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Pakistan

Market Strategy

Pakistan’s investment landscape continues to shift, with a move towards top down investing as improving economic variables provide a cushion against continued tapering within emerging / frontier markets in the midst of tighter global liquidity. CY16 will be a story of two distinct halves where a potential correction/consolidation in 1H will likely be followed by a period of sustained recovery in 2H. Our blended index target of 38,500 offers a decent upside of 17% coupled with a D/Y of ~7%. While expected return in CY16 compares unfavorably with average 25% return since CY10, we believe Pakistan equities are at the cusp of take‐off where investments with a longer horizon (2‐3 years) will likely realize superior returns. With an undemanding market P/E at 8.1x (regional avg: 14.9x), we believe materialization of key catalysts including the uptick in FDI courtesy the China Pak Economic Corridor (CPEC) and Russia as well as a potential re‐classification to Emerging Market space will likely provide the impetus to pent‐up valuations. In line with Pakistan’s macro investing theme, we remain bullish on infrastructure allied sectors with particular emphasis on Cements and Steel. Preferred plays include FCCL, DGKC and KOHC (Cements) while we also like PSO (OMCs), OGDC (E&P), UBL and HBL (Banks) while we are selectively underweight Textiles (Top Sell: GATM). Money managers will also need to focus on Tier II & III scrips where we like SRVI, FEROZ, ASC and ASTL.

Pakistan – a strong top‐down: Amid an increasingly incoherent operating environment, with declining commodity prices and low local interest rates in tandem with increasing rates in the US, Pakistan’s economic variables have continued to improve. This has resulted in a fundamentally strong top‐down story, a stark contrast to the bottoms‐up investment theme in the years gone by. Current Central Bank’s fx reserves stand at USD16.2bn with total reserves at USD21.1bn; FY16 CAD is projected at 0.5%‐0.6% of GDP with fiscal deficit at an improved 4.8%‐4.9% of GDP while CPI is expected at 3.2%‐3.3% in FY16 and 4.5% in CY16.

CPEC – Leading the FDI spurt: Pakistan’s long term investment case is premised on the USD46bn CPEC where early harvest projects worth USD28bn should provide the next material growth in FDI. Of prominence will be the global power struggle for influence where the US and Russia have also shown inclinations to invest in Pakistan. Positive sentiment surrounding the CPEC projects should result in a market re‐rating particularly in the infrastructure allied sectors where we highlight Cements and Steel manufacturers as key initial phase beneficiaries.

A return to Emerging Market status: CY16 may potentially witness Pakistan re‐entering the MSCI EM space with six companies currently fulfilling the entire quantitative criteria. In terms of foreign fund flows, it remains to be seen how the re‐classification pans out, however, we believe Pakistan is particularly well placed compared to other EMs given its position as a net commodity importer and external debt being just 22.6% of GDP. From a historical context, Pakistan equities’ P/E multiple peaked at 13.8x when the country was last classified as EM.

Conviction Calls: Preferred plays include the Construction & Materials (FCCL, DGKC, KOHC) and Steel (ASTL) industries. We also remain overweight on PSO within OMCs, OGDC (E&Ps), UBL and HBL (Banks) while being selectively underweight in Textiles (Sell: GATM).

Pakistan Equity MarketStrategy 2016

Emerging Pakistan!

BMA Universe Valuation Summary

4 Jan 2016

Priced on: 31‐Dec‐15

KSE100 Dec’16 target: 38,500

KSE100 Index: 32,816

Upside: 17%

KSE Market Capitalization

PKR6.9tn (USD66.3bn)

KSE100 Market Capitalization

PKR5.8tn (USD55.4bn)

12M KSE100 ADT Value

PKR9.3bn (USD90.9mn)

CY15 CY16F CY17F

EPS Chg (%) 2.2 2.9 8.6

P/E (x) 9.2 8.1 7.5

P/B (x) 1.6 1.5 1.4

D/Y (%) 6.9 7.3 8.0

E/Y (%) 12 12 13

ROE (%) 19 19 18

ROA (%) 3 3 3

*All metrics based on current prices

KSE100 Index & Volume Chart

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BMA Research [email protected] +92 111 262 111 www.bmacapital.com

1

Pakistan Market Strategy

5 Jan 2015


Timeline: Events Chart CY15 ………………….………………………..……………………………….……….. 1

Key Charts …………………………………………………………………………………………………………………. 2

Pakistan Market: Targeting 38,500 by Dec’16! …………................................................... 3

BMA Conviction Calls……………………………………..…………………………......…………………………. 11

Technical Perspective …………………………………………………………………......……………………….. 12

Pakistan Economy ……………………………………………………………………………………………………... 13

Sectors……………………………….…………………………………………………………………….…….………….. 21

Infrastructure (Cement and Steel)……………………….………………………………..……………………. 22

Oil Marketing Companies…………………………….…………………….………………………….……......... 25

Banks……………………………………………………………………………………………………........................ 28

Oil and Gas: Exploration & Production…………….……………………….…………………………………. 31

Fertilizer………………………………………………......…………………………………………………................ 33

Power………………..………………………………………………………………….……...……………................. 35

Automobile..………..……….…………………………………………………………….……………...……………... 36

Textile……………..……….…………………………………………………………………….………...…..…………... 38

Conviction Calls………………………………………………………………………………………………….………. 41

PSO: Smooth sailing ahead …………………………………………....………………………………………….. 42

FCCL: Earnings growth to prop up dividend yield.……………………………………………………….. 44

DGKC: Undemanding multiples – an ideal entry point…………………………...…..…………….... 46

UBL: An established front! ………………....……………..……………………………………….………….….. 48

HBL: The new standard bearer....……….…..………………….………………………….…………………… 50

OGDC: U‐turn ahead! ……………………………………..……………..…………………………………………… 52

GATM: Underperformance to persist…………………………………..……………………………………… 54

Other notable mentions….….……………………………………..………………………………..………….... 56

Table of Contents


Events Chart CY15

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Jan‐15

Jan‐15

Feb‐15

Mar‐15

Apr‐15

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Jul‐1

5

Aug

‐15

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Dec‐15

1

DR cut by 100bps

PC approves HBL privatization

SECP fines a stock broker

Concerns on disclosure requirements, directed by SECP

SECP seeks to dispel rumors

HBL divestment –Moody's assign positive credit rating to Pak

Chinese President visit to Pakistan

Ruling party MNA disqualified

DR cut 100bps

MSCI Review ‐ Pak evaluated for EM

Global sell‐off amid regional currency depreciation

Tribunal annuls Sadiq’s election to NA

FED keeps interest rate unchanged 10‐year $500m bond

issued at 8.25pc rate

Reserves hit USD20bn mark

US interest rate hike delayed

Dissent on Broker Regulations

Fed meeting minutes signaling rate hike

US Fed rate hike

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4 Jan 2016


Key Charts

Figure 1: Forward Regional P/E (x) Figure 2: Forward Regional Dividend Yield (%)

Source: Bloomberg, BMA Research

Figure 3: Average PIB and E/Y differential Figure 4: P/E vs. Reserves

Source: SBP, BMA Research

Figure 5: CPI vs DR Figure 6: BOP Composition (USDmn)


8.1

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0 5 10 15 20

Pakistan

MSCI FM 100

Vietnam

China

India

Malaysia

Indoneshia

Phillipines

1.8

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2.5

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7.3

8.8

0.0 5.0 10.0

India

China

Sri Lanka

Vietmam

Malaysia

Pakistan

MSCI FM100

0%2%4%6%8%10%12%14%16%18%

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Earnings Yield 10yr PIB yield

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12.014.016.0

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CY10 CY11 CY12 CY13 CY14 CY15

SBP Forex Reserves (USDbn) KSE100 PE (RHS)

0%2%4%

6%8%10%12%

14%16%18%

Dec‐10 Dec‐11 Dec‐12 Dec‐13 Dec‐14 Dec‐15

DR CPI

(6,000)

(4,000)

(2,000)

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FY10 FY11 FY12 FY13 FY14 FY15

Current Account Capital Account Financial Account

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4 Jan 2016


Pakistan Market

PakistanMarket S

4 Jan 2016

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6

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arket Outloo

15 was characlified over thluded a –ve9ieve much ofl likely depicCY16 will likeget of 38,500nual return oer an impressrket before ggers in 1H, wreign Direct Inrridor (CPEC),ctor (particulatential classiock/reverse me in CY16 as

7: Key Marke

kistan’s chankistan’s historeraged in thempletely revendamentally stntral Bank’s count Deficit (GDP, containtential spurt iD503bn in 5Mring the period

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cterized by twhe latter par9.4% performf the same to ct a u‐shapedely be oversh0 offers a decf 25% since Csive D/Y of 7an eventual

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et Catalysts

nging macro rical investme double digitrsed as, despitrong top‐dowfx reserves a(CAD) at 0.5%ed PKR devain FDI particuMFY16 (USD64d FY06‐FY09.

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wo contrastinrt of the yeamance in 5Mcarryover in Cd movementhadowed by acent return ofCY10. At the s.3%. CY16 wiliftoff as ecotalysts to marFDI) particularin a market r& Steel) whthe MSCI Es. Nevertheleagers increasi

landscape:ent mantra as ts, leading to ite earnings gwn story. Ecoat USD16.2bn%‐0.6% of GDPluation, CPI aularly in the c42mn in FY15)

Dec’16!

g fortunes wiar. CumulativMCY15 (i.e. siCY16. In this rt where neuta potential stf 17%, albeit same time, Pll largely be aonomic deverket performarly in the conre‐rating ii) a hich may carrmerging Maess, cherry pingly focus on

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growth of just onomic variabn (total reseP with Fiscal Dat 3.2%‐3.3% context of the compares un

ith gains of abve full year 2nce peak in regard, BMA tral to negattrong recovesignificantly

Pakistan equita period of colopments kicance in 2H wilntext of the Cpotential spury forward tharkets (EM) picking will bn tier‐II & III sc

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bout 13% till 2.1% market Aug’15) whebelieves the ive performary in 2H. Ourlower than aties will contionsolidation ck in. While ll include i) upChina‐Pak Ecourt in the ‘Indhe market anIndex, whice the name crips for alph

Source: BMA

undoubtedlyradable listede. The situati6, Pakistan apto improve w1bn), FY16 Cimproved 4.8%5% for CY16)e current FDI th average US

4

Aug’15 return ere we market ance in r index average inue to for the lacking ptick in onomic ustrial’ nd iii) a h may of the as.

Research

y been d sector ion has pears a with the Current %‐4.9% ) and a at just D4.4bn

5


4 Jan 2016


Figure 8: SBP Reserves vs. Import Cover Figure 9: CAD and Fiscal Deficit over the years (%)


At the same time, a decisive operation against militants ala Operation Zarb‐e‐Azb has won Pakistan plaudits in the international stage while rooting out of extremists within different provinces appears to be picking pace. A pressing concern, however, is the current political skirmish where increasing uneasiness between Provincial Governments and the Center may result in spooking of investors.

Valuations remain impressive – Yet the market did not perform! In valuation terms, Pakistan equities continue to remain impressive where current P/E at 8.1x compares favorably with regional average of 14.9x while D/Y at 7.3% far exceeds the regional average at a paltry 2.6%. Monetary easing in CY15, with cumulative easing at 350bps, has particularly impacted valuations where every 0.5% decrease in the policy rate opens valuations by 5% on average.

Figure 10: Forward Regional P/E (x) Figure 11: Forward Regional Dividend Yield (%)


At the same time, current earnings yield at 12.3% far exceeds the sovereign yield with 10 year PIB returns at 9.1%, a classic case for equities to rally. Despite the obvious positives, the market has underperformed vis a vis its historical return where key determinants to

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2.2

0.1

2.11.1 1.3

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5.55.3

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CAD FD

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Pakistan

MSCI FM 100

Vietnam

China

India

Malaysia

Indoneshia

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India

China

Sri Lanka

Vietmam

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Pakistan

MSCI FM100

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4 Jan 2016


the dismal performance likely include i) foreign selling with USD315mn net outflow in CY15 (ex‐privatization), ii) lack of local investor participation amid increasing regulatory risks, iii) negative developments in the two index heavyweights Banks and Oil & Gas as unfolding regulatory and market risks reared their heads.

Fig 12: Average PIB and E/Y differential


CY16 – A u‐shaped recovery to 38,500: Our CY16 index target at 38,500, based on equal weighted TP mapping and Earnings growth + D/Y, offers a decent upside of 17%. With market catalysts in short supply in the near term, we believe directional movement in early CY16 will likely mirror the latter half of CY15 with a lift off in 2H. In this regard, the recovery drive in 2HCY16 will likely emanate from i) uptick in FDI particularly in the context of the China‐Pak Economic Corridor (CPEC), resulting in realization of pent‐up valuations, ii) a potential spurt in the ‘Industrial’ sector (particularly Cements & Steel) which may carry forward the market and iii) a potential classification to the MSCI Emerging Markets (EM) Index, which may unlock/reverse foreign flows.

Index Target Calculation & Regional Valuation

Volumes remain the key! A key observation in the market decline since Aug’15 has been the volumes, or lack of to be precise. Average Daily Turnover (ADT) and Average Daily Traded Value (ADTV) during the period Aug’15‐Dec’15 stood at 193.8mn shares and USD87.3mn, which contrasts adversely to the year’s average of 246.7mn shares / USD111.5mn. While cumulative foreign participation (gross trades) increased to USD5.7bn in CY15 (CY14: USD4.4bn), however, as mentioned earlier, foreigners remained

Country P/E (x) D/Y (%) ROE (%)

Pakistan 8.1 7.3 18.3

India 15.0 1.8 15.4

China 13.8 2.1 12.9

Malaysia 15.4 3.4 11.1

Vietnam 12.7 3.1 13.1

Sri Lanka 11.9 2.5 14.2

MSCI FM100 8.9 8.8 9.7


Index Target Dec'16

Current Index 32,816

Earnings Growth & D/Y 36,164

TP Mapping 40,823

Blended Index Target 38,500

Upside to Index Target 17%

Source: KSE, BMA Research

0%2%4%6%8%10%12%14%16%18%

Mar‐07

Oct‐07

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Earnings Yield 10yr PIB yield

Earning yields exceed sovereign yields by 260bps ‐ a classic case for equities to rally. Rally has thus far failed to materialize on account of emerging regulatory and sectoral risks.

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4 Jan 2016


net sellers with net FIPI outflow of USD315mn. At the same time, locals have been hesitant in deploying available liquidity given convergence of negatives including i) sustained foreign selling pressure resulting in locals to adopt a wait strategy and ii) increased political and regulatory uncertainty. Of particular interest were the regulatory developments including issues related to the Pakistan Stock Exchange (PSX) as well as heightened regulatory oversight on financial institutions. While knee‐jerk negative, we believe the regulatory developments are long term positive and should result in better trading practices.

Figure 13: ADT vis a vis ADTV Figure 14: FIPI vis a vis the Market

Source: KSE, NCCPL, BMA Research

But the market remains a long term ‘Buy’: As mentioned earlier, we believe the KSE‐100 will likely offer modest gains in CY16, however, real gains within the market will likely be made keeping in view a 2‐3 year investment horizon. Our view stems from the changing macro economic landscape within the country, particularly the expected influx of FDI as well as improved political governance amid increasing public accountability. With government’s as well as foreign investments being targeted towards infrastructure developments, we believe near term gains will likely be on offer within infrastructure allied sectors, particularly ‘Cements’ and ‘Steel’. At the same time, we may potentially see the rise of new blue chips as tier‐II and tier‐III scrips gain traction.

