Daily Call. General Election 2018 The Captain To Take Strike REP-300. July 26, Thumping victory on the cards for Pakistan Tehreek-e-Insaaf (PTI)

Transcription

1 REP-300 Market Strategy General Election 2018 The Captain To Take Strike Improve Governance FBR reforms Increase in tax rates Interest Rate Cuts PSEs restructuring Privatization programs Incentives for textile sector Party 2018* 2013 Pakistan Tehreek-e-Insaaf Pakistan Muslim League (N) Independents Mutthida Majlis-e-Amal 11 na Muttahida Qumi Movement 7 19 Grand Democratic Alliance 4 na Pakistan Muslim League (Q) 3 2 Aw ami National Party - 2 Jamiat Ulema-e-Islam (F)^ na 9 Jamaat-e-Islami^ na 3 Others 8 24 Total *Results as per Geo New s, ^Within MMA in 2018 Analyst PTI's Next 5-Year Economic Plan Pakistan Peoples Party AHL Research ahl-research@arifhabibltd.com Political Party Position Election 2018: Election in two constituencies postponed (NA-60 & NA-103) Election 2013: Election in three constituencies postponed (NA-19, NA-38 & NA-253) Thumping victory on the cards for Pakistan Tehreek-e-Insaaf (PTI) Equities Pakistan is expected to move towards formation of third consecutive democtratic setup. As per initial estimates from various media houses, we see the PTI to expectedly form the government with around 120 seats in the National Assembly, followed by predecessors, PMLN (atleast 60 seats) and PPPP (Pakistan Peoples Party Parliamentarians) (atleast 40 seats). As we write, PTI is also expected to form the government in KPK, while PPPP leads in Sindh. PTI and PMLN are neck and neck in the Punjab provincial assembly while BAP (Baluchistan Awami Party) leads the electoral race in Baluchistan. We must also highlight that other major political parties such as PMLN, PPPP, MMA (Muttahida Majlis-e-Amal) have expressed serious concerns over the transparency of the voting results, with PMLN outrightly rejecting the election result. What to expect from a PTI led gov t We can expect the PTI led government to revolve their rule around the nucleus of its manifesto: transforming governance via empowerment of local governments. Below we discuss salient features of the PTI manifesto: We see concerted emphasis on turning around fortunes of the ailing SOEs of the country. To achieve this Himalayan task, PTI propagates the idea of devolution of power. The party is expected to alienate the SOEs from the influence of ministries, whilst ensuring effective, honest and capable leadership alongside non-political and autonomous boards. PTI wants to create a central government holding company along the lines of Temasek of Singapore and wants business experts as autonomous board members for all SOEs. PTI also proposed the establishment of a wealth fund to which all ownership should be transferred. Moreover, PTI also has a major focus on making Pakistan a business friendly country and improve its Doing Business ranking. Measures to achieve this include digitization of processes/land records, court orders, reducing frequency of tax payments, compressing timelines for provision of basic amenities, measures to reduce red-tapism, bureaucratic hurdles (online filing of documents) and improvement of logistics infrastructure. On the CPEC front, the PTI government will aim to facilitate integration of Pakistani manufacturers in global value chains, utilize expertise from China to aid the domestic manufacturers in Pakistan, and create more opportunities for promotion of local value-addition by the introduction of various incentives for value-added exports. For energy reforms, the party has emphasized on the need to distance the country from rent-seeking models and improve dependence on domestic sources of energy. Furthermore, the party aims to eliminate circular debt through improvement in governance and wants to ensure complete rural electrification. The PTI government is also expected to continue supporting expansion and utilization of indigenous coal, primarily Thar coal. Addressing the elephant in the room (i.e lagging exports/ballooning current account deficit), multiple solutions are advised. The party will aim to introduce 100% zero rating of export oriented and allied industries, clearing of tax refunds, conversion of refund pay orders to negotiable instruments which could be discounted via banks to create liquidity for the exporters and introduction of cascading tariffs to manufacture maximum products in Pakistan. Moreover, localization of manufacturing chains would also make Pakistan competitive. 1

