowing has led to private sector crowding out while also limiting the capacities for future tax generation from the private sector in the country. We view the government borrowing to stay at an incremental pace, while drying up the private investment.

Govt. Financing through SBP and Sch. Banks Credit Flight


Government to find itself in a catch-22 Structural flaws on the fiscal position continued to pose threat to overall macroeconomic stability. The tax-to-GDP ratio of the country has been languishing under 10% and is one of the lowest among emerging economies. Revenue collection which stood at PKR

0%

10%

20%

30%

40%

50%

60%

Jan-

10

Feb-

10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Food perishable non-perishable

-2%

0%

2%

4%

6%

8%

Apr-1

0

May-1

0

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct-1

0

Nov-1

0

Food(MoM) intl' Food(MoM) dom

(50)

-

50

100

150

200

250

300

350

Jun

Jul

Aug

Sep Oct

Nov

Dec

From SBP From Sch. BanksPKRbn

(200)(100)

-100 200 300 400 500

July

Augu

st

Septe

mber

Octob

er

Dece

mber

PKRbn B-BorrowingM2Credit to Private Sector

14


400bn (US$ 4.6bn) in 1QFY11 against the expenditure of PKR 676bn (US$ 7.9bn), bringing the total deficit of 1.6%. As per latest, the government by 1HFY11 has collected PKR 654bn, translating into a rise of 13.2% YoY. Given the recent scenario, GoP is compelled to borrow more mainly on account to facilitate reconstruction and rehabilitation and higher defense expenses. We expect the fiscal deficit to widen up to 5.9% of GDP, financing of which is primarily dependent on external support and efforts made to mobilize more domestic resources.

Budget Deficit Incremental Budgetary borrowing YoY Comparison


External support soldiers on… Materialization of external inflows will be a catalyst for macroeconomic improvements. Under the IMF Emergency Need and Disaster Assistance (ENDA) fund of US$ 451mn and other external pledges (FoDP, CSF), the country was able to make quick emergency financing for the flood relief. However, the government requires more financial aid in order to finance rehabilitation and reconstruction in coming years ahead. Apart from the in-kind support the last two tranches worth US$ 3.4bn under the IMF SBA Program still awaits decision, underlying the approval of the RGST. The IMF has accepted the request for a 9-month extension till September 30, 2011.

Revenue Rise an obligation Since the approval of the IMF SBA Program, the government has been in an immense pressure to bring visible fiscal framework changes which includes implementing RGST. The implementation of RGST is likely to stretch the tax net by PKR 20bn or 0.12% of the GDP. The issue has been contested extensively among the politicians and policy makers over its fall-out impacts on sectors (in particular textile and fertilizer sector). Nevertheless, the implementation of RGST remains key, to bring in the remaining tranches of IMF worth US$ 3.4bn, which awaits approval.

Plan ’B’: removal of exemptions and zero ratings Given the non-development of political consensus over the RGST which has become controversial, the GoP may opt for a different strategy to raise the tax revenue. The government is considering to remove exemptions and zero ratings under the Sales Tax Act, while keeping tax rate intact.

Flood surcharge additional measures for revenue generation Another initiative to increase the tax net, but purely to accommodate the expenditure for flood losses comes with the introduction of 10% flood surcharge. Government is expected to raise estimated PKR 30bn or 0.2% of the GDP, which will be implemented from Jan-Jun’11.

-

200

400

600

800

1,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1QFY

09

2QFY

09

3QFY

09

FY09

1QFY

10

2QFY

10

3QFY

10

FY10

1QFY

11

Budget Defict(RHS)Total RevenueTotal Expenditure

PKRbn PKRbn

1,500

1,700

1,900

2,100

2,300

2,500

Jun

Jul

Aug Sep Oct

Nov

Dec

FY10 FY11

PKRbn

15


External Sectors The current account witnessed considerable improvements in FY10, where it declined to US$ 3.9bn (1.95% of the GDP) compared to US$ 9.3bn (5.56% of the GDP) in FY09. Following a similar trend in 5MFY11, current account deficit registered YoY drop of 72.3% to US$ 504mn, supported by a 4.3% drop in trade deficit and a 15.5% YoY increase in workers’ remittances of US$ 4.5bn received. Going forward, we believe trade deficit is likely to grow by at least 17%, mainly on account of rising imports on the back of higher oil prices. However, workers’ remittances are expected to further strengthen up in FY11 and likely to surpass the government target of US$ 10bn.

Oil a lurking a danger … The quantity of petroleum products imported during 5MFY11 showed a reduction of 7% YoY but due to higher crude oil prices the total impact threshed the import bill by US$ 2.5mn against US$ 2.3mn in 5MFY10. The decline in import quantity was a one of effect, due to production halt at refineries and low domestic demand during the flood period.

Going forward, we believe higher oil prices continue to threaten the rising trade deficit. We expect trade deficit of US$ 13.6bn for FY11 with an average crude oil price of US$ 80/bbl. Our calculation suggests that a US$ 5/bbl increase from the base case assumption deteriorates FY11 trade deficit by US$ 1.3bn.

Budget Deficit Correlation between trade deficit and oil price fluctuations

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

Discount rate The SBP has raised its policy rates by 50bps on three consecutive MPS since Jul’11. The reasons pointed by SBP for such hikes rested upon higher government borrowings

1.01.52.02.53.03.54.04.55.0

20406080

100120140160

Sep

-05

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Oil Prices(US$pbl) avg. QtrlyTrade Deficit(US$bn)RHS

0

1

2

3

4

5

6

0 50 100 150Oil (US$pbl)

Trad

eDefc

it (US

$bn)

Trade Deficit trend

Source: SBP, AHL Research

(18)(16)(14)(12)(10)(8)(6)(4)(2)0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

FY05 FY06 FY07 FY08 FY09 FY10 FY11T AHL Est

Exp(FOB) Imp(FOB) TD (RHS)USDbn

16


leading to higher inflation. The cut-off yield as of Nov’11 has inched up 1.4%, 3.0% and 3.5% since Sept’11 for 3M, 6M and 12M respectively. While the gap between the cut-off yield and discount rate (14%) has considerably narrowed. Therefore, we foresee a rise of 100bps to 15% by end of FY11.

