Market Pulse. Inter. ICI: Earnings growth intact despite drag from Life Sciences segment. Pakistan Chemicals

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1 Inter Pakistan Chemicals Research Entity Number REP-085 ICI: Earnings growth intact despite drag from Life Sciences segment We revisit our earnings estimates for ICI post poor 1QFY19 results. While we reduce our TP to PKR818/sh (previously PKR925/sh), we retain our Buy stance. Major drags resulted from (i) ) 94% yoy higher finance cost, (ii) absence of one-time tax credits and (iii) 1.4 ppt yoy lower GMs due to slowdown in the Life Sciences segment. The Life Sciences segment s topline declined by 13% yoy in 1QFY19 (ban on rbst injections in Jan 18), in contrast to 5-yr historical CAGR of 17%. We believe ICI s lucrative Life Sciences segment (25% of FY18 EBITDA) will likely remain under pressure in the medium term, until new product launches take place.in the interim, the segment may drag on ICI s margins and profitability, particularly in FY19F. ICI s legacy businesses (Soda Ash and Polyester combined EBITDA contribution of 60%) are expected to partially offset the drag from Life Sciences segment. We draw attention to ICI s FY18-21F earnings CAGR of 16%, which underscores retention of our Buy stance on the scrip. Maintain Buy with TP of PKR818/sh We revisit our investment case on ICI Pakistan Ltd (ICI) post 1QFY19 results. ICI posted 1QFY19 NPAT of PKR539mn (EPS: PKR5.83), down 34% yoy. The decline in earnings was majorly led by (i) 94% yoy higher finance cost (additional borrowing for CAPEX in Morinaga infant milk manufacturing facility) and (ii) absence of one-time tax credits (PBT declined 22% yoy). We incorporate (i) higher risk free rate of 10%, (ii) revised macroeconomic assumptions, (iii) lower dividend income from 40% owned NutriCo, (iv) 30% gas price hike (10% of COGS) and (v) slower growth in Life Sciences Segment. Our earnings estimates are down by 21% on average over our projection horizon. Life Sciences Business expected to be a drag in near-term ICI has now posted poor results in two consecutive quarters, where the decline resulted from slowdown in Life Sciences segment, ensuing from (i) ban on import and marketing of rbst injections (Jan 18) and (ii) slow-down in regulatory approvals for ICI s pharmaceutical sub-segment. To note, the Life Sciences segment s topline declined by 13% yoy in 1QFY19, in contrast to 5-yr historical CAGR of 17%. We expect ICI s lucrative Life Sciences segment (25% of FY18 EBITDA) to remain under pressure in the medium term until new product launches from acquired manufacturing facilities takes place. In the interim,the segment may drag ICI s margins and profitability, particularly in FY19F. ICI s legacy businesses stand strong ICI s legacy businesses (Soda Ash and Polyester combined EBITDA contribution of 60%) are expected to partially offset the drag from Life Sciences segment. We flag that the operating profits from Soda Ash segment increased 25% yoy in 1QFY19, while Polyester segment posted a turnaround with operating profit of PKR129mn in 1QFY19 vs. loss of PKR14mn in the same period last year. We highlight (i) 5.5/7% volumetric growth in Soda Ash segment for FY19/20F, and (ii) further expansion in Light Soda Ash capacity (75K tons) by FY20F to result in Soda Ash segment s EBITDA to grow at a 3 yr CAGR of 16%. Meanwhile, (i) 5% on average hike in international PSF prices coupled with (ii) 6% decline in oil derived raw material (PET) prices 2QFY19 to date is expected to result in favorable primary margins. With volumetric growth steady in Polyester segment, we expect healthy primary margins to result in steady operating profits from the segment vs. losses historically. Earnings to grow at a 3 yr CAGR of 16% While FY19F earnings are expected to post a decline, we highlight earnings CAGR of 16% across FY18-21F that underscores our Buy stance on the scrip. Our TP of PKR818/sh (revised down 11% from PKR925/sh) implies 15% upside on last close. ICI has rallied 17% from its CYTD low, where we advise investors to build positions on dips. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 3,4 &5 Intermarket Securities is the Local Research Partner of Exotix Capital Ailia Naeem ailia.naeem@imsecurities.com.pk Ext: November 2018 ICI Pakistan Limited Price (PKR/sh) TP (PKR/sh) Stance Buy Upside 15.4% Fwd D/Y 2.3% Total Return 17.7% Bloomberg / Reuters ICI PA / ICI.KA Mkt Cap (US$mn) m Hi-Low (PKR/sh) 920/ m Avg. Daily Vol ('000 shrs) m Avg. Traded Val (US$mn) 0.10 ICI Valuation Snapshot FY18A FY19F FY20F FY21F EPS (PKR) EPS Growth (%) -6.7% -1.6% 28.0% 32.4% PER (x) DPS (PKR) DY (%) 2.3% 2.3% 2.9% 3.9% PBV (x) ROE (%) 16.9% 15.4% 17.9% 21.2% EV/EBITDA (x) Source: IMS Research ICI vs. KSE100 Index 20% 10% 0% -10% -20% -30% Jan-18 Source: IMS Research ICI Apr-18 Jul-18 KSE100 Index Oct-18

