Weekly Review. Outlook. Pakistan Weekly Update StockSmart. AKD Equity Research / Pakistan. 7 September AKD Research. Index & Volume Chart

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1 AKD Equity Research / Pakistan AKD Research research@akdsecurities.net Indices KSE-100 KSE-30 This w eek 40,855 20,098 Last w eek 41,742 20,491 Indices KMI-30 Allshare This w eek 68,783 29,978 Last w eek 70,817 30,654 Mkt Cap. PkRbn US$bn This w eek 8, Last w eek 8, Jun-18 Avg. Daily Turnover ('mn shares) This w eek Last w eek Change % Top- 5 V olume Le a de rs S ymbol V olume (mn) BOP : KEL : AGL : EPCL : LOTCHEM : (share mn) Volume (LHS) KSE-100 Index (Index) 47,000 45,000 43,000 41,000 39,000 37,000 Source: PSX & AKD Research Weekly Review With a modest recovery in the first couple of days, KSE-100 index spiraled down over the week erasing all CY18TD gains (+0.35%) to close at 40,855pts, down 2.1%WoW, back at levels last seen in end-july. Showcasing all the tell-tale signs of a highly volatile, illiquid (average weekly turnover shrinking 22%WoW) and shifty near term outlook, investors seem to remain cautious, based on: i) a number of crucial, time sensitive decisions for the nascent Government where clarity is awaited (headway on IMF negotiations vital), and ii) growing risk of a cyclical downturn in consumption led demand where monetary tightening and high fuel prices make for a terse spending backdrop. Key news flows for the week were: i) US Secretary of State Michael Pompeo stating that his visit to Islamabad led to an agreement that it s time for the United States and Pakistan to deliver on their commitments, ii) the central bank planning to auction PkR5.15trn worth of Market Treasury Bills and Pakistan Investment Bonds during Sep-Nov 18, iii) Prime Minister Imran Khan approving increase in gas prices up to 46% as proposed by OGRA, while ordering steps to control annual gas theft of PkR50bn, and iv) The president on the advice of the PM reconstituting the Council of Common Interests (CCI), and constituting the Cabinet Committee on China-Pakistan Economic Corridor (CCoCPEC). Volume leaders for the week were: i) BOP (57.4mn shares), ii) KEL (54.3mn shares), iii) AGL (35.9mn shares) and iv) EPCL (30.7mn shares). Constituents of the leader board were: i) ABL (+2.3%WoW), ii) KAPCO (+2.1%WoW), iii) UBL (+1.9%WoW), iv) KEL (+1.5%WoW), whereas laggards were: i) PIOC (-10.9%WoW), ii) DGKC (-9.3%WoW), iii) CHCC (-9.1%WoW) and iv) NCL (-6.8%WoW). (Shrs'000) 180, , , , ,000 80,000 60,000 40,000 20,000 Index & Volume Chart - Source: PSX & AKD Research Outlook 41,582 41,754 41,621 41,266 40,855 3-Sep 4-Sep 5-Sep 6-Sep 7-Sep Ready Volume (LHS) KSE100 Index (RHS) (Index) 42,000 41,800 41,600 41,400 41,200 41,000 40,800 40,600 40,400 Universe Gainers & Losers More volatility is expected as dulling volumes (average volumes at 138.7mn shares) give rise to large, incoherent moves in thinly traded scrips. Accumulating positions on dips and tactical sector switching could yield returns. Overall, market participants will be closely monitoring policy decisions, particularly regarding gas or electricity price hikes (proposed by OGRA and NEPRA with ECC's formal decisions pending) and near term measures to curtail the external account deficit (increased RDs, other non-tax measures). 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% ABL KAPCO UBL KEL HBL EFOODS NCL CHCC DGKC PIOC Important disclosures Important disclosures including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. AKD Securities TREC Holder & Registered Broker Pakistan Stock Exchange REP-019 Find AKD research on Bloomberg (AKDS<GO>), firstcall.com and Reuters Knowledge Copyright All rights reserved. The information provided on this document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject AKD Securities or its affiliates to any registration requirement within such jurisdiction or country. Neither the information, nor any opinion contained in this document constitutes a solicitation or offer by AKD Securities or its affiliates to buy or sell any securities or provide any investment advice or service. AKD Securities does not warrant the accuracy of the information provided herein.

