Market Pulse. Inter. Expect profits to grow substantially in 2QCY18. Pakistan Fertilizer

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1 Inter Pakistan Fertilizer Expect profits to grow substantially in 2QCY18 Research Entity Number REP-085 We expect IMS Fertilizer Universe to post strong profit growth of 69% YoY for 2QCY18, where core fertilizer profits (ex-engro) are expected to grow 39% YoY. We anticipate primary margins to recover on a YoY basis amid lower discounts and easing inventory burden, despite 23% YoY drop in Urea volumes during the period. We have also revisited our investment case for Fertilizers with revised TPs (up 3-16%), led by +3-7% uptick in CY18F-20F EPS, after accounting for recent hike of PRs50 per bag in Urea prices. We continue to like concessionary gas based players like EFERT and FATIMA among core fertilizer names, whereas ENGRO provides an attractive blend of earnings growth and defensive attributes. Among core fertilizer plays, FFC is likely to post highest EPS growth of 72% YoY in 2QCY18, through better primary Urea margins and mounting GIDC accruals. ENGRO would likely realize higher earnings growth (2QCY18: up 3.6x YoY) on low base effect amid higher super tax in the SPLY. Reversing earnings cycle; expect profits to grow substantially in 2QCY18 We expect IMS Fertilizer Universe to post cumulative profit after tax of PRs11.5bn in 2QCY18, up 69% YoY. Excluding ENGRO, core-fertilizer profits are expected to grow 39% YoY, wellsupported by lower price discounts, and alleviating inventory pressures. ENGRO is likely to post highest earnings growth of 3.6x (EPS: PRs6.37), amid a low base effect. Among core fertilizer plays, FFC is likely to post highest growth of 72% YoY, supported by better primary Urea margins and mounting GIDC accruals relieving burden of working capital financing and healthy other income. Note that earnings can surprise if deferred liabilities are reversed amid change in future corporate tax rates (positive for FATIMA and EFERT). Volumes disappointed to an extent During 2Q, Urea offtake plummeted 20%YoY (down 23% YoY including exports), while DAP offtake posted growth of 15% YoY. Contrast in consumption of nutrients implies delay in sowing of Kharif crops, which should make up for healthy Urea offtakes in the latter half of CY18. While water availability remains a principal concern for crop plantation, we believe industry should be able to sell at least 5mn tons Urea, which is very close to the industry s average production of mn tons p.a., in our view. while profit growth should be led by prices With substantial decline in inventories, and rising end-consumer prices, manufacturers passed-on c. PRs100 per bag of Urea in May While there is lack of clarity regarding the nature of this pass-on, we believe manufacturers would likely be prudent in booking subsidy, and the pass-on would essentially be a replacement of cash subsidy. This should result in c. PRs70 per bag higher YoY retention prices for Urea, but QoQ retention prices should remain flattish. Recall that since May 18, manufacturers have cumulatively passed-on over c. PR200 per bag of Urea on dealer transfer basis (PRs100/bag on account of subsidy), which should reflect mostly in coming quarters. Estimates revised up on Urea price increase; Overweight stance maintained We have also revisited up our investment case for Fertilizers with 3-16% upgrade in our target prices, post +3-7% revision in earnings estimates over next three years. This change is based on recent hike in Urea prices by c. PRs50/bag and possibility of further increase in Urea prices - against potential increase in gas prices. We continue to like concessionary gas based players like EFERT (TP: PRs86/sh) and FATIMA (TP: PRs39/sh) among core fertilizer names. ENGRO (TP: PRs362/sh) provides an attractive blend of earnings growth (5yr CAGR: 26%) and defensive attributes (CY19F: D/Y: 8.7%). Though FFC (TP: PRs111/sh) remains the biggest beneficiary of rise in Urea prices, uptick in gas prices should restrict the growth potential. Thematically attractive attributes of the sector coupled with strong earnings momentum warrant an Overweight stance, in our view. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 3,4 &5 Intermarket Securities is the Local Research Partner of Exotix Capital IMS Fertilizer Universe Abdul Samad Khanani abdul.samad@imsecurities.com.pk Ext: July 2018 Price (PRs) TP (PRs) Upside Stance FFBL % Buy FATIMA % Buy ENGRO % Buy FFC % Buy EFERT % Neutral Fertilizer Previews Urea DAP (PRs) 2Q18 2Q17 YoY YoY YoY FFC % -10% 81% EFERT % -18% 107% FATIMA % 6% n.a. FFBL (0.38) (0.27) 41% 4% -25% ENGRO % n.a. n.a. IMS Fertilizer Universe P/E (x) P/B (x) DY (%) 19F 20F 19F 20F 19F Fert. Sector % FFBL % FATIMA % ENGRO % FFC % EFERT %