CPEC – The game changer! Our long term investment case is premised on Pakistan reaping fruits of the USD46bn investment within the China Pak Economic Corridor. While a long term play, early harvest projects identified within the CPEC amount to USD28bn, a substantial amount that should uplift Pakistan’s GDP growth past 5%. As per news reports, 5 projects have currently reached financial closure while a sixth project, the all important Karachi‐Lahore Motorway, has achieved partial financial closure.

CPEC 5 projects which achieved financial closure

5241 50

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ADT (mn sh.) ADTV (USDmn) ‐ RHS

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KSE‐100 Index FIPI USDmn (RHS)

Project Cost (USD bn)

Lahore Orange line (metro train) 1.60

Gwadar international airport 0.23

1,320 MW coal power plants Port Qasim 1.90

1,000 MW Quaid e Azam solar park Bahawalpur 1.30

660 MW coal power plants Thar block II Engro 1.90

3.8mn tons coal mining project Thar Source: News Reports

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4 Jan 2016


Geopolitics will also likely come into the picture as a result of the CPEC with various global powerhouses vying for influence within the region, including Pakistan. Developments within the CPEC (and other political reasons) have already resulted in increased Russian focus on investments in Pakistan with a ~USD2.0bn energy deal for laying a liquefied natural gas (LNG) pipeline from Karachi to Lahore while news reports indicate the US has also shown interest in participating in the CPEC.

Key Focus – Infrastructure Plays: The CPEC will be more than just roads and will encompass power projects, dams, expressways, metros, coal mining and the like. While the USD46bn is certainly highly positive for Pakistan, we believe it is likely the beginning, rather than an end, towards Pakistan’s development. As already mentioned, key sectors to benefit from the CPEC will be Construction allied sectors including (but not limited to) Cements and Steel.

With local dispatch (FY16 expected growth: 15%) and sector profitability (BMA Cement Space FY16 growth: 18%) depicting double digit growths, we believe the sector is primed for a lift‐off with multiples likely to re‐rate. A strong movement within the Cement sector also presents a counter argument to our u‐shaped index movement thesis, where any bull run within the sector will likely unlock latent positive view within the market and move the market northwards.

A return to Emerging Market Status – Should we be excited? CY16 will mark the year where Pakistan may potentially re‐enter the MSCI Emerging Market (EM) space, the first time since Dec’08. As per our calculations, currently 6 companies fulfill the entire quantitative criteria (size and liquidity requirements) as opposed to the minimum requirement of 3 while Pakistan also meets most of the Market Accessibility criteria.

While EMs certainly account for bigger assets under management (AUMs), emerging markets have recently faced an exodus of funds amid slowing economies, commodities’ meltdown and flight of capital towards the greenback. CY15 already marked the first year of outflows from emerging markets since CY98, with total net outflows estimated at USD541bn. Will Pakistan re‐entering the EM space put brakes on the foreign outflows witnessed is anybody’s guess. We do, however, believe there is an increasing probability of a reversal in foreign outflows currently being witnessed. Our view stems from major EMs undergoing negative economic transitions particularly given their revenue dependence on commodities as well as having large swathes of USD denominated debt, both at the country and corporate level. The case for Pakistan is just the opposite with Pakistan being a net commodity importer and external debt standing at just 22.6% of GDP (negligible corporate level USD debt). At the same time, Pakistan is at the opposite end of the economic spectrum with economic variables lifting off rather than peaking.

Will the Qatar and UAE story unfold in Pakistan? Unlikely in our view given that classification of those markets into Emerging Markets took place during a period of foreign flows into EMs while Pakistan’s potential re‐classification is taking place at a period of sustained outflows from EMs. While Pakistan’s macro story is certainly more impressive than other emerging economies given its status as a net commodity importer, potential FDI inflow (CPEC; Russia) and low external debt, we believe flight of capital towards the US will certainly keep overall EMs under pressure, which may include Pakistan.

From a valuation perspective, the last time Pakistan was classified as an EM, market P/E peaked at 13.8x (CY06) while economic variables were certainly worse off than they are

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4 Jan 2016


now. The table below lists the comparison in key economic metrics in Apr’06 when market P/E peaked and now:

Comparison ‐ Key Metrics

Dec'15 Apr'06

SBP Reserves (USDbn) 16.2 10.6

CPI (%) 3.2 8.9

Policy Rate (%) 6.0 9.0

Market P/E (x) 8.1 13.8

Source: SBP, KSE, Bloomberg

The US Fed decision puts a spanner: The US Fed increased rates by 0.25% in Dec’15, taking the target rate for the federal funds to between 0.25% to 0.5%. At the same time, median projections indicate the fed funds rate to increase to 1.375% by CY16 end and 2.375% by CY17 end. Given estimated concurrent rate rises, we believe flight of capital will likely be directed towards the US, where the greenback and the US bond market may perform particularly well.

Ramifications across global financial markets will be huge with EMs particularly vulnerable. As stated earlier, continued decline in commodity prices in confluence with risks on emerging economies’ currencies could result in continued outflows. Stymieing of this outflow is anybody’s guess. From Pakistan’s context, a potential re‐classification into the MSCI EM in tandem with the US Fed policy decisions could tilt foreign flows either way with a bigger pie size argument being countered with a shift in global investor sentiment.

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Market Strategy: Preferred plays include infrastructure allied sectors with particular emphasis on Cements (FCCL, DGKC, KOHC) and Steel (ASTL). PSO makes the cut as our top pick within the OMC sector given easing liquidity lack of risks from pile up of circular debt while OGDC stands as the top pick within E&Ps despite low oil prices given an undemanding valuation set. Tier I banks will continue to show strength where our top picks include UBL and HBL. We remain underweight on Textiles and recommend a Sell on GATM given expensive valuations. Tier II & III scrips will also garner much limelight as new blue chips arise where we like SRVI, FEROZ, ASC and ASTL.

Cements: We expect the cement sector to be the prime performing sector of the market in CY16 amid expectation of increased demand growth due to i) expected initiation of dams construction and ii) CPEC projects. Also, margin growth to 45% (historic high) courtesy i) declining FO cost and ii) low coal prices will further strengthen profitability. We prefer KOHC and FCCL due to their ideal positioning and relatively low utilization offering returns of 50% and 52%, respectively. We also highlight DGKC due to its improving margins (coal power project) and strong valuations.

Oil Marketing Sector: We expect CY16 to fare better for OMCs on account of stable oil prices wherein absence of inventory losses, unlike CY15, will likely allow growing petroleum sales to trickle down into earnings growth. Moreover, phase‐wise elimination of circular debt pile‐up along with the potential settlement of old stock will remain the prime trigger. The addition of LNG will likely cannibalize FO sales while partially hurting HSD sales to industrial sector. Within the sector, we have a strong conviction on PSO (TP: PKR485/sh), being a prime candidate for re‐rating in CY16.

Banks: CY16 will mark an imminent shift in banks’ asset mix from investments to advances as project financing for the CPEC projects begin. With a muted profitability growth in CY16, we advocate that the investors maintain their exposures only in tier‐I banks given i) higher proportion of auxiliary income in total revenue base, ii) better operational efficiencies, iii) lower reinvestment risk and iv) higher unrealized gains on investments. We have a strong liking of UBL and HBL offering total returns of 36% and 28% respectively.

Oil and Gas Exploration & Production: At an implied oil price of USD18‐22/bbl and P/E of 7.6x (9% discount over KSE100’s P/E), current trading level of Pakistan E&Ps provides an attractive entry point. We maintain our long term conviction on the sector backed by i) strong oil production FY16‐FY18 CAGR of 9%, ii) 60%‐65% higher wellhead gas price offered on new concession and iii) an active drilling program. We maintain our conviction on OGDC (PKR/183sh), while POL (TP: PKR383/sh) follows with an attractive D/Y of 11%.

Fertilizer: With profitability of the sector already suffering from the recent gas price increase, the sentiment in fertilizer sector may remain weak owing to another potential gas tariff hike, expected in CY16. With questions on the ability of the sector to pass on any further cost increases, the sector profitability faces a significant risk. In the midst of uncertainty, we prefer EFERT (TP: PKR98/sh) due to its relative hedge against increase in gas tariffs and a prospective extension in gas availability.

Automobile: With the backdrop of increasing appetite for auto credit, general uptrend in volumetric sales and FX movement as well as the commodity markets slump consolidating industry margins, the automobile sector is expected to continue its positive streak in CY16. We have favorable stance on INDU, HCAR and PSMC with our target prices of PKR1,316/sh, PKR311/sh and PKR577/sh, translating into upsides of 30%, 30% and 17%, respectively.

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4 Jan 2016


Textiles: With i) declining value added export sales amid Euro‐zone economic crisis, ii) 10% duty imposition on Indian yarn and grey fabric and iii) potential gas tariff hike in 2HCY16, the value added sector remains unattractive for investors. We maintain a ‘Sell’ call on Gul Ahmed Textile Mills (GATM) with a TP of PKR25/sh, offering a negative return of 31%.

BMA Conviction Calls

Conviction Calls

Companies Price TP Position Upside DY

Total Return

P/E P/B ROE 31‐Dec‐15 Dec‐16

PSO 326 485 Long 49% 3% 52% 6.3 0.9 15%

FCCL 37 52 Long 42% 10% 52% 8.7 2.8 32%

DGKC 148 218 Long 47% 4% 51% 8.0 1.0 12%

UBL 155 199 Long 28% 8% 36% 6.9 1.3 20%

HBL 200 241 Long 20% 8% 28% 8.2 1.5 19%

OGDC 117 183 Long 56% 6% 62% 6.9 1.0 15%

GATM 25 36 Short ‐31% 0% 0 NM 1.2 ‐7%

Portfolio Return 47%

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4 Jan 2016


Technical Perspective for 2016

With very high volatility and some mixed sentiments, the benchmark KSE‐100 Index finished CY15 flattish (up 2%YoY). Major negative contribution during the year came from Oil, Telecom and Banking sector while Chemicals, Automobile, Cements and Pharmaceuticals sector were the major outperformers.

The near term trend of the market is negative and the Index is in the downward channel. In long term, we remain optimistic and keep our positive stance on the market, expecting 15%‐20% upside at the end of CY16.

We also expect higher volatility in the current year with some sharp rallies and equally sharp corrections.

Our technical forecast range for 1QCY16 is a low of 30,600 points level, and if the 30k physiological support level holds then the Index will start its upward movement and will likely to move towards its 50% Projection Fibonacci level at 35,605 points level and then to 36,546‐39,500 (61.8% and 100% Projection Fibonacci level) points level at the end of the year. The rise will test investor confidence at multiple supply levels.

Period Direction Strategy

1QCY16 Neutral Gradual Accumulation

2QCY16 Consolidation Accumulation

3QCY16 Positive Participation

4QCY16 Positive Profit taking

Outlook

Near term Negative

Medium Term Recovery

Long Term Positive

Medium Target 35,605

Long Target 39,500

Inner Risk 30,500

Support 27,475

Source: BMA Research


KSE‐100 Index Weekly Chart

For achieving the aforesaid targets, higher market participation in terms of volumes in the near to medium term are required for a bullish rally.

Conversely, any breach below 30,000 support level on the downside will initiate a downward leg with the initial target at 28,645 points level and then 27,475 (in worst case scenario), though the probability of such an event seems extremely low.

We technically recommend to avail trading opportunities in higher volume stocks at appropriate entry/exit levels.

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4 Jan 2016


Economy

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4 Jan 2016


Rebound in inflation limited to average 4.5% in CY16

Throwback to CY15 – high base dragged CPI: The outgoing year witnessed a significant decline in inflationary pressure with average CPI clocking in at 2.5% compared to 7.2% in CY14. The trend further weakened with the start of FY16 where 1HFY16 average CPI stood at 2.1%. The marked reduction in average CPI figure can primarily be attributed to a high base impact. In addition, global slump in commodity prices, with a major decline in oil prices (down 48% on average) in CY15, further intensified the downtrend in inflationary pressure. In this regard, the transport basket (weight: 7.2%) reported an average 10% decline. This coupled with muted trend (up 0.6%) in food basket (weight: 34.83%) further kept CPI on the lower side. During the period, NFNE averaged at 4.7%, prominently lower than 7.9% in CY14 while trimmed core inflation also remain depressed at average 3.4% compared to 7.3% in CY14.

Figure 15: Muted inflationary pressure on high base Figure 16: Soft trend in Food and Transport basket

Source: PBS, SBP, BMA Research

CY16 ‐ Depressed commodities to keep upside limited: The end of high base effect will likely pull CPI to ~4.5% mark in CY16 where we expect monthly CPI numbers to remain in the range of 4%‐5% over the next 12 months. The state of global commodity markets, particularly crude oil, will remain most critical to the direction of CPI in CY16. In this regard, we foresee minimal chances of a steep uptrend in the commodity prices owing to abundant supplies and weakening macros. Moreover, unlike past year, we foresee limited hike in gas price (direct weight: 1.6%) in CY16 amid 11% reduction in oil prices during preceding six month benchmark period (Jun’15‐Nov’15). This coupled with absence of any major surcharge on electricity (direct weight: 4.4%) will likely keep inflationary pressure subdued. Consequently, we foresee CPI in FY16 clocking in at 3.2%‐3.3% while the rebound in FY17 will remain in the vicinity of 4.7%‐5.0%.

Interest rates bottomed out

Steep easing in CY15 not diverted towards economic growth: CY15 witnessed a significant reduction of 300bps in discount rate to a historic low of 6.5% in an aggressive approach adopted by the central bank to kick start the pick‐up in private sector credit. The introduction of target rate in May’15 took the effective easing in interest rates to 350bps. Widening real interest rates (RIR) to an average 4.3% in CY15 compared to 2.7% last year amid softening CPI remained the prime reason behind sharp decline in interest

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4 Jan 2016


rates. Nevertheless, the easing phase has yet failed to achieve its true motive as private sector credit offtake witnessed a nominal uptick of 4% during the period.

Figure 17: Easing interest rates on expanding RIR Figure 18: CPI YoY comparison


Sudden increase in policy rate – not on the cards: Expected rebound in inflation from Jan’16 has raised concerns among investors pertaining to resumption of monetary tightening. However, the gradual pick‐up in inflation to ~4.5% in CY16 will simply be a function of end of high base impact in Nov’15 rather than any material jump in the prices. At the same time, with improving current account deficit (already down 59% in 5MFY16), estimated at 0.5%‐0.6% of GDP in FY16 compared to 1.0% last year, SBP can afford to maintain real rates close to 1.5%‐2.0% for next year. In contrast to last year, we believe i) improvement in energy supplies and ii) start of major projects under CPEC will likely generate the demand of credit by private sector.

Interest rates in 2HCY16 – a tricky one: Given an expected mixed trend in the key macro determinants of interest rates i.e. inflation and external account, we believe MPS decisions in 2HCY16 will likely carry an element of uncertainty. From the vantage of external account, the BoP position of Pakistan may witness some pressure on account of end of external disbursements (IMF and CSF) while depressed exports may offset the gains from decline in oil import bill. The resultant weakness in PKR/USD may lead the SBP to expand real interest rates and thus, result in a 50bps hike in 2HCY16, as per market expectations.

On the flip side, the recent downward slide in oil prices and weak global commodities will likely limit uptrend in 2HCY16 CPI to 4.5%‐4.7%, assuming no recovery in oil prices during 2HCY16. Thus, the tendency of real interest rates to remain steady at around 1.3%‐1.5% may provide adequate space to SBP to maintain policy rate at current level, compared to market anticipation of a 50bps hike in 2HCY16.

Influx of FDI may influence MPS: Furthermore, a turnaround in FDI flows courtesy CPEC projects and consequent support to BoP position may contain the devaluation, if any, in PKR/USD. This may allow SBP to maintain policy rate at 6.0%, despite recovery in oil prices, for full year. In a nut shell, the trend in FDI during CY16 will remain critical to the macro‐economic performance of Pakistan in CY16.

