inter market perspective · 7/26/2018 · program while focus on social reforms will be a major...

Inter Market Perspective

Intermarket Securities is the Local Research Partner of Exotix Capital

www.jamapunji.pk

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 12, 13 & 14

July 26, 2018

Better than expected performance in Punjab, and continued dominance in Khyber Pakhtunkhwa, has enabled PTI to emerge as the largest party in Pakistan, reportedly with 115 of 270 directly contested National Assembly seats (based on most recent count). This should enable PTI to lead a coalition government with Imran Khan to be the new Prime Minister.

A stronger than expected government should lead to more than just a relief rally at the KSE-100 Index which trades at a forward P/E of 7.5x vs. long-term average of 8.5x. Near-term economic policy will likely be dictated by an anticipated IMF program while focus on social reforms will be a major departure from status quo parties. Foreign policy, however, is unlikely to see significant change.

The Textile and Technology sectors can be big winners, in our view. Major sectors such as Banks, Oil & Gas and Fertilizer should remain largely unaffected by election results, where we remain positive on all three. We also think the Construction sector may not be as adversely affected as initially suspected.

PTI does better than expected PTI has built on the momentum over the last few months to win a resounding mandate with 115 out of 270 directly contested NA seats (based on most recent count by media outlets in the absence of official results). Key building blocks of this victory are (i) retaining dominance in Khyber Pakthunkwa, (ii) the South Punjab bloc, (iii) inclusion of “electables” and (iv) a decisive shift in industrial hub Faisalabad and emphatic win in the financial center Karachi. This should enable PTI to form government together with smaller parties and independents. At the Provincial Assemblies level, status quo has reportedly prevailed with PML-N winning in Punjab, PPP in Sindh and PTI in Khyber Pakhtunkhwa.

PTI’s policy thrust We see three key policy thrusts under a PTI-led government:

Social Reforms: Health, Education and Justice are key tenets of PTI’s policies. Focus on these at the federal level should reflect a major shift away from status quo parties.

Economy: Initial policies should focus on stabilization within an IMF program. PTI’s economic agenda features: (i) basing PKR exchange rate on fundamentals, (ii) SOEs turnaround rather than privatization, (iii) pushing financial inclusion and direct taxation, and (iv) support to manufacturing, SME & exporting sectors.

Foreign Policy & Security: Ties with China will be further developed while new relations with Russia could be explored. Relations with USA and India, however, may remain on the backburner. NAP will be implemented and a multipronged strategy, including developing an effective counter-narrative, will be used to combat terrorism.

Market can depict more than a relief rally PTI’s strong mandate should result in the KSE-100 depicting an emphatic rally. Elections have traditionally resulted in positive market reaction and we expect the same this time around; in 2008 the Index was up 5% 1m after elections, and 11% up in 2013. Forward P/E of 7.5x vs. a long-term average of 8.5x certainly provides space for this. However, extension of this rally depends on how quickly economic stabilization occurs (IMF program needed in our view).

Preferred Sectors & Top Picks Textile and Technology sectors stand out as key winners of the 2018 elections. There is less clarity on other sectors which – after an initial rally – will be dictated by sector-specific fundamentals where we are positive on Banks, Oil & Gas and Fertilizer and negative on Autos. For Construction, we think there is enough in PTI’s manifesto to suggest the sector may not be as adversely affected as initially suspected. Some stocks that we like include ABL, MCB, ENGRO, PPL, NCL, NML, SHEL, LUCK and ASTL.

Risks: Continuation of polarized polity & failure to enter IMF program in a timely manner.

2018 Elections: PTI's turn to bat

Pakistan Strategy

Market Snapshot

KSE 100 Index 41,339pts

Market Cap (PRsbn) 8,496

Market Cap (US$bn) 66

Market Free Float 28%

Forward PE (x) 7.5

Avg. Daily Vol (mnshrs)* 175

Avg. Daily Td Val (PRs mn)* 8,141

Avg. Daily Td Val (US$ mn)* 74 *FY18

NA Composition (for 270 seats)

National Assembly

Actual Seats*

Expected Seats

PTI 115 90

PML-N 64 70

PPP 43 32

MQM-P 8 13

MMA 11 10

Others 15 16

Independents 14 35 Source: Media Reports * Final results may vary from these

Preferred Sectors & Top picks Textiles

Fertilizer

NCL

EFERT NML

ENGRO

Oil & Gas

Pharma PPL

AGP

SHEL

SEARL

Power

Cement HUBC

LUCK

Banks

Steel BAFL

ASTL

MCB ABL Source: IMS Research

Research Entity Number – REP-085

IMS Research [email protected]

+92-21-111-467-000

http://www.jamapunji.pk/

2 | P a g e

Perspective

2018 Election Results Against our expected win on 90 NA seats, PTI has delivered 115 seats on 270 directly contested seats (based on the most recently reported count). Conversely, the PML-N has won 64 seats vs. our expectation of 70 seats. PTI should now be able to form a stronger than expected coalition government together with smaller parties and independent candidates, with Imran Khan likely to be the next Prime Minister.

