Stabilization achieved, what next?

Pakistan Investment Strategy

2020

January 07, 2020 Prices as of 6th Jan 2020

Insight Research REP-147

research@insightsec.com.pk
+92 (21) 32402558
www.Jamapunji.pk

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Executive Summary

Background: KSE-100 index posted a double-digit return of IMF Program & Reduction in Budget Deficit

~10% despite headwinds on the economic front during CY19. -2.0% -

On 16-Aug-19 benchmark index reached a low of 28,691 -3.0% (500.0)

points (down by 32.1% from 1st Jan 2019) then posted a -4.0%
(1,000.0)
recovery of 12,043 points to close the year at 40,375 points -5.0%

(recovery of 41% from its low). -6.0%

(1,500.0)

2001 IMF (2,000.0)

-7.0% program: 55%
IMF program brings twin deficit discipline -8.0%
reduction in
budget deficit 2008 IMF program:
2013 IMF program: 24%
reduction in budget
(2,500.0)

Historically, whenever we go to IMF, discipline is observed in -9.0%

12% reduction in
budget deficit
deficit
(3,000.0)
both Current and Fiscal accounts, especially during the first

FY2000
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
two years (as mentioned in the graph). This is also visible
Budget Deficit Budget Deficit (% of GDP)
during 1QFY20 where total fiscal deficit was recorded at Source: MoF, Insight Research

PKR286bn against PKR541bn in SPLY (decline of 47%). A IMF Program & Reduction in Current Account Deficit

significant reduction was witnessed due to 17.2% increase in 10 6.0%

2013 IMF program:
tax revenues as a result of govt’s documentation drive. IMF 5
CAD reduce to 1.1% of
GDP
4.0%
has set a ceiling for primary fiscal deficit at Rs284bn for FY20, 0
2.0%
0.65% of GDP. Similarly, IMF also set a target of PKR5.24tn 0.0%
which is unlikely to be achieved, we believe that govt. may

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021
-5
-2.0%
further request IMF for downward revision. -10
-4.0%
-15 2001 IMF program: -6.0%
CAD became Positive 2008 IMF program:
-20 CAD start declining -8.0%

-25 -10.0%

Current A/C (% of GDP) Current account deficit

Source: MoF, Insight Research
Executive Summary

Oil is the real Wild Card: Pakistan’s indigenous oil meets

roughly ~30% of the total demand and rest has to be met CAD sensitivity with Oil
through imports, oil imports are ~26% of total import bill. As Crude Oil $/bbl C/A deficit (bn $)*
per SBP data, total oil imports have declined by 32% to 50 2.4
USD$4.6bn YoY in 5MFY20, primarily due to lower volumes
of imports as a result of lower economic activity and subdued
62 4.8
crude oil prices during 5MFY20, at $62/bbl average crude. 75 6.8
Growing tension between US and Iran will create uncertainty Source : PBS, Insight Research
in Middle-East further, which may further increase crude oil * based FY20 estimates annualized
prices in near term.
As per our back of the envelope calculations every 5%
increase in crude oil price from current levels, will increase the P/E Historical
current account deficit by ~$0.5bn on an annualized basis. Avg P/E : 8.6x
16.0
14.0
KSE-100 Index: 50,000✓✓✓ 12.0
We estimate that KSE-100 is likely to hit 50,000, offering an 10.0

upside of ~21% by the end CY20 (methodology used justified 8.0

P/E and TP mapping). Moreover, ISL universe is currently 6.0

4.0
trading at a discount of 32% against long-term average P/E of 2.0
KSE-100 (8.6x). Similarly, ISL universe is trading at a P/Bv of -
1.2x vs 1.9x long-term P/Bv of KSE-100 index, discount of

27-Dec-15

25-Dec-16
30-Dec-12

29-Dec-13

28-Dec-14

24-Dec-17

23-Dec-18
30-Jun-13

23-Jun-19
29-Jun-14

28-Jun-15

26-Jun-16

25-Jun-17

24-Jun-18
9-Jul-06

8-Jul-07

1-Jul-12
6-Jul-08

5-Jul-09

4-Jul-10

3-Jul-11
8-Jan-06

7-Jan-07

6-Jan-08

4-Jan-09

2-Jan-11

1-Jan-12
3-Jan-10
~58%. Source : Bloomberg, Insight Research
Executive Summary
Key drivers of the index
Reserve VS USD/PKR
Stable PKR/USD parity: Rupee has appreciated 6% from its
200 180
low on 27th Jun 2019, recovery largely due to improvement 180
End of IMF

in current account which was down by 69% YoY. This was

program
160
160
driven by $4.5bn support from friendly countries (Saudi 140 140
Arabia, UAE & Qatar). Pakistan is also planning its first Panda 120
bond worth US$1bn, along with this issuance of Euro 100
120

Bonds/Sukuks of $2-3bn, this will further ease pressure on 80 100

PKR. In addition to this foreign inflows in Pakistan's debt

Inflow of $4.5 mn
60 from SA,
80
markets (PIBs and T-bills) through SCRA account are also
UAE,Qatar,CHINA
40 First tranche of
IMF EFF program
adding to the reserve buildup. This will improve overall 20 60

