KSE-100: Profitability portrays a 9.6% YoY improvement during CY17 5-March-2018

Transcription

1 REP-300 KSE-100: Profitability portrays a 9.6% YoY improvement during CY17 5-March-2018 Analyst: AHL Research ahl-research@arifhabibltd.com Best Domestic Equity House Best Equity House Corporate Finance House of the Year Top 25 Listed Companies

2 KSE-100 Profitability Profitability Increases by 9.6% YoY During CY17 KSE-100 profitability recorded a 9.6% uptick YoY in CY17, driven primarily by Oil & Gas Exploration Companies (+53% YoY). While Automobile Assemblers (+36% YoY) and Oil & Gas Marketing Companies (+34% YoY) were also prominent contributors to the earnings surge. We have adjusted one-timers and extra ordinary items to arrive at the change in core profitability of the sectors including gain on disposal of shares of EFERT, EFOODS and ABL recognized in the bottom-line of ENGRO and IBFL. Sectors leading the profitability chart during CY17 are Textile Spinning (+889% YoY), Technology & Communication (+120.4% YoY) and Real Estate Investment Trust (+118.3% YoY). During CY17, the KSE-100 index declined by 7,335 points majorly owed to by Cement (-2,356 points), Commercial Banks (-2,172 points) and Power Generation & Distribution (-850 points). On the other hand, E&P Companies positively contributed 596 points during the same period. 2

3 KSE-100 Profitability Profitability Increases by 9.6% YoY During CY17 On a QoQ basis, the index depicted a 3.0% rise in profitability led essentially by Textile Composite (+291% QoQ), Leather and Tanneries (+214% QoQ) and Paper and Board (+194% QoQ). During 4QCY17, the KSE-100 index declined by 1,938 points majorly contributed by Power Generation & Distribution (-531 points), Oil & Gas Marketing Companies (-519 points) and Cement (-401 points). On the other hand, E&P Companies positively contributed 754 points during the same period. We have based our analysis on KSE-100 index companies. 84 companies have announced their results and have been included in this analysis while the remaining 16 companies have not yet disclosed their results. The companies which have been included in our analysis represent almost 83.6% of the market capitalization of the KSE-100 index. 3

4 KSE-100 Profitability Exhibit: KSE-100 Sector Profitability (PKR mn) Weight CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ KSE100 Index 540, , % 135, , % 131, % Automobile Assembler 4.0% 31,440 23, % 7,934 6, % 7, % Automobile Parts & Accessories 0.8% 2,657 3, % 774 1, % % Cement 8.8% 49,663 58, % 11,724 15, % 12, % Chemicals 1.2% 6,542 6, % 1,573 1, % 1, % Commercial Banks 24.8% 124, , % 30,563 31, % 30, % Engineering 2.4% 7,897 6, % 2,239 1, % 2, % Fertilizer* 12.1% 31,259 37, % 12,054 16, % 7, % Food & Personal Care-Pruducts 2.4% 17,034 15, % 3,568 2, % 4, % Glass & Ceramics 0.3% 2,585 2, % % % Insurance 2.2% 5,996 5, % 1,730 1, % 1, % Leather & Tanneries 0.2% 1,523 1, % % % Leasing Companies 0.1% % (180) 191 nm 180 nm Miscellaneous 1.6% 1,166 1, % % % Modarabas 0.0% % % % Oil & Gas Exploration Companies 14.6% 137,496 89, % 34,437 25, % 35, % Oil & Gas Marketing Companies 5.8% 30,556 22, % 6,914 9, % 8, % Paper & Board 1.0% 6,857 6, % 2,548 1, % % Pharmaceuticals 2.4% 10,146 9, % 3,221 2, % 2, % Power Generation & Distribution 6.1% 27,131 25, % 6,787 5, % 6, % Real Estate Investment Trust 0.3% 3,993 1, % 1,797 1, % % Refinery 0.9% 9,676 11, % 455 3, % 2, % Synthetic & Rayon** 0.0% 6,302 3, % 286 2, % % Technology & Communication 1.5% 5,480 2, % (830) (2,116) nm 1,766 nm Textile Composite 2.3% 6,938 9, % 3,121 3, % % Textile Spinning 0.1% % % % Textile Weaving 0.1% 2,290 3, % % % Tobacco 1.8% 9,494 9, % 2,819 2, % 3, % Transport 0.9% 492 2, % (442) 649 nm (472) nm Vanaspati & Allied Industries 0.0% % % % Woollen 0.0% % % % Closed-End-Mutual Funds 0.4% (712) 1,844 nm 63 1, % (895) nm Jute 0.0% (69) (44) nm (16) (11) nm (11) nm Sugar & Allied Industries 0.1% 811 2, % (40) 762 nm (405) nm *Adjusted for one time gain on disposal of EFERT & EFOODS of PKR 54,000mn, **Adjusted for one time gain on disposal of investment in associate of PKR 5,788mn 4