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4 Jan 2016


Figure 19: CPI vs Oil vs DR Figure 20: CAD vs Oil vs DR


External Account – Volatility ahead

Impressive gains made on weak Oil + Loan proceeds: The external account position witnessed a significant improvement in FY15 on account of i) hefty loan proceeds (Sukuk and IMF) and ii) 18%YoY decline in oil import bill. Current account deficit (CAD) eased by 16%YoY in FY15 to USD2.6bn primarily due to strong trend in remittances (up 18%YoY) while contained trade deficit further added to the improvement in CAD. During FY15, continued multilateral flows from lending agencies at USD3.1bn coupled with Sukuk issue of USD1.0bn kept Financial Account (FA) in surplus of USD5.0bn. Steady trend in aforesaid accounts coupled with disbursement of ~USD2.0bn from IMF led to a significant 49%YoY improvement in forex reserves (held with SBP) to USD13.5bn in FY15

Figure 21: YoY change in CAD (USD mn) Figure 22: Downtrend in oil import bill (USD mn)


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4 Jan 2016


Lower oil and Multilateral flows to keep external account strong in FY16: The improving trend in external account will continue in FY16 where we foresee CAD to clock in at 0.5%‐0.6% of GDP compared to 1.0%‐1.3% over the last three years. At the same time, FA will likely remain in surplus owing to continued inflows from multilateral agencies. In this regard, recent approval of USD900mn from World Bank and ADB coupled with disbursement of remaining USD1.0bn from IMF will remain the key to sustainability of forex reserves. Given upcoming Euro bond payment in Mar’16, the government may consider another Sukuk issue of potentially USD500m in 1HFY16, in addition to recent issue of USD500mn Eurobond in Sep’15, to keep the SBP forex reserves above USD16bn by Jun’16 end.

Figure 23: Import cover vs forex reserves Figure 24: BoP breakup (USDbn)


Emanating risks beyond FY16 – warrants attention: Conclusion of IMF’s Extended Fund Facility worth USD6.6bn and possible end of CSF payments, both by Jun’16 end, have raised serious concerns on the sustainability of BoP surplus in 2HCY16. Taking cue from the past two years, the inflows from IMF and CSF cumulatively contributed USD3.0bn p.a. to the external account. Though there are no significant repayments in the pipeline for 2HCY16, however absence of such considerable external inflows will likely put a dent on Financial Account amid consistent outflows from equity market and dismal FDI. That said, a grace period allowed by IMF till FY18 end will allow the government to shore‐up its FDI account, likely to gain a boost from CPEC projects, and thus, covering the shortfall arising from absence of loan/aid inflows in years ahead.

Spurt in FDI – point of inflection?

Lackluster trend in FDI: An unfriendly business environment on account of adverse law and order, deteriorating energy supplies and volatile currency remained the prime reason behind dismal trend in FDI over the last five years. In this regard average annual FDI flow during FY11‐FY15 stood at USD1.3bn, 70% lower than average FDI annual in FY06‐FY10. During the said years of weak FDI inflow, rising inflation and increase in indirect taxes further dampened investor confidence in the country. Consequently, GoP resorted to loan financing from various multilateral agencies to fill the deficit in external account.

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4 Jan 2016


Figure 25: Dismal FDI flows in the country (USD bn) Figure 26: Shift from FDI to Loan financing (USD bn)


CPEC – The FDI magnet: CY16 is expected to turn over a new leaf for Foreign Direct Investment Account courtesy initiation of projects under China Pakistan Economic Corridor worth USD46bn. We expect 2HFY16 may continue to replicate the past dismal trend in FDI due to materialization of CPEC on a small scale, keeping total FDI contained to USD1.5‐2.0bn. Moving ahead, initiation of large scale projects and significant drawdown under the ‘early harvest project’ program worth USD28bn over CY16‐CY18 will pave the way for a notable jump in FDI during FY17 and onwards. So far, as per our understanding, financial close of five projects has been announced of which ~USD4.0bn will form the Chinese component of investment/loan.

Materialization of CPEC to open new investment avenues: In addition to core CPEC related FDI, increasing development activity in the country will likely attract further investment from both other multilateral agencies and regional countries. In this regard, recent deals/MoUs to set‐up i) USD2.0bn worth gas pipeline by Russia and ii) USD500mn worth refinery by UAE can be perceived as a start to revived confidence of foreign investors in Pakistan. Moreover, with Pakistan GDP expected to surpass 5.0% over the next three years, growing economic activity will further support the uptrend in FDI. To recall, during FY06‐FY08 (average GDP: 5.4%), the average annual FDI inflow in Pakistan stood at USD4.6bn. However, in contrast to the aforesaid period where ~60% of FDI was composed of Telecoms and Banks, FDI in next five years will likely remain concentrated in Power, Construction and Transport segments.

PKR depreciation – When and How much?

Resilience of PKR/USD – a temporary strength? Contained depreciation in PKR/USD by an average ~2.5% over the last three years (CY13‐CY15) compared to an average ~5.3% in CY08‐CY12 was mainly a function of i) hefty loan/grant receipts and ii) sharp decline in oil prices in FY15. Since the strength in external account was not backed by growth in genuine variables (particularly Exports and FDI), concerns on the sustainability of PKR/USD have started to re‐surface as evident from ~3% depreciation in PKR/USD during 2HCY15, the highest six monthly depreciation in last two years.

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4 Jan 2016


Fig 27: PKR/USD trend in CY15


Emerging risk to PKR/USD in 2HCY16: We expect PKR/USD to remain relatively stable in 1HCY16 and depreciate by ~1% to PKR105.5/USD by Jun’16 end. Limited devaluation will likely be due to strong BoP position amid continued inflows from lending agencies and depressed oil prices. However, in 2HCY16, absence of loans/grants will likely weaken the overall BoP position. Given minimal probability of recovery in exports, recovery in oil prices, if any, will further aggravate the external account woes. Thus, we do not rule out a knee jerk reaction on the currency in 2HCY16 where PKR/USD may witness a relatively higher depreciation of ~3%. In addition, potential devaluation in regional currencies followed by further interest rate hike by Federal Reserve will also exert upward pressure on PKR/USD.

Fiscal deficit to remain below 5% mark

Fiscal deficit – efforts yielding fruits: The improving trend in fiscal position of continued in FY15 where fiscal deficit clocked in at 5.3% compared to preceding five year average of 6.6%. The stark improvement was led by contained growth in expenditure by 7% (FY10‐FY14 CAGR: 14%). Various revenue generating measures also led to an impressive growth of 17% in Federal tax collection while steady trend in non‐tax revenue further supported the growth in revenue. The reliance on domestic financing increased to 88% of total revenue‐expenditure gap in FY15 compared to 63% last year, primarily due to reduction in foreign grants and program loans.

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4 Jan 2016


Figure 28: Trend in Fiscal Deficit Figure 29: Financing of Budget deficit

Source: SBP, MoF, BMA Research

Tax collection ‐ a hard nut to crack: We expect FY16 Fiscal Deficit to remain in the vicinity of 4.8%‐4.9% compared to a highly optimistic GoP/IMF target of 4.3%. The variation from the target can primarily be attributed to continued revenue slippages where we foresee tax collection to remain close to ~PKR2.9tn compared to target of PKR3.1tn. Though the recent measures of additional tax collection of PKR40bn will provide breathing space to GoP, we believe the said measures will not suffice to keep fiscal deficit within 4.3%. Tax collection will remain a challenging task in FY16 owing to i) downside in oil prices (‐ve for GST collection on petroleum products), ii) lower collection under WHT on non‐compliant banking transactions and iii) partial collection under SROs elimination. The only support to fiscal deficit can come from lower allocation under energy subsidy, estimated to be 27%YoY‐30%YoY lower than last year’s disbursement.

Privatization program – focus to shift towards loss minimization: Government is expected to continue its privatization program in CY16 with a target of 11 companies. However, unlike past two years, the focus will now shift towards privatization and restructuring of loss making public sector entities (PSEs) rather than amassing forex reserves. To note, the government divested and raised a total of USD1.7bn (FX component: USD1.1bn) by divesting stake in profitable financial and petroleum PSEs. The divestment of stake in companies like Pakistan Steel Mills (PSM) and Pakistan Airlines (PIA), inflicting a huge burden on fiscal account, will further support the government’s objective to contain fiscal deficit below 4.5% beyond FY16. Further to that, privatization of power distribution companies will yield a two pronged benefit i) potential reduction in energy sector subsidy (currently at 0.7%‐0.8% of GDP) and ii) growth in LSM through improvement in energy supply.

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4 Jan 2016


Sectors

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Infrastructure (Cement and Steel)

The sector theme in CY16 will be based primarily on strong dispatch growth backed by increasing infrastructure and power development projects initiated under the CPEC and various public sector programs. As such, bottom‐line growth over the coming years will be a function of increased local sales where we foresee local dispatches posting a 5yr CAGR of 9%, a significant leap over the 4% CAGR depicted in past 5 years. The stellar growth in cement demand also dilutes the risk of a price war despite new capacities coming online, as strengthening local demand will be enough to absorb the incremental capacities. We recommend investors to take bets on companies with low utilization level coupled with ideal location to benefit from the upcoming growth in demand. In this regard, we prefer KOHC (TP: PKR352) and FCCL (TP: PKR52/sh) offering returns of 50% and 52%, respectively. Apart from the sectoral theme we also highlight DGKC (TP: PKR218) due to its growing margins (coal power project) and strong valuations offering a return of 51%.

Cement demand entering into high growth phase: Local demand has entered a boom stage, with 16% growth in dispatches over 5MFY16, with work on major development and infrastructural projects yet to commence. Thus, we believe, even though the base effect may slowdown the quantum of growth in next 5 years, however, we still see average growth rate to clock in above 9%. In contrast to the historical trend, the private sector has led the local dispatch growth of cement in the country in the past two years which is expected to remain strong in the years to come. In this regard, we believe all time low inflation and interest rates are expected to increase consumer purchasing power and hence stimulate generic demand for cement.

Fig 30: GDP growth vs. Local dispatches

Capacity expansion: An opportunity, not a threat! Given surging cement demand in the country, we believe the expansion phase in the industry is inevitable. At current pace of growth in dispatches, the cement industry will hit full utilization by FY18, potentially coinciding with the end of gestation period for new capacities. Thus forecasted growth in local dispatches dilutes the risk of a price war. We foresee all new capacities to operate at a reasonable utilization level of 70% by FY20. Consequently, the entire expansion wave shall be perceived as a long term opportunity to tap the high growth potential of the cement industry rather than a risk to profitability.

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Figure 31: Total prospective capacities (mn tons) Figure 32: Industry utilization trend (mn tons)

Source: Company accounts, APCMA, BMA Research

A further expansion in margins possible: With international crude oil prices under immense pressure, margins of cement industry will continue to benefit from reduced power costs. All major cement producers of the country have standby FO based generation capacities, since power cuts always remained a constant hurdle to production. However, the capacities sat idle since generation cost on FO had historically been significantly higher than alternative sources. The scenario has now changed drastically with cost of generation on FO down at PKR7.2/unit, 42%‐10% lower than grid and gas based generation. Thus, if oil prices stay at current levels, the potential for margin expansion remains through substitution of grid imports with internal FO based power generation. Furthermore, we also expect coal prices to stay lower by 15% in FY16 and FY17 compared to FY15 amid ample supplies and weak demand, providing further support to gross margins. These factors combined are expected to take industry margins to 45% in FY16 compared to 40% last year (historic high), up 4.7pps.

Figure 33: Margin trend vs. Fuel prices (USD/ton) Figure 34: Power cost from various sources (PKR/kWh)

Source: PSO website, Bloomberg, Company accounts, BMA Research

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DGKC 3.00

CHCC 1.30

ACPL 1.30

FECTC* 0.95

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Total capacity addition 14.85

*unannounced additional capacities

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Leverage for expansion; ideal timing: The current leg of the expansionary wave is expected to rely heavily on debt and internal cash generation. In this regard, strong operating cash flows and historic low interest rates are expected to limit additional equity injections. Furthermore, lower interest rates shall also decrease the break‐even utilization levels of the new capacities.

Concurrent steel growth: The iron and steel sector is also projected to enjoy a high demand phase owing to i) implementation of power and infrastructural projects, ii) other CPEC early harvest projects such as the Orange line and Gwadar airport, iii) upgradation of existing and laying of new gas pipelines as well as railway tracks and iv) a boom in private sector projects including several housing schemes.

Figure 35: Steel consumption in Pakistan (mn tons) Figure 36: Iron & steel sector YoY growth in Pakistan

Source: Pakistan Economic Survey 2014‐15, Steel Statistical Yearbook 2015

The aforementioned factors will impact steel demand over and above a natural progression in the economy to consume more steel with improved macros and increasing urbanization. To put things in perspective, Pakistan’s crude steel use improved to 29.4 kg per capita from 24.2 kg per capita (up 21%YoY) in 2014 – prior to the surge in public, private and foreign funded projects. Likewise, for finished steel products, usage increased to 23.5 kg per capita from 19.3 kg per capita (up 22%YoY) during 2014, but still remains depressingly low compared to the region.

Figure 37: Apparent steel use kg/capita ‐ crude Figure 38: Apparent steel use kg/capita ‐ finished

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Oil Marketing Companies

We expect CY16 to remain a favorable period for the Oil Marketing Companies (OMCs) driven by i) continued uptrend in volumetric sales and ii) absence of inventory losses on relative stability in oil prices. At the same time, slowdown in the pace of pile‐up in circular debt and reduced petroleum prices will also lower the quantum of borrowing needs which will more than offset the impact of any interest rate hike in CY16 and thus, lead to a notable reduction in finance cost of the sector. Moreover, PKR/USD (down 4.3%CYTD) will likely remain stable in remaining FY16 which will address market concerns on downside in earnings from exchange losses. Continued gas shortage to CNG stations coupled with a mere premium of Petrol at 7% over CNG will likely keep MOGAS demand upbeat in CY16 as well. At the same time, upcoming infrastructure projects (motorways, highways) and increased heavy transportation activity should bode well for HSD and Asphalt demand in the country. In a nutshell, we foresee a three year CAGR of 7% in volumetric sales of the sector. The only positive takeaway from CY15 was complete eradication of circular debt pile‐up, the benefit of which will be fully realized in CY16. Pakistan State Oil (PSO) stands out as our top pick in the sector, currently trading at FY16 P/E of 6.3x, a discount of 25% and 41% over KSE100 and OMC sector, respectively.

Stability in oil prices to keep earnings steady: The previous year remained a dismal period for OMCs during which the sector witnessed a sharp decline of 59% and 37% in earnings during FY15 and 1QFY16 due to increased volatility in oil prices. Hefty inventory losses during the aforesaid period overshadowed the impact of growing MOGAS sales (up 23%‐40%) in the country. Moving ahead, FY16 will likely witness stable to narrow range of volatility in oil prices thereby keeping the burden of inventory losses to a minimum and thus, allowing the impact of growth in petroleum sales (estimated at 6%YoY) to completely trickle down into the profitability (up 18%YoY – excluding inventory loss impact).

Figure 39: Sales Trend Figure 40: Profitability Trend (PKRbn)

Source: OCAC, Company Reports, BMA Research

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Volume growth concentrated in retail fuels: Improving macros, lower petroleum prices and increasing infrastructure development in the country will remain the prime reasons behind growing petroleum sales (3 year CAGR 7%), going forward. MOGAS will remain the major growth driver, expected to register a CAGR of 13% in next three years where the demand will primarily be stimulated by i) attractive price levels (depicting mere premium of 7% over CNG alternative) and ii) persistent gas outages at CNG stations. The demand for HSD will likely be strengthened by increasing heavy transportation activity contingent on timely completion of motorways/highways which will also lead to improved offtake of Asphalt in the country. Though absence of new FO based power producers will keep growth in FO sales muted, we believe 17%‐18% expected lower average FO price in CY16 will generate additional demand from industrial sector, benefitting smaller OMCs with low volume base.