Jul'19
Jul'13

Jul'14

Jul'15

Jul'16

Jul'17

Jul'18

Oct'19
Oct'13

Oct'14

Oct'15

Oct'16

Oct'17

Oct'18
Jan'13

Jan'19
Jan'14

Jan'15

Jan'16

Jan'17

Jan'18
Apr'13

Apr'14

Apr'15

Apr'16

Apr'17

Apr'18

Apr'19
sentiment for cyclicals.
PKR/USD (Closing) SBP reserve
Source: Insight Research
Monetary easing to start from May-2020: We foresee 3M PKRV Vs 5Y PKRV

inflationary pressures to start easing from Mar-2020 16% 5%

onwards, as a result SBP is likely to start monetary easing 15%

from May-2020.
3%
14%

We estimate interest rates to ease by 175bps during CY20,

1%
13%

which is clearly appearing in the yield curve, where yield of 12% -1%

long-term bond is trading below 245bps from 3 months T- 11%

Yield curve start inverting,
-3%

bills indicating a rate cut in near term. Moreover, return on

current spread b/w 3M
10% and 5Y PKRV is ~-245bps

National saving schemes (down by 232bps since 1st July’19) 9% -5%

Nov-19
Nov-19

Nov-19
Nov-19
Sep-19

Sep-19
May-19
May-19

May-19

Sep-19
May-19

Oct-19
Oct-19
Oct-19
Oct-19
Aug-19
Aug-19
Aug-19
Jun-19
Jun-19
Jul-19
Jul-19

Jul-19
Apr-19
Apr-19
Apr-19
Apr-19

Jul-19

Dec-19
Dec-19
Dec-19
is also declining in-line with the yield curve. This bodes well
Spread % PKRV 5Y PKRV 3M
for high leveraged sectors such as Steel and Cements. Source: Zakheera, Insight Research
Executive Summary

Structural reforms to lift investors confidence: Our economy is in transition phase under the supervision of
IMF’s program and FATF guidelines. FATF guideline will help in documenting the untapped economy while
IMF’s fiscal reforms will broaden our tax-net, framework to reduce fiscal loopholes (i.e. circular debt) and
stabilize exchange rate fluctuation. Moreover due to FATF’s strict guidelines govt is targeting implementation
of AML/CFT requirements on National Saving Schemes (NSS), increasing tax compliance and documentation
requirements for real estate sectors.

Top overweight sectors:

Banks: ISL banking universe is expected to perform well on of account strong earnings growth (53%) due to
absence of one-off’s, NIMs expansion due to immediate repricing in the cost of deposit in declining interest
rate environment.

E&Ps: Our E&P universe is trading at a steep discount of ~55% on implied crude oil price of US$30.5/bbl.
Moreover sector is also trading at discount ~39% from ISL's universe forward P/E.

Textile and Technology: Export oriented sectors are in the sweet spot as revenues and margins are primary
beneficiary of Rupee devaluation, Moreover, Govt. is also providing incentives to shore up exports in future.

IPPs: Resolution of circular debt along with proposed Pakistan energy Sukuk-II would prove to be an
inflection point. Resumption of electricity generation from RFO plants given slashed FO prices post IMO-20
along with decreasing yields would further enhance valuations.
Key Challenges
To achieve a sustained recovery in economic growth, the authorities will have to
address the following:

1. Structural fiscal issues. 2. Energy Sector Circular Debt.

▪ Low tax collection (10.9% of GDP) as major ▪ Delayed tariff notification
segments such as wholesale and retail trade, ▪ Partial cost recovery
agriculture and real estate largely remain outside ▪ Lagged release of subsidies
the tax net. ▪ Delay in structural reforms in the power sector
▪ Heavy losses incurred by PSEs (Discos etc.)
▪ In the aftermath of the latest NFC Awards, ▪ Rising capacity payments. Due to significant
distribution of resources/responsibilities among increase in new capacities, capacity payments
provinces and federal government has become would rise from PKR450bn in 2016-17 to
extremely lopsided. The federal government PKR1,500bn by 2024-25. The solution lies in
effectively gets just 37% of the revenues, while increasing demand rather than increasing tariffs.
its responsibilities include debt servicing, defense,
major subsidies, national development projects 4. Wrong growth model. Pakistan’s growth model
etc. Without addressing the aforesaid imbalance, remained lopsided towards domestic consumption
fiscal sustainability would remain elusive. which resulted in frequent boom bust cycles in the
past. Pakistan needs to pursue more balanced
3. Weak external competitiveness, low value addition, growth with exports and investments contributing
poor productivity and little exportable surplus are more to GDP growth.
other issues.
Geo-Politics is another Wild Card

IRAN/SAUDI-US Conflict:
▪ The recent round of tensions in the Middle East driven by US attack on Gen Qasem Soleimani, is a space
to closely follow. Iran has promised retaliation and this has the potential to engulf the entire Arabian
Peninsula. Pakistan has clearly said that it won’t allow its soil to be used against attack on any other
country, but this is no hidden fact that the Gulf countries enjoy a high leverage on Pakistani authorities.

▪ Out of the total remittances that Pakistan receives 54% of comes from Middle East of which UAE and
Saudi make up 21% and 23% respectively. Since it’s no hidden secret that Iran and Saudi/US led coalition
are fighting against each other, Pakistan being dragged into the Saudi led war is a possibility that one can’t
completely ignore. To recall Pakistan’s parliament voted in April 2015 not to join Saudi-led military
intervention in Yemen, dashing Riyadh’s hopes for powerful support from outside of region.