2 Sep 07, ,500 41,400 41,300 41,200 41,100 41,000 40,900 40,800 40,700 Sep 06, ,800 41,700 41,600 41,500 41,400 41,300 41,200 Sep 05, ,820 41,780 41,740 41,700 41,660 41,620 41,580 41,540 41,500 9:15 9:38 10:02 10:25 10:49 11:12 11:36 11:59 12:23 12:46 13:09 13:33 13:56 14:20 14:43 15:07 15:30 15:54 16:17 9:30 9:54 10:17 10:41 11:04 11:28 11:51 12:15 12:38 13:02 13:25 13:49 14:12 14:36 14:59 15:22 9:30 9:55 10:20 10:44 11:09 11:34 11:58 12:23 12:48 13:12 13:37 14:01 14:26 14:51 15:15 9:30 9:54 10:17 10:41 11:04 11:28 11:51 12:15 12:38 13:02 13:25 13:48 14:12 14:35 14:59 15:22 9:30 9:55 10:20 10:44 11:09 11:33 11:58 12:23 12:47 13:12 13:37 14:01 14:26 14:50 15:15 Sep 04, ,850 41,800 41,750 41,700 41,650 41,600 41,550 41,500 41,450 41,400 Sep 03, ,800 41,700 41,600 41,500 41,400 41,300 41,200 41,100 Source: PSX & AKD Research This Week s Daily Reports ASTL: Dhabeji project starts paying back, (AKD Daily, Sep 07, 2018) Previewing FY18 result, we expect ASTL to report NPAT of PkR1,576mn (EPS: PkR5.31) compared to NPAT of PkR1,074mn (EPS: PkR3.62) in full year FY17, up 47%YoY. The anticipated earnings growth is a function of i) 25%YoY topline growth that comes both from higher volumes (+14%YoY) and price hike (+17%YoY) and ii) margin accretion (+104bpsYoY) on the back of elevated primary margin (pricing spread between rebar-scrap prices). On a quarterly basis, we expect the company to post net earnings of PkR579mn (EPS: PkR1.95) in 4QFY18 vs. PkR255mn (EPS: PkR0.86) in 4QFY17, up 2.27xYoY. Additional units from the new Dhabeji line, higher retention price and lower effective tax rate (ETR: 18% in 4QFY18 vs. 44% in 4QFY17) are key contributors to the elevated bottom-line. Accompanying results, the company is also expected to announce a cash dividend of PkR2.25/sh. Gaining 3.8%FYTD, ASTL trades at an attractive FY19F P/E of 6.6x. We currently have a Buy stance on ASTL, where our liking for the scrip stems from its strong earnings credentials (4yr forward earnings CAGR of 18%). Pakistan Fertilizers: New Government = New Rules, (AKD Daily, Sep 06, 2018) We downgrade our Fertilizer universe to Underweight as we caution against potential sectoral headwinds including i) additional available inventory via either local production and/or imports, ii) gas price hike with the PM having reportedly approved a broad based gas tariff increase and iii) potential inability to pass on cost increase (with the key word being potential ). With regards to the latter, we believe any price increase may likely to be restricted by GoP action as evidenced by recent ECC discussions regarding windfall profits. At the same time, the decision to resume production on three closed urea plants (FatimaFert, Agritech and Pak Arab) on RLNG may not be viable in the context of annual costs (PkR8.4bn subsidy may not be economically feasible). If gas prescribed price hike is transposed on end consumer prices (as reported in news reports), our Fert Universe profitability for CY19 reduces by an average 14%, while adjusted TPs come at EFERT (PkR75.9/sh from current PkR87.7/sh), FFC (PkR86.8/sh; Current: PkR104.1/sh), FFBL (PkR40.1/sh; Current: PkR48.2/ sh) and FATIMA (PkR38.7/sh; Current: PkR45.1/sh). Pakistan Economy: IMF or no IMF, that is the question, (AKD Daily, Sep 05, 2018) Escalated CAD along with hefty debt repayments have led to an inflated gross external financing gap (US$20.42bn in FY18) as insufficient external inflows (US$14.35bn loans in FY18) pulled SBP FX reserves to US$9.79bn (down US$6.34bn during FY18). Looking ahead, a heightened CAD (US$17.8bn in FY19F) with additional drags from upcoming redemption of Eurobond and commercial borrowing repayments are likely to push gross external financing to US$22.44bn in FY19. In this regard, inadequate external inflows estimated at US$13.45bn (ex. bailout financing) should translate into a net shortfall of ~US$8.84bn by FY19-end (ex of budgeted short term loans & Eurobond net financing gap stands at US$15.34bn) which would strain FX reserves to unsustainable levels. Moreover, for recent policy makers, the path to possible remedies for the prevailing BoP shortfall include: i) approaching international debt market, ii) investments from non-residential Pakistanis, iii) Chinese bailout, iv) 'gifts' from friendly countries, and v) eventual IMF financing facility. With each mode of financing carrying inherent benefits and associated risks, in our view GoP hands are tied to another IMF financing facility along with accompanying caveats (with the sole purpose of improving on external vulnerabilities). While under an IMF facility, GoP could likely tap in other external avenues (bilateral facilities) as well as fetch better yields in international debt market to create a blend of financing to fil the external gap. OMCs: Slow month for volume belies market share shifts, (AKD Daily, Sep 04, 2018) POL products continued to soften as Aug'18 total volumetric offtake of 1.35mn tons fell 18% MoM/46%YoY, signifying the slowest month for sales since Feb'07. FO sales remained the major culprit -46%MoM/-79%YoY, while retail fuel segment also tapered (HSD and MOGAS sales recorded -20%MoM/-38%YoY and -1%MoM/-11%YoY). 8MCY18 volumes point to 18% YoY dip in total volumes, where MOGAS was the only catalyst (+3%YoY) while HSD/FO 2