5 E&P Banks Fertilizer Cement Autos OGMCs Power FMCGs Pharma Textile Tobacco Paper Engineering REIT Insurance Chemicals Others KSE-100 Profitability in CY17 (PKR bn)

6 E&P Banks Fertilizer Cement Autos OGMCs Power FMCGs Pharma Textile Tobacco Paper Engineering REIT Insurance Chemicals Others KSE-100 Profitability in 4QCY17 (PKR bn)

7 Quarterly Profitability of KSE-100 Profit after tax YoY (RHS) (PKR bn) % 16.0% % 12.0% 10.0% % 6.0% % 2.0% 300 CY12 CY13 CY14 CY15 CY16 CY17 0.0% *For comparison purpose we have deleted the recently listed companies from annual data 7

8 Quarterly Profitability of KSE-100 Profit after tax QoQ (RHS) YoY (RHS) (PKR bn) % % % % % % 90 1QCY16 2QCY16 3QCY16 4QCY16 1QCY17 2QCY17 3QCY17 4QCY % 8

9 REIT E&P Autos OGMCs Engineering Pharma FMCGs Power Paper Chemicals Insurance Banks Tobacco Cement Fertilizer Textile Major Sector s Profitability Growth in CY17 (YoY) 140% 120% 118% 100% 80% 60% 53% 40% 36% 34% 21% 20% 10% 7% 7% 6% 6% 6% -2% -3% -15% -16% -26% 0% -20% -40% 9

10 FMCGs Paper E&P Engineering Tobacco Autos Power Pharma REIT Banks Insurance Chemicals Textile Cement OGMCs Fertilizer Major Sector s Profitability Growth in 4QCY17 (YoY) 80% 68% 60% 54% 40% 34% 32% 30% 20% 20% 18% 11% 10% 0% -4% -8% -12% -13% -20% -40% -26% -27% -27% 10