▪ Recently, when Pakistan didn’t participate in the Kuala Lumpur summit, seen a bid to create an alternate
to OIC (Organization for Islamic Countries) Turkish President said that Saudis blackmailed Imran Khan
over Malaysia summit. He further went on to say that Saudis threatened to send Pakistan workers back
and withdraw its $6bn deposited in the State Bank of Pakistan.
Geo-Politics is another Wild Card

PAKISTAN/INDIA:
▪ The year 2019 remained a tumultuous year as far as India/Pak relations are concerned, nuclear
neighbors that have fought 3 wars in the past came head on. On 14th Feb 2019, suicide car bombing in
Pulwama killed 40 Indian soldiers, India put blame on Jaish e Mohammad and retaliated with airstrikes
on 26th Feb 2019 in Pakistani territory in a major escalation. Thereafter Pakistan responded and shot
down Indian airplane, returning the captured pilot to ease tensions. Soon after in August’19 India
revoked Kashmir’s special status, raising fears of unrest. India went further to introduce the CAA/NRC
bill a bid to marginalize Muslims in Dec-19.

▪ As we sit into the 5th month of lockdown in Kashmir things don’t look good. According to an article by
Michael Kugelman in foreign policy magazine, the two nuclear armed nations will enter 2020 just one
trigger event away from war. “The trigger could be another mass casualty attack on Indian security
forces in Kashmir traced back to Pakistan based group, or acting on the threats issued repeatedly by
Delhi in 2019 and Indian preemptive operation to seize territory in Pakistan administered Kashmir”.
Pakistan Economy
CAD contracted at the cost of economic slowdown
▪ CAD has contracted by 69.8% (YoY) in 5MFY20 to US$1.83bn as compared to $6.04bn in SPLY.

▪ Imports registered a decline of 20% mainly due to a) lower volumes/prices of crude and other related
products which registered a decline of 32%, b) food and other commodities imports decreased by 12%
YoY c) machinery imports also reduced by 7%, while export inched-up by 5%.

▪ We estimate CAD to reach ~$4.8bn during FY20 (1.7% of GDP), previously CAD had reached at $13.8bn
(4.9% of GDP).
Current Account Deficit US$ mn (Monthly) Current Account Deficit (% of GDP Vs CAD $Bn)

500 7% 25

6%
0 20
5%
-500
4% 15
-1,000
3% 10
-1,500 2%
5
-2,000 1%

-2,500 0% 0
FY2016

FY2017

FY2018

FY2019

FY2020

FY2021
Nov 19
Apr 18

Jun 18

Aug 18

Oct 18
Nov 18

Apr 19

Jun 19

Aug 19

Oct 19
Jan 18

Mar 18

May 18

Jan 19

Mar 19

May 19
Feb 18

Sep 18

Feb 19

Sep 19
Jul 18

Dec 18

Jul 19

Source: SBP, Insight Research Source: SBP, Insight Research

Pakistan Economy
Shriveling industrial output likely to limit Real GDP growth
▪ Weak economic activity as a result of monetary tightening (325bps in CY19) along with steep PKR
devaluation has impacted the industrial growth adversely, which will shrink industrial output by 1.4% YoY.
Major decline is expected to come from Automobiles, Steel, Refineries and OMCs. While Agriculture sector
is also expected to grow by a meager 1.8% due to lower sugarcane and cotton output. We expect GDP
growth for FY20 to reach ~2.6%.

▪ As we foresee May-2020 will be a tipping point where SBP will start adjusting policy rate and this will lift
overall sentiments. We estimate GDP growth to be in the range of ~3.8% in FY21 and momentum likely to
continue which will be largely driven from enhanced industrial/Agri output.

Real GDP Growth - %

6%
6%
5%
5%
4%
4%
3%
3%
2%
FY2016

FY2017

FY2018

FY2019

FY2020

FY2021
Source: SBP, Insight Research
Pakistan Economy
Improving Import Cover
▪ Pakistan’s foreign exchange reserve had reached to a dead level of $7.2bn back in Dec-18, which was
roughly equivalent to 1 month 10 days of import cover. Thanks to Saudi Arabia and GCC countries
who deposited ~$4.5bn in SBP treasury account which rescued Pakistan from the verge of a default,
due to delay in opting for IMF program. Entry into IMF program provided much needed relief as it
brought further assistance from other multilateral agencies (World bank, ADB), which has come with
more clear vision and economic reforms with identified objectives.

▪ In addition to the above, total foreign investment in T-bills/PIBs reached to US$1.43bn (99.28% in T-
bills). We believe that the amount realized to date is too small as compared to its potential, If things go
right on the IMF and FATF fronts, in combination with new tax reforms, we anticipate that this
amount would reach $3-5 billion within the span of 5-6 months.
SBP Forex Reserves ($mn) Vs Import
ChartCover (Months)
Title
16,000.00 3.50

3.00
13,500.00
2.50
11,000.00
2.00
8,500.00
1.50

6,000.00 1.00
Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov
17 17 17 18 18 18 18 18 18 19 19 19 19 19 19

SBP Fx reserves Import Cover

Pakistan Economy

Improving Import Cover

▪ Due to the massive devaluation witnessed in the Pakistani rupee from 105 to 155, REER is now
hovering ~95.81 which is closer to its fair value.

Economy: REER vs PKR/USD

150
PKR/USD REER
160 140

130
140
120

120 110

100
100
90

80
80
70

60 60
Jan-18

Jan-19
Aug-18
Apr-18
May-18

Apr-19
May-19
Jun-19
Oct-17

Dec-17

Mar-18

Dec-18
Jul-18

Mar-19

Aug-19
Jun-18

Oct-18

Jul-19

Oct-19
Nov-17

Nov-18

Nov-19
Sep-17

Feb-18

Sep-18

Feb-19

Sep-19
Source: SBP, Insight Research
Pakistan Economy
IMF’s key guidelines
IMF has approved $6bn EFF facility back in Jul-19, subject to achievement of wide-ranging reform plan to ensure
macro economic stability. Key reforms under IMF program are as follows:

• Market based exchange rate

• Monetary tightening
• Lower fiscal deficit by broadening tax net
• Floor on SBP reserves
• Road map to resolve circular debt

Pakistan’s balance of payment situation is improving under the guidance and policy measures of IMF, which is
endorsed by IMF in its first review back in Dec-19.
Indicative Targets FY19 FY20 FY21
all Figures in PKR Bn End- DEC End- June End- DEC End- June End- Sep
Cumulative floor on Cash Transfers Spending (BISP) 30 116 86 180 41
Cumulative floor on general government budgetary health and education spending - 1,287 570 1,524 121
Floor on net tax revenues collected by the FBR 1,795 3,829 2,198 5,238 1,324
Ceiling on net tax refund arrears 90 236 (53) (105) (133)
Ceiling on power sector payment arrears cumulative flow 1,415 1,619 93 134 27
Source : IMF
FY19 FY20 FY21
Performance Criteria End- DEC End- June End- DEC End- June End- Sep
Floor on net international reserves of the SBP - Mn $ (11,853) (17,731) (16,061) (10,248) (8,841)
Ceiling on net domestic assets of the SBP - PKR Bn 7,296 9,079 8,815 9,066 8,529
Ceiling on SBP's stock of net foreign currency swaps/forward position - Mn $ 7,532 8,040 8,055 7,555 7,305
Ceiling on government primary budget deficit - PKR Bn 153 1,353 (87) 264 (58)
Ceiling on net government budgetary borrowing from the SBP - PKR Bn 4,737 6,689 7,756 7,187 7,187
Ceiling on the amount of government guarantees - PKR Bn 1,313 1,555 1,763 1,863 1,922
Source : IMF
Pakistan Economy
Inflationary pressure to tame from Mar-20 onward
▪ We expect inflation to remain on a higher note during FY20, average CPI for the fiscal year 2020 is
expected to clock in at 11.24% as compared to 6.8% in FY19. Pak rupee devaluation, increase in power &
gas tariff and abrupt increase in food prices were the reason for this upsurge. We believe that current
policy (i.e. 13.25%) is adequately adjusted with CPI expectation in near-term.

▪ We estimate that inflation will start to decline from Mar-20 and is expected to reach single digit from
Aug-20. However, average CPI for CY20 is estimated to be ~10.2%.

▪ “The SBP increased its policy rate to maintain a positive real interest rate to shore up confidence and
anchor inflation expectations. Future decisions on monetary policy will be taken with primary
consideration given the inflation outlook” (IMF Review Dec-19).
Economy: Real Interest rate Vs Policy Rate
6.00% 14.00%
Real Interest rate Policy Rate
5.00% 12.00%
10.00%
4.00%
8.00%
3.00%
6.00%
2.00%
4.00%
1.00% 2.00%
0.00% 0.00%
Mar-17

May-17

Mar-18

May-18

Mar-19

May-19

Nov-19

Mar-20

May-20
Nov-16

Jan-17

Nov-17

Jan-18

Nov-18

Jan-19

Jan-20

Nov-20
Jul-17

Sep-17

Jul-18

Sep-18

Jul-19

Sep-19

Jul-20

Sep-20
Source: SBP, PBS, ISL Research
Pakistan Economy

Rate cut likely from May-20

Rate cut likely from May-20: SBP’s monetary policy stance will stay consistent with medium-term
inflation objective whereas keeping +2% policy rate in real terms on a forward-looking basis. Considering
the outlook of CPI, SBP may start monetary easing from May-20.