Key building blocks in PTI’s victory include (i) winning more seats in Khyber Pakhtunkhwa compared to 2013, (ii) the South Punjab bloc where PTI has won 21 out of 46 seats, (iii) inclusion of “electables”, (iv) a decisive shift in textile hub Faisalabad which was a clean sweep for PML-N in the last elections and (v) strong performance in Karachi.

PTI maintained majority in Khyber Pakhtunkhwa, with even higher seats than in 2013. In particular, its performance in Punjab and Karachi are major surprises where PTI has reportedly won 12 out of 21 seats in Karachi, beating out entrenched MQM-P in the process. PTI's better than expected performance in Punjab came at the expense of PML-N which has won 64 seats. Among other parties, PPP won 43 NA seats, better than in 2013. Contrary to some expectations, religious bloc MMA did not put on a strong show, winning just 11 seats in total. Based on the initial reported results, the provincial set-ups could be unchanged from 2013, with PML-N reportedly having majority seats in Punjab, PPP in Sindh, and PTI in KPK.

While rigging allegations coupled with the absence of official results have marred the 2018 elections, opponents' crying foul is not unexpected given the scale of PTI's victory. These allegations are unlikely to make much headway, in our view.

Below results are not final and could change. They are based on the most recent count reported by News channels

National Assembly Actual Seats*

Expected Seats

National Assembly

Likely Coalition

PTI 115 90

PTI 115

PML-N 64 70

MQM-P 8

PPP 43 32

GDA 7

MQM-P 8 13

Others 7

MMA 11 10

Independents 10

Others 15 16

Independents 14 35

Total 147

Source: Media Reports * Final results may vary from these

Punjab (Seats)

Sindh (Seats)

PTI’s route to victory in the NA was built on the South Punjab bloc as well as a decisive shift in textile hub of Faisalabad.

PPP has fended off the GDA alliance while PTI emerged as the second largest party in the province, outpacing the likes of MQM-P and PSP.

PML-N retains pole position in the provincial assembly. A PTI-led alliance even in the provincial assembly cannot be ruled out, but is unlikely in our view.

PPP will now form government inSindh.

National Assembly Provincial Assembly


PML-N 60 129

PPP 32 73

PTI 62 122

PTI 14 23

PPP 8 6

MQM-P 8 18

Independents 5 31

GDA 4 8

Others 4 5

Khyber Pakhtunkhwa (Seats)

Baluchistan (Seats)

Unlike KPK's history of selecting anti-incumbent governments, PTI gained significant momentum in the province.

Fragmented seats in Baluchistan, as was the case in the 2013 elections.

We await clarity on the eventual shape of the Baluchistan government.



PTI 30 66

BAP 1 14

MMA 4 10

BNP 4 9

ANP 1 7

MMA 5 8

PML-N 4 3

Source: News Channels

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Perspective

PTI’s Policies Going by its manifesto, its campaign rhetoric and its performance in Khyber Pakhtunkhwa over 2008-2013, we see PTI's policies being focused in the three key areas of (i) Social Reforms, (ii) Economy and (iii) Foreign Policy / Security. Social reforms are likely to be concentrated in Health, Education, improved police performance and speedy delivery of justice. Beyond a near-term focus on macroeconomic stabilization, PTI's economic policies may look to be more inclusive while possibly leveraging its strong support base among overseas Pakistanis. Finally, PTI may be more inward-looking on its foreign policy stance while retaining a guarded approach towards USA.

Social targets to take center stage PTI intends to develop Pakistan’s human capital and deliver a demographic dividend by turning around the deeply neglected Health and Education sectors. Among other benefits, this will also help the country to diversify and shore up its exports, while also leading to higher remittances (FY18: 6.5% of GDP) over the longer-term. In the interim, however, given the high proportion of the Federal Budget devoted to debt servicing and military expenditure (together 33% of expenditure), spending on health and education may by extension necessitate raising tax revenues and cutting budgetary expenditure on infrastructure projects. Emphasis will be laid on opening more hospitals and schools, along with improving quality in existing ones. Similarly, PTI wants to root out corruption and red tape in overhauling the civil services. These will also accrue long term benefits but progress here will be protracted, in our view.