2 KSE100 Index & Volume Earnings yield vs. T-bill spread 49,000 47,000 45,000 43,000 41,000 39,000 37, % 6.0% 5.0% 4.0% 3.0% 2.0% 35,000 - Jan-18 Apr-18 Jul-18 Oct-18 Vol. Shares (mn) - Rhs KSE100 Index pts. Earnings Yields - 12m Tbills Spread Source: PSX, IMS Research Sector wise FIPI Flows (US$mn) 20- MTD CYTD FYTD E&P 0.06 (6.2) (132.5) (82.6) Food 0.04 (0.6) (9.3) (9.8) Telecom 0.01 (0.1) (4.4) (6.2) Textile 0.00 (6.3) (25.3) (15.0) Power (0.09) 1.0 (31.2) (16.2) OMC (0.12) (2.4) (20.1) (12.4) Fertilizer (0.25) Other (0.33) (4.0) 38.4 (16.2) Banks (0.65) (14.0) (236.8) (140.6) Cement (2.41) (17.1) (50.2) (46.6) Source: NCCPL World Indices Last Close DoD Δ DoD Δ (%) CYTD Δ (%) FYTD Δ (%) Pakistan 41, % 2.3% -1.2% China 2, % -20.0% -7.1% Hong Kong 25, % -13.6% -10.8% India 35, % 4.2% 0.1% Indonesia 6, % -5.5% 3.6% Malaysia 1, % -4.8% 1.1% Japan 21, % -5.2% -3.2% Singapore 3, % -11.0% -7.4% Korea 2, % -15.6% -10.5% Taiwan 9, % -8.4% -10.1% Bangladesh 5, % -15.1% -2.0% Sri lanka 5, % -6.6% -4.0% Philippines 7, % -14.7% 1.5% Thailand 1, % -8.1% 1.0% Vietnam % -6.6% -4.3% USA 2, % -1.2% -2.8% UK 6, % -9.6% -9.0% Germany 11, % -14.3% -10.1% Portfolio Flows (US$mn) Current 5D MTD 12M FYTD CYTD Total FIPI (3.74) (30.4) (45.4) (506.2) (320.7) (454.3) Individuals (1.1) Companies (2.2) Banks / DFI (0.4) (62.3) 3.1 (61.6) NBFC (0.2) (0.1) (0.8) Mutual Funds (3.8) 29.5 (6.7) 9.7 Other Organization Broker Trading (0.1) 1.4 (0.2) (31.8) (10.7) (28.9) Insurance Companies Source: NCCPL *Last 5 working days Commodity Prices Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%) Gold - US$/oz 1, % -4.1% -5.8% -2.0% Oil- US$/bbl % -4.5% -10.0% -26.7% Cotton US /lb % 12.3% 0.2% -6.1% Coal - US$/MT % 1.9% -2.3% -10.8% CRY Index % -2.5% -4.6% -7.7% Forex & Money Close DoD Δ YoY Δ bps CYTD Δ bps FYTD Δ bps 6m Tbill yield (%) Y PIB yield (%) m Kibor (%) Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%) PKR/US$ % 27.1% 21.4% 10.3% PKR/EUR % 23.1% 15.9% 8.2% PKR/JPY % 26.8% 21.6% 8.6%

3 I, Ailia Naeem, certify that the views expressed in the report reflect my personal views about the subject securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this report. I further certify that I do not have any beneficial holding of the specific securities that I have recommendations on in this report. Ratings Guide* Upside Buy More than 15% Neutral Between 0% - 15% Sell Below 0% *Based on 12 month horizon unless stated otherwise in the report. Upside is the percentage difference between the Target Price and Price. Valuation Methodology: We use multiple valuation methodologies in arriving at a Target Price including, but not limited to, Discounted Cash Flow (DCF), Dividend Discount Model (DDM) and relative multiples based valuations. Risks: (i) Continued decline in Life Sciences segment, (ii) Oversupply in Soda Ash to be price-detrimental, (iii) Decline in PSF margins, and (iv) Cannibalism in infant milk category. Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information, opinions and estimates herein are not direct at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject Intermarket Securities Limited to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable where such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness and correctness. This report makes use of forward looking statements that are based on assumptions made and information currently available to us and those are subject to certain risks and uncertainties that could cause the actual results to differ materially. No part of the compensation of the author(s) of this report is related to the specific recommendations or views contained in this report. This report is not a solicitation or any offer to buy or sell any of the securities mentioned herein. It is meant for information purposes only and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this report, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. Neither Intermarket Securities Limited nor any of its affiliates or any other person associated with the company directly or indirectly accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. Subject to any applicable law and regulations, Intermarket Securities Limited, its affiliates or group companies or individuals connected with Intermarket Securities Limited directly or indirectly may have used the information contained herein before publication and may have positions in, or may from time to time purchase or sell or have a material interest in any of the securities mentioned or may currently or in future have or have had a relationship with, or may provide investment banking, capital markets and/or other services to, the entities mentioned herein, their advisors and/or any other connected parties

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