2 PTI has also promised an elaborate housing policy that will build 5mn houses through fiscal and regulatory incentives for allied industries, slums rehabilitation and resettlement programmes, protection of environment while developing high rise buildings and providing tax credits to households on mortgage financing. Past five years performance With five years in power at the center, the PML N government delivered across the board adding 11,000MW to the national grid, making progress on the mammoth USD 55bn China- Pakistan Economic Corridor (CPEC), expanding the tax net to collect an all-time high of PKR 3.9trn in tax revenue, shielding manufacturing sectors such as cement (robust PSDP targets aided dispatches to touch an all-time high of 41mn tons in FY18) and steel (import stage protectionist duties led the sector to grow manifold) and in-turn, achieving a 12-year high GDP growth rate of 5.8%. Albeit, not all was rosy as the term ended; current account deficit (CAD) skyrocketed to reach a record USD 18bn / 6.4% of GDP in FY18 and reserves shrunk to a cover of less than 2 months vs. a high of >5 months witnessed in Jul 16. In addition, as the Panama case unfolded, Party President and Prime Minister Mr. Nawaz Sharif was asked to step down by the Supreme Court of Pakistan mere months before the General Elections. That said, with Punjab being a stronghold of the party where strategic infrastructure development has been more visible, PML N managed to come out as the largest party securing 129 seats out of 297 (as per preliminary stats). A meaningful presence hence guarantees that the party will continue to influence Pakistan s political space. Outlook: KSE100 target at 46,136pts, providing 11.6% total return in 2018 We believe the domestic equity bourse is going to respond positively to the new formation of the government, which will mark the end of the longstanding political noise that initiated more than a year ago when the Panama Papers surfaced. Furthermore, the elections and subsequent formation of the new government will mark the second successful smooth transition in power in the history of Pakistan. Peaceful, transparent and smooth passage of the entire process will reignite investor sentiment and instill confidence in foreign investors in the stability of the government, and hence the country s capital markets. Followed by the new gov t setup, the next big development will be resolution of external account concerns through IMF program or dependence on loan from friendly countries that should boost overall confidence once the new and improved political setup takes full charge of the gov t office. Based on valuation models, including earnings growth, justified price to earnings and target prices, we assign KSE-100 a target level at 46,136pts, indicating an upside potential of 16% from current levels. Key risk to our target remains failure in timely resolution of the balance of payment issue. Moreover, we view that earnings growth of 17% alongside attractive valuations prevailing in the stock market are likely to entice investor confidence. The KSE-100 index is currently trading at an attractive P/E of 8.0x compared to the regional average of 12.4x. Additionally, the market offers a lucrative dividend yield of 6.8%, higher than the regional average of 2.8%. Impact on sectors and stocks As far as sectors are concerned that will benefit the most from the PTI gov t policies, we expect Banks (focus on manufacturing, mortgages and SME financing), Cement (expected housing policy of 5mn new homes), IPPs (focus on governance of DISCOs), OMCs (circular-debt resolution through governance and liquidity injections), E&Ps (increased drilling activity on more favorable law & order in KPK and Baluchistan) and Textiles (competitive energy prices and settlement of refunds and rebates) to be the major beneficiaries. Please refer to the next page for detailed impact analysis on key stocks. 2

3 Sector Development Impact Preferred Stocks Banks E&P Fertilizer Cement Power OMCs Textile Engineering (Steel) Source: AHL Research Government is expected to focus on SMEs, to promote growth, jobs and exports. Moreover, long term project financing is expected to be encouraged via establishment of new DFI or intensifying existing institution. Mortgage financing is also expected to be promoted. Given largest presence of PTI's government in Federal and KPK tagged with decent relationship with provincial parties of Balochistan, it is expected that the law and order situation in KP and Baluchistan would improve leading towards robust drilling activities. New government is expected to focus on agriculture growth and its contribution to GDP. New govt under the IMF program may be compelled to raise power/gas tariffs and cut PSDP spending (in short run only) to contain fiscal deficit. However, post IMF program, infrastructural spending is expected to improve. New gov t will bring structural reforms (governance improvement in DISCOs, control of T&D losses) which will reduce the quantum of circular debt. With the problem of circular debt arriving majorly due to the power sector, we believe the quantum will ease off once the new government takes office. This will improve liquidity position and allow companies to invest in expansion of retail and storage facilities. PTI's plans to improve exports seem aggressive like reducing taxes (100% zero rated), making energy prices competitive to region and clear pending refunds / rebates of export oriented sector. A potential cut in PSDP will have a ripple effect for rebar demand. Albeit, ongoing construction of dams across the country may provide respite. Whereas demand for flat steel (CRC Galvanized) appears less elastic. Better yields on housing and SME financing compared to corporate and govt securities. Improved drilling activities and investment flows from foreign partners. With the expected shortage of urea in CY18, we believe urea prices are expected to remain strong. Volumetric growth to slow down in the short run as PSDP is a major demand driver. Improvement in Medium-to-long term demand forecast intact. Moreover, PTI's housing scheme may propel cement demand in mid term. Easing circular-debt issue will improve liquidity, thus higher dividend payouts cannot be ruled out from the power companies. PSO to be a major beneficiary of improving circular-debt scenario. This plan may improve liquidity position and encourage exporters of Pakistan as textile exports contribute more than 60% to total exports of Pakistan. With long steel (rebar) demand closely linked to cement and housing demand, growth may slow down in the short run. Whereas demand for flat steel remains less elastic as market for home electronics and automobiles would not alter much. BAFL, HBL, UBL OGDC, PPL EFERT, FFC LUCK, DGKC HUBC PSO NML, NCL ASTL 3

4 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 December 2018 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 Following valuation technique(s) are used to arrive at the target price of subject security (ies); Discounted Cash Flow (DCF) Risks The following risks may potentially impact our valuations of subject security (ies); Interest Rate Risk Exchange Rate (Currency) Risk 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. 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 LOTCHEM, NBP and PSO. 4

5 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. 5