PTI’s Policies

Social Reforms Economy Foreign Policy & Security

Health, Education and Justice are key social tenets Initial focus on stabilization within an IMF program PTI could be inward looking on foreign policy

Health insurance may be expanded country-wide Regulate exchange rate on economic fundamentals and focus on Exports – particularly Textile & Technology

Expand strategic ties with China (CPEC) and explore new ties with Russia

Reforming police & civil services, and reducing case backlogs, particularly in civil cases

Introduce financial instruments for overseas Pakistanis Relationship with US to be determined by reciprocity and mutuality of interest

Task force to bring back alleged looted wealth from abroad

Push Deposit/GDP ratio from 30% to 50% Develop a blueprint for the Kashmir issue (India)

Push for South Punjab province Push direct taxation Will prioritize politico-diplomacy to attract FDI and facilitate trade

Divert 3% of federal divisible pool revenues to FATA after merger with Khyber Pakhtunkhwa

Turnaround SOEs by putting them in a state fund Implement NAP and form National Security Organization for multi-pronged strategy against terrorism including creating a counter-narrative

Karachi uplift scheme Create jobs in SME, Housing, IT, Health, Education and Tourism

Build 5mn houses for middle and low income populace

Source: PTI Manifesto & IMS Research

PTI's spending on education & health in Khyber Pakhtunkhwa

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Focus on Exports PTI's manifesto recognizes the importance of promoting strong growth in exports for long-term sustainability of the external position (Pakistan’s Exports to GDP ratio is a paltry 7%). For textile exports, PTI has outlined rationalizing energy costs as a key incentive. This likely points towards an extension of Textile Package, as proposed by the outgoing PML-N government. Over the longer term, PTI has rightly identified the opportunity to develop Pakistan’s tech exports; which exports only US$2bn compared to over US$100bn from India. This mixes well with PTI’s other goals of developing the country’s human capital and push to digitize the economy. PTI also believes in a free exchange rate, which will be pertinent to maintain the recent momentum in exports, seen late in the previous government.

Energy sector remedies As the previous PML-N government significantly addressed the power capacity deficit, PTI will shift focus to bringing down line losses and theft. We think transferring ownership of SOEs like Power discos, Steel Mills, PIA etc. from ministries and into a state-owned fund could be an efficient way of addressing structural frailties. Privatizing these entities and expecting a turnaround like in case of K-Electric entails a long waiting period. Note that under the previous IMF program, the state demonstrated ability to overhaul power discos on its own and circular debt buildup stalled to a great extent.

Mini Budget on the horizon The last Budget was heavily criticized by opposition parties given it was announced just before PML-N's term ended. In this backdrop, and given the altered macroeconomic landscape coupled with the need for fiscal consolidation, PTI is likely to announce a revised Budget in the next few months in our view.

We think some steps under such a Mini Budget could be:

Withdraw recent cuts in income tax rates. This could save up to PKR200bn (0.5% of GDP) where the provisional FY18 fiscal deficit to GDP clocked in at a high 6.8%.

The PML-N government gradually brought down corporate tax rates from 35% to 30% (ex-Banks). The PTI could potentially look to reverse some of this reduction.

PSDP allocation of PKR750bn (excluding the PKR250bn earmarked under an ambiguous public-private structure), may see some cuts. Moreover, PTI will likely wait until the economy has stabilized before undertaking its own infrastructure plans e.g. building 5mn houses for low income populace. CPEC projects however are expected to continue apace.

Subsidies particularly in the power space could potentially come in for downward revision. Moreover, concessionary GST rates could potentially go out the window where Tractors for instance currently enjoy a concessionary GST of 5%.

Foreign policy will be unchanged We think PTI will keep Pakistan’s foreign policy unchanged where China will continue to be favored. Imran Khan has consistently opposed the US’s stance on War on Terror and while we attribute some of this to populist rhetoric, we do not expect relations with the US to improve significantly. PTI has also emphasized on making progress on the Kashmir issue, instead of looking to boost trade ties which PML-N tried to adopt early on in its term.

Pakistan's Exports to GDP has halved in the past decade

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Perspective

Market can depict more than a relief rally While we flagged a relief rally after elections irrespective of who formed government, a resounding mandate for PTI and a stronger than expected coalition should now result in an emphatic rally. The KSE-100 has historically rallied strongly in the aftermath of elections – it was up 5% 1m after the 2008 elections and 11% after the 2013 elections – and we expect much the same this time around.

Market Performance: Pre & post elections

1m 3m 6m 12m

Elected Govt. Election Date Prior After Prior After Prior After Prior After

PPP 5-Oct-93 5% 15% 9% 59% 22% 79% 10% 67%

PML-N 2-Feb-97 17% 1% 7% -4% 6% 21% 0% 4%

Military/PML-Q 11-Oct-02 4% 9% 14% 39% 10% 40% 73% 101%

PPP 15-Feb-08 4% 5% 10% 1% 13% -31% 25% -60%

PML-N 10-May-13 6% 11% 14% 18% 23% 16% 38% 42%

PML-N/Caretaker* 25- July-18 -1% - -10% - -8% - -9% - Source: IMS Research, *based on last closing prices

Valuations provide space The KSE-100 Index is up 2%CYTD (-12% in US$ terms) to trade at a forward P/E of 7.5x, which is lower than its long-term average of 8.5x, and close to its cyclical lows. This provides space for the market to depict a sustained rebound, in our view. Although the incoming government will face acute challenges on the economy, particularly on the Balance of Payments front, there is now little to be surprised about the macroeconomic stabilization that is underway and is likely to extend over the next few months. An IMF program looks increasingly likely and is the next key checkpoint.