Economy: Policy rate Vs Inflation

14% 14.00%
Inflation Policy Rate
12% 12.00%

10% 10.00%

8% 8.00%

6% 6.00%

4% 4.00%

2% 2.00%

0% 0.00%
Nov-16

Nov-17

Nov-18

Nov-19

Nov-20
Jun-17

Jun-18

Aug-18

May-19
Jun-19

Jun-20
Dec-16
Jan-17

Mar-17

May-17

Dec-17
Aug-17
Sep-17

Jan-18

Mar-18

May-18

Sep-18

Dec-18
Jan-19

Mar-19

Dec-19
Aug-19
Sep-19

Jan-20

Mar-20

May-20

Dec-20
Aug-20
Sep-20
Feb-17

Apr-17

Feb-18

Apr-18

Feb-19

Apr-19

Feb-20

Apr-20
Jul-17

Oct-17

Jul-18

Oct-18

Jul-19

Oct-19

Jul-20

Oct-20
Source: SBP, PBS, ISL Research
 Valuation Guide
Ticker Price Target Upside Stance Earnings per Share Dividend per share Price to Earnings Dividend Yield Price to Book
2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021
BANKS
HBL 161 200 24% BUY 9.8 22.8 28.6 5.0 7.0 12.0 16.5 7.1 5.6 3.1% 4.3% 7.4% 1.2 1.1 1.0
MCB 212 249 17% BUY 19.1 26.8 34.3 16.0 16.0 18.0 11.1 7.9 6.2 7.5% 7.5% 8.5% 1.7 1.6 1.5
UBL 175 205 17% BUY 15.4 21.6 28.6 11.0 12.0 12.0 11.3 8.1 6.1 6.3% 6.9% 6.9% 1.4 1.3 1.1
BAHL 80 98 23% BUY 9.3 13.1 15.1 3.5 4.5 5.5 8.6 6.1 5.3 4.4% 5.7% 6.9% 1.7 1.4 1.1
BAFL 47 65 38% BUY 7.2 9.6 11.8 4.0 4.0 4.0 6.6 4.9 4.0 8.5% 8.5% 8.5% 1.1 1.0 0.8
ABL 98 111 14% BUY 11.3 16.1 19.8 8.0 9.0 9.0 8.6 6.1 4.9 8.2% 9.2% 9.2% 1.3 1.2 1.0
10.7 7.0 5.5 6.1% 6.7% 7.8% 1.4 1.2 1.1
E&P's
OGDC 149 223 50% BUY 27.5 28.5 27.7 11.0 11.3 11.0 5.4 5.2 5.4 7.4% 7.6% 7.4% 1.0 0.9 0.8
PPL 140 187 34% BUY 22.7 23.2 25.9 1.4 3.5 6.5 6.2 6.0 5.4 1.0% 2.5% 4.6% 1.3 1.1 0.9
POL 468 560 20% BUY 59.4 66.0 69.0 50.0 55.7 58.6 7.9 7.1 6.8 10.7% 11.9% 12.5% 3.5 3.2 3.0
MARI 1,282 1,582 23% BUY 182.4 195.9 240.9 6.0 6.0 6.3 7.0 6.5 5.3 0.5% 0.5% 0.5% 2.7 1.9 1.4
6.0 5.7 5.5 5.0% 5.6% 6.2% 1.3 1.1 1.0
CEMENTS
LUCK 445 586 32% BUY 35.0 20.5 40.0 6.5 3.0 10.0 12.7 21.7 11.1 1.5% 0.7% 2.2% 1.5 1.5 1.4
DGKC 74 74 0% HOLD 3.7 (8.8) 3.5 1.0 - 1.0 19.9 N.M 21.1 1.4% 0.0% 1.4% 0.5 0.5 0.5
MLCF 23 25 9% HOLD 1.3 (3.8) 4.2 0.5 - 1.5 17.2 N.M 5.5 2.2% 0.0% 6.5% 0.4 0.4 0.4
FCCL 16 18 16% BUY 2.1 1.1 2.4 1.5 0.5 2.3 7.6 13.8 6.5 9.7% 3.2% 14.5% 1.7 1.7 1.7
PIOC 30 37 24% BUY 3.5 (3.2) 1.7 - - 0.5 8.5 N.M 17.4 0.0% 0.0% 1.7% 0.5 0.5 0.5
12.6 161.6 10.6 2.2% 0.8% 3.6% 0.9 0.9 0.9
 Valuation Guide
Ticker Price Target Upside Stance Earnings per Share Dividend per share Price to Earnings Dividend Yield Price to Book
2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021
FERTILIZERS
FFBL 20 34 73% BUY (1.9) (0.3) 1.3 - - 0.8 N.M N.M 14.7 0.0% 0.0% 3.8% 1.6 1.7 1.5
ENGRO 342 403 18% BUY 34.0 39.8 44.5 31.0 32.0 36.0 10.1 8.6 7.7 9.1% 9.4% 10.5% 1.4 1.4 1.3
FFC 100 124 24% BUY 13.2 14.9 15.8 10.4 12.5 13.5 7.6 6.7 6.3 10.4% 12.5% 13.5% 3.4 3.2 3.0
EFERT 73 86 18% BUY 12.7 12.9 13.7 12.3 11.0 11.5 5.7 5.6 5.3 16.9% 15.1% 15.8% 2.1 2.0 1.9
FATIMA 27 32 20% BUY 6.8 7.6 6.8 2.5 3.5 3.5 3.9 3.5 3.9 9.3% 13.1% 13.1% 0.8 0.7 0.6
7.5 6.6 6.2 10.6% 11.4% 12.4% 1.6 1.5 1.4
TEXTILE
NML 103 140 36% BUY 16.7 14.9 14.6 4.0 4.0 6.0 6.2 6.9 7.0 3.9% 3.9% 5.8% 0.5 0.5 0.5
NCL 42 52 23% BUY 13.2 6.7 8.8 4.0 2.0 2.5 3.2 6.3 4.8 9.5% 4.7% 5.9% 0.7 0.6 0.6
KTML 38 60 56% BUY 5.9 6.6 8.9 1.8 2.0 2.8 6.6 5.9 4.3 4.5% 5.2% 7.1% 0.7 0.7 0.6
GATM 43 56 29% BUY 8.4 6.5 8.0 2.5 2.0 2.8 5.1 6.7 5.5 5.8% 4.6% 6.4% 1.2 1.1 0.9
7.1 8.7 7.7 3.8% 3.3% 4.6% 0.7 0.6 0.6
IPP's
HUBC 95 122 28% BUY 8.7 21.9 24.9 - 2.0 4.0 11.0 4.4 3.8 0.0% 2.1% 4.2% 2.2 1.4 1.0
NPL 27 26 -5% HOLD 11.0 13.7 6.2 1.5 1.0 1.0 2.5 2.0 4.4 5.5% 3.7% 3.7% 0.7 0.6 0.5
NCPL 19 28 48% BUY 9.3 13.6 9.5 2.0 1.0 2.0 2.0 1.4 2.0 10.5% 5.3% 10.5% 0.5 0.4 0.4
5.1 3.3 3.3 8.8% 8.5% 10.6% 1.3 1.0 0.8
Mid Caps
TGL 103 142 38% BUY 16.4 18.4 22.0 3.0 4.0 4.0 6.3 5.6 4.7 2.9% 3.9% 3.9% 1.2 1.1 0.9
SYS 119 160 34% BUY 12.6 12.9 16.4 3.3 4.5 7.5 9.5 9.3 7.3 2.7% 3.8% 6.3% 2.7 2.3 1.9
PIBTL 11 15 40% BUY (1.3) 0.5 0.7 - - - N.M 23.2 16.2 0.0% 0.0% 0.0% 1.5 1.4 1.4