17


Economic Indicators FY07 FY08 FY09 FY10 FY11E Economic Growth Real GDP Growth

6.8% 3.7% 1.2% 4.1% 2.1% GDP(PKRbn) FC

5,192 5,383 5,448 5,671 5,788 Service sector growth rate FC

7.0% 6.0% 1.6% 4.6% 4.2% Industrial sector growth FC

8.3% 4.8% -3.7% 5.2% 3.4% Agricultural sector growth FC

4.1% 1.0% 4.0% 2.0% -1.4% GNP Per capita FC (PKR)

33,345 33,973 33,957 35,219 - Saving and Investment Gross total Investments

22.5% 22.1% 19.0% 16.6% - Public Sector growth MP

5.5% 5.4% 4.6% 4.3% 3.9% Private Sector growth MP

15.4% 15.0% 12.7% 10.7% - National Savings Growth

17.4% 13.4% 13.2% 13.8% - Private Sector Credit (%GDP) MP

28.6% 28.2% 22.8% 20.6% - Prices CPI(YoY)

7.8% 12.0% 20.8% 11.7% 15.8% M2 Growth

19.3% 15.4% 9.6% 12.5% 13.8% PKR/USD

60.4 68.2 81.3 85.3 87.5 Policy rate (end rate)

9.5% 12.0% 13.5% 13.9% 15.0% 6-month KIBOR(end Period)

9.8% 14.0% 12.7% 12.3% 13.4% External Sector Exports(US$bn) FOB

17.3 20.4 19.1 19.6 18.99 Imports(US$bn) FOB

27.0 35.4 31.7 31.1 32.62 Trade Deficit(US$bn)

-9.7 -15.0 -12.6 -11.4 -13.63 Remittances(US$bn)

5.5 6.5 7.8 8.9 10.13 FDI(US$bn)

5.1 5.4 3.7 2.2 2.5 Portfolio Investment(Net) US$bn

3.3 0.0 -1.1 -0.1 Fx Reserves (US$bn)

13.30 8.60 9.10 13.00 15.12 Exchange Rate

60.63 62.55 78.50 83.80 87.15 CAB (US$bn)

(6.88) (13.87) (9.26) (3.50) (7.78) Financial Account Balance (US$bn)

9.97 8.13 5.63 5.00 5.53 Public Finances Total Revenue(PKRTr)

1.2 1.4 1.7 2.0 2.3 Tax Revenue(PKRtr)

0.8 1.0 1.2 1.5 1.7 Expenditure (PKRtr)

1.4 1.9 2.1 2.5 3.3 Total Tax Revenue(%GDP)*

9.7% 9.9% 9.8% 10.1% - Expenditure (%of GDP)*

14.2% 17.3% 14.8% 15.9% - Consolidated Deficit

4.3% 7.4% 5.2% 6.3% 5.9% Domestic Debt (PKRbn)

5,101 6,476 8,307 9,686 - External Debt (

39.5 44.9 51.1 54.5 - Total Debt (PKRbn)

5,101 6,476 8,307 9,686 - Total Debt (%GDP)*

58.8% 63.2% 65.2% 66.0% - Debt Servicing(per capita)

11 12 22 27 - Monthly Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 CPI(YoY) 12.3% 13.2% 15.7% 15.3% 15.5% 17.2% CAB(US$mn)

(372) 447 35 54 Remittances 791.2 933.1 922.1 855.1 926.9 - Trade Deficit(US$mn) -12.7 -11.1 -6.0 -7.6 -3.9 -2.0 *Market Price SOURCE: SBP, FBS, MoF, AHL Research

18


Sector Outlook

Sector Stance Key Drivers Top Picks

Oil & Gas

E&P Sector Over-weight Rising oil prices and double digit production growth mainly stemming from TAL bock would be the key drivers behind AHL E&P universe earnings growth of 27% YoY in FY11.

PPL, POL

OMC Sector Over-weight Strong FO demand, revision of Turnover tax to 0.5% and rising prices of deregulated products will be the major earnings drivers. Whereas fixation of OMC margins and circular debt will remain the earnings dampeners.

APL, PSO

Electricity IPPs Over-weight Defensive nature stemming from strong dividend yield, earnings hedge against PKR depreciation and inflation forms the heart of our liking for the sector. Whereas circular debt remains the main concern for IPPs.

HUBC, KAPCO

Construction & Materials Cements Market-weight

Domestic demand is expected to recover as reconstruction activities start picking up. Exports on the other hand are expected to remain subdued on account of capacity additions in the region. Rising coal prices are threatening the bottom lines of particularly small players.

LUCK

Automobile & Parts

Auto Manufacturers Under-weight

Volumetric growth is fueling earnings growth for auto assemblers. INDU is our top pick due to its higher deletion level relative to local peers and better gross profit margins.

INDU

Banks Market-weight Declining NPLs, downwards sticky spreads due to rising interest rate are driving banks NIMs. Delay flood provisioning delayed till Dec 2011 and continuation of conservative stance towards private sector lending.

NBP

Chemical

Fertilizer Over-weight Strong urea demand and primary margins are the key plays for the local urea manufacturers. Gas curtailment on an open end basis is a key downside risk for the manufacturers.

FFC, ENGRO

Others Over-weight Strong primary margins of US$ 300/ton, healthy demand from PSF sector, Cash of more than PKR 7.7bn and cost saving measures like captive power plant form the heart of our Buy recommendation.

LOTPTA

Fixed line Telecom-

munication Market-weight Healthy growth from Ufone and Broadband Services are the major earning drivers. Whereas Fixed Line segment continues to suffer decline. PTC

19


Top Picks CY11

20


Hub Power Company Limited Electricity Moving From Defensive to Growth

Recommendation Our Dividend Discount Model (DDM) based target price for December 2011 works out to be PKR 50/share, which offers an upside potential of 34% from its closing price (December 31, 2010) of PKR 37.41/share. Beside attractive upside potential, the stock offers FY11F dividend yield of 13.4%, making it one of the best defensive play in the market. Thus we recommend Buy.

Indexation factors to drive revenues in FY11 In FY11 company returns are expected to be driven by Pak Rupee deprecation and efficiency gains as PCE component will remain flat. Last year PCE component jumped by 31%, resulting in earning growth of 47% YoY. The PCE component will rise by 8%, which is expected to push earnings higher by 24% YoY in FY12.

Narowal Project Delay The Narowal project was initially planned to start commercial operations by March 2010 which was delayed till October 2010. The project has been further delayed due to fire incident in CVT equipment during testing in August 2010. Now the plant is expected to come online in February 2011. The delay in commencement of its operations has resulted increase in IDC cost and liquidated damages. However we believe that the company is fully insured against the liquidate damages and rising IDC cost. In order to avoid further financial losses due to this delay, management is planning to commission the plant in phases. We expect project will start contributing in the earnings of the company in last quarter of current fiscal year.

Laraib – Hydel Power Plant Hubco has acquired 75% shares in Laraib Hydel power plant which has a capacity of generating 84MW electricity. The project has achieved its financial close in December 2009. The plant is expected to commence its commercial operation date in June 2012.