We envisage the following:

Market turnover has averaged just US$70mn in CY18TD vs. US$115mn in CY17. The 2018 elections should act as an inflection point for volumes as investor confidence returns.

Foreign investors have been net sellers to the tune of US$191mn in CY18TD. Given that the PKR has already depreciated by more than 20% since Dec’17 and elections have successfully concluded, it is possible that foreign institutional investors take a relook at Pakistan particularly if policy clarity comes through.

Staying conservative, we think a P/E range of 7x-8x over the next year or so is reasonable. This will not be as high as the average under the PML-N term (9.5x) which benefitted from low international oil prices, but also not as low as under PPP (6.8x), difficult years where recovery was impeded by the global financial crisis and the aftershocks of a transition from military rule to democracy.

KSE100 Index rebounds tend to be strong

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6 | P a g e

Perspective

Sectors & Stocks

7 | P a g e

Perspective

Exporters Election Impact – Positive

Continued focus on Pakistan’s exports: With burgeoning current account deficit, the incoming government will likely focus on boosting Pakistan’s textile exports which form 60% of total exports. This may include continuation of duty drawbacks for textile companies where PTI's strong performance in Faisalabad – Pakistan's textile hub – is instructive, in our view. In addition, desire to let the PKR follow economic fundamentals should also bode well.

Explore tech potential: PTI explicitly wishes to increase digitization in the country – in public and civil services etc. which could benefit companies such as Systems Ltd (SYS PA). The sector is also likely to continue seeing tax breaks and other incentives.

NCL: 60% of NCL's revenues emanate from exports. Product mix is skewed towards spinning segment but we highlight that rising cotton prices would ultimately translate into uptick in yarn prices. Furthermore, NCL’s recently inaugurated 40MW coal fired captive power plant would ensure uninterrupted power supply.

NML: Best-in-class composite textile manufacturer. It will benefit not just from anticipated government incentives but also from its portfolio of strong underlying group companies.

Energy Election Impact – Positive

Focus on Oil & Gas: Following on from previous governments, PTI has also emphasized development of indigenous hydrocarbon reserves. Upstream Oil & Gas companies have lately ramped up effort to this end; however, PTI could facilitate them by offering better policies for tapping tight gas reserves and off-shore finds.

Circular debt remedies: We think setting up a professionally run and depoliticized fund to run SOEs separate from the state may be a better strategy to expediently address structural frailties (line losses, non-recoveries and theft) compared to privatization. If an IMF program is taken, tariff hikes will likely be on the cards. It also remains to be seen whether the PTI government will be open to the idea of a large circular debt settlement.

PPL: Among the E&Ps, PPL has the best prospects for near-term production growth while it has also been aggressive on the exploration front. Gas additions in Gambat South block is the source of strong production growth, while trends in Kandhkot and Adhi are also very encouraging.

SHEL: Mostly reliant on lubricants, SHEL is our top pick in the OMCs space due to its unmatched exposure to that market, and recovering retail market share. We like SHEL’s renewed interest in Pakistan to leverage its lubricant base. Valuations are attractive particularly as market share should improve from current historic lows.

HUBC: Our top pick among IPPs. Even though dividends would remain constrained in FY19F, the 1,320MW power plant expected to commission in Aug’19 may add PKR3.0/sh to the bottom line post commercial operations date.

Financials Election Impact – Neutral to Positive

Increasing Access to finance: Going by its manifesto, PTI will look to implement the SBP’s National Financial Inclusion Strategy via increasing Deposit-to-GDP ratio from 30% presently to 50%. If successful, this will be a significant positive for Banks; however, it may also potentially coincide with regulatory steps to further curb margins, in our view.

Rising interest rates to support banks: Interest rates have risen by 175bps this year and monetary tightening may continue, especially under an IMF program. We think the net benefit from rising NIMs will outweigh fallout on asset quality going forward.

