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KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While  all  reasonable  care has been  taken  to  ensure  that  the  information  contained  therein  is not untrue or misleading  at  the  time of publication, we make no  representation  as  to  its  accuracy or completeness and  it should not be relied upon as such. From time to time KASB Securities Ltd. and any of  its officers or directors may, to the extent permitted by  law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility whatsoever for any direct or  indirect consequential  loss arising from any use of this report or  its contents. In particular, the report takes no accounts of the investment objectives, financial situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors.  KASB, as a full‐service firm, has or may have business relationships, including investment‐banking relationships, with the companies in this report. 

Morning Shout

Aijaz Siddique Aijaz.siddique@kasbsec.com KASB Securities Limited +92 21 111 222 000

Industry Overview Fertilizers | Pakistan February 26, 2016

Pakistan Fertilizer

REK-76 www.jamapunji.pk

   

ECC decision sub-optimal in the short-run; Buy EFERT & FATIMA

Implementation of latest ECC decision lacks benefit in CY16 We opine the impact of latest decision by Economic Coordination Committee (ECC) of the Cabinet pertaining to redistribution of gas from Mari Shallow field may be sub-optimal for the sector as a whole in the short-run and may result in additional burden of US$120mn on external account. Our view is premised on following three factors: (1) the additional allocation of 13.5mmcfd to Fatima Fertilizer Limited (Fatima) would go un-utilized till the company completes phase-II of the debottlenecking project (DBN), (2) Fauji Fertilizer Company Limited (FFC) would be able to only partially utilize 34mmcfd in the medium-term unless it undertakes further capex on BMR, and (3) Engro Fertilizer (EFERT) is well placed to contribute the most to domestic urea production if gas is not diverted in CY16. Furthermore, in case of no implementation of the same, higher domestic production would lead to import substitution and would be beneficial for the industry, farmers and the government (as we have mentioned below there is a risk of rebound in international prices in CY16/17). We continue to maintain a Buy call on EFERT and Fatima, while maintaining our U/P stance on FFC.

Redistribution not optimal in ST given production constraints Fatima: As per our discussions with the management, additional allocation would have no positive impact on current urea production. Our forecasted earnings are PRs5.22 for CY16 at current prices. Fatima was allocated ~110mmcfd in the past, out of which ~13mmcfd was eventually diverted to EFERT. The gas has now been re-allocated to Fatima. Additional gas is one of the requirements for phase II of the DBN project, which will increase ammonia production by 200mtd. Therefore, the company might push forward the timeline for the DBN following the decision.

FFC: Despite the capex undertaken by the company, FFC lacks the capacity to utilize more than 9-12mmcfd. Additional production can range from 100-120ktons in CY16. Assuming the plant runs at 123% capacity utilization (nameplate capacity 2,048ktons) total production would be 2,520ktons and a proportional increase in off-take would increase our earnings estimate for CY16E to PRs10.27, up 5.8% from PRs9.71.

EFERT: Redistribution would result in insufficient gas to operate old plant. Assuming redistribution from 1’Apr-16 (EFERT continues to receive the gas at the moment) would result in production cut of more than 550ktons. If gas continues to be available we forecast earnings of PRs12.47, an increase of 22% over our base case PRs10.24. In case of redistribution we expect additional gas from Mari with a gap of 1-2months.

Domestic and international urea prices increase slightly As per our channel checks FFC and EFERT have increased urea prices slightly. On 15’Feb-16, FFC sold urea in the range of PRs1,750-1,820/bag which has increased to PRs1,790-1,820/bag. We expect domestic prices to prevail at these levels in CY16. Similarly, international urea prices have also demonstrated an upward trend with the ME urea currently trading at US$205/mt on 19’Feb-16 (up 5% from US$195/mt on 5’Feb-16). Although it is still too early to call a rebound in international prices we do not expect prices will fall significantly from current levels (see our report on 10’Feb-16). At the same time we do not believe prices can climb back above US$230/mt in CY15 keeping in mind the current supply-demand scenario in the international market.

CY16E EPS sensitivity to redistribution PRs1820/bag NR* R* Change

Fatima 5.22 5.22 0%

FFC 9.71 10.27 6%

EFERT 12.47 10.24 -22% NR* = No Redistribution R* = Redistribution Source: KASB Estimates

ME Prilled Urea prices and Futures for Jun-16

150170190210230250270290310330

4218

142

195

4220

942

223

4223

742

251

4226

542

279

4229

342

307

4232

142

335

4234

942

363

4237

742

391

4240

542

419

ME

Ure

a U

S$/

mt

Spot Futures

Source: KASB Research

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Pakistan Fertilizer – February 26, 2016

Index Data & Volume Leaders

Close % Chg

Vol. US$ mn

KSE30 17,956.72 0.0% 32.81 KSE100 30,802.53 0.1% 40.32 KSE All Share 21,413.33 0.0% 49.37 DGKC 154.55 2.1% 3.93 OGDC 104.15 0.7% 2.94 SEARL 409.52 -2.8% 2.88 PAEL 55.95 0.1% 2.46 ENGRO 266.90 -0.1% 2.26