3 This Week s Daily Reports offtake fell -7%/-45%YoY, sapping growth from overall sales. Sizeable shifts in market share (PSO/APL/HASCOL at 8MCY18 shares of 44/10/13% vs. 55/9/10% in 8MCY17) are the norm where smaller unlisted players seem to be taking the charge. In this backdrop, APL offers upsides from its well-heeled financial footing and legacy business franchise, where current levels imply 27.8% total gain inclusive of FY19 D/Y of 11.8%. Pakistan Market: Awaiting policy direction!, (AKD Daily, Sep 03, 2018) Equities wobbled during the outgoing month, reacting on news flows and earning reads in the absence of policy direction, with KSE-100 index closing 2.3%MoM lower at 41,742pts. In this regard, below expectation results from banks, anti-corruption proceedings, and an inconclusive ECC meeting weighed on sentiments. Going forward, near term policy focus on addressing geo-political relationships and pending structural issues (i.e. external financing needs, circular debt and gas pricing) should broadly dictate the market performance. Despite long optimism, near-term burdens particularly a precarious economic situation should weigh on equity returns. Aug'18 sector performance was dictated by heavyweights Banks witnessing decline of 4.5%MoM, followed by Engineering (-3.8%MoM), Cements (-3.3% MoM) and Power (-2.2%). 3

4 Regional Valuations (2018) EPS Growth PE(x) Pakistan 20.67% 7.01 Indonesia 10.20% Malaysia 12.95% Philippines 7.68% Vitenam 13.03% India 19.70% China 13.57% 9.54 % ROE Divd Yld Pakistan 16.0% 7.04 Indonesia Malaysia Philippines Vitenam India China Source: AKD Research & Bloomberg PkR/US$ Trend TRJ-CRB Index Source: Bloomberg Source: Bloomberg Major World Indices Performance Country Bloomberg Code WoW CYTD Pakistan KSE100 Index 40,855 41, % 0.9% Srilanka CSEALL Index 6,118 6, % -3.9% Thailand SET Index 1,689 1, % -3.7% Indonesia JCI Index 5,851 6, % -7.9% Malaysia FBMKLCI Index 1,799 1, % 0.1% Philippines PCOMP Index 7,599 7, % -11.2% Vietnam VNINDEX Index % -1.6% Hong Kong HSI Index 26,973 27, % -9.8% Singapore FSSTI Index 3,134 3, % -7.9% Brazil IBX Index 31,495 31, % -0.4% Russia RTSSTD Index 15,518 15, % 13.5% India SENSEX Index 38,390 38, % 12.7% S&P SPX Index 2,878 2, % 7.6% DJIA INDU Index 25,996 25, % 5.2% UK UKX Index 7,244 7, % -5.8% Germany DAX Index 11,924 12, % -7.7% Qatar DSM Index 9,827 9, % 15.3% Abu Dhabi ADSMI Index 4,918 4, % 11.8% Dubai DFMGI Index 2,827 2, % -16.1% Kuwait KWSEIDX Index 6,633 6, % 3.5% Oman MSM30 Index 4,433 4, % -12.2% Saudi Arabia SASEIDX Index 7,688 7, % 6.3% MSCI EM MXEF Index 1,018 1, % -12.1% MSCI FM MXFM Index % -15.6% International Major Currencies Commodities Source: Bloomberg SPOT Chg +/- WoW CYTD Dollar Index % 3.11% USD/PkR % 12.40% USD/JPY % -1.51% EUR/USD % -3.50% GBP/USD % -3.91% AUD/USD % -8.62% NZD/USD % -7.58% CHF/USD % -0.74% CAD/USD % 4.76% USD/KRW 1,123 1, % 4.88% CNY/USD % 5.21% Source: Bloomberg SPOT Units WoW CYTD TRJ-CRB Points % -1.85% Nymex (WTI) US$/bbl % 12.18% ICE Brent US$/bbl % 14.19% N. Gas Henry Hub US$/Mmbtu % % Cotton USd/Pound % 2.18% Gold US$/Tr.Oz % -8.21% Sliver US$/Tr.Oz % % Copper US$/MT % % Platinum US$/Oz % % Coal US$/MT % 3.78% Source: Bloomberg 4