Circular Debt Circular debt remains a main concern for the entire energy chain. By the end of 1QFY11 the company receivables from WAPDA stood at PKR 75bn, whereas the payables to PSO were at PKR 68bn. The Company receives penal interest from WAPDA at SBP discount rate plus 2% per annum, whereas the company pays a penal interest to PSO at the same rate. However despite increasing intensity of circular debt, the company has been able to sustain its dividend payout.

Financial Highlights (PKRmn) FY09A FY10A FY11E FY12F FY13F

Revenues 82,784 99,694 107,245 118,049 121,382

Net Income 7,789 9,385 9,943 13,880 14,117

EPS (PKR) 3.27 4.80 5.03 6.26 6.86

DPS (PKR) 3.35 5.00 5.00 5.90 6.50

Dividend Yield 9.0% 13.4% 13.4% 15.8% 17.4%

P/E 11.45 7.79 7.43 5.98 5.45

ROE 12.8% 18.6% 19.1% 23.0% 24.5%

Source: Company accounts & AHL estimates

Target Price (PKR/share)

Last Closing (PKR/share)

Upside

KSE CodeBloomberg CodeReuters Code HUBC KA

Outstanding Shares (mn) 1,157 Market Cap (US$ mn) 505 Market Cap (PKR mn) 43,283 Free Float 70%12M Avg. Daily Turnover 1.79mn12M High/Low (PKR) 37.57/30.74

Source: Company accounts

Source: KSE

AnalystUsman [email protected]

HUBC PA

Key Data

Shareholding

Stock Performance


BUY50.0037.41

33.7%

HUBC

Int. Power17.4%

Allied Bank4.8%

Xenel12.1%

Fauji Foundat

ion8.5%

Others57.2%

95%

100%

105%

110%

115%

120%

125%

130%

Dec

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-10

HUBC

KSE100

21


Kot Addu Power Company Limited Electricity Best Defensive Play

Recommendation Our Dividend Discount Model (DDM) based target price for December 2011 works out to be PKR 51.4 per share, which offers an upside potential of 26% from its closing price (December 31, 2010) of PKR 40.68 per share. Beside attractive upside potential, the stock offers FY11F dividend yield of 16.0%, making it one of the best defensive play in the market.

Low Maintenance Cost will drive the earnings in FY11 During FY10 maintenance cost was the major dampener of earnings. Due to shortage of gas, plant was forced to operate on FO, which resulted in 186% rising in company’s repair and maintenance cost. As per our discussion with the management, the availability of gas is better than the last year and all the major overhauling of the plant has been completed in FY10. Consequently the maintenance cost will be higher as compare to historical levels but will be substantially lower than FY10. We expect maintenance cost to decline by 53% YoY in FY11.

During 1QFY11 company posted a net profit of PKR 2.04bn resulting into an EPS of PKR 2.31 per share depicting a growth in earnings of 52% YoY. This huge jump in earning was due to lower operating cost. Plant remained close for almost two months in the 1QFY11 due to flood in the area which resulted in lower operating cost.

Escalable Component and Rupee Devaluation In contrast to Hubco’s rising returns, KAPCO’s escalable component will remain flat going forward. The company’s earning will be supported mainly by PKR depreciation against the Greenback.

Circular Debt The company has to bear a negative spread as it pays penal interest to PSO at 6 month T-Bill rate plus 6% whereas it receives penal interest from WAPDA at SBP discount rate plus 4%. By the end of 1QFY11, the company has receivables of PKR 50bn from WAPDA on the account of circular debt, whereas the Company has to pay PKR 25.6bn to Pakistan State Oil (PSO) on the account of fuel supply.

Financial Highlights (PKR mn) FY09A FY10A FY11E FY12F FY13F

Revenues 69,364 85,935 103,980 108,166 113,412

Net Income 5,672 5,089 6,626 6,760 7,072

EPS (PKR) 6.44 5.78 7.53 7.68 8.03

DPS (PKR) 6.45 5.00 6.50 7.10 7.70

Dividend Yield 15.9% 12.3% 16.0% 17.5% 18.9%

P/E 6.31 7.04 5.40 5.30 5.06

ROE 24.6% 22.6% 28.3% 28.3% 29.2%




Upside

KSE CodeBloomberg CodeReuters Code KAPCO KA

Outstanding Shares (mn) 880 Market Cap (US$ mn) 418 Market Cap (PKR mn) 35,809 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

BUY51.4040.68

26.4%

Wapda 45.7%

National Power36.0%

Others18.3%

80%

90%

100%

110%

120%

130%

Dec

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KAPCO

KSE100

22


Fauji Fertilizer Company Limited Chemicals The Safest Bet

Recommendation At current price level of PKR 125.86/share, the stocks offers an upside potential of 4.9% based on our Dec-11 target price of 132.0/share. In addition to this, the company offers an attractive dividend yield of 11.5%, taking total one year potential return to 16.4% based on our CY11 earning estimates.

FFC going for diversification Fauji Fertilizer Company’s (FFC) potential acquisition of 79.85% shares of Agritech Limited (AGL) will reinforce its dominant position in the urea segment. The company’s market share will increase to 45% from existing 39%. We expect the acquisition price would be around PKR 9.4bn and would be largely financed through debt. Hence, additional borrowing would result in higher finance cost. Moreover, the company has invested PKR 450mn in a 50MW FFC Energy Limited project. Going forward, once this project comes online in CY12 it would aide in further strengthening other income of the company.

Gas curtailment; a blessing in disguise Recently, the GoP has decided to the enhance gas curtailment from 6% to 12% for fertilizer manufacturers which are on Mari network (FFC & ENGRO). This is expected to end by Feb’11 and then revert back to 6% on an open end basis. Consequently manufacturers hiked Urea price by PKR 190/bag which we believe is likely to bode well for FFC. As a result, FFC CY11 earnings would improve by PKR 5.67/share to PKR 20.81/share. However, we still have not incorporated this price rise because GoP has called the Urea manufacturers to explain the rationale behind this spike.

Dividend Payout may dwindle to 95% FFC’s dividend payout has exceeded 100% over the last four years However, contrary to past trends we expect the company’s payout to drop to 95% in the medium term, given the company’s plans to look out for new business ventures as part of its growth strategy which the company’s lacks currently. Despite expected dividend attrition in the medium term, FFC remains amongst the highest dividend yield stocks in our AHL Stock Universe. Thus, we believe it will continue to be favoured by risk adverse investors.