11 Commercial Banks Rising Reversals Compensate for Declining Capital Gains Key Highlights Profitability of the banking sector has shown a flattish trend YoY in CY17, declining by a meagre 2%. Major highlights of the year include higher interest expense (11% YoY rise), primarily on the back of high volumetric growth in deposits, and lower capital gains industry wide (mainly on account of poor equity performance, we view). Furthermore, we view falling investment yields owing to PIB maturities depressing Net Interest Income, which showed a flattish trend YoY (+2%). Source of respite to profitability during the year was derived from stronger recovery pipeline of banks as a reversal of PKR 296mn was booked during CY17 vis-à-vis provisioning expense of PKR 2bn in CY16. Non Funded Income (NFI) showed a downturn of 18% YoY largely due to 30% YoY decline in capital gains. However, a 17% growth in fee income lent support as banks expanded their horizon over developing branchless banking platforms and financial inclusion systems. HMB recorded a staggering 2.3x QoQ higher profit in 4QCY17 in light of a reversal booked worth PKR 654mn in 4QCY17 (3QCY17: PKR 1.3mn provisioning expense), while MCB booked a massive impairment charge worth PKR 3bn causing a 47% QoQ downturn in profitability. UBL and ABL s profitability during the year declined by 6% and 12% YoY, respectively attributable to higher interest expense and lower dividend income. Albeit, UBL posted a 12% improvement QoQ in earnings driven by a 27% sequential uptick in fee income. Exhibit: Banking Sector (PKR mn) 2,000 Capital Gains Provisioning/(Reversal) PAT (RHS) 2,500 Exhibit: Commercial Banks (PKR mn) CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ ABL 12,926 14,700-12% 3,037 2,327 31% 3, % AKBL 5,122 5,223-2% 1,047 1,016 3% 1, % BAFL 8,515 7,890 8% 1,222 1,491-18% 2, % BAHL 8,654 8,143 6% 2,245 2,705-17% 1, % FABL 4,516 4,302 5% % % HMB 5,671 6,129-7% 2,359 2,306 2% 1, % MCB 21,963 22,063 0% 2,916 4,243-31% 5, % MEBL 5,780 5,514 5% 1,306 1,202 9% 1, % NBP 23,181 23,040 1% 8,489 9,434-10% 6, % SNBL 1,643 1,879-13% % % UBL 26,190 27,783-6% 6,841 6,253 9% 6, % Total 124, ,664-2% 30,563 31,867-4% 30, % 1,500 1, Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 (500) (1,000) 2,000 1,500 1,

12 Oil & Gas Exploration Companies Higher Prices Lead to Increase in Bottom-line Key Highlights The sector recorded a 34% YoY profitability increase to PKR 34.4bn in 4QCY17 / 2QFY18 mainly due to higher oil prices (+24% YoY). OGDC, PPL and MARI contributed 28%, 55% and 78% towards rise in profitability. MARI s profitability surged by a massive 73% YoY to PKR 3.2bn. Pertinently, gas production jumped by 4% YoY to 670mmcfd while oil production declined by 11% YoY to 1,359bopd. Major reason behind this phenomenal growth is the entitlement of unwinding factor as MARI HRL s gas price went up by 16% HoH to USD 1.17/mmbtu along with higher benchmark Arab Light prices. POL s bottom-line dropped by 5% YoY during 2QFY18 amid imposition of windfall levy and reversal of Tal block re-pricing incentive. According to the company s perspective, supplementary agreements were signed under conversion package therefore, the windfall levy was not applicable and agreements cannot be changed unilaterally. Hence POL will challenge the imposition in the court of law. That said, oil and gas production witnessed an increase of 9% and 15% YoY, respectively in 2QFY18. Exhibit: Gross Margins & Profit after tax During 2QFY18, PPL recorded 36% YoY higher sales amid 24% YoY higher oil prices. Moreover, oil production increased by 12.54% YoY to 14,924bopd while gas production declined by 6.7% YoY 759mmcfd. Higher profitability during 1HFY18 can also be attributable to one-off revenue recognition from TAL block during 1QFY18. OGDC showed a 28% YoY rise in profitability to PKR 19.7bn in 2QFY18. Topline increased by 25% to PKR 52bn attributable to higher oil and gas prices during the period. However, during 2QFY18, oil and gas production decreased by an identical 7% YoY. The company also booked a one-off revenue amounting to PKR 3.8bn on account of TAL block conversion during 2QFY18. (PKR mn) 40,000 35,000 30,000 25,000 20,000 Profit after tax Gross Margins (RHS) 60.0% 58.0% 56.0% 54.0% Exhibit: Exploration & Production Sector PKR mn CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ MARI 11,339 8,610 32% 3,202 1,846 73% 3,613-11% OGDC 70,467 55,774 26% 19,662 15,377 28% 17,010 16% POL 9,784 8,218 19% 2,227 2,338-5% 2,534-12% PPL 45,905 17, % 9,345 6,048 55% 12,678-26% Total 137,496 89,882 53% 34,437 25,610 34% 35,835-4% 15,000 10,000 5,000 - Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec % 50.0% 48.0% 12