Figure 41: APL sales trend (mn tons) Figure 42: PSO sales trend (mn tons)


Figure 43: HASCOL sales trend (mn tons) Figure 44: Industry sales trend (mn tons)


‐0.1

0.1

0.2

0.3

0.4

0.5

0.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0


Total MOGAS

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0


Total MOGAS

0.0

0.1

0.2

0.3

0.4

0.5

0.00.20.40.60.81.01.21.41.61.8


Total MOGAS

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0


Total MOGAS

27


4 Jan 2016


Improving liquidity on active reforms: CY16 is expected to bring a significant improvement in the liquidity position within the energy chain on account of i) privatization of DISCOs, ii) implementation of ‘circular debt management plan’ and iii) lower FO prices. The lower level of FO prices has already allowed the government to put in place a prudent payment mechanism, resulting in almost complete elimination of fresh pile‐up in circular debt. Going forward, potential reduction in line losses and improvement in recoveries post privatization and restructuring of DISCOs will determine a long term solution to the problem. The execution of ‘circular debt management plan’ over FY16‐FY18 will not only halt the pile‐up but may also seek to settle the old outstanding amount. In this regard, a partial non‐cash settlement of the outstanding amount through another PIB can be expected in CY16 which will further strengthen the fundamentals – key beneficiary ‘PSO’.

LNG – An opportunity or a threat? Given nominal size of LNG imports at ~200mmcfd or ~1.5mn tons, we believe the start of LNG imports and its allocation to power sector will pose limited threat to the petroleum sales. However, in the long term, expansion in the size of LNG shipments and its diversion to industrial sector may pose material threat to HSD and FO off‐take, being utilized for captive power generation. We expect PSO, being the sole importer of LNG, to remain immune from any such threat as it will hedge any decline in FO/HSD against LNG imports.

Figure 45: Break up of volume growth story (mn tons) Figure 46: OMC wise sales trend (mn tons)


Investment Perspective: Unlike past one year, we expect stable oil prices, lower finance cost and growing petroleum sales will lead to a notable improvement in earnings in FY16, estimated to increase by 18%YoY (excluding inventory gain/loss impact). Slowdown in the pace of pile‐up in circular debt and reduced petroleum prices will likely lower the borrowing requirements which will more than offset the impact of any interest rate hike in CY16. The complete elimination of monthly pile‐up in circular debt remains the major trigger of OMC sector and thus, we maintain our conviction on PSO as our top pick in the entire Oil and Gas chain.

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0


Total HSD MOGAS FO

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2013 2014 2015 2016F 2017F 2018F

PSO (LHS) APL HASCOL

28


4 Jan 2016


Banks

The banking sector shed 16% in market capitalization despite ~10%YoY growth in profitability in 9MCY15 as adverse regulatory developments came to the fore. With i) DR bottoming out, ii) regulator unlikely to take further steps to reduce spreads (already at a multiple year low of ~5.3% and iii) tax regime unlikely to see more changes, worst may already be in the background. However, one risk that still lingers over banking sector is the rolling over of the maturing PIBs, which may potentially cap the growth in profitability in the medium term. We advocate investors to maintain exposures in the blue‐chip banking scrip, especially those which have i) higher proportion of auxiliary income in total revenue base, ii) better operational efficiencies, iii) lower reinvestment risk and iv) higher unrealized gains.

Nominal decline in ROE in CY16 but long term fundamentals intact‐ Historic low DR and adverse tax measures implemented by the government kept the investor sentiments on Pakistan’s banking sector poor during CY15. However, the fundamentals of the banking industry remain robust. We forecast the earnings of big‐6 banks to post 5yrs earning CAGR of 8.5% while average tier‐I ROE of the Big‐6 is likely to clock in at 20.5% in CY16, gradually increasing to ~21.3% by CY19. The strong balance sheet growth (5yr CAGR 12.5%), diversified revenue sources and impeccable asset quality are the three factors that are expected to drive the earnings growth of Pakistani Banks in the long term.

Figure 47: Comparison of Big‐6 Banks’ ROE Figure 48: Average ROE trend

Source: Company Accounts, BMA Research

Maturing PIBs a question mark: One significant risk hanging over Pakistan’s Banking sector is imminent maturity of ~PKR1.4tn worth of high yielding PIBs in 1HCY16 and the reinvestment risk on them. To recall, Pakistani Banks subscribed heavily to high yielding PIBs in 1HCY14, resulting in NIMs expansion of ~60ppsYoY in CY14, where the first tranche of their maturity in 1HCY16 is likely to exert downward pressure on the NIMs. We expect the government will continue to rely on longer tenor debt instruments and thus, likely roll‐over the maturity of the PIBs, going forward. As for the yield, we are skeptical that the government will again offer huge premiums on the 3yr and expect the premium on DR to settle somewhere between 100bps‐150bps, unlike 250bps+ offered in CY14.

19.5% 19.1% 19.0% 18.9%

15.1%

10.3%

0%

5%

10%

15%

20%

25%

UBL MCB HBL ABL BAFL NBP

19.9%

18.8%

16.7%

17.4% 17.5%17.0% 17.1%

18.0%

15%

16%

17%

18%

19%

20%

21%

CY11

CY12

CY13

CY14

CY15F

CY16F

CY17F

CY18F

29


4 Jan 2016


Figure 49: CY16F PIB to deposit ratio Figure 50: PIB to deposit ratio of Big‐6


Increasing disposable income of the consumers ‐ Lower inflation (likely to remain near ~4.5% in CY16), commodity prices slump and depressed interest rates may provide an impetus to consumer borrowing which currently constitutes only ~10% (PKR367bn) of the overall loan portfolio, while during the last monetary easing cycle the same had increased to ~18.7%. The significantly higher yield available on consumer as compared to the corporate loans will support NIMs of the banks. However, we expect the banks to tread safely this time given the bitter experience of CY08 financial crisis and the risky nature of such loans.

Figure 51: Asset quality of Big‐6 banks Figure 52: Consumer financing as a % of total loan


Dividend yield making a case of its own: On the back of heavy underperformance during CY15, valuations have opened up and dividend yields have also become attractive. In this regards, the average dividend yield that the Big‐6 banks are currently offering is standing at ~9% which is comparable to current PIB yields but also offer an upside. Conversely, the P/B that Big‐6 Pakistani Banks are currently trading at is only ~1.2x, lowest since CY12.

42%

36%33%

28%

23%20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

ABL UBL MCB BAFL NBP HBL

0%

5%

10%

15%

20%

25%

30%

35%

40%

0.0

0.5

1.0

1.5

2.0

2.5

CY13

CY14

CY15F

CY16F

CY17F

CY18F

PIB to Dep PIBs (PKRbn)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

81%

82%

83%

84%

85%

86%

87%

88%

HBL MCB BAFL NBP UBL ABL

Coverage (RHS) NPL

6.1%

14.1%

4.5%2.3%

8.0%

19.6%

0%

5%

10%

15%

20%

25%

HBL UBL MCB ABL BAFL NBP

30


4 Jan 2016


Fig 53: Dividend yield CY16F

CPEC to drive advance growth in medium and long term‐ The advent of China Pakistan Economic Corridor (CPEC) will likely trigger the demand for private sector credit driven by increased project financing will likely pick up. With Big‐6 banks faring positively (read: decade high) on most banking sector matrices, namely the CAR ratio (big‐6 average: 16%), coverage ratio (average: 86%) and infection ratio (average: 9%) as testimony of industry soundness. We expect the banks are by and large adequately placed to participate in the eminent credit growth. However, the growth in loan books will depend on the risk appetite of individual banks

Figure 54: Forecasted asset mix of banks in CY16 Figure 55: Advances (PKRbn) and advances growth


Focus on Tier‐1: The operating environment of the bank will be difficult in CY16 as the NIMs are expected to be squeezed (down 60bpsYoY). We suggest investors to limit their exposures to the banks with i) alternate revenue sources, ii) higher operating efficiencies iii) significant unrealized gains and iv) lower reinvestment risk. The two banks that standout on these matrices are HBL and UBL with CY16E cost‐to‐income ratios of 47% and 44%, respectively with proportion of non‐funded income to total income of both the banks likely to stand at 34% and 32%, respectively.

11.4%10.3%

8.4% 8.0% 7.8%7.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

NBP BAFL UBL HBL ABL MCB


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

MCB ABL NBP UBL HBL BAFL

ADR IDR

‐2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

CY11

CY12

CY13

CY14

CY15F

CY16F

CY17F

CY18F

Advances Advances Growth

31


4 Jan 2016


Oil and Gas: Exploration & Production

CY15 remained a dismal period for E&P sector where i) relentless decline in oil prices (down 47% on average), ii) delays in development projects and iii) absence of notable exploration finds led to a steep underperformance of 38% by the sector against the benchmark index. Consequently, P/E of the sector has now contracted to 7.6x, depicting a discount of 9% over KSE‐100 compared to an average premium of 12% in last 5 years. At the same time, current trading levels of the BMA E&P Universe are reflecting an oil price of USD18‐22/bbl, USD10‐14/bbl lower than prevailing oil prices. Concerns on addition of Iranian supply and weak global macros may limit the upside in oil prices and thus, keep E&P sector under pressure in near term. However, over a one year horizon, we expect the sentiment to improve in CY16 owing to notable production additions where we foresee an addition of 12%‐14% and 8%‐9% in oil and gas production, respectively. Unlike CY15 (oil price down 44%), relative stability in oil prices will likely allow the aforesaid production gains to translate into earnings growth. Easing circular debt within the energy chain will improve cash flows and assure timely completion of key projects in CY16. We flag OGDC and POL as our preferred picks in the sector with TPs of PKR183/sh and PKR383/sh, translating into upside of 56% and 43%, respectively.

Production gains to enhance confidence: CY16 will be a year of notable gains in oil and gas production courtesy completion of key development projects and tie‐in of previous finds by the E&P sector. We expect TAL, Nashpa, KPD‐TAY and Gambat South will remain the major contributing fields, expected to add 12%‐14% and 8%‐9% to the existing oil and gas production of the country, respectively. Continued development activities in the country will likely yield a 3‐year production CAGR of 9% in oil and 4% in gas.

Figure 56: Strengthening Hydrocarbon production Figure 57: Oil Production trend (kbpd)

Source: PPIS, Company Reports, BMA Research

Active exploration efforts to continue: Despite the free fall in oil prices, the capex plan of the E&P sector remained on track, increasing by 31%YoY. To note, 46 exploration wells were drilled during the period, 5% higher than last 5 year average of 30 wells p.a. Going forward, we believe the exploratory drilling to further accelerate on account of i) improved law‐order situation, ii) better cash flow position and iii) favorable pricing policy. With regards to wellhead gas pricing on new exploration efforts, government has already

3,800

3,900

4,000

4,100

4,200

4,300

4,400

4,500

0

20

40

60

80

100

120

140

FY12 FY13 FY14 FY15 FY16F FY17F FY18F

Gas Production (mmcfd) Oil Production (kbpd)

0

5

10

15

20

25

30

35

0

20

40

60

80

100

120

140


Total Nashpa TAL

32


4 Jan 2016


granted coverage of 46 concessions under Petroleum Policy 2012, offering 25%‐49% higher prices over previously granted wellhead gas prices. The drilling will remain concentrated in hydrocarbon rich KPK and Baluchistan regions.

Figure 58: Drilling Trend (wells) Figure 59: Mounting CAPEX on aggressive E&D (PKRbn)

Source: PPIS, Company Reports, BMA Research

Dollar hedged revenue streams: The recent depreciation in PKR/USD by 3.0%FYTD and concerns on future direction of PKR bodes well for the E&P sector. Given the USD denominated oil revenues and USD based pricing of some gas fields, E&Ps provide a perfect hedge against PKR depreciation. As per our estimate, 1% depreciation in PKR/USD translates into annualized earnings impact of 1%‐2% on the E&P sector.

Rich cash flows to further add value: Marked by elimination in pile‐up of circular debt and decent production gains, the cash generation of the sector will remain strong, going forward. In this regard, we foresee FCFE of the sector to post a CAGR of 10% in next three years. At the same time, we expect FCFE/NPAT ratio to improve to an average 57% in next three years compared to last three year average of 34%. With a strong cash based earnings track record, POL will continue to offer the highest yield of 11% in the E&P space followed by OGDC and PPL with 5.8% and 5.7%, respectively.

Figure 60: Dividend yield Figure 61: Robust FCFE on steady profitability (PKRbn)

Source: KSE, Company Reports, BMA Research

2135

50 46 51 54 5736

6250

3540 43 46


Exploratory Development

0

20

40

60

80

100

120

0

20

40

60

80

100

120

140

160


Operating Cash (LHS) CAPEX

6.0% 6.3%

11.0%

OGDC PPL POL0

10

20

30

40

50

60

70

80

0

50

100

150

200


PAT (LHS) FCFE

33


4 Jan 2016


Direction of oil prices to determine the sentiment: Unlike FY15, we expect FY16‐FY17 period to fare better from earnings perspective as stability (or slight recovery) in oil prices will allow the aforementioned production gains to completely translate into profitability growth. It is pertinent to note that BMA E&P Universe, being trading at implied oil prices of USD18‐22/bbl, has already priced‐in the negatives of weak oil prices. We have kept our oil price assumption conservative at USD40/bbl each in FY16 and FY17 while USD45/bbl over FY18 and onwards. Even in a bear case scenario (USD32/bbl long term oil price assumption) the sector still offers an upside of ~25% against current market prices.

Figure 62: Production (mnboe) vs Sales (PKRbn) Figure 63: Profitability trend (PKRbn)

Source: Company Reports, BMA Research

Attractive valuations: Following a free fall in oil prices (down on average 47% in CY15), the E&P sector steeply underperfomed the benchmark index by 38%. Consequenlty, the forward P/E multiple of the sector, currently at 7.2x, is now trading at a discount of 14% over KSE‐100 compared to an average premium of 12% in last 5 years.We expect CY16 to fare better owing to notable production gains and additions in reserves due to aggresive exploration. We re‐iterate our preference for OGDC and POL with TPs of PKR183/sh and PKR383/sh, which translates into an attractive upside of 56% and 43%, respectively.

Fertilizer

The sector is currently going through turbulent times since local gas tariffs are increasing as part of structural reforms while international urea prices are consistently on a declining trend (down 26%CYTD), limiting the industry’s ability to pass on the increase in cost. Furthermore, the ongoing deadlock between the manufacturers and government pertaining to urea prices has further aggravated the situation leading to build‐up in inventories, affecting the liquidity situation of the manufacturers to a material degree. To make things worse, another potential gas price hike in 1HFY16 presents further risk to the profitability of the industry. In such unstable environment, we highlight EFERT (TP: 100PKR/sh) as our preferred play in the sector with limited risks from increase in gas tariffs as the company operates at a fixed concessionary gas price.

Urea price deadlock: The urea manufacturers and the government have been under a deadlock with regards to urea prices where manufacturers are reluctant to reduce prices unless a reciprocal benefit is offered in the form of reversal in feed stocks prices to previous levels. This has led buyers to defer their purchases in anticipation of buying urea

245

250

255

260

265

270

275

280

285

050100150200250300350400450


Sales (LHS) Production

0

50

100

150

200

250

300

350

0

50

100

150

200

FY13 FY14 FY15 FY16F FY17F FY18

EBITDA (RHS) NPAT

34


4 Jan 2016


at reduced prices and thus, resulting in a build‐up of inventory at 0.62mn tons (Nov’15). However, the issue cannot be stretched for long as urea is consumed round the year. Thus we believe even if prices do not reverse, off‐take will start to settle on normalized levels.