Higher dividend income from subsidiary FFC has 51% stake in FFBL, the sole producer of DAP in Pakistan. Despite the gas curtailment issue we expect FFBL to post healthy earnings in the range of 5.0-5.25/share in the next 2-3 years on the back of high DAP margins. In addition to this, 90% dividend payout ratio from the subsidiary will contribute on average 19% to FFC’s bottom line between CY11- CY15, hence providing earnings stability.

Financial Highlights (PKRmn) CY09A CY10E CY11F CY12F Revenues 36,163 39,539 39,789 42,014

Net Income 8,823 10,258 10,275 10,620

EPS (PKR) 13.00 15.12 15.14 15.65

DPS (PKR) 13.00 14.50 14.50 15.00

PER 9.68 8.32 8.31 8.04

Div. Yield 10.33% 11.52% 11.52% 11.92%

ROE 67% 76% 73% 73%




Upside

KSE CodeBloomberg CodeReuters Code FAUF KA



Source: KSE

AnalystShahbaz [email protected]

FFC

Hold132.00125.86

4.9%

FFC PA

Key Data

Shareholding

Stock Performance


Fauji Foundat

ion44.3%

NIT & ICP

4.8%

Financial Inst.24.5%

Othrs26.3%

95%

100%

105%

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115%

120%

125%

130%

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FFCKSE100

23


ENGRO Corporation Chemicals A Risk Worth Taking!

Recommendation At closing price of (December 31, 2010) PKR 193.81/share, the scrip offers upside potential of 15.6% against our December 2011 target price of 224/share. Further, the scrip is currently trading at PER of 10.6x based on our CY11 earnings estimates.

Growth drivers ahead Currently fertilizer business contributes 95% to the profitability of ENGRO Corporation whereas other subsidiaries weight in profit mix is minimal. Going forward, fertilizer business will remain the prime bread winner for the company, projected to contribute on average 61% to company’s profitability from CY11 onwards. In addition to this, food and energy business would further augment the company’s bottom line contributing 18% and 10%, respectively in CY12.

Trial production starts Engro Fertilizer Limited (EFL), a 100% owned subsidiary of ENGRO Corporation successfully started the much awaited trail production of its Urea plant on December 29, 2010. According to the management, CoD of the plant is now expected by end Feb’10, when gas supply is restored to its previous levels. The new plant’s efficiency level is superior to its peers due to latest technology. Further, the gas concerns which are prevailing now due to the less availability from Qadirpur is likely to decline due to the ongoing development activities on the field.

Debt the primary concern of investors The key concern, which fears investors taking exposure in ENGRO is its interest bearing debt exceeding PKR 108bn mark, translating into a debt: equity ratio of 3.34x as of September 30, 2010. As most of the repayments need to be made by Engro Fertilizer Limited (EFL), it should not be much a problem given the fact 1.3mn tons fertilizer plant function smoothly and demand dynamics don’t change. Strong cash flows from the foods & energy business would aide in retiring debt the company as well.

Public offering on the cards Engro plans to list its subsidiaries (Engro Energy and Engro Fertilizer) to alleviate cash flow strains expected to arise once loan repayments start to flow from CY11.

Financial Highlights (PKR mn) CY08A CY09A CY10E CY11F CY12F

Revenues 40,793 58,152 68,900 115,684 124,091

Net Income 4,126 3,631.0 5,951 6,602 7,502

EPS (PKR) 12.6 11.1 18.2 20.2 22.9

DPS (PKR) 6.0 6.0 6.0 6.0 7.0

PER (x) 15.4 17.5 10.6 9.6 8.4

Div. Yield 1.8% 1.8% 1.8% 1.8% 2.1%

ROE 20.2% 13.9% 19.9% 19.9% 20.5%

Source: Company Accounts and AHL Research



Upside

KSE CodeBloomberg CodeReuters Code ENGRO KA



Source: KSE


ENGRO PA

Key Data

Shareholding

Stock Performance


ENGRO

BUY224.00193.81

15.6%

Dawood Group48.5%

Individuals

25.2%

Others26.4%

95%

100%

105%

110%

115%

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130%

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ENGROKSE100

24


Pakistan Petroleum Limited Oil and Gas Positives Still Not Priced In

Recommendation At current price level of PKR 217.15/share, the scrip is offering an upside potential of 16.6% based on our December 2011 target price of PKR 253.2/share. In addition to this the stock is trading at an attractive PER of 7.70x and offering a dividend yield of 6.9% based on our FY11 earnings estimates.

Production driving earnings growth Oil & gas production is expected to register YoY increase of 49% and 6% to 8,200 bopd and 990mmcfd, respectively. This surge is likely to be on the back of annualized production impact from Nashpa, Latif and Mamikhel fields. Production from Sui Field has improved to 570mmcfd during 5MFY11 as compared to 530mmcfd in FY10. This improvement was pivotal for PPL as Sui (which contributes ~60% to total gas revenues) was exhibiting signs of depletion since 2HFY10.

Key price triggers going forward PPL has gone aggressive on exploration front as it acquired 14 new exploration blocks last year and plans to drill two new exploration wells one in Hala and other in Bahawalpur East Block this year. Further, few exploration efforts are nearing maturity such as, Rehan -1(Kirthar) and Tolanj X-1 (TAL) which have crossed 95% of their target depth and would act as key price triggers in 2QFY11. On the development front, Kandkhot compression facility has been installed expected to add 25mmcfd of gas in FY11 to PPL’s gas volumes. EWT of Naspha-2 is under way which is expected to add 1,560 bopd in 4QFY11 to company’s oil volumes. However, we have incorporated this from 1HFY12. Other noteworthy triggers on development front include Mela-03 and Manzalai-8 anticipated to come online in 2HFY11.

TGR would benefit PPL the most PPL would benefit the most when Tight Gas Reserves (TGR) policy is finally approved by GoP as its holds major stakes in fields like Sawan and Miano which are estimated to have huge TGR reserves. If this holds true, company’s earnings could rise substantially as prices of TGR will be at a premium of 40% compared to Zonal gas prices computed under 2009 petroleum policy coupled with jump in gas production.

Gas price to jump in 1HFY12 Market is yet to price-in the expected gas price surge of 8%-10% consequent to rise in oil prices. Due to unique gas pricing structure of Pakistan gas prices are expected to remain status quo in 2HFY11 but will witness a substantial rise in 1HFY12.