13 Fertilizer Urea Exports Saved the Day Key Highlights Fertilizer sector witnessed a 5% YoY decline in profitability during 4QCY17 to PKR 9,500mn while on a cumulative basis, sector posted a meager decline of 1% YoY to PKR 21,852mn in CY17. EFERT s profitability during CY17 jumped up by 12% YoY amid 11.6% YoY increase in urea offtake while FFC and FFBL s profitability declined by 9% YoY and 25% YoY, respectively. During CY17 urea offtake was up by 6.5% YoY to 5.85mn tons while during 4QCY17 urea offtake declined by 17% YoY to 1.68mn tons. On the other hand, DAP offtake during CY17 / 4QCY17 plunged by 12% / 42% YoY. Sector topline increased by 10% YoY in CY17 due to higher local urea offtake along with support from exports. Sector gross margins increased by 2% to 21.6% during CY17. During 4QCY17, sector gross margins jumped significantly by 6pps from 16% to 22%. Higher urea realized prices in 4QCY17 amid clearance of inventory tagged with higher DAP primary margins. During 4QCY17, FFC remained an outliers posting a bottom-line jump of 12% given sale of imported DAP (+179k tons) in the period under review. Exhibit: Gross Margins & Profit after tax (PKR mn) Profit after tax Gross Margins (RHS) 11, % 24.0% 9, % 7, % Exhibit: Fertilizer Sector PKR mn CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ EFERT 10,137 9,025 12% 3,441 3,369 2% 2,594 33% ENGRO 9,407 15,107-38% 2,553 6,524-61% 3,139-19% FFBL 1,004 1,338-25% 1,282 2,393-46% % FFC 10,711 11,781-9% 4,778 4,276 12% 2, % Total 31,259 37,252-16% 12,054 16,562-27% 7,956 52% Total (Ex. ENGRO) 21,852 22,144-1% 9,500 10,037-5% 4,817 97% 5,000 3,000 1,000 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec % 16.0% 14.0% 12.0% 13

14 Cement Higher Input Cost + Pricing Pressure Continue to Dampen Profitability Key Highlights Cement sector profitability dropped by a massive 26% YoY in 4QCY17. Albeit, CHCC and FCCL managed to outperform the industry posting a bottom-line rise of 20% and 19% YoY, respectively. Topline of the sector remained unimpressive, down by 1% YoY in 4QCY17. Although cement dispatches depicted a growth of 10% YoY to 11.89mn tons in 4Q (local dispatches were up by 14% YoY whereas exports took a hit of 18% over SPLY), pricing pressure in the North region compressed revenues. Gross margins of the cement sector retreated by 9ppts to 34% during 2QFY18. CHCC s profitability ascent was led by commencement of its 1.2mn tons new line meanwhile rehabilitation of FCCL s line II supported its bottom-line. DGKC remained a laggard with profitability drop of 65% YoY amid margin erosion (by 11ppts to 32%) and 1Q s tax credit reversal. Exhibit: Gross Margins & Profit after tax (PKR mn) Profit after tax Gross Margins (RHS) Higher coal prices (+10% YoY) along with lower retention prices in the north region were major reasons behind the margins attrition. 17, % Exhibit: Cement Sector 15, % PKR mn CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ ACPL 2,809 3,115-10% % 605-9% BWCL 12,382 13,832-10% 3,198 3,903-18% 2,996 7% CHCC 2,280 1,754 30% % % DGKC 7,204 9,215-22% 896 2,598-65% 2,837-68% FCCL 2,578 3,893-34% % % 13,000 11,000 9, % 35.0% KOHC 2,999 4,497-33% 741 1,198-38% % LUCK 13,202 13,727-4% 3,530 3,800-7% 3,017 17% 7, % MLCF 4,056 5,236-23% 924 1,471-37% 1,049-12% PIOC 2,153 3,032-29% % % Total 49,663 58,302-15% 11,724 15,772-26% 12,876-9% 5,000 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec % 14