NCL - Valuation Snapshot

EPS

(PKR) PER

(x) DY (%)

PBV (x)

ROE (%)

FY19F 8.01 6.38 5.5% 1.00 15.6%

FY20F 7.51 6.81 5.1% 0.95 14.0% Source: IMS Research

NML - Valuation Snapshot

EPS (PKR)

PER (x)

DY (%)

PBV (x)

ROE (%)

FY19F 17.08 7.88 4.5% 0.52 6.6%


PPL- Valuation Snapshot

EPS

(PKR) PER

(x) DY (%)

PBV (x)

ROE (%)

FY19F 30.91 6.67 7.3% 1.52 22.7%


SHEL - Valuation Snapshot

EPS (PKR)

PER (x)

DY (%) PBV

(x) ROE (%)

CY19F 46.72 6.55 12.1% 2.66 40.7%

CY20F 56.28 5.43 15.0% 2.45 45.1% Source: IMS Research HUBC - Valuation Snapshot

EPS

(PKR) PER

(x) DY (%)

PBV (x)

ROE (%)

FY19F 11.54 7.94 8.8% 3.10 39.1%


BAFL - Valuation Snapshot

EPS

(PKR) PER

(x) DY (%)

PBV (x)

ROE (%)

CY19F 7.46 7.59 5.3% 1.08 14.2%

CY20F 8.89 6.36 6.2% 0.96 15.1% Source: IMS Research

8 | P a g e

Perspective

Insurance penetration: PTI issued 1.5mn "Sehat Insaf" cards (health insurance) in Khyber Pakhtunkhwa. Envisaged rollout of this scheme nationwide could lead to improved insurance penetration. Companies such as Adamjee Insurance Ltd (AICL PA) could benefit.

BAFL: Better leveraged to increase in interest rates because of (i) highest proportion of current deposits, (ii) low reliance on PIBs and (iii) highest ADR.

MCB: Poised to benefit from rising interest rates given its emphasis on asset quality. MCB's strong capital will ensure balance sheet growth without compromise on dividends.

ABL: Thematically very similar to MCB. It trades at a sharp discount to MCB but this is balanced by lower ROE and trading illiquidity.

Fertilizer Election Impact - Neutral

Broader focus towards reducing input costs: PTI’s manifesto aims to introduce new subsidies and optimize existing subsidies. Further plans include easy credit facilities, better farm input pricing, and lower import duties on agriculture machinery.

Can fertilizer pricing come under question? PTI could potentially look into recent fertilizer price increases (this is not our base case). Introduction of new subsidy schemes and high EBITDA margins can possibly restrict the sector’s pricing power, in our view.

Good for long-term farm economics: We anticipate more socially popular reforms to prove beneficial for long-run farm economics within the country. This should eventually reflect in higher spending on fertilizers, seeds and tractors.

EFERT: Largest urea capacity with room to play on volumes and pricing power. We believe recent urea price increases have not yet been fully priced-in, and EFERT can continue to surprise both in terms of earnings and payouts.

ENGRO: ENGRO offers a blend of high growth and healthy D/Y through a mix of sustainable fertilizer business and upcoming high ROE power businesses. The company also has c. 40% of its market capitalization in cash which can fund future earnings growth. We anticipate ENGRO to post a 5yr EPS CAGR of 26%.

Consumers & Pharmaceuticals Election Impact - Neutral

Mixed impact for Consumer names: Likely reversal in personal income tax rates could reduce demand, particularly for consumer discretionary names. However, PTI's manifesto calls for enforcing milk and meat standards in the country. If this extends to implementation of a minimum pasteurization law for instance, it could bode extremely well for the formal dairy sector and for companies such as EFOODS and FFL.

Wider healthcare penetration and increased Health standards: PTI has focused on expanding much needed affordable healthcare footprint in Pakistan. This will be done via insurance schemes, greater preventative/curative treatment programs (rise in government tenders is positive for cheaper local drug manufacturers) and rise in hospitals (secondary/tertiary healthcare facilities).

Question mark on Pharma pricing: While greater access to affordable medicines will benefit companies with cost effective brands (mostly local companies; AGP, SEARL), this could be counterproductive for names with greater cost of doing business (MNCs in particular). A PTI government could potentially take a tougher approach to pricing revisions compared to the Drug Policy 2015.

AGP: Our liking for AGP is premised on (i) strong sales growth (projected 5yr sales CAGR: 20%), (ii) industry-leading margins resulting in high bottom-line translation and (iii) ongoing diversification initiatives under partnership with Mylan including the nutraceuticals segment. AGP is also better leveraged to CPI linked pricing via greater non-scheduled product mix.

ABL - Valuation Snapshot

EPS

(PKR) PER

(x) DY (%)

PBV (x)

ROE (%)

CY19F 14.70 7.21 7.5% 1.01 14.0%


MCB - Valuation Snapshot

EPS

(PKR) PER

(x) DY (%)

PBV (x)

ROE (%)

CY19F 21.87 9.45 8.2% 1.41 14.9%


ENGRO- Valuation Snapshot

EPS

(PKR) PER

(x) DY (%)

PBV (x)

ROE (%)

CY19F 37.09 8.74 8.3% 0.86 9.8%


EFERT - Valuation Snapshot

EPS

(PKR) PER

(x) DY (%)

PBV (x)

ROE (%)

CY19F 11.26 7.10 11.3% 2.32 32.7%


AGP - Valuation Snapshot

EPS

(PKR) PER (x) DY (%)

PBV (x)

ROE (%)

CY19F 6.05 14.27 0.0% 3.38 23.7%


9 | P a g e

Perspective

SEARL: SEARL has been aggressive in bringing new products to market over the last 5-6yrs; this will likely continue alongside diversification into infant nutrition and entry into new segments e.g. Hepatology and Nutraceuticals. US FDA approval in particular could unlock multiple new markets; exports are just 8% of the revenue mix but have the potential to grow significantly.