2 KSE100 Index & Volume Earnings yield vs. T-bill spread 54,000 50,000 46,000 42,000 38,000 34,000 30,000 1, % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jul-17 Aug-17 Oct-17 Nov-17 Jan-18 Feb-18 Apr-18 May-18 Jul-18 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Vol. Shares (mn) - Rhs KSE100 Index pts. Earnings Yields - 12m Tbills Spread Source: PSX, IMS Research Sector wise FIPI Flows (US$mn) 17-Jul-18 MTD CYTD FYTD Cement (0.84) (9.5) (13.1) (9.5) E&P (0.36) (6.0) (55.8) (6.0) OMCs (0.26) (4.0) (11.7) (4.0) Banks (0.23) (24.8) (120.9) (24.8) Others (0.09) (2.3) 52.4 (2.3) Food (0.04) (0.9) (0.4) (0.9) Telecom (0.02) (0.9) 1.0 (0.9) Power (0.01) (1.2) (16.2) (1.2) Textile (0.00) (0.4) (10.7) (0.4) Fertilizer (4.7) 3.1 Total (1.7) (46.7) (180.1) (46.7) World Indices Last Close DoD Δ DoD Δ (%) CYTD Δ (%) FYTD Δ (%) Pakistan 39, % -1.3% -4.7% China 2, % -15.4% -1.7% Hong Kong 28, % -5.8% -2.7% India 36, % 7.2% 3.1% Indonesia 5, % -7.8% 1.1% Malaysia 1, % -3.3% 2.7% Japan 22, % -0.3% 1.8% Singapore 3, % -4.8% -0.9% Korea 2, % -6.9% -1.2% Taiwan 10, % 1.3% -0.5% Bangladesh 5, % -14.7% -1.5% Sri lanka 6, % -3.0% -0.2% Philippines 7, % -13.7% 2.6% Thailand 1, % -7.3% 1.9% Vietnam % -6.4% -4.1% USA 2, % 5.1% 3.4% UK 7, % -0.8% -0.1% Germany 12, % -2.0% 2.9% Portfolio Flows (US$mn) Current WTD* MTD 12M FYTD CYTD Total FIPI (1.7) (26.7) (46.7) (333.9) (46.7) (180.2) Individuals Companies Banks / Dfi (2.6) (4.5) 6.8 (6.5) 6.8 (57.8) NBFC (0.2) (0.1) 0.5 (7.3) 0.5 (0.2) Mutual Funds (2.3) (7.6) (33.9) (57.8) (33.9) (17.4) Other Organization Broker Trading (0.2) 3.4 (0.9) (42.5) (0.9) (19.0) Insurance Companies Source: NCCPL Commodity Prices Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%) Gold - US$/oz 1, % -0.5% -5.8% -2.0% Oil- US$/bbl % 47.2% 12.1% -8.7% Cotton US /lb % 30.4% 12.4% 5.3% Coal - US$/MT % 30.9% 12.4% 2.7% CRY Index % 8.7% -1.4% -4.6% Forex & Money Close DoD Δ YoY Δ bps CYTD Δ bps FYTD Δ bps 6m Tbill yield (%) Y PIB yield (%) 9.93 (0.05) m Kibor (%) Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%) PkR/US$ % 21.7% 16.2% 5.6% PkR/EUR % 24.7% 13.8% 6.3% PkR/JPY % 21.9% 16.4% 4.0%

3 I, Abdul Samad Khanani, 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) Decline in Urea demand, (ii) rising inventory levels amid seasonal slowdown in sales and (iii) immediate repayment of GIDC accruals. 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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