15 Power Generation & Distribution Profitability up by 18% YoY during 4QCY17 Key Highlights Profitability of Power Generation and Distribution sector posted a growth of 18% YoY to PKR 6,787mn during 4QCY17. The results of KEL & SPWL have not been announced yet, so the profitability is excluding these companies. Payout ratio of the sector remained low on account of piling receivables. NPL and NCPL skipped the payout, however HUBC and KAPCO announced PKR 1.50/share and 4.35/share, respectively. Net sales of the sector surged by 13.2% YoY on account of 17% higher FO prices along with 12.4% YoY higher generation of 4,198 GWh. Gross margins (GMs) clocked-in at 19.0% during 4QCY17, an increase of 59bps YoY. Stable GMs can be attributed to 0.7% PKR depreciation despite higher generation. We have a BUY call on HUBC, KAPCO, NCPL & NPL with Dec 18 target price of PKR 122.5/share, PKR 63.6/share, PKR 32.9/share and PKR 39.1/share, respectively. Exhibit: Gross Margins & Profit after tax (PKR mn) Profit after tax Gross Margins (RHS) 8, % During CY17, profitability of the power sector witnessed an increase of 7% YoY. 7, % Gross margins during CY17 declined by 338bps mainly due to 8.7% YoY growth in power generation to 19,191 GWh compared to 17,653 GWh in same period last year. 7, % 22.0% 6, % Exhibit: Power Sector PKR mn CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ HUBC* 10,917 11,483-5% 2,914 2,605 12% 2,384 22% KAPCO 9,671 8,912 9% 2,214 1,853 19% 2,181 2% 6,000 5, % 16.0% 14.0% NCPL 3,364 2,474 36% % 896-5% NPL 3,179 2,564 24% % 860-6% Total** 27,131 25,433 7% 6,787 5,747 18% 6,320 7% 5,000 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec %, *Consolidated, **Ex. KEL & SPWL 15

16 Oil & Gas Marketing Companies Evolving Dynamics of FO Adversely Affecting Profitability Key Highlights The Oil and Gas Marketing Companies (OMCs) sector profitability witnessed a massive decline of 27% YoY. This decline was majorly led by PSO which exhibited a dip of 38% YoY, while SNGP and APL also remained under stress, posting a decline of 12% and 7% YoY during 4QCY17. During 4QCY17, PSO s topline surged by 19% YoY given higher product prices and volumetric growth in MoGas, HSD, Jet Fuel, Lubes, LNG, and LPG by 17.6%, 8.8%, 13.7%, 18.0%, 49.2% and 35.0% YoY, respectively. Decline in earnings Exhibit: Gross Margins & Profit after tax came on account of lower other income amid PIB maturities and decline in furnace oil sales by 21% YoY. (PKR mn) Profit after tax Gross Margins (RHS) Profitability compression of SNGP (down by 12% YoY) in 4QCY17 was a result of 10, % higher UFG losses and finance costs in light of the expanding gas network. 5.0% APL s sales volumes and gross margins increased during the quarter however, 7,800 bottom-line dipped by 7% YoY due to reversal of provisions for other charges relating to Workers Welfare Fund. 4.0% 4, % Exhibit: Oil & Gas Marketing Sector PKR mn CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ APL 4,953 5,345-7% 1,480 1,594-7% 1,330 11% 1, % 1.0% PSO 16,733 13,563 23% 3,493 5,639-38% 5,029-31% SNGP 8,871 3, % 1,941 2,204-12% 1,919 1% Total* 30,556 22,850 34% 6,914 9,437-27% 8,278-16% (1,200) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec %, *Ex. HASCOL, SHEL & SSGC 16