KSE-100 Intra-day Movement FIPI

30,70530,73030,75530,78030,80530,83030,85530,88030,90530,930

9:30 AM 10:53 AM 12:13 PM 1:33 PM 2:54 PM

High 30,937

Low 30,712

KSE-100: Top Gainers & Losers FIPI

-6% -4% -2% 0% 2% 4% 6%

FABL

NESTLE

POML

GATM

BNWM

BATA

GHGL

RMPL

PAKT

ASRL

Source: KASB Research

Morning News

Asset base of banking sector increases 4.6% (Tribune): The asset base of the banking sector registered an increase of 4.6% QoQ in 4Q15, according to the Quarterly Performance Review (QPR) of the Banking Sector for Oct-Dec 2015 released by the State Bank of Pakistan (SBP). An increase of 7.8% in private sector advances, including both seasonal and fixed investment, and a moderate rise in the banks’ investment in sovereign papers were the major contributors to this increase in assets. The deposit for the quarter increased 6.9%, primarily driven by growth in current account and fixed deposits. Moreover, the asset quality of the banking sector improved largely on the back of improved cash recoveries. Non-performing loans (NPLs)-to-loans ratio decreased from 12.5% in Sep-15 to 11.4% in Dec-15. The ratio of net NPLs-to-net loans decreased from 2.5% to 1.9% over the same period.

APTMA demands increase in duty on import of cotton yarn (The News): All Pakistan Textile Mills Association (APTMA) Chairman Mr Tariq denied the Federal Commerce Minister’s earlier statement that APTMA had approached him to remove 10% Regulatory Duty (RD) on the import of fine counts of cotton yarn from India. He rather emphasized that the government should increase the RD on import of fine counts of cotton yarn from India to 20%, as current imposed duty had not restricted cheap imports of Indian yarn.

Exporters to get refunds from next month (The News): On Thursday, Commerce Minister Mr Khurram Dastgir Khan informed the National Assembly that the government would release PRs5mn refunds to exporters from Mar-16. He further added that according to the textile policy the Textile Ministry will pay PRs2.5bn to exporters.

Reserves at US$20.33bn (Dawn): As reported by the State Bank of Pakistan (SBP) the country’s total liquid foreign exchange reserves stood at US$20.3bn during the week ending Feb’19 compared to US$20.38bn in the previous week. SBP reserves decreased US$36mn to US$15.47bn from US$15.51bn. The decrease in reserves was due to the payments of US$35mn on account of external debt servicing.

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Pakistan Fertilizer – February 26, 2016

International Equity Markets

Asian Markets (Last trading session’s)       European Markets (Last Trading Session’s Rates) Price Abs. Chg. % Chg. Price Abs. Chg. % Chg. All Ordinaries 4,944.74 1.5 0.03 ATX 2,120.04 19.8 0.9 Shanghai Composite 2,741.25 -187.7 -6.41 BEL-20 3,338.07 58.3 1.8 Hang Seng 18,888.75 -303.7 -1.58 CAC 40 4,248.45 93.1 2.2 BSE 30 22,976.00 -112.9 -0.49 DAX 9,331.48 163.7 1.8 Jakarta Composite 4,658.32 0.6 0.01 AEX General 415.38 7.9 1.9 KLSE Composite 1,658.16 -6.0 -0.36 Swiss Market 7,794.05 104.5 1.4 Nikkei 225 16,140.34 224.5 1.41 FTSE 100 6,012.81 145.6 2.5 NZSE 50 6,225.28 -5.1 -0.08 American Markets Straits Times 2,603.40 -16.6 -0.63 Dow Jones Ind. Average 16,697.29 212.3 1.3 Seoul Composite 1,918.57 6.0 0.32 NASDAQ Composite 4,582.21 39.6 0.9 Taiwan Weighted 8,365.86 83.0 1.00 NASDAQ -100 4,241.06 40.4 1.0 KSE-100 Index 30,802.53 15.9 0.05 S&P 500 Index, RTH 1,951.70 21.9 1.1

Source: Bloomberg                                                                                 

Foreign Portfolio Investment in Equities Country Day (US$mn) WTD (US$mn) MTD (US$mn) YTD (US$mn) 12M (US$mn) Date

Pakistan -4.4 -5.1 -37.8 -87.6 -347.5 25-2 India -75.2 1.2 -680.9 -2,383.0 -2,574.7 24-2 Indonesia -1.8 -33.7 271.5 106.4 -2,305.8 25-2 Japan - -3,915.5 -14,108.8 -27,011.5 -14,953.6 19-2 Philippines -8.8 -9.5 -57.4 -100.1 -2,185.9 24-2 South Korea -27.4 -61.3 -427.0 -2,754.4 -6,467.1 26-2 Sri Lanka -1.3 -2.0 7.5 -11.5 -53.2 25-2 Taiwan 201.6 295.2 1,257.3 -446.1 -2,404.8 25-2 Thailand 3.2 68.0 55.2 -163.6 -4,218.4 25-2 Vietnam 0.7 5.9 -10.0 -68.4 -21.4 25-2 Abu Dhabi 10.4 44.2 139.3 173.9 1,671.7 25-2 Source: Bloomberg, NCCPL 

Forex and Money Market snapshot Commodity Prices

Price Abs. Chg. % Chg. WTI (Crude Oil) 32.17 1.77 5.8

Gold 1,233.03 4.28 0.3

CRB Index 162.64 1.14 0.7 Source: Bloomberg

 Fundamental equity opinion key

Investment rating Total return expectation (within 12-month period of date of initial rating)

Buy ≥ 20% Neutral ≥ 0% Underperform N/A Source: KASB

Current  Previous  Chg. 6-Month KIBOR (Offer) 6.36 6.36 0.00 12-M T-Bill (Average) 6.19 6.19 0.00 10- year PIB (Average) 8.33 8.38 -0.05 PkR/ US$ 104.68 104.79 -0.11 Source: KASB Money Market

World Markets and Commodity Prices