Figure 64: Urea inventory vs off‐take (000’ tons) Figure 65: Company wise inventory (000’ tons)

Source: NFDC, Company Reports, BMA Research

Price discount with international urea market, wiped out: Historically local urea prices have maintained a ~30% discount to the international urea prices. However, increasing urea price in the country (up 7.8%CYTD) following hike in gas prices (up 23%‐63%) coupled with a sharp decline of 29% in international urea prices has wiped out the entire discount. This remains a challenging situation for the local urea manufacturers, since the government is planning for a further increase in gas tariff (expected in 1HCY16) in which case the local industry will have limited or no pass on capability.

Fig 66: Local urea price (ex‐factory) vs. imported (PKR/bag)

Another gas price increase: As per news‐flow, the government is considering another gas tariff hike, as agreed with IMF, in 1HCY16. With issues relating to previous tariff hike still unresolved, we believe the decision of another gas price hike will likely find it hard to go

1,000

1,500

2,000

2,500

3,000

3,500

Jan‐13

Mar‐13

May‐13

Jul‐1

3

Sep‐13

Nov

‐13

Jan‐14

Mar‐14

May‐14

Jul‐1

4

Sep‐14

Nov

‐14

Jan‐15

Mar‐15

May‐15

Jul‐1

5

Sep‐15

Nov

‐15

Imported Ex‐factory Local

Source: Bloomberg, NFDC, BMA Research

‐

100

200

300

400

500

600

700

800

900

Jan

Feb

Mar

Apr

May Jun Jul

Aug Sep

Oct

Nov

Inventory Off‐take

‐

50

100

150

200

250

300

EFERT FFC FATIMA FFBL

35


4 Jan 2016


through, at least in the stipulated time. However, if tariffs do increase, the fertilizer industry will be in a hard spot since the ability to increase prices remain limited given imported urea prices at par with the local prices (assuming local urea prices reverse).

EPS Negative EPS impact following gas price hike (PKR/sh)

Increasing gas availability; production may improve: The incumbent government is putting in all efforts to dilute or eradicate the gas supply shortage in the country. In this regard, i) availability of LNG, ii) increasing local exploration and finds (commissioning of KPD‐ Mar’16), iii) other alternatives (TAPI and IP pipeline) are the prime avenues. With underutilized capacities within the local industry (listed), improved supply of gas can improve production and profitability of the industry.

Potential increase in urea production if gas supplies improve

Power

Investment theme of the Power sector continues to remain premised on the attractive dividend yields, however, due to 7.4% outperformance witnessed in CY15 the upsides remain limited. Given their business model, power companies offer investors i) hedge against PKR depreciation as well as inflation and ii) stable earnings (guaranteed return). Also with FO prices in the country down by 29%CYTD coupled with the government’s resolve to remove inefficiencies within the distribution channels, the accretion of circular debt has reduced significantly hence improving the sector’s liquidity position. Given improved working capital management, the load factors of the IPPs are also likely to improve and the IPPs are also likely to realize savings under reduced finance burden. We expect the savings realized under lower finance burden will have an impact of PKR1.2/sh‐PKR1.8/sh on the bottom‐lines of the companies

Improved cash‐flows: Cash flows for IPPs are likely to improve on the back of slowdown in accumulation of circular debt owing to lower FO prices in the country. This coupled with lower DR rates in the country and GoP’s commitment to gradually retire the outstanding quantum of circular debt, the BMA Power Sector companies will realize savings under finance cost of PKR1.2/sh‐PKR1.8/sh on an annualized basis in FY16.

Max production/Capacity

(tons) Current production

(tons) Available capacity

(tons)

FFC 2,483,494 2,370,374 113,120

FFBL 627,079 213,018 414,061

FATIMA 500,000 371,461 128,539

EFERT 2,274,850 1,900,000 374,850

Surplus capacity 1,030,570

Additional gas required (MMCFD) 91


Gas price increase 10% 15% 20% 25% 30%

FFC 1.01 1.51 2.02 2.52 3.03

FFBL 0.38 0.56 0.75 0.94 1.13

EFERT 0.31 0.46 0.62 0.77 0.93

FATIMA 0.09 0.13 0.18 0.22 0.27


36


4 Jan 2016


Dividend yields remain attractive as ever: The dividend yields of the BMA Power Universe remain attractive, despite the outperformance, with FY16 D/Y hovering around 8%‐11% against the risk free yield of only 6.5%. The spread between the dividend yield and the risk free rate that on average was 100bps between CY11‐CY13 currently stands between 150bps‐300bps

Automobile

BMA Automobile Universe commands healthy returns based on i) enhanced demand due to overall improved macros, ii) an anticipated uptrend in auto financing with historically low interest rates in the country and iii) supportive industry gross margins on the back of commodity markets slump and FX movements. Amongst the local OEMs, INDU continues to enjoy strong sales figures for its new generation Corolla (volumes up 39%YoY during 5MFY16 period) whereas HCAR and PSMC are gearing up to benefit from the demand boom phase by launching new products/uplifts during CY16 and CY17. We have a favorable stance on the industry with our TPs for PSMC, INDU and HCAR offering upside of 16.5%, 30.0% and 30.1%, respectively, from the last trading day for CY15.

Demand drivers: The local automobile industry witnessed 56%YoY growth during 11MCY15 with 206k units sold during the period. Excluding the government backed Apna Rozgar Scheme, growth rate for the industry stands at 26%YoY, testifying a high growth period for the industry. The improved macroeconomics (rising per capita incomes, forthcoming CPEC related projects) are expected to further enhance domestic demand. We foresee an uptrend in auto financing owing to historically low interest rates and banks’ increasing appetite to lend. INDU continues to enjoy strong sales figures for its new generation Corolla (volumes up 39%YoY during 5MFY16 period) while HCAR and PSMC are also expected to benefit from the demand boom phase by launching new products/uplifts during CY16 and CY17.

Figure 67: Annual car sales (000’) vs. YoY growth Figure 68: Outstanding auto credit vs. interest rate

Source: Company Reports, SBP, PAMA, BMA Research

The pivotal role of FX: The CKD imports dependant automobile industry cashed in on the 14.3%YoY and 5.5%YoY depreciation in USD/JPY and USD/THB rates during CY15,

‐60%

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‐20%

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FY05

FY06

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Jun'15

Auto credit (PKRbn)Interest rate %

37


4 Jan 2016


respectively, and the unusually low 1.7%YoY depreciation in USD/PKR rate during the same period. Resultantly, industry gross margins surged 3.0‐4.0pps YoY on average as per 9MCY15 financial results. We believe the recent slight reversal in FX movement (USD/JPY appreciation of 0.6%QoQ) is short‐lived. We expect the bleak outlook of the Japanese economy coupled with expectations of BoJ upping its quantitative easing program will likely lead to further weakening of JPY. Speculation with regards to competitive currency devaluation in Asia (USD/THB down 6.4%FYTD, USD/MYR down 14.5%FYTD, USD/CNY down 4.7%FYTD) amidst the economic slowdown in China will further add to the pressure on JPY.

Figure 69: USD/PKR depreciation vs. sector margins Figure 70: JPY/PKR depreciation vs. sector margins

Source: Company Reports, Bloomberg, BMA Research

Capitalizing on the commodities slump: The global commodity markets crash bore favorable results for the local automobile industry by driving raw material costs down as steel prices nosedived ~30%CYTD (US steel CRC). We believe the deepening concerns of oversupply amidst a global economic slowdown particularly China, the largest consumer of many commodities during its boom, will keep commodity markets depressed moving forward. Therefore, we do not expect any sudden reversal of trend in steel prices. We expect gross margins of the sector to remain strong at around 13.0%‐15.0% in next three years.

Figure 71: Steel CRC price vs. sector margins Figure 72: Global steel prices trend

0%

5%

10%

15%

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‐6.0%

‐4.0%

‐2.0%

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1QCY

14

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14

3QCY

14

4QCY

14

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15

2QCY

15

3QCY

15USD/PKR GPM (RHS)

0%

5%

10%

15%

20%

‐10.0%

‐8.0%

‐6.0%

‐4.0%

‐2.0%

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14

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14

3QCY

14

4QCY

14

1QCY

15

2QCY

15

3QCY

15

JPY/PKR GPM (RHS)

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

$400

$500

$600

$700

$800

$900

$1,000

2QCY

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3QCY

14

4QCY

14

1QCY

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2QCY

15

3QCY

15

CRC price USD/ton GPM

‐50%

‐40%

‐30%

‐20%

‐10%

0%

US shredded steel scrap

World export HRB

World export CRC

% decline CYTD % decline FYTD

Source: Company Reports, Steel Benchmarker, BMA Research

38


4 Jan 2016


The fickle nature of AIDP: The long awaited, but much delayed, auto policy or AIDP‐II can be a make or break scenario for the three dominant players. The final contents and approval timing of the said policy is anybody’s guess, but the current manufacturers may face an unfavorable tariff structure and increased competition from new entrants if the government decides to incentivize green field investors only.

Investment perspective: BMA Automobile Universe offers attractive valuations primarily based on the organic industry growth that we foresee. From last trading levels (Dec’31), PSMC, INDU and HCAR offer 16.5%, 30% and 30.1% upside with our TPs of PKR577/sh, PKR1,316/sh and PKR311/sh, respectively.

Textile Sector

The textile sector of Pakistan remained under pressure in FY15 on account of i) tepid demand from trading partners amid global economic slowdown, ii) incessant import of cheap Indian yarn and iii) continued energy crisis. The sector underperformed KSE‐100 by 14.1pps in FY15. Going forward, we expect dwindling export trend to continue amid weak global macros however, we believe CY16 may turn the corner for the non‐value added segment. With the imposition of 10% regulatory duty on Indian yarn and grey fabric to curtail the relentless import of Indian yarn in the country, the spinning units dealing in high quality yarn will witness an increase in their margins. In addition to this, i) declining FO prices, ii) 40 year low Discount Rate and iii) inclusion of the spinning and the weaving segments in the Long Term Finance Facility (LTFF), will provide further support to the bottom‐line. With the relatively positive outlook of the non‐value added sector, we prefer NCL (TP:PKR53/sh) while we maintain a SELL stance on the value added sector with GATM (TP:PKR25/sh) being our top sell.

Duty Imposition ‐ ray of hope for the non‐value added sector: While the value added segment is facing repercussions of the Euro‐zone economic turmoil, the coming quarters of FY16 are expected to be positive for the spinning and the weaving segments. The imposition of 10% regulatory duty on imported Indian yarn and grey fabric will provide some respite to the spinning and the weaving sector. This duty imposition may shift the locus of interest towards the non‐value added sector, with yarn margins likely to improve which have already increased by 16%, following the duty imposition. The value added sector on the other hand, will bear the brunt of this duty imposition with NML potentially losing PKR3.3/share from its bottom‐line.

Figure 73: Yarn margins (PKR/kg)

0

20

40

60

80

100

120

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

FY15 FYTD

Source: Business Recorder, Dawn, BMA Research

39


4 Jan 2016


Declining FO price to relieve cost pressures: With the average FO price hovering at USD226/MT in 1HFY16 (down 44%), we expect the current fiscal year to further relieve the textile units of the fuel cost pressure which accounts for 13% of their total COGS. Of the units located in the North, NML and NCL which derive 50% of their fuel requirement from FO, will likely see positive impacts of PKR2.40/sh (21% of EPS) and PKR1.25/sh (30% of EPS), respectively on their bottom‐line.

Figure 74: Estimated current fuel mix Figure 75: Forecasted fuel mix


Mixed outlook on volumetric exports: Increasing demand from the US due to strong macroeconomics, as evident from recent interest rate hike, will likely increase the proportion of textile exports to the region. However, the economic slowdown in EU will affect the export demand and curtail the growth in volumes of value added exports, going forward. In the wake of any further PKR depreciation, every 1% depreciation will yield an impact of PKR1.1/sh (10% of EPS), PKR0.88/sh (33% of EPS) and PKR0.65/sh (16% of EPS) on the earnings of NML, NCL and GATM, respectively, on an annualized basis.

Fig 76: Companies’ sales mix

0%

20%

40%

60%

80%

100%

NML GATM NCL

Gas FO Coal Grid

0%

20%

40%

60%

80%

100%

NML GATM NCL

Gas FO Coal Grid

78%63% 68%

22%37% 32%

0%

20%

40%

60%

80%

100%

120%

NML GATM NCL

Export Sales Local Sales

Source: Company Report, BMA Research

40


4 Jan 2016


Inclusion of spinning and weaving units in LTFF: The piece‐meal announcement of textile package in Oct’15 extended the LTFF facility to the spinning and the weaving segments. With the LTFF rate 150bps lower than the average KIBOR (on which the spinning and weaving units used to borrow previously), we believe earnings of these two segments will stand to benefit from reduced finance cost.

Fig 77: Discount rate

Investment Perspective: With the relatively positive outlook of the non‐value added sector, we prefer NCL due to i) 46MW coal fired power plant coming online in Mar’16 and ii) 10% duty imposition on the import of Indian yarn and grey fabric. At our TP of PKR53/sh, the scrip offers an upside of 56% on the last day closing price. However, we maintain a SELL stance on the value added sector with GATM being our top sell, offering a negative return of 31% at our TP of PKR25/sh.

0%

2%

4%

6%

8%

10%

12%

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

FY15 FYTD


41


4 Jan 2016


Conviction Calls

42


4 Jan 2016


CY16 is expected to be the year of the long awaited re‐rating in Pakistan State Oil (PSO) as its liquidity woes are expected to finally reach a resolution courtesy likely implementation of the ‘Managing Circular Debt’ program in FY16. Turn of events is on the cards for PSO where we foresee marked improvement in company’s cash flows on account of i) almost complete elimination in monthly circular debt pile‐up and ii) possibility of phase wise retirement of outstanding stock of circular debt over the next three years. On the core operations front, given stagnant trend in FO demand, the partial replacement of FO through diversification into LNG fuel segment (estimated to grow by 2.0x) will open a new channel of growth. At the same time, decline in finance cost owing to reduced borrowings amid decrease in working capital requirements will further enrich the bottomline. To note, reduced burden of receivables and depressed petroleum prices will significantly ease‐off the working capital requirements. At last closing, the stock is trading at FY16F and FY17F P/E of 6.3x and 5.9x, respectively. Based on our TP of PKR485/sh, the stock offers a total return of 52%.

All efforts focused on circular debt resolution: The execution of ‘Managing Circular Debt’ program in FY16 will remain the prime trigger whereby gradual reduction in the outstanding stock of circular debt by a cumulative PKR102bn will likely address the long standing issue of strained liquidity position within the energy chain. Further to that, any non‐cash settlement worth PKR40‐50bn through another PIB issue will likely enrich PSO’s bottomline by PKR11‐14/sh (21%‐26% of FY16F EPS), on an annualized basis.

Lower oil prices to further ease liquidity woes: With 30%‐35% share in electricity generation, the downward slide in furnace oil prices (down 26% in FY15) and resultant decline in electricity bills has led to notable improvement in power bill collections and recoveries. This allowed the government to put in place a prudent payment mechanism leading to almost ‘NIL’ monthly pile‐up in circular debt. Going forward, we foresee FO prices to remain lower by 32% in FY16 thus, allowing the existing payment mechanism to sail smoothly. Timely disbursement of payables to PSO will continue to keep monthly pile‐up near zero, we believe.

Reduced borrowing requirement to contain finance cost: From the vantage of P&L, easing circular debt will lower the need for borrowings required to bridge the receivable‐payable gap. To note, the weight of total finance cost on operating profit (i.e. finance cost/EBIT) increased to a hefty 48% in FY15 compared to 6% in FY08, where FY08‐FY15 was a period of massive accumulation in circular debt. Going forward, reduced borrowing coupled with low interest rate environment will likely depress the finance cost. In this regard, we expect finance cost/EBIT to average at 30% in the next three years while interest coverage to improve to 3.5x in FY16‐20 period (previous 2.9x).