Financial Highlights (PKRmn) FY09A FY10A FY11E FY12F FY13F Revenues 61,580 59,962 78,823 85,080 92,413

Net Income 27,703 23,321 33,691 36,232 39,256 EPS (PKR) 23.18 19.52 28.19 30.32 32.85

DPS (PKR) 13.00 9.00 15.00 16.00 16.00 PER 9.37 11.13 7.70 7.16 6.61 Div. Yield 5.99% 4.14% 6.91% 7.37% 7.37%

ROE 44% 29% 36% 32% 35% ROA 33% 22% 27% 25% 23%




Upside

KSE CodeBloomberg CodeReuters Code PPL KA

Outstanding Shares (mn) 1,195 Market Cap (US$ mn) 3,026 Market Cap (PKR mn) 259,494 Free Float 21%12M Avg. Daily Turnover 1.20mn12M High/Low (PKR) 218.3/147.7


Source: KSE


PPL PA

Key Data

Shareholding

Stock Performance


PPL

BUY253.19217.15

16.6%

Financial Inst.5.2%

GoP69.8%

NIT & ICP

0.3%Others24.8%

90%

100%

110%

120%

130%

140%

Dec

-09

Jan-

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May

-10

Jun-

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Aug-

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Oct

-10

Nov

-10

Dec

-10

PPLKSE100

25


Pakistan Oilfields Limited Oil and Gas The Growth Story Not Over Yet

Recommendation At December 31, 2010 closing price of PKR 295.96/share, the scrip is offering an upside potential of 13.5% based on our December 2011 target price of PKR 336.1/share. In addition to this the stock is trading at an attractive PER and dividend yield of 7.1x and 9.5%, respectively, based on our FY11 earnings estimates.

Oil growth story not over yet Pakistan Oilfields registered a phenomenal production rise of 40% YoY to 5.26mn boe in FY10. We believe, the company’s growth story is not over yet as it is projected to deliver production growth of 35% YoY in FY11 to 7.26 boe. This rise would mainly come from the TAL block. This phenomenal production rise would translate in earnings growth of 33% YoY to PKR 41.78/share in FY11. Further, rising oil prices which are currently trading around US$90 mark would benefit POL more in contrast to its peers because it enjoys the highest realized price.

Relatively cushioned from inter-corporate issue POL is one of the few companies in the energy chain, which is relatively cushioned from inter-corporate debt issue. Moreover, due to relatively mere gas production, the dues from gas distribution companies are relatively lower. POL’s latest receivables are reported at PKR 3.3bn which translates into 56 days compared to 226 and 182 days for OGDC and PPL, respectively. Hence, company’s payout ability is not threatened. In FY11 we expect the company to pay cash dividend of PKR 28.0/share, translating into a dividend yield of 9.5%

Update on Drilling front Recently, POL adopted an aggressive stance on exploration contrary to its past. Currently 5 wells are under progress. Completion of drilling activities in Tolanj X-1 (TAL block), Margalla and Chak Naurang remain key price triggers for POL going forward. The company has again re-entered in Domial-1, where drilling activity was suspended due to high sulphur content and pressure encountered during testing. In addition to this the company has started drilling activities in Domial-2. Moreover, Makori East (POL-21% stake) has already been discovered but further drilling is in progress before commercial production is unveiled. On the development front, news of EWT of Maramzai and Manzalai VIII is expected, which could be a price trigger for the scrip. The target completion of all the aforementioned wells is FY11. If all wells prove successful, oil & gas production of the company would surge by 24% YoY and 40%YoY to 5,100 bopd and 90mmcfd of gas, an earnings jump by 33% YoY.

Financial Highlights (PKRmn) FY09A FY10A FY11E FY12F FY13F Revenues 14,047 17,845 22,694 24,507 24,146 Net Income 5,618 7,437 9,883 10,694 10,704

EPS (PKR) 23.75 31.44 41.78 45.21 45.25 DPS (PKR) 18.00 25.50 28.00 29.00 29.00 PER 12.46 9.41 7.08 6.55 6.54 Div. Yield 6.08% 8.62% 9.46% 9.80% 9.80% ROE 22% 26% 32% 31% 29%




Upside

KSE CodeBloomberg CodeReuters Code PKOL KA



Source: KSE


POL

BUY336.1

295.9613.5%

POL PA

Key Data

Shareholding

Stock Performance


Attock Group53.9%

Financial Inst

24.5%

Individuals

10.6%

Others11.0%

85%

95%

105%

115%

125%

Dec

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May

-10

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Oct

-10

Nov

-10

Dec

-10

POL

KSE100

26


National Bank of Pakistan Banks Downward Sticky NIMs Driving Earnings Growth

Recommendation Our December 2011 Target Price of the bank is PKR 85/share, offering an upside potential of 11% from closing price PKR 76.8/share (December 31, 2010). The bank is current trading at CY10 and CY11 P/B of 0.77x and 0.72x and P/E of 6.5x and 5.5x respectively. While bank’s CY10 and CY11 dividend yield is estimated to be around 9.8%.

NIMs to sustain as Interest income to grow by x% in CY11 NBP is expected to sustain its NIMs at 5.7% as the banks were able to sustain their spreads, which on fresh loans have reached to a level of 6.77% in November 2010, up by 38bps from the corresponding period last year. While the bank’s ADR is estimated to be in the region of 70% compared to 73% last year.

Lower Provisions leading to earnings growth The banks provisioning against NPLs witnessed a substantial decline of 47% YoY during 9MCY10. However; this was mitigated as the bank realized provision against investments, which surged by 17 times to PKR 2.1bn, mainly due to impairment on shares. Total provisioning is anticipated to stand at PKR 8.2bn in CY10, down by 29% YoY. In CY11 provisions are likely to remain on the lower side as NPL run rate will continue to slow down, thus improving bank’s coverage ratio. Incase of provisioning for NPLs related to CY10 floods, as per SBP circular it could be deferred till Dec 2011.

NBP’s exposure to Capital market The bank’s exposure to the capital market has increased significantly since transfer of share against NIT (LoC). By September 2010, NBP held portfolio investment to the tune of PKR 19.7bn, a contribution of 7.7% towards total investments. With the market witnessing an upside of 20% in the last quarter, NBP is likely book significant gain under the head of gain on securities. The bank has already booked a gain of PKR 1.9bn during the 9MCY10, up by 8.2 times from the corresponding period last year.

Single Treasury Account (STA) a Concern delayed As per standby agreement with IMF, the government was required to implement STA policy by June 2009, further extended to June 2010. Under the policy, all public deposits were to be transferred gradually from commercial banks to an STA with State Bank of Pakistan (SBP). According to the estimates, government balance constitutes about 11% to total banking deposits while contribution to NBP’s deposit is estimated to be around 37%. However, GoP is not indicating any time with regards to implementation of this policy. This delay is positive for NBP, however, even though its implementation will be in phases, is considered major negative for the bank as it will lead to higher deposit cost for the bank.