17 Automobile Growing Volumes Driving Sector s Profitability Key Highlights Profitability of the Automobile sector (Assemblers & Parts) augmented by 20% YoY (excluding Thall due to one off earnings recorded in SPLY) during 4QCY17 due to automobile sales portraying a progress of 28% YoY to 63,669 units compared to 49,888 units in 4QCY16 and tractor sales improving by 28% YoY. This growth was led by HCAR, PSMC, MTL and ATLH as their sales grew by 43%, 34%, 29% and 11% YoY, respectively. MTL s earnings displayed a growth of 51% YoY in 4QCY17 which dominated sector profitability on the back of impressive sales given agriculture growth in Pakistan, CPEC related transportation activities and higher localization. Mimicking the same trend, INDU and ATLH also registered double digit earning growth. During the period under review, profitability of the sector witnessed meager growth of 2% YoY on account of i) sudden PKR depreciation of 5.2% against USD, ii) higher commodity prices (CRC up by 23% YoY), and iii) reversal of PKR 2bn provision in 4QCY16 which dragged down sector s profitability. If we exclude Thall limited, given to its one off reversal, than sector profitability will grown by 20% YoY in 4QCY17. Exhibit: Automobile (Assemblers & Parts) Sector PKR mn CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ ATLH 4,453 3,613 23% 1,171 1,001 17% 1,142 3% HCAR 7,240 5,148 41% 1,417 1,492-5% 1,618-12% INDU 14,291 11,635 23% 3,735 3,027 23% 3,629 3% MTL 5,456 2,758 98% 1,612 1,067 51% 1,167 38% THALL 2,657 3,949-33% 774 1,980-61% % Total* 34,098 27,103 26% 8,708 8,567 2% 8,054 8%, * Ex. PSMC Exhibit: Gross Margins & Profit after tax (PKR mn) Profit after tax Gross Margins (RHS) 10,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec % 16.5% 16.0% 15.5% 15.0% 14.5% 14.0% 17

18 Textile Rebate and Inventory Gains Supported bottom-line Key Highlights Revenue of the sector in 4QCY17 improved by 6% YoY due to surge in demand as exports witnessed a growth of 8% YoY along with increase in final product NML s profit after tax improved by 3% YoY attributable to higher other income (dividend from NPL, MCB, DGKC, NCL, and AICL), while gross margins remained flat during the period under review. prices. KTML s earnings declined by 49% YoY during 4QCY17 on the back of i) lower Albeit, lower dividend income and higher input cost for value added sector caused decline in sector s profitability by 8% YoY during 4QCY17. payout from subsidiary (MLCF), ii) higher reliance on local sales, and iii) rise in input cost. This quarter remained favorable for the spinning sector due to early Exhibit: Gross Margins & Profit after tax procurement of inventory (cotton) at cheaper rates resulting in improved margins as local cotton prices increased by 6.14% YoY. On the other hand, value added sector felt the heat as companies faced difficulty to pass on the (PKR mn) 4,000 Profit after tax Gross Margins (RHS) 16.0% impact of rising input costs. 3, % NCL s PAT increased by 5% YoY due to prevailing rebate in this quarter alongside inventory gains that corroborated the company s profitability. 3, % 2, % 2, % Exhibit: Textile Sector PKR mn CY17 CY16 YoY Dec-17 Dec-16 YoY Sep-17 QoQ FML 2,290 3,115-26% % % 1,500 1, % 10.0% GADT % % % KTML 1,570 2,726-42% 573 1,114-49% % % NCL 989 1,755-44% % (95) -717% NML 4,380 4,913-11% 1,961 1,909 3% % Total 10,073 12,595-20% 3,865 4,194-8% 1, % - Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec % 18

19 Engineering Margins of Long Products > Flat / Tubular Products in 4Q Key Highlights Profitability of the engineering sector depicted a growth of 32% YoY during 4QCY17, led by growth in volumes (LSM data suggests that steel production grew by 29% YoY in 4QCY17) while manufacturers also pushed prices higher. With CSAP and INIL primarily involved in construction of various pipes, their margins were wiped out given high RM (HRC) costs which could not be passed on as contracts are usually secured on bidding, we view. ISL exhibited the biggest earnings jump of 98% YoY amid improved dispatches and higher CRC prices. However, as HRC prices continued their rising trajectory, margins remained uninspiring (17% vs. 21% in 4QCY16). Exhibit: Gross Margins & Profit after tax Following suit, ASTL s bottom-line impressed with a growth of 28% YoY. Robust margins of 19% in 4QCY17 vis-à-vis 17% in SPLY on account of recent price hikes (PKR mn) Profit after tax Gross Margins (RHS) alongside lower than expected tax charge (6%; amid recognition of tax credits on listing and BMR) aided profitability. 2,300 2, % 26.0% Albeit, earnings of CSAP and INIL underwent a downturn of 19% and 5% YoY, respectively. Exhibit: Engineering Sector PKR mn CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ ASTL 1,116 1,211-8% % % 1,900 1,700 1,500 1,300 1, % 22.0% 20.0% 18.0% 16.0% CSAP 959 1,491-36% % 422-2% INIL 1,756 1,394 26% % % ISL 4,066 2,417 68% 1, % 1,003 17% Total 7,897 6,513 21% 2,239 1,699 32% 2,024 11% Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec % 12.0% 19