Construction Election Impact - Neutral to Negative

Expect a PSDP cut: Bringing down the fiscal deficit and need for social reforms may result in a cut in PSDP, possibly announced in a mini-budget. This will be negative for public sector demand of cement and steel. However, we argue that this has already been priced in. Moreover, CPEC projects will likely continue while building of new dams has become inevitable especially in the wake of critical water shortage in the country. At the same time, PTI's manifesto earmarks 3% of Federal Divisible Pool (c. PKR80bn) to FATA development.

Focus on smaller housing schemes: PTI’s manifesto of social reforms and smaller housing schemes could drive more demand under a separately announced scheme for low-income groups. While this should provide relief for cement/steel demand, procurement and pricing of inputs could come under question, which may result in lower pricing power for manufacturers.

Greater focus would be towards exports: Given a secular decline in the Exports to GDP ratio over the last decade, we anticipate greater push towards exports, including in case of cement where surplus upcoming capacities may be diverted abroad (cement exports totaled 4.7mn tons in FY18 vs. peak of 11.0mn tons in FY09). Greater reliance on exports would help in maintaining pricing consensus within the industry irrespective of margin differential between local and export dispatches.

LUCK: Exports potential and dollarized margins on coal project underpin our liking for LUCK. Cost leadership in the sector leads to less downside risk relative to peers.

ASTL: Recent steep correction has opened up attractive valuations. ASTL’s premium brand, first expansion in steel industry and strong pricing power put it in a sweet spot.

Autos Election Impact – Neutral to Negative

Slowdown in demand: PKR weakness and interest rate reversal along with curb on non-filer buyers will likely limit growth in the near to medium term. Upsides include complete ban on used CBU imports and relaxation on non-filer sales.

Margins constraints & new competition: New assemblers are expected to start local operations in 1-1.5 yrs with a preferential duty structure, where margin accretion for incumbents looks unlikely. Sales of high margin variants like Hilux/Fortuner can take further hit due to post election slowdown and possible decline in farmer incomes.

GST hike is possible among fiscal challenges: Post-elections, agricultural incentives may take a backseat and subsidies could be rationalized due to expected austerity measures. Potential adverse actions include hike in GST on tractors and subsidy cut on input costs (fertilizer, electricity tariff etc).

SEARL - Valuation Snapshot

EPS


PBV (x)

ROE (%)

CY19F 19.10 15.77 3.7% 4.41 27.9%


LUCK - Valuation Snapshot

EPS


PBV (x)

ROE (%)

FY19F 47.24 10.77 2.7% 1.37 12.7%


ASTL- Valuation Snapshot

EPS


PBV (x)

ROE (%)

FY19F 15.56 4.18 9.6% 1.24 29.8%


10 | P a g e

Perspective

Risks

Rigging allegations have surfaced quickly with the PML-N in particular being quick to cry foul. This is not entirely unexpected and we believe this issue is unlikely to make much headway. That said, continuation of a polarized polity is certainly a risk that could take away from the feel-good factor of a strong PTI win. We also highlight that official results are still awaited, where the final tally could differ from initial numbers being posted in the media which we have relied upon.

PTI will have to work with other parties – PML-N in Punjab (likely) and PPP in Sindh. Although a reconciliatory stance is advisable, it is unlikely given the stiff anti-corruption stance that PTI has long campaigned on coupled with allegations of rigging by opponents. A zealous stance on anticorruption risks execution delays at best, and possibility of turning into a witch-hunt at worst.

Compared to PML-N, PTI suffers from lack of policy clarity due to being untested at the center. Failure of this clarity to arise quickly under the new government may lead to the post-election rally fizzling out.

The economy is currently operating on very thin buffers with import cover now standing at less than 2 months. Any inordinate delay in building Fx reserves to adequate levels – which is likely to only come through via an IMF program – will put more pressure on the PKR and will likely necessitate a tougher monetary policy stance.

Macroeconomic shocks including the 20%+ PKR depreciation since Dec’17 and the 175bps CYTD increase in interest rates will inevitably clamp down on corporate profitability. A greater than expected fallout on corporate profits is a risk.

.