Financial Highlights (PKRmn) CY08A CY09A CY10E CY11F CY12F Revenues 60,943 77,948 88,719 97,901 105,208

Net Income 15,451 18,212 16,465 18,876 21,156

EPS (PKR) 11.48 13.54 12.24 14.03 15.72

DPS (PKR) 5.50 6.50 7.50 8.50 8.50

PER (x) 6.68 5.66 6.27 5.47 4.88

Div. Yield 7.17% 8.48% 9.78% 11.09% 11.09%

ROE 14.12% 16.41% 12.94% 13.43% 14.08% Source: Company Accounts and AHL Research



Upside

KSE CodeBloomberg CodeReuters Code NBPK KA

Outstanding Shares (mn) 1,345 Market Cap (US$ mn) 1,203 Market Cap (PKR mn) 103,170 Free Float 23.7%12M Avg. Daily Turnover 4.15mn12M High/Low (PKR) 81.00/59.49


Source: KSE

AnalystFaisal [email protected]

NBP PA

Key Data

Shareholding

Stock Performance


NBP

BUY85.0076.68

10.9%

GoP76.5%

Others18.8%

Foreign Compan

ies4.7%

95%100%105%110%115%120%125%130%135%140%

Dec

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May

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Oct

-10

Nov

-10

Dec

-10

NBPKSE100

27


Attock Petroleum Limited Oil and Gas Aggressive market penetration is fueling growth

Recommendation We recommend Buy stance for APL with December 2011 target price of PKR 430.7/share, which offers an upside potential of 28.8%, from December 31, 2010 closing price of PKR 334.52/share. The Stock is currently trading at PER and dividend yield of 5.3x and 10.5%, respectively based on FY11 earnings estimates.

Market penetration in retail fuel segment Attock Petroleum Limited (APL) has been aggressively expanding its retail fuel network across the country with an average 34 stations per year since FY08. This led to increase its market share to 4.6% and 5% in HSD and MS, respectively, compared to 2.4% in FY08. To further penetrate in the retail segment, APL is currently working on 43 new retail outlets, which are expected to be operational in FY11-12. Besides this, a joint venture with Askari CNG to convert 20 of its outlets into multi-fuel stations under the brand of APL will further support to retail segment growth. We expect the Company to register a YoY growth 15% and 20% in HSD and MS, respectively.

FO sales are back on track APL suffered FO volume contraction of 12.9% in FY10, with its market share dropped to 4.5%. This was to deliberate decision by the company to distance itself from circular debt plagued. However APL has come back strongly in 5MFY11 with a 41.4% YoY increase in FO volumes, driving market share to 6.3%. Despite increasing exposure to FO market, APL is relatively cushioned to circular debt as most of its FO sales are made to Attock Power Gen, a group company.

Demand of Asphalt to grow after floods Recent floods in the country led to catastrophic destruction to the infrastructure, which is likely to boost the demand of asphalt. Having a monopoly over asphalt, APL is likely to benefit from the rising asphalt demand in the country. We expect asphalt demand to grow by 5% in FY11 to 296mn tons as compared to a mild 1% growth in FY10.

Strong cash position is supporting payouts and other income APL stands out among its listed peers with strong cash position of PKR 8.5bn (36.6% of total market cap), which contributes around 29.3% to the net earnings in terms of interest income. We expect APL’s interest income to cross PKR 1bn in FY11. This healthy cash position strengthens APL’s payout ability with highest dividend yield of 10.5% among listed OMCs.


Net Revenues 61,863 82,792 86,776 100,720 109,594

Net Income 3,111 3,594 3,620 4,025 4,160

EPS (PKR) 54.02 62.40 62.85 69.88 72.23

DPS (PKR) 25.00 30.00 35.00 40.00 40.00

Dividend Yield 7.5% 9.0% 10.5% 12.0% 12.0%

PER (x) 6.19 5.36 5.32 4.79 4.63

ROE 49.2% 44.0% 36.6% 35.9% 33.2%

Sources: Company financials and AHL estimates



Upside

KSE CodeBloomberg CodeReuters Code APL KA



Source: KSE

AnalystSyed Abid [email protected]

APL PA

Key Data

Shareholding

Stock Performance


APL

BUY430.70334.52

28.8%

Attock Oil

2.2%

Pharaon Invst. Group34.4%

ATRL21.9%

POL7.0%

CEO7.0%

Others27.6%

80%

90%

100%

110%

120%

130%

Dec

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APL

KSE100

28


Pakistan State Oil Company Limited Oil and Gas Strong Earnings Growth Overshadowed by the Circular Debt

Recommendation We recommend Buy stance on Pakistan State Oil Company Limited (PSO) with December 2011 target price of PKR 377.6/share. At closing price of December 31, 2010, the Stock provides an upside potential of 27.9%. Besides this, the Stock offers an attractive PER of 5.9x based on recurring FY11 earnings.

Turnover tax reversion back to 0.5% brings a sigh of relief The GoP has notified long awaited decision of reduced turnover tax from 1% to 0.5%. PSO is likely to be the major beneficiary due to a reversion in deferred tax of PKR 2.8bn charged in FY10 in addition to PKR 851mn tax liability charged in 1QFY11. This may result in total reversal of PKR 21.29/share in 2QFY11.

Fixation of margins to have nominal impact on PSO Effective from Dec’10 Oil and Gas Regulatory Authority (OGRA) has fixed OMC’s margins in absolute rupee terms per liter. Previously margins were calculated as 4% of the sum of Ex-Refinery price and IFEM. This has resulted in a margin drop of 22%-25% on different products. Impact of this, however is nominal (PKR 4/share or 5% of EPS) on PSO as furnace oil (FO) and diesel contribute more than 80% towards Company’s top line, which remained unaffected by the margin fixation.

Circular debt issue Circular debt still remains the burning issue for the Company with crippling effect on its cash flows, which reduced PSO’s payout to 15% in FY10. Complete resolution of circular debt is impossible until problems like dependency on high cost power generation, high Transmission and distribution losses and inability of timely collection by DISCO’s are resolved. However the government’s decision to phase out power subsidies is a step in right direction, as it will improve liquidity of the whole energy chain. We expect subdued payout of around PKR 10/share in FY11 on account of circular debt issue.

FO demand driving the growth FO volume during FY10 registered a YoY rise of 18.3% due to capacity additions of 1,275MW during the period. FO demand is expected to grow by 15% during FY11 on account of approximately 800MW oil based capacity additions and rising demand from existing power plants due to lower availability of gas. With more than 88% share in the FO market, PSO is likely to gain the most out of FO segment.