20 Pharmaceuticals Growing Awareness Directly Proportional to Rise in Demand Key Highlights Pharmaceutical sector displayed a growth of 10% YoY in profitability during 4QCY17. SEARL and ABOT remained major contributors to profitability and posted a growth 39% and 20% YoY, respectively while Glaxo s earnings fell by 22% YoY. ABOT s profitability increased by 20% YoY in 4QCY17 due to significant jump in topline by 13% YoY and lower taxation charged during the period. Exhibit: Gross Margins & Profit after tax GLAXO s topline increased by 15% YoY in 4QCY17, whereas bottom-line witnessed a reduction of 22% YoY. This reduction can be attributed to decline in gross margins and higher taxation. (PKR mn) 6,500 Profit after tax Gross Margins (RHS) 35.0% SEARL s bottom-line increased by 39% YoY in 4QCY17. The company s gross profit margin settled at 43% in 2QFY18 as compared to 41% and 32% in 4QCY16 and 3QCY17, respectively. The increase in gross margins is due to changing sales mix towards profitable products. 5, % 33.0% 4, % Exhibit: Pharma Sector PKR mn CY17 CY16 YoY 4QCY17 4QCY16 YoY 3QCY17 QoQ ABOT 4,205 4,022 5% 1,416 1,176 20% 1,111 28% 3, % GLAXO 2,981 2,762 8% % 784-2% SEARL 2,959 2,431 22% 1, % % Total 10,146 9,215 10% 3,221 2,906 11% 2,668 21% 2,500 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec % Source: Company Financials,, AHL Research 20

21 Disclaimer Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. In addition, we currently do not have any interest (financial or otherwise) in the subject security (ies). Furthermore, compensation of the Analyst(s) is not determined nor based on any other service(s) that AHL is offering. Analyst(s) are not subject to the supervision or control of any employee of AHL s non-research departments, and no personal engaged in providing non-research services have any influence or control over the compensatory evaluation of the Analyst(s). Equity Research Ratings Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as Dec 18 for Target Price. In addition, return excludes all type of taxes. For more details kindly refer the following table; Rating BUY HOLD SELL Description Upside* of subject security(ies) is more than +10% from last closing of market price(s) Upside* of subject security(ies) is between -10% and +10% from last closing of market price(s) Upside* of subject security(ies) is less than -10% from last closing of market price(s) Equity Valuation Methodology AHL Research uses the following valuation technique(s) to arrive at the period end target prices; Discounted Cash Flow (DCF) Dividend Discounted Model (DDM) Sum of the Parts (SoTP) Justified Price to Book (JPTB) Reserved Base Valuation (RBV Risks The following risks may potentially impact our valuations of subject security (ies); Market risk Interest Rate Risk Exchange Rate (Currency) Risk 21

22 Disclaimer This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report Arif Habib Limited: Corporate Member of the Pakistan Stock Exchanges. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited. Disclosure required under Research Analyst Regulations, 2015: In order to avoid any conflict of interest, we hereby disclosed that; Arif Habib Limited (AHL) has shareholding in FFC,LOTCHEM, NBP, NCL, PAEL, & PSO. 22

23 Disclaimer For U.S. persons only: This research report is a product of Arif Habib Limited ( Arif Habib ), which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Arif Habib Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Arif Habib Limited has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer. 23