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Price

(PRs)TP (PRs) Upside Stance 18F 19F 20F 19F 20F 18F 19F 20F 19F 20F 19F 20F

E&P 28% 2% 9.0 7.0 6.9 1.3 1.2 7.6% 8.4%

OGDC 149 179 20 Buy 17.71 21.84 22.27 23% 2% 8.4 6.8 6.7 1.1 1.0 7.4% 8.7%

PPL 206 244 18 Buy 23.36 30.91 30.99 32% 0% 8.8 6.7 6.7 1.5 1.4 7.3% 7.3%

POL 639 588 (8) Sel l 46.13 66.39 71.36 44% 7% 13.9 9.6 9.0 4.6 4.5 9.7% 10.5%

Banks 29% 21% 10.5 8.2 6.7 1.19 1.1 6.9% 7.6%

ABL 106 123 16 Buy 12.63 14.70 17.22 16% 17% 8.4 7.2 6.2 1.0 0.9 7.5% 8.5%

MCB 207 213 3 Neutra l 19.01 21.87 27.07 15% 24% 10.9 9.4 7.6 1.4 1.3 8.2% 8.7%

HBL 170 185 9 Neutra l 14.38 21.80 27.25 52% 25% 11.8 7.8 6.2 1.2 1.0 5.9% 7.1%

UBL 176 185 5 Neutra l 16.19 21.61 25.04 33% 16% 10.9 8.2 7.0 1.2 1.1 6.8% 7.1%

BAFL 57 58 3 Neutra l 6.31 7.46 8.89 18% 19% 9.0 7.6 6.4 1.1 1.0 5.3% 6.2%

Cement -11% 7% 7.9 8.9 8.3 1.0 1.0 5.4% 5.6%

DGKC 104 150 44 Buy 20.34 12.41 12.83 -39% 3% 5.1 8.4 8.1 0.5 0.5 5.3% 5.5%

LUCK 509 606 19 Buy 49.39 47.24 50.20 -4% 6% 10.3 10.8 10.1 1.4 1.2 2.7% 2.6%

MLCF 47 75 61 Buy 7.57 8.39 10.34 11% 23% 6.2 5.6 4.5 0.9 0.9 12.9% 18.2%

CHCC 88 84 (5) Sel l 12.61 9.28 9.79 -26% 6% 7.0 9.5 9.0 1.2 1.1 4.8% 5.7%

FCCL 22 19 (11) Sel l 1.91 2.40 2.13 26% -11% 11.5 9.2 10.3 1.5 1.4 11.4% 6.8%

ACPL 138 172 24 Buy 26.56 19.89 15.56 -25% -22% 5.2 7.0 8.9 1.0 0.9 8.8% 9.2%

KOHC 116 171 47 Buy 19.06 18.00 24.83 -6% 38% 6.1 6.5 4.7 0.9 0.8 6.5% 9.0%

Fertilizer 28% 14% 9.3 7.3 6.4 1.4 1.3 9.6% 10.4%

FFC 100 111 11 Neutra l 11.35 13.70 12.10 21% -12% 8.8 7.3 8.2 3.7 3.6 11.6% 11.6%

EFERT 80 86 8 Neutra l 9.34 11.26 12.21 20% 8% 8.6 7.1 6.5 2.3 2.2 11.3% 12.2%

FFBL 36 44 19 Buy 3.50 5.67 8.17 62% 44% 10.4 6.4 4.5 2.2 2.0 5.5% 6.9%

FATIMA 34 39 13 Neutra l 5.31 6.09 6.41 15% 5% 6.5 5.6 5.4 1.2 1.1 8.7% 9.4%

ENGRO 324 362 12 Neutra l 25.50 37.09 51.07 45% 38% 12.7 8.7 6.3 0.9 0.8 8.3% 9.6%

OMCs 10% 15% 8.0 7.3 6.3 1.3 1.2 7.4% 9.4%

PSO 305 388 27 Buy 50.65 50.38 54.94 -1% 9% 6.0 6.1 5.5 0.8 0.7 6.6% 8.2%

APL 552 776 41 Buy 68.70 75.11 85.86 9% 14% 8.0 7.4 6.4 2.5 2.4 10.7% 12.5%

HASCOL 317 302 (4) Sel l 14.63 21.50 30.69 47% 43% 21.6 14.7 10.3 3.8 3.4 2.7% 4.7%