Favorable macros to keep core operations steady: Given largest storage and retail network, PSO will largely benefit from construction of highways/motorways and movement of heavy transport under CPEC projects will further strengthen the demand of HSD and Asphalt in the country.

Investment Perspective: At last closing PSO’s FY16 P/E of 6.3x is depicting a discount of 25% and 41% to KSE100 and comparables, respectively. Potential improvement in FCFF/EPS ratio owing to reduction in circular debt accretion will likely cover the aforesaid discount, paving the way for the long awaited scrip’s re‐rating. With a TP of PKR485/sh (total return: 52%), PSO remains our top pick in the entire Oil and Gas chain.

Pakistan State Oil (PSO)

Smooth sailing ahead

Stock Data

Share Price Performance

PSO: BUY

Target Price: 485

Current Price: 326

Price (PKR/Share) 326

Reuters Bloomberg Website

PSO.KA PSO PA www.psopk.com

52‐weeks High/Low (PKR) 420.0 / 290.7

Dividend Yield 3%

Market Cap (PKR bn) 89

Market Cap (USD mn) 845

Avg Daily Turnover (PKR mn) 354

Avg Daily Turnover (USD mn) 3.5

Shares Outstanding (mn) 272

KSE‐100 Index Weightage (%) 2.3

Free Float 47

Company Description

Pakistan State Oil Company Limited engages in the procurement, storage, distribution, and marketing of petroleum and related products in Pakistan. The company offers motor gasoline, furnace oil, jet fuel, kerosene and high speed diesel oil. It operates a retail network of 3,557 outlets; 150 convenience stores; 251 CNG facilities; 24 mobile quality testing units; and refueling facilities at 9 airports and 2 sea ports. Pakistan State Oil Company Limited was founded in 1974 and is headquartered in Karachi,

Shareholding Structure

Federal Govt, 25%

NIT & ICP, 16%

Modarabas and MF, 15%

Individuals, 14%

Foreign Investors, 9%

Others, 21%

43


4 Jan 2016


Key risks: key risk to our investment case are i) Re‐emergence of circular debt on rebound in oil prices, ii) exchange loss on unforeseen volatility in PKR/USD and iii) increasing competition from small OMCs.

Profit & Loss (PKRmn) FY13A FY14A FY15A FY16F FY17F FY18F

Net Sales 1,100,122 1,187,639 913,094 773,651 859,163 990,985

Gross Profit 34,161 36,824 23,579 31,733 33,512 36,715

Operating Profit 22,631 24,621 10,950 20,242 20,520 22,739

Other Income – Net (1,081) 10,515 3,387 3,427 3,640 3,223

EBITDA 27,375 43,053 23,662 31,796 31,578 33,558

Profit Before Tax 19,210 32,969 12,034 21,310 21,741 23,483

Net Profit 12,638 21,818 6,936 14,084 15,001 16,438

Cash Flow

CF from Operations 79,444 (62,367) (29,574) 37,599 1,855 (1,316)

CF from Investing (46,107) 4,281 3,490 3,195 3,086 2,970

CF from Financing (11,698) 63,682 (22,619) (16,036) (1,418) (1,734)

Net Change in Cash 21,639 5,596 (48,703) 24,759 3,524 (80)

Free Cash Flow to Equity 20,676 7,595 (46,640) 27,204 6,241 3,995

Balance Sheet

Current Assets 224,356 313,514 275,749 232,511 248,615 272,462

Long Term Assets 57,593 58,637 65,559 65,610 65,707 65,847

Total Assets 281,949 372,151 341,307 298,120 314,322 338,309

Current Liabilities 217,035 288,346 250,676 196,707 201,055 212,960

Non‐Current Liabilities 4,271 5,184 8,321 7,464 7,034 6,753

Total Liabilities 221,307 293,530 258,997 204,171 208,089 219,713

Total Equity 60,643 78,621 82,310 93,949 106,234 118,596

Key Ratios

EPS (PkR) 46.5 80.3 25.5 51.8 55.2 60.5

DPS (PkR) 5.0 8.0 10.0 10.0 15.0 17.0

BVS (PkR) 223.2 289.4 303.0 345.8 391.0 436.5

P/E (x) 7.0 4.1 12.8 6.3 5.9 5.4

Dividend Yield 1.5% 2.5% 3.1% 3.1% 4.6% 5.2%

P/BVS(x) 1.5 1.1 1.1 0.9 0.8 0.7

EV/EBIDTA 6.7 4.3 7.8 5.8 5.8 5.5

Asset Turnover 3.9 3.2 2.7 2.6 2.7 2.9

Sales Growth 7.4% 8.0% ‐23.1% ‐15.3% 11.1% 15.3%

Operating Profit Margin 2.1% 2.1% 1.2% 2.6% 2.4% 2.3%

Net Profit Margin 1.1% 1.8% 0.8% 1.8% 1.7% 1.7%

EBITDA Margin 2.5% 3.6% 2.6% 4.1% 3.7% 3.4%

44


4 Jan 2016


Fauji Cement Company Limited (FCCL) is expected to remain among the leaders in terms of local dispatch growth (especially North) due to its ideal positioning, with close proximity to major upcoming infrastructural projects and dam sites. Furthermore, the company’s margin expansion is expected to continue in the upcoming year courtesy commissioning of the company’s waste heat recovery plant (WHR) in 4QFY15, expected to save PKR0.31/sh. This coupled with substitution of grid based power imports with 25% lower cost FO based captive generation will further add to the gross margins of the company. With no expansion plans of FCCL yet in sight, the company’s de‐leveraging is expected to pick pace and, thereby easing the burden of finance cost on the bottomline. At the same time, healthy cash generation will likely allow the company to maintain payouts in the vicinity of 80%‐85%. At our target price of PKR52/sh, FCCL offers an upside of 42% coupled with an attractive dividend yield of 9.5% ‐ ‘BUY’

Amongst the leaders in local dispatch growth: With a local dispatch growth of 16%YoY in 1HFY16, FCCL stood amongst the leading manufacturers with total dispatch growth of 9%YoY, partially contained by 20%YoY decline in exports. Going forward, we expect domestic dispatch growth to further accelerate owing to i) initiation of construction on Dasu dam, expected by 4QFY16 and ii) early harvest projects under CPEC. FCCL, ideally positioned not only in terms of utilization level (82%) but also its proximity to major construction sites, will remain amongst the prime beneficiaries of the aforesaid development. We expect FCCL’s local dispatches to grow at a 3yr CAGR of 11% while an average 9% decline in exports settles the total dispatches growth CAGR at 8.5%.

Margins to remain strong: Following the downtrend in international crude prices, generation cost on FO slid 35%YoY, currently at ~PKR7.1/unit. FCCL, capitalizing on the opportunity, has shifted towards partial self power generation to substitute grid based power imports costing PKR12.5/unit (post fuel adjustment). The development is expected to save PKR431 (PKR0.32/sh) on an annualized basis. Furthermore, full year impact of 10MW WHR plant in FY16, commissioned in 4QFY15, will yield additional savings of ~PKR417mn (PKR0.31/sh). Additionally, at eight years low coal price level of USD50/ton is expected to support margin expansion. Consequent to cumulative impact of all mentioned factors gross margin in CY16 are expected to stand at 48%, up 11pps.

High dividend payout to maintain FCCL charm: FCCL, being a part of the Fauji group, is expected to maintain its high dividend payouts given the groups track record. Thus, with its consistently high payout (+80%), the company offer investors with an attractive dividend yield of 9.5%. With the pace of growth expected to be significantly high in the upcoming years, 3yr earnings CAGR of 19%, FCCL will continue to provide investors with attractive D/Y reaching upto 11% in FY18.

Deleveraging to pick pace: With growing earnings and lack of CAPEX plans (i.e. expansion) in sight, the company’s deleveraging will likely pick pace with a net capacity to retire PKR2.2bn per annum (on average) in FY16‐FY18. This will significantly ease off the burden of financial cost on the bottom‐line in the years ahead.

Investment perspective: FCCL, in the recent past, has commanded a premium over industry multiples owing to high dividend payouts. At current levels the scrip is currently trading at a P/E of 8.7x, where at our target price of PKR52/sh the scrip offers a total return of 52%.

Fauji Cement Company Limited (FCCL)

Earnings growth to prop up dividend yield

FCCL: BUY

Target Price: 52

Current Price: 37

Stock Data

Price (PKR/Share) 37 Reuters Bloomberg Website FAUC.KA FCCL.PA www.fccl.com.pk 52‐weeks High/Low (PKR) 40.3 / 28.3 Dividend Yield 10% Market Cap (PKR bn) 49 Market Cap (USD mn) 468 Avg Daily Turnover (PKR mn) 244 Avg Daily Turnover (USD mn) 2.4 Shares Outstanding (mn) 1,331 KSE‐100 Index Weightage (%) 1.5 Free Float 55


Company Description


Fauji Cement Company Limited manufactures and sells ordinary Portland cement in Pakistan. It offers cement for the construction of various projects, such as dams, bridges, highways and motorways, commercial and industrial complexes, residential housing societies, and other structures. The company also exports its products to Afghanistan, as well as to Tajikistan, India, the Middle East, Sri Lanka, East Africa, and South Africa. Fauji Cement Company Limited was incorporated in 1992 and is headquartered in Rawalpindi, Pakistan.

Associated Cos, 49%

Individuals, 25%

Modaraba & MF, 7%

Joint Stock Cos, 5%

Others, 14%

45


4 Jan 2016


Key risks: key risk to our investment case are i) announcement of expansion potentially leading to dividend cut, ii) reversal in global commodity market, iii) work on dams and CPEC projects delay and iv) breakdown in cement price consensus.


Net Sales 15,967 17,532 18,642 20,451 22,246 24,226

Cost of Sales 10,887 11,448 11,615 10,479 11,733 13,433

Operating profit 4,597 5,551 6,385 9,141 9,646 9,948

Other Income – Net 95 152 191 199 153 226

EBITDA 5,870 6,820 7,676 10,437 10,952 11,264


Net Profit 2,097 2,626 4,116 5,656 6,215 6,510

Cash Flow

CF from Operations 5,994 5,853 7,424 6,847 7,514 8,006

CF from Investing (54) (266) (1,335) (250) (250) (250)

CF from Financing (4,567) (6,328) (4,579) (7,003) (6,972) (6,708)

Net Change in Cash 1,373 (741) 1,490 (406) 292 1,048

Ending Cash Balance 1,542 801 2,290 1,890 2,182 3,230

Balance Sheet

Current Assets 5,039 5,188 6,414 5,407 5,864 6,956

Long Term Assets 25,266 24,193 24,115 23,069 22,013 20,947

Total Assets 30,305 29,381 30,528 28,475 27,877 27,903




Total Equity 15,936 15,788 17,418 18,543 19,786 21,088

Key Ratios

EPS 1.4 1.8 2.9 4.2 4.7 4.9

DPS 1.25 1.50 2.50 3.50 3.75 4.00

BVS 12.0 11.9 13.1 13.1 14.9 15.8

PER 26.0 20.5 12.7 8.7 7.9 7.5

Dividend Yield 3.4% 4.1% 6.8% 9.5% 10.2% 10.9%

P/BVS(x) 3.1 3.1 2.8 2.8 2.5 2.3

Sales Growth 38.6% 9.8% 6.3% 9.7% 8.8% 8.9%

Earnings Growth 279.9% 25.2% 56.7% 37.4% 9.9% 4.8%

Gross Margins 32.4% 34.7% 37.7% 48.8% 47.3% 44.6%

Operating Profit Margins 28.8% 31.7% 34.3% 44.7% 43.4% 41.1%


EBITDA Margins 36.8% 38.9% 41.2% 51.0% 49.2% 46.5%

PakistanMarket S

4 Jan 2016

PakistanMarket S

DGKC:

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47


4 Jan 2016


Key risks: key risk to our investment case are i) delay in commissioning of coal based captive power plant, ii) reversal in global commodity market, iii) work on dams and CPEC projects delay and iv) breakdown in cement price consensus.


Net Sales 24,915 26,542 26,104 27,753 28,409 29,273

Cost of Sales 15,589 17,284 16,649 16,404 16,331 17,585

Operating profit 8,090 8,460 9,828 10,933 12,460 12,645

Other Income – Net 1,466 1,647 2,320 1,900 2,185 2,821

EBITDA 9,667 10,250 11,708 12,832 14,466 14,711


Net Profit 5,502 5,965 7,624 8,109 8,843 9,213

Cash Flow


CF from Investing (2,051) (1,394) (7,837) (3,907) (1,472) (1,472)


Net Change in Cash 1,362 841 (1,052) 1,435 5,550 5,906

Ending Cash Balance 468 1,309 257 1,692 7,242 13,148

Balance Sheet

Current Assets 25,983 32,068 31,426 31,283 36,814 42,767

Long Term Assets 37,542 41,213 42,965 44,973 44,438 43,844

Total Assets 63,526 73,282 74,391 76,256 81,252 86,611


Non-Current Liabilities 6,220 5,824 5,511 4,878 4,798 4,798


Total Equity 47,998 61,516 62,296 67,972 74,163 80,612

Key Ratios

EPS 12.6 13.6 17.4 18.5 20.2 21.0

DPS 3.00 3.50 5.00 5.50 6.00 6.25

BVS 110 140 142 155 169 184

PER 11.8 10.8 8.5 8.0 7.3 7.0

Dividend Yield 2.0% 2.4% 3.4% 3.7% 4.1% 4.2%

P/BVS(x) 1.3 1.1 1.0 1.0 0.9 0.8

Sales Growth 38.6% 6.5% -1.7% 6.3% 2.4% 3.0%

Earnings Growth 33.9% 8.4% 27.8% 6.4% 9.1% 4.2%

Gross Margins 37.4% 34.9% 36.2% 40.9% 42.5% 39.9%

Operating Profit Margins 32.5% 31.9% 37.6% 39.4% 43.9% 43.2%


EBITDA Margins 38.8% 38.6% 44.9% 46.2% 50.9% 50.3%

48


4 Jan 2016


UBL makes the grade as one of our top picks from BMA Banking Universe. Operating on solid foundations (CY16E NPL and coverage at 10.2% and 87%, respectively) gives the bank ample space to tap into likely pickup in advances. Together with a very strong non funded income franchise, we expect the bank will likely be able to wither the storm of PIB maturities that is now on the horizon. Besides, on the back of quantitative tightening in the Fed rate, the NIMs of the banks will improve given the ~25% (PKR116bn) of its total loan portfolio is FC denominated. Moreover, the bank is still carrying ~PKR38bn in unrealized gains on its books which may come in handy as bank normalizes its earnings. Valuations have opened up following heavy underperformance of ~23% in CY15 against the benchmark KSE100 index due to difficult operational environment at home and concerns over the bank’s foreign operations amid political unrest in Yemen. However, given adequate provisioning of its loan portfolio and careful lending in GCC, we believe the concerns are somewhat overblown. At last closing, the bank offered a total return of 36% (capital gains: 28% D/Y: 8%) at our TP of PKR199/sh.

Enough strength in balance sheet to cater to advances growth: UBL saw its loan book swell by an average 32% in the last credit growth cycle (CY04‐CY08). We believe the bank, once again, can tap on forthcoming domestic credit growth cycle as it is adequately placed to realize 15% CAGR in advances in CY16‐CY18 given its stable book and asset quality. The bank’s NPLs ratio is expected to improve to 10.2% in CY16 while the coverage will also improve to ~87%, giving ample room to cater to likely uptick in private sector credit demand. Though bank’s CAR ratio currently stands at 15.1%, smaller in comparison with CAR ratios of 16%‐22% of comparables, our working suggests that only a growth in excess of 20% in advances over next 5 years will force the bank to raise additional capital.