Net Revenues 612,696 742,758 794,702 909,498 991,430

Net Income (6,699) 9,050 12,178 10,430 11,372

EPS (PKR) (39.05) 52.76 71.00 60.81 66.30

DPS (PKR) 5.00 8.00 10.00 22.00 27.00

Dividend Yield n.m 2.7% 3.4% 7.5% 9.1%

PER (x) (7.56) 5.59 4.16 4.85 4.45

ROE -25.8% 36.1% 35.6% 24.6% 23.0%




Upside

KSE CodeBloomberg CodeReuters Code PSO KA



Source: KSE


PSO PA

Key Data

Shareholding

Stock Performance


PSO

BUY377.60295.18

27.9%

GoP25.5%

NIT ICP15.9%

Financial Inst.41.0%

Others17.6%

75%

85%

95%

105%

115%

125%

Dec

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PSOKSE100

29


Lotte Pakistan PTA Limited Chemicals Primary Margins are driving the profitability

Recommendation The stock of LOTPTA provides an upside potential of 16.5% to our December 2011 target price of PKR 16/share. At December 31, 2010 closing price of PKR 13.7/share, the stock offers PER and dividend yield of 4.1x and 7.3%, respectively based on our CY11 earnings estimates. Our liking for the Stock is stemmed from strong primary margin outlook, strong local demand which guarantees a 100% capacity utilization, captive power plant and healthy cash position.

Primary Margins to stay strong till CY12 Cotton shortage around the globe has pushed its prices northward as the price jumped by 88.6% during CY10. Lower availability and high price of cotton has strengthened demand and prices for Polyester Staple Fiber (PSF), which consequently improved Pure Terephthalic Acid (PTA) prices during CY10. PTA-PX margins averaged to US$ 305/ton during CY10, a 26.7% higher when compared with average margin of US$ 241/ton during CY09. We expect the primary margins to sustain these levels in CY11 due to lower availability of cotton. Amid higher cotton prices, excess Px supply in the region and strong PTA demand we think that the primary margins would stay strong for at least couple of years till regional PTA capacities come online. PTA industry is going through a major expansion phase in Asia, whereby its capacity is expected to reach to 52.5mn tons in CY13 from existing 38mn tons.

Captive power plant to reduce power cost The Company is planning to build its captive power plant of 40MW with an estimated cost of US$ 40mn (PKR 3.4bn) with an expected commissioning in CY12. Power project is likely to have an annualized EPS impact of PKR 0.61/share. Besides saving the power cost, captive power plant will open up an opportunity to sell the surplus electricity to Karachi Electric Supply Corporation (KESC).

Healthy Cash position to strengthen other income The Company enjoys a strong cash position of PKR 7.7bn (PKR 5.0/share) as of September 2010 financials. LOTPTA is earning an interest income at a rate of 12% which has likely to increase its other income by 91.1% to PKR 915mn in CY10. We expect other income to remain strong going forward, despite the fact that the Company has to pay its US$ 63mn loan as a bullet payment in CY12. Strong operational performance is likely to keep on strengthening its cash position going forward.

Financial Highlights (PKR mn) CY08 CY09A CY10E CY11F CY12F

Net Revenues 32,936 37,774 41,368 50,720 51,833

Net Income (1,760) 3,383 4,583 5,089 4,676

EPS (PKR (1.16) 2.23 3.03 3.36 3.09

DPS (PKR) - 0.50 1.00 1.00 0.75

Dividend Yield 0.0% 3.6% 7.3% 7.3% 5.5%

PER (x) n.m 6.13 4.53 4.08 4.44

ROE -35.6% 58.7% 51.0% 41.4% 29.5%




Upside

KSE CodeBloomberg CodeReuters Code LOTT KA

Outstanding Shares (mn) 1,514 Market Cap (US$ mn) 242 Market Cap (PKR mn) 20,745 Free Float 25%12M Avg. Daily Turnover 12.4mn12M High/Low (PKR) 13.7/6.9


Source: KSE


LOTPTA PA

Key Data

Shareholding

Stock Performance


LOTPTA

BUY16.0013.70

16.8%

KP Chemic

al75.0%

NBP Trustee

Dept0.9%

Individuals

16.7%

Others7.4%

85%95%

105%115%125%135%145%155%165%175%185%

Dec

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May

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-10

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-10

Dec

-10

LOTPTA

KSE100

30


Lucky Cement Limited Construction and Materials Focus Shifting to Domestic Market

Recommendation We recommend buy stance on LUCK with December 2011 target price of PKR 97.1/share, offering an upside potential of 28.1% from December 31, 2010 price of PKR 75.79/share. The stock is trading at FY11E PER and dividend yield of 6.4x and 6.6%, respectively. Our Buy stance is stemmed from the following factors.

Domestic sales to improve by 8% YoY in FY11 Increasing supply additions in GCC and improved domestic margins led Lucky Cement to refocus on the domestic front, evident from 15% YoY increase in domestic sales during 5MFY11, compared to 9% YoY decline in the Industry sales. We expect the Company to post 8% YoY growth in domestic sales in FY11. Exports on the other hand are expected to decline by 7% YoY.

Cost efficiency measures to increase profitability The company is expected to cumulatively generate 25MW from WHRPs of Karachi and Pezu plants. This is likely to result in savings of 20% in power cost having an annualized EPS impact of PKR 1.68/share. Moreover to improve transport efficiency the Company has acquired 18 long trailers to ship bagged cement to Karachi port and bring coal to plant using these trailers. This is expected to reduce transportation cost by 10%-15%, effective from 2HFY11.

Sale of electricity will diversify revenue base The Company signed a Memorandum of Understanding (MoU) with Karachi Electric Supply Corporation (KESC) to transmit 40MW of electricity on October 2010. With nothing materializing of this front, the Company has started to consider other options of transmitting the surplus power to its group companies, which are expected to be relocated in the Company’s vicinity. As per our calculations, 80MW surplus electricity transmission can have an annualized EPS impact of PKR 1.48.

Rising coal prices are threatening bottom line As a result of QE2, seasonal demand pressures and flooding in Australia, coal price has surged by 45.9% since Sep’10 to US$ 128/ton. US$95/ton in 1HFY11, a 47.4% YoY rise. Our assumption for FY11 stands at US$ 105/ton, still higher than YTD average of US$ 95/ton. Every US$ 5/ton increase from our base case assumption dilutes FY11 EPS estimate by 9% or PKR 0.97/share. However believe that supply easing post Australian floods and end of winter season will put a downwards pressure on the international coal prices.