SHEL 306 436 43 Buy 34.98 46.72 56.28 34% 20% 8.7 6.5 5.4 2.7 2.5 12.1% 15.0%

Engineering 79% 1% 10.8 6.1 6.0 2.2 1.9 7.9% 8.6%

ASTL 65 98 50 Buy 5.09 15.56 7.43 206% -52% 12.8 4.2 8.8 1.2 1.1 9.6% 8.8%

MUGHAL 56 80 43 Buy 5.26 8.35 14.94 59% 79% 10.7 6.7 3.8 2.0 1.7 5.8% 7.6%

ISL 101 137 35 Buy 9.93 13.97 16.15 41% 16% 10.2 7.3 6.3 3.5 2.7 7.9% 8.9%

Power 12% 18% 5.8 5.2 4.4 1.6 1.4 12.0% 14.9%

NPL 29 34 16 Buy 10.54 11.00 11.72 4% 7% 2.8 2.7 2.5 0.5 0.5 10.3% 13.7%

HUBC 92 133 45 Buy 8.92 11.54 14.93 29% 29% 10.3 7.9 6.1 3.1 2.7 8.8% 12.0%

KAPCO 54 58 8 Neutra l 14.26 14.37 15.17 1% 6% 3.8 3.7 3.5 1.2 1.1 20.5% 22.4%

NCPL 26 24 (9) Sel l 8.86 9.88 12.90 11% 31% 3.0 2.7 2.0 0.7 0.5 7.6% 11.4%

Textiles 17% 4% 8.9 7.6 7.3 0.6 0.6 4.7% 4.9%

NML 135 172 28 Buy 12.46 17.08 17.27 37% 1% 10.8 7.9 7.8 0.5 0.5 4.5% 4.5%

NCL 51 62 21 Buy 8.25 8.01 7.51 -3% -6% 6.2 6.4 6.8 1.0 1.0 5.5% 5.1%

KTML 50 61 22 Buy 6.87 6.28 7.69 -8% 22% 7.3 8.0 6.5 1.1 1.0 5.0% 6.0%

Autos 10% 5% 7.0 6.4 6.1 1.8 1.6 8.5% 9.0%

PSMC 347 393 13 Neutra l 47.94 47.06 44.89 -2% -5% 7.2 7.4 7.7 0.8 0.8 2.6% 2.4%

HCAR 295 390 32 Buy 45.48 48.67 47.14 7% -3% 6.5 6.1 6.3 2.0 1.7 6.4% 6.4%

INDU 1,309 1,964 50 Buy 188.22 217.43 238.15 16% 10% 7.0 6.0 5.5 2.5 2.2 11.5% 12.2%

GTYR 153 123 (20) Sel l 11.82 11.86 14.49 0% 22% 13.0 12.9 10.6 2.0 1.8 3.9% 4.6%

Tractors 3% 11% 9.2 8.9 8.0 6.8 6.0 9.8% 10.5%

MTL 1,112 1,340 20 Buy 133.79 134.00 148.70 0% 11% 8.3 8.3 7.5 5.5 5.0 10.8% 11.7%

AGTL 659 594 (10) Sel l 62.31 67.61 74.54 8% 10% 10.6 9.7 8.8 9.8 8.0 8.5% 9.0%

Chemicals 14% 21% 21.3 18.7 15.4 3.6 3.2 2.7% 3.3%

ICI 800 873 9 Neutra l 37.57 42.69 51.78 14% 21% 21.3 18.7 15.4 3.6 3.2 2.7% 3.3%

Pharma 19% 24% 14.3 12.0 9.7 3.2 2.7 3.2% 3.8%

AGP 86 114 32 Buy 5.16 6.05 7.73 17% 28% 16.7 14.3 11.2 3.4 2.9 0.0% 0.0%

SEARL 301 353 17 Buy 16.00 19.10 23.39 19% 22% 18.8 15.8 12.9 4.4 3.8 3.7% 4.3%

Food 39% 79% 66.8 48.2 26.9 5.5 4.6 0.0% 0.0%

EFOODS 87 86 (2) Sel l 1.31 1.81 3.25 39% 79% 66.8 48.2 26.9 5.5 4.6 0.0% 0.0%

IMS-Universe 21% 11% 9.2 7.5 6.9 1.4 1.2 7.4% 8.3%

EPS (PRs) EPS Growth (%) PER (x) PBV (x) DY (%)

IMS Universe

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We, IMS Research Team, certify that the views expressed in the report reflect our personal views about the subject securities. We also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this report. We further certify that we do not have any beneficial holding of the specific securities that we have recommendations on in this report.

*Based on 12 month horizon unless stated otherwise in the report. Upside is the percentage difference between

the Target Price and Market Price.

Valuation Methodology: We use multiple valuation methodologies in arriving at a Target Price including, but not limited to, Discounted Cash Flow (DCF), Dividend Discount Model (DDM) and relative multiples based valuations.

Risks: Please refer to page 10.

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 independently 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

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Subject to any applicable law and regulations, Intermarket Securities Limited, its affiliates or group companies or individuals connected

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to, the entities mentioned herein, their advisors and/or any other connected parties

Ratings Guide* Upside

Buy More than 15%

Neutral Between 0% - 15%

Sell Below 0%

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RESEARCH DISCLOSURES

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inter market perspective · 7/26/2018 · program while focus on social reforms will be a major...

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