5 Jun-18 Chart Bank Earnings Yield vs. T-Bill (12M) Differential Advance to Decline Ratio (%) Jun-18 Jun-18 FIPI Flows for the week LIPI Flows for the week (US$'000) (500) (1,000) (1,500) 71 (781) (153) (1,052) Ind., 6.17 Bank/DFI, 2.84 Ins, 8.57 (2,000) (2,500) (3,000) NBFC, 0.11 Others, 0.25 (3,500) (4,000) (3,876) (2.00) (4.00) Co., (1.64) M.Funds, (1.38) (4,500) (6.00) Prop. Trading, (5.06) AKD Universe vs. KSE-100 Index KSE-100 vs. MSCI-EM & MSCI-FM 3% -2% -7% -12% -17% -22% -27% 20% 15% 10% 5% 0% -5% KSE100 MSCI FM MSCI EM -32% -10% -15% KSE-All Share Index AKD Universe 5

6 Jul-07 Mar-08 Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 AKD Universe Valuations F 2019F 2020F EPS (PkR) EPS chg (%) (0.50) (4.91) EPS chg (%) ex-e&p (15.73) Book Value per Share (PkR) Payout (%) Valuations Price to Earnings (x) PER (ex-e&p) (x) Price to Book (x) Price to CF (x) Earnings Yield (%) Dividend Yield (%) EV / EBITDA (x) Profitability Return on Equity (%) Return on Assets (%) Chg in Sales (%) (14.06) Gross Margin (%) Operating Margin (%) Net Margin (%) Source: AKD Research Market PER Chart 2018 (x) Source: AKD Research 6

7 AKD Universe Active Coverage Cluster s Valuations Stock Symbol Price TP Stance EPS(PkR) PE(x) PB(x) DY(%) UR Under Review (PkR) (PkR) 17 18F 19F 17 18F 19F 17 18F 19F 17 18F 19F Automobile and Parts Indus Motors INDU 1, , Buy Pak Suzuki Motors PSMC Buy Cements DG Khan Cement DGKC Accumulate Lucky Cement LUCK Buy Maple Leaf Cement Factory MLCF Buy Fauji Cement Company Ltd. FCCL Accumulate Pioneer Cement Limited PIOC Buy Cherat Cement Co Limited CHCC Accumulate Gharibwal Cement Ltd GWLC Buy Cable & Electrical Goods Pak Elektron Ltd PAEL Buy Engineering Amreli Steels Ltd. ASTL Buy Fertilizers Engro Corporation ENGRO Accumulate Engro Fertilizers Limited EFERT Accumulate Fauji Fert. Bin Qasim Ltd. FFBL Accumulate Fauji Fertilizer Company FFC Accumulate Fatima Fertilizer FATIMA Buy Food Producers Engro Foods Limited EFOODS Neutral Oil & Gas Oil & Gas Development Co. OGDC Buy Pak Oilfields POL Accumulate Pakistan Petroleum PPL Buy Hascol Petroleum HASCOL Accumulate Attock Petroleum APL Buy Pakistan State Oil PSO Buy Power Hub Power Co. HUBC Buy K-Electric Co. KEL 5.39 UR UR UR UR UR UR UR UR UR UR UR UR UR UR Kot Addu Power Company KAPCO Accumulate Personal Goods Nishat Mills NML Buy Nishat Chunian Ltd. NCL Buy Banks Allied Bank Limited ABL Neutral Bank AlFalah BAFL Neutral Habib Bank Limited HBL Buy MCB Bank Limited MCB Buy National Bank of Pakistan NBP Buy United Bank Ltd UBL Buy Source: AKD Research 7