Aggregate 7.4 6.5 6.0 6.2% 6.7% 7.4% 1.4 1.2 1.1
Source: Company Accounts, Insight Research Prices are as at: 6th Jan, 2020
*N.M = Not Meaningful
2015-2019 Forward P/E Analysis
2015-19 forward P/E analysis: Insight Universe

30 Current Average

25

20

15

10

GATM
BAHL
BAFL

SYS
OGDC

HUBC

NCPL
LUCK

NPL
KTML
HBL
MCB

TGL
MARI

ENGRO
ABL

EFERT

NCL
POL

NML
FFC

FATIMA

KAPCO
UBL

PPL

FCCL

Source: Company Accounts, Insight Research *adjusted for negative P/E

Pakistan Economy
Pakistan Key Economic Indicators
Fiscal Year FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021
Population (million) 177 181 184 188 192 194 197 201 205 209 213
GDP (US$ b) 214 224 231 245 271 283 305 315 275.4 282 309
Real GDP growth (%) 3.6% 3.8% 3.7% 4.1% 4.0% 4.7% 5.2% 5.5% 3.3% 2.6% 3.8%
Agriculture growth 2.0% 3.6% 2.7% 2.5% 2.5% 0.3% 2.2% 3.9% 0.8% 1.8% 2.6%
Manufacturing growth 2.5% 2.1% 4.9% 5.7% 3.9% 3.7% 5.8% 5.4% -0.3% 0.3% 1.7%
Services growth 3.9% 4.4% 5.1% 4.5% 4.3% 5.6% 6.5% 6.2% 4.7% 4.2% 4.9%
Inflation - CPI (%) 13.7% 11.0% 7.4% 8.6% 4.5% 2.9% 4.2% 3.9% 7.3% 11.3% 8.8%
Exports (US$ b) 25.4 24.7 24.8 25.1 24.1 22.0 22.0 24.8 24.3 25.2 26.2
Imports (US$ b) 35.8 40.4 40.2 41.7 41.3 40.3 48.5 56.6 52.8 45.6 48.7
Trade Deficit (US$ b) (10.4) (15.7) (15.4) (16.6) (17.2) (18.4) (26.5) (31.8) (28.5) (20.4) (22.5)
Trade Deficit (% of GDP) -4.9% -7.0% -6.6% -6.8% -6.4% -6.5% -8.7% -10.1% -10.4% -7.2% -7.3%
Remittances (US$ b) 11.2 13.2 13.9 15.8 18.7 19.9 19.4 19.9 21.8 22.3 23.8
Current A/C (US$ b) 0.2 (4.7) (2.5) (3.1) (2.8) (4.9) (12.6) (19.9) (13.8) (4.8) (5.7)
Current A/C (% of GDP) 0.1% -2.1% -1.1% -1.3% -1.0% -1.7% -4.1% -6.3% -5.0% -1.7% -1.9%
FX reserves (US$ b) 18.2 15.3 11.0 14.1 18.7 23.1 20.0 16.6 14.5 17.1 19.9
SBP FX reserves (US$ b) 14.8 10.8 6.01 9.1 13.5 18.1 16.1 9.8 7.3 13.1 12.8
Total Public Debt (% of GDP) 58.9% 63.3% 64.0% 63.5% 63.3% 67.6% 67.2% 72.1% 84.8% 85.1% 83.6%
Budget Deficit (% of GDP) 6.5% 6.8% 8.2% 5.5% 5.3% 4.6% 5.8% 6.5% 8.9% 6.2% 5.0%
6-Months interest rate (end period) 13.8% 12.1% 9.1% 10.2% 7.0% 6.1% 6.2% 7.0% 12.2% 13.0% 9.5%
US$/PKR parity - (end period) 86.1 94.7 99.8 98.8 101.8 104.8 104.9 121.5 160.0 157.7 163.6
Moody's' Rating (end period) B3 B3 Caa1 Caa1 B3 B3 B3 B3 B3-
S&P Rating (end period) B- B- B- B- B- B- B B B-
Source: Economic Survey of Pakistan, SBP, PBS, IMF, Insight Research Estimations 2020 onwards
SECTOR OVERVIEW
Pakistan Strategy 2020

COMMERCIAL BANKS - Overweight

Banking sector is set to outperform the benchmark due to absence of Industry Deposit Growth - %

one-off expenses, which will expand ROE and also improve payout
ratio of top tiers banks. UBL and HBL have maintained CAR buffer of 23.5%

2.6% and 4.45% respectively, against regulatory requirement of 12.5% 18.5%

(Dec-19).
13.5%

Net interest income likely to remain strong during CY20/21: Banks 8.5%
investment mix is now more tilted towards PIB’s, as a result, NII is
3.5%
expected to remain on higher side due to immediate re-pricing in cost

Dec-03
Dec-04
Dec-05
Dec-06
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
of deposits and lagged re-pricing in assets (investment/advances) in an
expansionary monetary cycle. Source : SBP, MOF

CA (Current Account) % Vs CASA %

Deposit growth stream is at the bottom of the cycle: Deposit growth is
100%
likely to kick-in once reforms under FATF and IMF program have been 90%
implemented. Industry’s deposit growth is currently hovering nearer to 80%
the global financial crisis (2008-09), deposit growth during CY19 till 70%

November is at 7.2% against the 10 year average of 14.6%. In our 60%

50%
view, impact of enhanced KYC/CDD requirements are already in place. 40%
We believe this may result in increased deposit growth (12% expected 30%
in CY20), ultimately benefiting those banks having higher current 20%
HBL UBL ABL MCB BAFL BAHL
account base (BAFL, UBL). Current % Savings % Fixed CASA Ratio
Source : Company Financials , ISL
Research
Pakistan Strategy 2020