Financial Highlights (PKRmn) FY09A FY10A FY11E FY12F FY13F

Net Revenues 26,330 24,509 26,086 26,975 28,772

Net Income 4,597 3,137 3,834 4,501 4,989

EPS (PKR) 14.21 9.70 11.86 13.92 15.43

DPS (PKR) 3.00 4.00 5.00 6.00 6.00

Dividend Yield 4.0% 5.3% 6.6% 7.9% 7.9%

PER (x) 5.33 7.81 6.39 5.45 4.91

ROE 21.9% 13.0% 14.6% 15.7% 15.9%




Upside

KSE CodeBloomberg CodeReuters Code LUKC KA



Source: KSE


LUCK PA

Key Data

Shareholding

Stock Performance


LUCK

BUY97.1075.79

28.1%

Directors

29.7%

Associated

Comp.9.7%

General Public31.7%

Others28.9%

85%

95%

105%

115%

125%

Dec

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May

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Oct

-10

Nov

-10

Dec

-10

LUCK

KSE100

31


Pakistan Telecommunication Company Limited Fixed Line Telecom. Ufone Driving The Growth

We are initiating coverage on Pakistan Telecommunication Company Limited (PTC) with a DCF based Dec 2011 target price of PKR 24.7/share. At last closing price (December 31, 2010) of PKR 19.42/share, the scrip offers an upside potential of 27% to our target price. The scrip is currently trading at a FY11 P/E of 7.8 and offering prospective FY11 dividend yield of 8.8%. Our Target price is derived from consolidated operations as we believe it rightly reflects company’s growth prospects, which are primarily emanating from Ufone operations. While fixed line operations continued to face the declining trend.

Cellular Segment to drive PTC’s growth Ufone’s revenue has grown at a CAGR of 31% during FY06-10 to PKR 41.7bn, hence Ufone’s contribution in PTC’s top line has surged to 42% in FY10 from just 16% in FY06. We expect this trend to persist, resulting in cellular contribution to increase to 45% in FY11 and further to 49% by FY14, as company’s consolidated revenue grows at a CAGR of 4.8% from FY10 to FY14. We expect Ufone to sustain its market share at 20%. This strong growth in Ufone is expected to take PTC’s consolidated top line to PKR 118.8bn, exhibiting a 4.7% CAGR (FY10-14)

Revenues from FLL, WLL and Broadband By FY10, PTC’s standalone revenues (including Domestic, International, Vfone and Broadband) have registered a decline of 14% since FY08. This contraction is mainly attributed to decline in Fixed Line revenues, which has dropped from PKR 57.47bn in FY08 to PKR 43.57bn by FY10, a decline of 24%. We expect PTC’s revenues (excluding Ufone) to depict a decline of 2.6% YoY in FY11 to PKR 55.7bn compared to a drop of 3.5% YoY in FY10. Going forward, we expect revenues (excluding Ufone) of the company to grow at a CAGR (FY11 - FY14) of 2.9% mainly on the back of the rising WLL and broadband revenues.

Technical Services Fee to end in FY12 As per the terms of Sales Purchase Agreement (SPA), Etisalat is allowed to charge technical service fee at 3.5% on the consolidated revenues of the company for a period of 5 years, commencing from October 2006. The tenor of this levy will expire in 1QFY12, which is expected to lead to 17% decline in admin expenses in FY12.

Ufone to Support PTC’s standalone profitability PTC received first dividend flows from Ufone of PKR 695mn in FY10, contributing around 13.5% towards company’s other income. Going forward, rising dividend income will provide some relief to the declining profitability of PTC, which is suffering from sliding fixed line revenues. We expect dividend of PKR 650mn (PKR 0.13/share) from Ufone in FY11. Moreover, PTC’s loan to Ufone of PKR 11bn will further boost company’s profitability on standalone basis as the company will book interest income of PKR 1.6bn (PKR 0.31/share) in FY11.

Financial Highlights (PKRmn) FY09A FY10A FY11F FY12F FY13F Revenues 92,720 98,906 101,996 107,394 112,620

Net Profit 10,923 12,750 11,679 13,515 13,515

EPS (PKR) 2.14 2.30 2.48 3.00 3.31

DPS (PKR) 1.50 1.75 1.70 1.80 1.80

Dividend Yield 7.7% 9.0% 8.8% 9.3% 9.3%

P/E 9.07 8.43 7.84 6.48 5.86

ROE 10.4% 10.9% 11.3% 12.9% 13.4% Source: Company Accounts and AHL Research



Upside

KSE CodeBloomberg CodeReuters Code PTCA KA

Outstanding Shares (mn) 5,100 Market Cap (US$ mn) 1,155 Market Cap (PKR mn) 99,042 Free Float 15%12M Avg. Daily Turnover 3.74mn12M High/Low (PKR) 22.37/17.0


Source: KSE

AnalystFaisal [email protected]

PTC PA

Key Data

Shareholding

Stock Performance


PTC

BUY24.7019.42

27.2%

Etisalat Internati

onal26.0%

GoP62.2%

Individual

1.9%

Others9.9%

90%95%

100%105%110%115%120%125%130%

Dec

-09

Jan-

10M

ar-1

0Ap

r-10

May

-10

Jun-

10Ju

l-10

Aug-

10Se

p-10

Oct

-10

Nov

-10

Dec

-10

PTCKSE100

32


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.

© 2010 Arif Habib Limited, Corporate Member of the Karachi, Lahore and Islamabad Stock Exchanges and National Commodity 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.

33


Contact information

Equities Research Email Telephone

Faisal Khan

Shahbaz Ashraf

Syed Abid Ali

Saad Khan

Usman Saeed

Khurram Kamal

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]

+92-21-3246-2589

+92-2132460717-19 Ext : 211

+92-2132460717-19 Ext : 211

+92-2132460717-19 Ext : 211

+92-2132460717-19 Ext: 248

+92-2132460717-19 Ext : 211

International sales Email Telephone

Mohammed Imran Head of International sales [email protected] +92-21-3246-2596

Domestic sales Email Telephone

Sajid Q. A. Bhanji

M. Yousuf Ahmed

Farhan Mansoori

Syed Farhan Karim

Afshan Aamir

Furqan Aslam

Vice President and Director

Senior Vice President

Vice President

Vice President

Vice President

AVP

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

+92-21-3244-6254

+92-21-3242-7050

+92-21-3247--3268

+92-21-3244-6255

+92-21-3244-6256

+92-21-3244-6256

Corporate finance and advisory Email Telephone

M. Rafique Bhundi

Kashif Suhail

Saifuddin Shamsi

Vice President

Vice President

Senior Analyst

[email protected]

[email protected]

[email protected]

+92-21-3240-1931

+92-21-32046-2597

Ext : 253

IT email Telephone

Salman Haider Head of IT [email protected] Ext: 233

Management email Telephone

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

january 5, 2011 pakistan outlook 2011 eyeing an index ... · 14.6 13.8 13.3 12.2 10.4 10.1 8.5 4 8...

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