8 AKD Universe Coverage Cluster s Performance S toc ks S ymbol P ric e Absolute P e rforma nc e (%) 1 Y e a r 1 Y e a r 7 - S e p- 18 1M 3M 6M 12 M CY TD High Low KS E Inde x 4 0, , , Automobile a nd P a rts Indus Motors INDU Pak Suzuki Motors PSMC Ce me nts DG Khan Cement DGKC Lucky Cement LUCK Maple Leaf Cement Factory MLCF Fauji Cement Company Ltd. FCCL Pioneer Cement Limited PIOC Cherat Cement Limited CHCC Gharibwal Cement Limited GWLC Engine e ring Amreli Steel Ltd ASTL Fe rtilize rs Dawood Hercules DAWH Engro Fertilizers Ltd. EFERT Engro Chemical ENGRO Fatima Fertilizer FATIMA Fauji Fert. Bin Qasim Ltd. FFBL Fauji Fertilizer Company FFC Food P roduc e rs Engro Foods Limited EFOODS Ca ble & Ele c tric a l Goods Pak Elektron Limited PAEL Oil & Ga s Oil & Gas Development Co. OGDC Pak Oilfields POL Pakistan Petroleum Ltd. PPL Pakistan State Oil PSO Attock Petroleum Ltd. APL Hascol Petroleum HASCOL P owe r Hub Power Co. HUBC K- Electric Limited KEL Kot Addu Power Company KAPCO P e rsona l Goods Nisaht (Chunian) Ltd. NCL Nishat Mills NML Ba nks Allied Bank Limited ABL Bank AlFalah BAFL Habib Bank Limited HBL MCB Bank Limited MCB National Bank of Pakistan NBP United Bank Ltd UBL Source: PSX & AKD Research 8

9 Economic Snapshot End Month Data Units Jun-18 Monetary Rates T-Bills - 3M % T-Bills - 6M % n.a n.a n.a T-Bills - 12M % n.a n.a n.a n.a n.a n.a PIB 10Y % n.a n.a n.a n.a n.a n.a n.a n.a n.a KIBOR 6M % Discount rate % Policy rate % Inflation Headline inflation % Core inflation % Food inflation % (0.20) External Indicators Export (PBS) US$ (mn) 1,888 1,974 1,977 1,971 1,902 2,231 2,133 2,144 n.a Import (PBS) US$ (mn) 4,929 4,898 4,910 5,607 4,797 5,280 5,066 5,814 n.a Trade Deficit (PBS) US$ (mn) (3,041) (2,924) (2,933) (3,636) -2,895-3, n.a Export (SBP) 2,380 2,546 2,464 2,111 2,059 2,305 2,246 2,266 n.a Import (SBP) 5,258 5,346 5, ,334 4,943 4,949 5,149 n.a Trade Deficit (SBP) (2,878) (2,800) (2,676) (2,763) (2,275) (2,638) (2,703) (2,883) n.a Home Remittances US$ (mn) 1,654 1,577 1,724 1,639 1,672 n.a 1,651 1,771 n.a Current Account US$ (mn) (1,315) (1,441) (1,256) -1,617-1,241 1, n.a Banking Sector Deposits PkR (bn) 11,777 11,969 12,362 12,002 11,933 12,571 12,277 12,258 13,063 Advances PkR (bn) 6,151 6,280 6,530 6,556 6,629 6,812 6,839 7,046 7,362 Investments PkR (bn) 8,342 8,475 8,542 7,637 8,127 6,853 7,784 6,733 8,179 W. A. lending rate % n.a W. A. deposit rate % n.a Spread rate % n.a Public Finance Tax collection PkR (mn) 541, , , , , ,486 n.a n.a n.a Direct taxes PkR (mn) 270, , , , , ,243 n.a n.a n.a Indirect Taxes PkR (mn) 270, , , , , ,243 n.a n.a n.a Currency Fx Reserves US$ (mn) 19,584 18,774 20,154 18,957 18,317 17,796 17,540 15,977 16,386 USDPkR - Interbank PkR/USD Source: SBP, PBS & AKD Research 9

10 Analyst Certification We, the AKD Research Team, hereby individually & jointly certify that the views expressed in this research report accurately reflect our personal views about the subject securities and issuers. We also certify that no part of our compensation was, is,or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. We further certify that we do not have any beneficial holding of the specific securities that we have recommendations on in this report. AKD Research Team Analyst Tel no. Coverage Usman Zahid (693) Executive Director Research Haris Imtiaz (639) Economy Ali Asghar Poonawala (646) OMCs & Automobiles Waqas Imdad Ali (634) Cements & Fertilizer M.Daniyal Kanani (602) Oil & Gas & Power Umer Farooq (637) Textiles & Steel Qasim Anwar (680) Technical Analysis Nasir Khan (639) Research Production Tariq Mehmood (643) Library Operations DISCLOSURES & DISCLAIMERS This publication/communication or any portion hereof may not be reprinted, sold or redistributed without the written consent of AKD Securities Limited. has produced this report for private circulation to professional and institutional clients only. The information, opinions and estimates herein are not directed 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 to any additional registration or licensing requirement within such jurisdiction. 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