COMMERCIAL BANKS
NPL accumulation slower than historical trajectory: Banks higher risk NPL Growth vs GDP Growth
profiling under Basel-III and rigid compliance under SBP guidelines, 55.0% 7.00%

have kept them away from heavy pileup in NPL’s even in economic 45.0% 6.00%

slow-down scenario (as shown in the graph). NPL’s of our universe 35.0% 5.00%

registered growth of 30%-40% back in 2008/09 where GDP growth 25.0% 4.00%

had dropped to a bottom of 0.3%. In recent past, NPL stock has 15.0% 3.00%

increased significantly only of those banks having global operations 5.0% 2.00%

(HBL, UBL). Main reasons behind the surge in NPLs/provisions i)

-5.0% 1.00%
-15.0% 0.00%
Unstable Middle East situation due to lower crude oil prices ii) increase
in NPL’s and its provisions due to depreciation of presentation Growth in NPL GDP - Growth
currency (i.e. Pak rupee). Source : SBP, MOF

Sector key risk

• IFRS-9 (to be implemented from Dec-2020) and TSA
implementation.
• Lower than estimated growth in deposit as a result of economic
slowdown and leads to higher growth NPLs.
• Quicker than estimated decline in policy rates.
Pakistan Strategy 2020

OIL & GAS EXPLORATION - Overweight

Oil prices on the rise: Crude oil prices witnessed gain of 32% YoY, Furnance
E&Ps Sector
Oilrelative
Price to KSE100 index

driven by OPEC decision to cut production by 0.5mbpd (cumulatively Oil Price Av g. O il Discount

cut extends to 1.7mbpd) from Jan’20. Whereas American crude 100

90
45.0%

inventories fell to their lowest level in recent two months, lifting prices
30.0%
80
15.0%
by cutting supply.
70
60 0.0%
50
-15.0%
Trading at multiples below 5/10-year Average: Current Fundamentals
40
30 -30.0%

of E&Ps sectors offer decent upside and currency hedge as impact of 20

10
-45.0%

PKR depreciation in FY19 will be completely translated in FY20. 0 -60.0%

Jul-15

Jul-17

Jul-18

Jul-19
Jul-16
Comparing with historical P/E, E&Ps are trading well below the mean

Oct-16

Oct-17

Oct-18

Oct-19
Oct-15
Jan-16

Jan-18

Jan-19
Jan-15

Jan-17
Apr-15

Apr-16

Apr-18
Apr-17

Apr-19
of 8.9x in past 5 year and 9.46x over the past 10 years. As compared to Source: Bloomberg, PSX, Insight Research

the benchmark KSE100 index, E&Ps are at a deep discount of ~39%. OGDC & PPL: Trade Debts VS Payout Ratio

Circular debt might restraints Capex/Payouts: Circular debt has

Trade Debts Pay outs (%)
90%
240,000

subdued Pakistan energy chain, with E&Ps being no exception. Though 215,000 75%

lower oil prices scaled-down the capital expenditure globally and in

190,000

Trade Debt in Millions

165,000 60%

Payout Ratio
Pakistan. However, it can also be attributed to circular debt piling up. 140,000
45%

Amongst E&Ps OGDC (1QFY20: PKR264b) and PPL (1QFY20: 115,000

90,000 30%

PKR259b) are the key victims as MARI’s major customers is fertilizer 65,000
15%
sector. 40,000
15,000 0%

1-Jan-11

1-Jan-13

1-Jan-17

1-Jan-19
1-Jan-15
1-May-10

1-May-12

1-May-14

1-May-16

1-May-18
1-Sep-11

1-Sep-13

1-Sep-15

1-Sep-19
1-Sep-09

1-Sep-17
Source: Company accounts, Insight Research
 100

0
10
20
30
40
50
60
70
80
90

100

0
10
20
30
40
50
60
70
80
90
POL
Jan-15 Jan-15
Apr-15 OGDC
Apr-15

Furnance
Furnance
Jul-15 Jul-15

5-YearOil
5-Year

Oct-15 Oct-15 Oil Price

Oil Price
P/E
Jan-16 Jan-16

Price
Oil Price

Apr-16 Apr-16

Trend
Jul-16 Jul-16
P/E Trend

Oct-16 Oct-16

POL P/E
OGDC P/E

Jan-17 Jan-17
Apr-17 Apr-17
Jul-17 Jul-17
Oct-17 Oct-17
Jan-18 Jan-18
Pakistan Strategy 2020

Apr-18

5 YEAR AVG
Apr-18
5 YEAR AVG

Jul-18 Jul-18
Oct-18 Oct-18
Jan-19 Jan-19
Apr-19 Apr-19
Jul-19 Jul-19

10 YEAR AVG
10 YEAR AVG

Oct-19 Oct-19
3
5
7
9

5
7
9
11
13

11
13
15
17
100

0
10
20
30
40
50
60
70
80
90
PPL

100

0
10
20
30
40
50
60
70
80
90

MARI

Jan-15 Jan-15
Apr-15 Apr-15
Furnance
Furnance

Jul-15 Jul-15
5-Year
5-YearOil
E&Ps: Trading at cheap multiples

Oct-15 Oct-15
Oil Price

Oil Price
Oil P/E

Jan-16 Jan-16
Price
P/EPrice

Apr-16 Apr-16
Trend

Jul-16 Jul-16
Trend

Oct-16 Oct-16
MARI
PPL P/E

Jan-17 Jan-17
Apr-17 Apr-17
Jul-17 Jul-17
Oct-17 Oct-17
Jan-18 Jan-18
5 YEAR AVG

Apr-18
5 YEAR AVG

Apr-18
Jul-18
Jul-18
Oct-18
Oct-18
Jan-19
Jan-19
Apr-19
Apr-19
Jul-19
Jul-19
Oct-19
10 YEAR AVG
10 YEAR AVG