Growing Auxiliary Income: UBL remains the best franchise for fee and commission based products as well as the market leader in the branchless banking segment with a total market share of 19%‐21% through its stronghold UBL Omni. Going forward, we forecast the fee and commission income of the bank to post 5yr CAGR of 13% between CY15‐CY20 on the back of expanding branchless banking, expected increase in trading volumes and rising foreign remittances.

Asset quality concerns overblown: UBL’s foreign loan book being concentrated in GCC region, which stood at PKR116bn (25% of bank’s total loan book), can be sighted as the main reason for the bank’s significant underperformance on the bourse during CY15. While the concerns were legitimate in the war hit Yemen, the bank has since adequately provided for its advances and also had reduced its exposure in the country by ~41%, as of Sep’15. Contrary to the general notion, we believe the bank’s strategic presence in GCC gives it a distinctive advantage over its peers, especially in the wake of Fed rate hike, as it will help the bank protect its NIMs given depressed interest rates at home.

Investment Perspective: UBL is our top pick in banking sector, offering a total return of 36% (upside 28%, D/Y 8%). We believe the bank has potential to surprise earnings on the higher side as it carries significant unrealized capital gains (PKR37bn) on its books.

United Bank Limited (UBL)

An established front!

Stock Data


Target Price: 199

Current Price: 155



UBL.KA UBL PA www.ubldirect.com


Dividend Yield 8%


Market Cap (USD mn) 1,811



Shares Outstanding (mn) 1,224


Free Float 40

Company Description


Bestway Group (BG),

61%

General Public &

Others, 34%

FI's, 2%Others, 3%

UBL is engaged in commercial banking and related services. The bank operates over 1,200 branches inside Pakistan including 14 Islamic Banking branches, making it the third largest bank in Pakistan. The bank also operates 17 branches outside Pakistan. UBL’s GDRs are traded at London Stock Exchange. The bank was established in 1959 as a local private sector bank but was nationalized in 1974 by the GoP. It was sold off to a consortium of Abu Dhabi Group of UAE and Bestway Group in 2001 under a privatization program.

UBL: BUY

49


4 Jan 2016


Key risks: key risk to our investment case are i) PIB reinvestment, ii) expected growth in advances fail to materialize, iii) GCC political risks snowballs

Profit & Loss (PKRmn) CY12A CY13A CY14A CY15E CY16F CY17F

Interest Income 73,507 72,846 82,735 91,594 98,552 109,682

Interest Expense 34,948 34,910 37,769 36,779 38,828 44,190

Net Interest Income 38,560 37,936 44,967 54,815 59,724 65,492

Provisions 4,137 1,303 882 3,463 5,203 5,978

NII after Provisions 34,423 36,633 44,085 51,352 54,520 59,514

Non Interest Income 17,131 18,114 19,296 24,525 25,110 27,024

Non Interest Expense 24,703 26,940 29,983 34,061 37,419 41,039

PBT 26,851 27,807 33,398 41,815 42,212 45,500

Tax 8,960 9,193 11,469 15,971 14,774 15,925

PAT 17,891 18,614 21,930 25,844 27,438 29,575

Balance Sheet

Investments 349,590 423,777 497,334 785,969 787,445 832,331

Advances 364,364 390,813 434,264 483,583 557,737 642,925

Total Assets 896,535 1,009,739 1,111,414 1,416,447 1,509,262 1,682,788

Borrowing 68,720 40,574 53,065 185,136 169,411 189,740

Total Deposits 698,430 827,848 895,083 1,028,534 1,129,405 1,264,934

Total Liabilities 804,296 908,825 985,898 1,279,757 1,365,097 1,528,681

Net Assets 92,238 100,914 125,516 136,690 144,165 154,107

Core Equity 78,702 88,558 94,589 105,763 116,330 129,056

Total Equity 92,238 100,914 125,516 136,690 144,165 154,107

Key Ratios

EPS (PkR) 14.6 15.2 17.9 21.1 22.4 24.2

Earnings Growth 15.0% 4.0% 17.8% 17.9% 6.2% 7.8%

DPS (PkR) 8.50 10.00 11.50 12.03 13.00 14.01

DY 5.5% 6.5% 7.4% 7.8% 8.4% 9.0%

P/B (x) 2.1 1.9 1.5 1.4 1.3 1.2

P/E (x) 10.6 10.2 8.6 7.3 6.9 6.4

ROE 20.7% 19.3% 19.4% 19.7% 19.5% 19.8%

ROA 2.0% 2.0% 2.1% 2.0% 1.9% 1.9%

Cost to Income 43.7% 47.8% 46.2% 42.5% 43.7% 44.0%

ADR 52.2% 47.2% 48.5% 47.0% 49.4% 50.8%

IDR 50.1% 51.2% 55.6% 76.4% 69.7% 65.8%

Infection 14.0% 12.1% 11.2% 10.8% 10.2% 9.7%

Coverage 78.0% 87.3% 84.9% 85.8% 87.0% 88.1%

PakistanMarket S

4 Jan 2016

PakistanMarket S

Stock Da

Share Pr

HBL: B

Target

Curren

Price (PKR/S

Reuters

HBL.KA

52‐weeks H

Dividend Yie

Market Cap

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income balance he scrip of 28%

51


4 Jan 2016


Key risks: key risk to our investment case are i) PIB reinvestment, ii) expected growth in advances fail to materialize, iii) GCC political risks snowballs

Profit & Loss (PKRmn) CY12A CY13A CY14A CY15E CY16F CY17F

Interest Income 116,773 120,605 137,842 126,807 130,443 149,591

Interest Expense 59,012 65,207 68,756 59,919 58,780 72,316

Net Interest Income 57,760 55,397 69,087 66,888 71,663 77,275

Provisions 6,767 1,400 1,493 3,578 2,745 3,336

NII after Provisions 50,993 53,998 67,593 63,310 68,918 73,939

Non Interest Income 15,960 18,941 23,512 38,433 35,280 37,709

Non Interest Expense 31,392 36,806 42,590 45,130 49,235 54,017

PBT 35,562 36,133 48,515 56,614 54,963 57,631

Tax 12,770 13,106 16,695 21,755 19,237 20,171

PAT 22,792 23,027 31,820 34,858 35,726 37,460

Balance Sheet

Investments 797,095 826,062 924,307 1,298,645 1,439,266 1,603,486

Advances 499,818 563,701 595,295 632,235 748,148 866,749

Total Assets 1,610,474 1,715,271 1,864,434 2,090,735 2,332,787 2,620,650

Borrowing 196,588 107,864 103,411 119,612 134,331 151,681

Total Deposits 1,214,964 1,401,230 1,524,538 1,708,743 1,919,021 2,166,873

Total Liabilities 1,477,745 1,572,837 1,694,332 1,905,052 2,139,488 2,415,814

Net Assets 132,730 142,434 170,103 185,683 193,300 204,836

Core Equity 118,717 130,634 147,265 162,846 176,476 189,576

Total Equity 132,730 142,434 170,103 185,683 193,300 204,836

Key Ratios

EPS (PkR) 15.5 15.7 21.7 23.8 24.4 25.5

Earnings Growth 15.0% 1.0% 38.2% 9.5% 2.5% 4.9%

DPS (PkR) 6.2 7.3 12.0 14.3 15.8 16.5

DY 3.1% 3.6% 6.0% 7.1% 7.9% 8.2%

P/B (x) 2.2 2.1 1.7 1.6 1.5 1.4

P/E (x) 12.9 12.7 9.2 8.4 8.2 7.8

ROE 19.0% 16.9% 20.6% 19.7% 19.0% 19.0%

ROA 1.5% 1.3% 1.6% 1.6% 1.4% 1.4%

Cost to Income 43.2% 50.8% 46.9% 43.9% 47.4% 48.6%

ADR 41.1% 40.2% 39.0% 37.0% 39.0% 40.1%

IDR 65.6% 59.0% 60.6% 76.0% 74.9% 73.8%

Infection 10.9% 12.7% 12.0% 11.6% 10.5% 9.5%

Coverage 73.4% 80.8% 79.9% 83.4% 83.4% 83.4%

PakistanMarket S

4 Jan 2016

PakistanMarket S

Stock Da

Share Pr

OGDC:

Target

Curren

Price (PKR/S

Reuters

OGDC.KA

52‐weeks H

Dividend Yie

Market Cap

Market Cap

Avg Daily Tu

Avg Daily Tu

Shares Outs

KSE‐100 Ind

Free Float

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: BUY

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nt Price: 117

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Bloomberg

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ny Description

as Development Coand sells oil and gas , 2013, the compalled; and 379 ent wells. The comnd well services. OLimited was fouered in Islamabad,

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53


4 Jan 2016


Key risks: key risk to our investment case are i) another spell of bearish trend in oil prices, ii) impairment of assets or dry well write‐offs and iii) state of law and order situation


Net Sales 223,365 257,014 210,625 186,779 202,280 221,270

Cost of Sales 82,314 92,629 94,594 89,281 95,616 102,780

Operating Profit 141,051 164,385 116,031 97,498 106,664 118,489

Other Income – Net 15,799 19,240 20,230 17,920 18,502 19,186

EBITDA 162,924 197,106 151,383 133,927 145,209 159,292


Net Profit 91,273 123,914 87,249 72,797 80,132 88,198

Cash Flow




Net Change in Cash (13,036) (2,301) (17,586) 5,285 8,441 3,829

Ending Cash Balance 42,415 40,114 22,528 27,813 36,254 40,083

Free Cash Flow to Equity 20,886 24,922 20,365 32,165 42,848 40,387

Balance Sheet

Current Assets 134,329 194,160 219,779 218,788 249,877 285,517

Long Term Assets 279,682 302,073 334,013 365,972 386,220 408,756

Total Assets 414,011 496,233 553,791 584,760 636,097 694,273




Total Equity 312,266 395,671 442,521 484,437 530,162 581,803

Key Ratios

EPS (PkR) 21.2 28.8 20.3 16.9 18.6 20.5

DPS (PkR) 8.3 9.3 7.8 6.8 8.5 9.5

BVS (PkR) 72.6 92.0 102.9 112.6 123.3 135.3

PER (x) 5.5 4.1 5.8 6.9 6.3 5.7

Dividend Yield 7.0% 7.9% 6.6% 5.8% 7.2% 8.1%

P/BVS(x) 1.6 1.3 1.1 1.0 1.0 0.9

EV/EBIDTA 3.0 2.4 3.1 3.6 3.3 3.0

Asset Turnover 0.5 0.5 0.4 0.3 0.3 0.3

Sales Growth 12.9% 15.1% ‐18.0% ‐11.3% 8.3% 9.4%



EBITDA Margin 72.9% 76.7% 71.9% 71.7% 71.8% 72.0%

54


4 Jan 2016


Gul Ahmed Textile Mills Ltd. (GATM), is expected to witness a dismal FY16 on account of i) declining value added export volumes amid global economic slowdown, ii) a potential gas price hike in 2HCY16 and iii) 10% duty imposition on Indian yarn and grey fabric. The 1QFY16 came with a blow to the company’s topline which posted a decline of 11%YoY, primarily on account of declining volumetric value added sales to EU (contributing 34% to the company’s topline) amid Euro‐zone economic crisis. In addition to the aforementioned reasons, i) company’s leveraged nature and ii) unrecorded GIDC pose repercussions for the future earnings stream. PKR depreciation may prove to be a saving grace for the company’s declining export sales, as a net positive impact of PKR0.88/sh can be realized from a depreciation of 1%, however, we do not expect a major depreciation in the currency, going forward. Owing to the aforementioned reasons, we have a ‘SELL’ stance on GATM at our TP of PKR25/sh, posting a downside of 31%.

Did the expansion come in at the right time? FY16 started on a dismal note with 11%YoY contraction in topline owing to lackluster trend in exports amid economic slowdown in EU. With minimal probability of recovery in EU, we believe the company’s expansion into the processing segment might have come in at an inappropriate time. This will continue to keep company’s exports under pressure. Though the company plans to increase its reliance on local sales through further expansion into the retail landscape, we believe this to have limited impact on the company’s topline as the retail expansion will come in gradually and will not be able to completely compensate for the decreasing export volumes.

GIDC reversal: GATM is completely reliant on gas to meet its fuel requirement of roughly 32MW due to adequate availability of this fuel in the South. Hence, the gas tariff hike expected in 2HCY16 will be a burden to the company’s profitability. Every 5% increase in gas tariff will have an impact of PKR0.34/sh on the earnings of the company on an annualized basis. Also, unlike other players in the textile sector, GATM booked a reversal of GIDC in FY14, with total unrecorded GIDC amounting to PKR868mn in FY15. Based on our prudent assumption, we expect the company to record the retrospective GIDC of PKR868mn in FY16 which will have a negative impact of PKR3.7/sh on the company’s earnings.

Highly leveraged nature: GATM is one of the most leveraged companies of the textile sector. To mention, the company’s D:E currently stands at 1.7x (industry average 0.96x) while the interest coverage ratio of the company stands at 1.6x (industry average 2.1x). The high financial leverage will have a profound impact on the bottom‐line in the current scenario where the growth in topline remains depressed. In addition, the company’s long term debt is at fixed interest rates and thus, the lower weighted average cost of debt in FY16 will fail to provide any material support to the profitability.

Valuation: We have a negative stance on GATM due to i) depressed export volumes amid Euro‐zone economic crisis, ii) 10% duty imposition on Indian yarn and grey fabric and iii) unrecorded GIDC, posting a downside of 31% on our TP of PKR25/sh ‐‘SELL’

Gul Ahmed Textile Mills Limited (GATM)

Underperformance to persist

Stock Data


GATM: SELL

Target Price: 25

Current Price: 36



GATM.KA GULA PA www.gulahmed.com


Dividend Yield 0%







Free Float 35

Company Description


Gul Ahmed Textile Mills Limited manufactures and sells textile products in Pakistan, Germany, the United Kingdom, China, the United States, the Netherlands, France, Brazil, the United Arab Emirates, and internationally. The company operates in two segments, Spinning and Processing. The company also operates a chain of 65 retail stores that offer a range of home accessories and fashion clothing products. The company was incorporated in 1953 and is based in Karachi, Pakistan.

Joint Stock Cos, 70%

Foreign Investors,

13%

Individuals, 7%

Investment Cos & MF,

6%

Others, 4%

55


4 Jan 2016



Net Sales 30,243 33,013 33,355 33,970 34,940 36,152

Cost of Sales 25,492 27,037 27,260 28,448 28,421 29,306

Operating Profit 2,120 2,659 2,118 1,013 1,899 2066

Other Income – Net 39 236 343 (25) (8) (8)

EBITDA 2,888 3,508 3,082 2,023 2,973 3,209

Profit Before Tax 852 1,496 783 (266) 620 817

Net Profit 711 1,235 605 (436) 341 527

Cash Flow

CF from Operations 198 2,673 730 (239) 645 869


CF from Financing 957 (586) 8 1,370 546 379

Net Change in Cash (423) 275 (1,153) 30 20 1

Ending Cash Balance 102 115 117 136 155 157

Free Cash Flow to Equity (812) 1,103 (1,056) (2,071) (1,219) (898)

Balance Sheet

Current Assets 13,922 15,896 15,728 17,800 18,285 18,867

Long Term Assets 7,267 8,381 9,215 9,307 9,404 9,508

Total Assets 21,189 24,277 24,943 27,107 27,689 28,376


Non‐Current Liabilities 2,505 2,612 2,802 2,071 1,379 858


Total Equity 5,429 6,660 7,169 6,734 7,074 7,337

Key Ratios

EPS (PkR) 3.1 5.4 2.6 (1.9) 1.5 2.3

DPS (PkR) ‐ 1.50 1.50 ‐ ‐ 1.00

BVS (PkR) 23.8 29.1 31.4 29.5 31.0 32.3

PER (x) 11.0 6.3 12.9 NM 22.9 14.1

Dividend Yield 0.0% 4.4% 4.4% 0.0% 0.0% 2.9%

P/BVS(x) 1.4 1.2 1.1 1.2 1.1 1.1

EV/EBIDTA 6.9 5.7 6.4 9.8 6.7 6.2

Asset Turnover 1.4 1.4 1.3 1.3 1.3 1.3

Sales Growth 20.7% 9.2% 1.0% 1.8% 2.9% 3.5%


Net Profit Margin 2.4% 3.7% 1.8% ‐1.3% 1.0% 1.5%

EBITDA Margin 9.5% 10.6% 9.2% 6.0% 8.5% 8.9%

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Other notable mentions

57


4 Jan 2016


Kohat Cement Company Limited (KOHC)

Kohat Cement Company Limited (KOHC) offers the highest total return and earnings growth in BMA Cement Universe. The prime drivers for the company are i) lowest capacity utilization at 73% amongst peers, ii) leading local dispatch growth amongst major players (18% in 5MFY16 compared to 16% of industry), iii) reaping maximum benefit from decline in FO prices and iv) expected commissioning of WHR plant in Dec’15. At our target price of PKR352/sh, the scrip offers a total return of 50% ‐ ‘BUY’.

Lowest utilization amongst peers: With the country in a high growth phase of cement demand, companies with the lowest utilization and right location are expected to be the prime beneficiaries. KOHC, with a utilization level of 72%, has enough capacity to cater to the growing local cement demand till FY20 (assuming dispatch CAGR of 10%). The company is already leading the pack amongst major players with a local dispatch growth of 24% in 1HFY16 (Industry growth: 14%). We expect the trend to continue however, the growth quantum may slowdown as the favorable base effect subsides.

Prime beneficiary of declining FO prices: KOHC is expected to reap the maximum benefit from decline in FO prices (down 37%FYTD). In this regard, the company will likely shift 70% of its power requirement to FO based self generation priced at 43% lower rate than existing grid imports. This shift is expected to add PKR506mn (PKR3.29/sh) to the bottom‐line of the company.

Commissioning of WHR plant: KOHC, is currently in the process of installing a 15MW WHR, expected to be commissioned by Dec’15. In current situation, the project is expected to partially displace FO based captive generation and thus, adding PKR325mn (PKR2.1/sh) to the bottomline.

Key risks: i) Another delay in commissioning of WHR, ii) relapse of mining lease issue, iii) reversal in global commodity market, iv) work on dams and CPEC projects delay and v) breakdown in cement price consensus.

Service Industries Limited (SRVI)

The key value drivers: We foresee upside potential in the scrip due to substantially decreasing raw material costs amid depressed international commodity markets and an expected increase in size of the pie (tyre and footwear divisions, both). Our back of the envelope calculations, based on forward P/E multiples of comparable footwear and tyre manufacturers, suggest an indicative TP of PKR1,400/sh with an upside of ~65%.

Commodity markets slump: The global commodity markets slump has hit hard the natural and synthetic rubber prices, especially in the 2HCY15. Singapore/Malaysia rubber prices hover around USD1.2/kg (Nov’15 figure), down 33% since Jun’15, as per World Bank. With rubber being the main constituent of a tyre, local tyre manufacturers such as SRVI stand to gain from the significant decline in their raw material costs, driving gross margins up. Given the downtrend in oil prices (an important raw material for synthetic rubber) and the global economic slowdown hampering demand, we do not expect a major spike in rubber prices soon. With our CY16 average rubber price assumption of USD1.3/kg, we have projected CY16 EPS of PKR125/sh (up 80%YoY).

Stock Data

KOHC: BUY

Target Price: 352

Current Price: 241



KOHC.KA KOHC PA www.kohatcement.com


Dividend Yield 4%







Free Float 30

Not Covered

Current Price: 850

Stock Data



SVCI.KA SRVI PA www.servisgroup.com




Avg Daily Turnover (PKR mn) 1.9




Free Float 50

58


4 Jan 2016


Growing domestic market: We anticipate strong sales growth potential for the company’s tyre division owing to improving macros and strengthening demand in the automobile industry. SRVI’s strong position in the large tyre replacement market will further support the growth in company’s sales. The enhanced sales volumes will also help the company achieve higher utilization compared to the current ~75% level of the installed capacity. SRVI is also performing well in the local footwear division with 9MCY15 period witnessing a 17%YoY revenue growth. Local demand roughly made up for the decline in footwear division export sales mainly due to the EU economic slowdown and 17%YoY appreciation in EUR/PKR rate.

Reduced finance cost: Given a Debt:Asset ratio of 1:3, the Company also benefits from the historic low levels of interest rates in the country. We expect effective interest rate in CY16 to remain lower by ~65bps than CY15 average. Moreover, it is pertinent to note that SRVI is likely to benefit from PKR depreciation as the company’s FX denominated export sales, estimated at ~PKR4.9bn for CY15 (28% of revenue), can more than make up for its currency exposure to imported raw material/rubber (CY15 estimate of ~PKR4.5bn).

Potential risks: Key risks include i) sudden reversal/spike in international rubber prices during CY16 lowering gross margins, ii) downtrend in footwear export volumes in the long run and iii) unexpected decrease in domestic automobile industry demand.

Ferozesons Laboratories

Ferozesons Laboratories makes the cut as one of our favorite pharmaceutical companies. The company is currently enjoying a monopolistic position in Hepatitis C treatment in the country through its groundbreaking new technology “Sovaldi”. While there have been talks that company face competition from new entrants, the snail’s pace of developments will allow the company to enjoy its monopolistic position for a foreseeable future. Company reportedly served 18,000 customers per month during 1QFY16 and consequently its earnings clocked at PKR756mn (EPS: PKR24.6). Our base case estimates forecasts a full year earnings of PKR3.1bn (EPS: PKR100.9) for the company in FY16. Assuming the scrip trades at a P/E of 18x (at a discount of 31% from the peers), a tentative TP works out at PKR1,816/sh, offering an upside of 64% on the last closing.

Phenomenal growth in earnings in FY16: The company served an average of 18,000 customers per month in 1QFY16 and consequently its earnings clocked at PKR756mn (EPS: PKR24.6). As per our estimates the effective net margins of the company’s Sovaldi franchise clocked at ~31% during 1Q, significantly higher than previously anticipated margins of ~10%. Assuming status‐quo on the margins and the number of customers served, we expect the company to announce a full year earnings of PKR3.1bn (EPS: PKR100.9) in FY16, up 3.3x.

Impasse on new licenses: Market murmurs gained momentum in 2HCY15 about DRAP considering issuing new licenses for Hep C treatment with a view of reducing the cost of treatment. In this regards, 14 companies we shortlisted initially and the list was later reportedly shot down to three candidates. However even those who were shortlisted have not been issued new licenses to market the drug and thus, prolonging the honeymoon period for FEROZ. In the event DRAP does award the licenses, it will take away the monopolistic position of FEROZ and we expect the

Not Covered

Current Price: 1,107

Stock Data

Price (PKR/Share) 1,107


FERO.KA FEROZ PA www.ferozsons‐labs.com

52‐weeks High/Low (PKR) 1,133.8 / 484.2







Free Float 35

59


4 Jan 2016


competitors to undercut the company, however, there is a high likelihood that it will be towards the tail‐end of FY16 or the beginning of FY17.

Huge cash reserves: As per its 1QFY16 results, the company currently has PKR2.4bn of cash and ST investments sitting on its books while company’s quarterly cash flow generation is well above PKR1.0bn. This provides the company not only enough room to announce a healthy payout, or conversely, have recurring cash returns on those investments. As per our estimate, the annualized earnings impact of return on cash reserve will be around PKR5.0/sh ‐ PKR5.5/sh.

Investment perspective: We expect the company to announce a full year FY16 earnings of PKR100.9/sh, based on 15,000 customers served per month and a status‐quo on its current net margins. However, the earnings can potentially surprise on the higher side if the number of customers served in any given month increases. Every new 1,000 customers served will result in additional earnings of PKR1.0/sh‐PKR1.5/sh on annualized basis.

Potential risks: i) New licenses for Sovaldi issued, ii) competing drugs introduced, iii) government takes new regulatory measures effecting price

Amreli Steels Limited (ASTL)

The key value drivers: Our liking for ASTL is rooted in its high (yet sustainable) gross margins courtesy depressed international commodity markets, the imminent growth in domestic demand for steel rebars and the company’s expansion plans (already underway). Based on our back of the envelope calculations, we have a TP of PKR85/sh with an upside of 41%.

Surge in gross margins: Global commodity markets slump has been highly beneficial for ASTL as the company’s main raw material (steel scrap) costs have nosedived with shredded scrap prices down 47%CYTD. In contrast, rebar prices have not been significantly reduced by the local manufacturers (prices down roughly 6%CY15TD). The high tariff barriers on import of finished steel products keeps the industry relatively insulated. Consequently, gross margins jumped to 19.0% in 1QFY16 compared to 13.6% during SPLY! Moving forward, we expect international commodity markets to remain subdued owing to global glut and weak demand amidst the economic slowdown in China and EU. We expect scrap price to average at USD200/ton in remaining FY16 compared to the current USD175/ton and 1HFY16 average USD235/ton levels, leading to notable savings of PKR5.0/sh in remaining FY16 earnings.

Demand explosion: The iron and steel products industry witnessed a growth rate of ~35%YoY during FY15. Moving forward, economic growth spearheaded by infrastructure development (CPEC related and otherwise) is expected to boost Pakistan’s steel demand including rerolled steel bars. Demand of cement is often regarded as a proxy for demand of steel to be used in construction. In this regard, given our expectation of a growth rate of ~9% in cement demand for next 5 years, we anticipate demand of steel products to further strengthen in years to come.

Capacity expansion: ASTL operates at nearly full capacity currently, that is, 180k tons of steel per annum. To cater to the forthcoming demand boom in the country, the company is undergoing a major expansion plan worth ~PKR3.4bn to increase its annual steel melting/rerolling capacity to 350k/480k tons, up 1.75x/2.67x of the current capacity, by 4QFY17. The expansion plans will also provide ASTL cost efficiencies in gas and electricity consumption owing to improved technology.

Not Covered

Current Price: 60

Stock Data Price (PKR/Share) 60


AMSL.KA ASTL PA www.amrelisteel.com







KSE‐100 Index Weightage (%) NA

Free Float 25

60


4 Jan 2016


Potential risks: An unexpected turnaround/uptick in steel scrap prices globally and any delay in implementation of expansion project remain the two major risks for ASTL.

Al Shaheer Corporation (ASC)

The key value drivers: ASC is our preferred play in the consumer sector based on its increased focus on the relatively higher margin domestic market. The company is pursuing aggressive retail expansion and we foresee strong growth potential especially for its mass market Khaas Meat brand (5 yr sales CAGR of 63%) in a currently unorganized market. ASC’s large exposure to export markets coupled with the forthcoming entry in new business segments will likely diversify the income stream of the company. The scrip currently offers an upside of 68% at our blended approach based TP of PKR104/sh

Retail expansion: ASC is focusing more on the higher margin domestic segment and plans to increase its retail footprint in the country by adding new standalone/shop‐in‐shop outlets for Meat One and Khaas Meat in FY16F and beyond. The numbers had already reached 30/24 stores for Meat One/Khaas Meat by Nov’15 and our base case model has incorporated 35/28 stores by FY16F end. We have projected 5 years sales CAGR of 29%/63% for Meat One/Khaas Meat with the two brands likely contributing 19%/12% to the topline by FY20F (up from 16%/3% share in revenues during FY15).

New ventures: ASC is venturing in the poultry segment (other than the current beef and mutton products) by incorporating a fully owned subsidiary which will include both raw chicken meat and processed meat products. Moreover, the new subsidiary will avail tax holiday till Dec’20 under the GoP Finance Act 2015 tax exemptions on Halal meat business. As per our calculations, the poultry subsidiary will contribute PKR0.9/sh to the EPS during its first full year of operations (FY18).

Export benefits: Exports accounted for 76%/71% of the topline during FY15/1QFY16 and will continue to be the single largest revenue generator moving forward. Courtesy this export exposure, ASC will benefit from any USD‐PKR rate depreciation moving forward.

Potential risks: Risks to our valuation include i) supply chain disruptions in local or export markets, ii) delay in implementation of expansion plans (retail stores, new business ventures), iii) decline in meat prices in the long run affecting margins and iv) any sudden and unexpected movement in domestic discount rate and USD‐PKR rate.

Stock Data



ASC.KA ASC PA www.alshaheer.net


Dividend Yield 0%






KSE‐100 Index Weightage (%) NA

Free Float 23

ASC: BUY

Target Price: 104

Current Price: 62


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This research report is for information purposes only and does not constitute nor is it intended as an offer or solicitation for the purchase or sale of securities or other financial instruments. Neither the information contained in this research report nor any future information made available with the subject matter contained herein will form the basis of any contract. Information and opinions contained herein have been compiled or arrived at by BMA Capital Management Limited from publicly available information and sources that BMA Capital Management Limited believed to be reliable. Whilst every care has been taken in preparing this research report, no research analyst, director, officer, employee, agent or adviser of any member of BMA Capital Management Limited gives or makes any representation, warranty or undertaking, whether express or implied, and accepts no responsibility or liability as to the reliability, accuracy or completeness of the information set out in this research report. Any responsibility or liability for any information contained herein is expressly disclaimed. All information contained herein is subject to change at any time without notice. No member of BMA Capital Management Limited has an obligation to update, modify or amend this research report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. Furthermore, past performance is not indicative of future results.

The investments and strategies discussed herein may not be suitable for all investors or any particular class of investor. Investors should make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives when investing. Investors should consult their independent advisors if they have any doubts as to the applicability to their business or investment objectives of the information and the strategies discussed herein. This research report is being furnished to certain persons as permitted by applicable law, and accordingly may not be reproduced or circulated to any other person without the prior written consent of a member of BMA Capital Management Limited. This research report may not be relied upon by any retail customers or person to whom this research report may not be provided by law. Unauthorized use or disclosure of this research report is strictly prohibited. Members of BMA Capital Management and/or their respective principals, directors, officers and employees may own, have positions or effect transactions in the securities or financial instruments referred herein or in the investments of any issuers discussed herein, may engage in securities transactions in a manner inconsistent with the research contained in this research report and with respect to securities or financial instruments covered by this research report, may sell to or buy from customers on a principal basis and may serve or act as director, placement agent, advisor or lender, or make a market in, or may have been a manager or a co‐manager of the most recent public offering in respect of any investments or issuers of such securities or financial instruments referenced in this research report or may perform any other investment banking or other services for, or solicit investment banking or other business from any company mentioned in this research report. Investing in Pakistan involves a high degree of risk and many persons, physical and legal, may be restricted from dealing in the securities market of Pakistan. Investors should perform their own due diligence before investing. No part of the compensation of the authors of this research report was, is or will be directly or indirectly related to the specific recommendations or views contained in the research report. By accepting this research report, you agree to be bound by the foregoing limitations.

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Stock Rating

Investors should carefully read the definitions of all rating used within every research reports. In addition, research reports carry an analyst’s independent view and investors should ensure careful reading of the entire research reports and not infer its contents from the rating ascribed by the analyst. Ratings should not be used or relied upon as investment advice. An investor’s decision to buy, hold or sell a stock should depend on said individual’s circumstances and other considerations. For BMA’s rating definitions (based on price returns), please see our table below:

Buy >20% upside potential

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Reduce <=‐5% to >=‐20% downside potential

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