Oct-19
3
6
9
12
15
18
21
24

3
6
9
12
15
18
21
24
Pakistan Strategy 2020

FERTILIZER - Market weight

Sectoral Theme: Agriculture sector contributes ~18.5% in Pakistan’s Spread b/w local and international urea price

GDP and hence plays an important role in economy. In FY19, 3,300

1,850
agriculture sector grew by meagre ~0.85% against the target of ~3.8%. 2,900
1,650

Where crops witnessed a decline of ~4.4% on account of water

2,500 1,450
2,100 1,250
scarcity, change in weather patterns and decline in area under

PKR/bag
1,700 1,050

cultivation. During 2019, fertilizer sector faced numerous ups and 1,300
850

downs in the form of higher prices of urea and DAP, GIDC issue and
650
900 450

rising inventory levels. We believe mature dynamics of fertilizer 500 250

nov'19
Oct'19
Jun'18

Jun'19
Mar'19
Mar'18
Feb'18

Sep'18

Feb'19

Sep'19
Jul'18

Jul'19
Nov'18
Oct'18

Dec'18
Jan'18

Jan'19

Apr'19
Apr'18
May '18

May '19
Aug'18

Aug'19
business, high payout ratio, government interference in the form of
subsidies/regulation of prices and PM agriculture emergency program Spread -RHS INTERN ATION AL UREA PRICE LOCAL UREA PRICE

will keep this sector in limelight. Source: NFDC, Insight Research

Industry Year End Inventory

Inventory Buildup: In 2HCY19, urea inventory started building up due 1,200 operations of RLNG based

to operations of RLNG based plants and lower offtakes owing to

Rising inventory level due to plants coupled with lowe

Industry inventory in thounsand tons

weak farmer income and offtake and higher prices
better gas supply
1,000
inflationary pressure and poor farmer incomes. In Nov’19 urea and Depressed sales mainly due to
water shortage

DAP inventory stood at 1,039KT and 555 KT, respectively. According 800

to the provisional number for the month of Dec’19 urea offtake 600

registered a growth of 79% YoY, this increase is mainly due to dealers 400

anticipation of gas price hike leading to urea price increase. Current 200
urea inventory stood at ~250K tons (based on provisional numbers).
Permission of export of 600kt of urea aloong
with reduction in prices

We believe that higher than historical offtake in Dec’19 might distress

-

urea demand-supply situation in 1QCY20. Source: NFDC, Zakheera Insight Research

Pakistan Strategy 2020

FERTILIZER
Increase in Gas Prices: According to OGRA’s ERR document dated 11-
Per ba g urea prices VS Gas price (Feed +Fuel)

Dec-2019, there is a proposed increase of 135% and 31% in prices of 2,500 Imposition of GST
along with lower
Subsidy anncounced by federal
government along with reduction is

feed and fuel gas respectively. This increase in gas prices will result in
production due to gas GST rate
2,000 curtailment

an increase of PKR 550 / bag of urea which is very unlikely to happen. 1,500
In our view, if the proposed hike materializes government will waive off
the GIDC levy. 1,000

Discontinuation of
500 subsidy
Imposition of Gas Infrastructure

Better Payouts: Fertilizer sector current dividend yield stands at

Development Cess

-
~9.5% vs. 5.24% of benchmark KSE-100. We expect dividend yields to
remain stable in the coming years. prices gas price
Source: NFDC, OGRA, Insight Research

Sector key risk

• Higher than expected increase in gas prices,
• Unfavorable verdict of GIDC issue
• Lower pricing power owing inventory buildup,
• Water shortage / adverse weather condition.
Pakistan Strategy 2020

IPPs - Overweight Circular Debt Accumulation (PKR Bn)

Liquidity Crunch: Pakistan energy sector is currently facing severe 1600
liquidity crunch due to intercorporate debts, commonly known as 1400
circular debt. Payments to energy producers are guaranteed by Gov’t 1200
of Pakistan, any delay in these payments are further enriched by 1000

interest on these delayed payments. Generation tariff of IPPs (CPP 800

part) is constructed to cover the basic investments of sponsor and is 600

400
liable to be paid even if no generation is utilized from them.
200
0
Circular Debt: As per the latest IMF report, circular debt of Pakistan 2013 2014 2015 2016 2017 2018 2019

ballooned by PKR465b in this year to reach PKR1,618b, 4.2% of GDP. Source: IMF, Insight Research
Main contributions to circular debt came from DISCOs inefficiencies,
delayed tariff adjustments, financial costs, and unbudgeted subsidies in
ratio of 37/25/20/18% respectively. With more capacities coming Generation Data
online in coming years, we opine that circular debt issues would remain Installed Capacity Hydro Capacity
Thermal Capacity Nuclear capacity
highlighted due to limited growth in demand of electricity and Generation
35,000 125,000
eventually revenue collection. 30,000 105,000
25,000 85,000
Low GDP 4.5% Normal GDP 5.5% High GDP 7.0%
.
Fiscal Year
Generation Peak Demand Generation Peak Demand Generation Peak Demand 20,000 65,000
GWh MW GWh MW GWh MW 15,000 45,000
2019-20 151,062 27,814 152,914 28,155 155,718 28,671 10,000 25,000
2020-21 158,842 28,782 161,841 29,325 166,429 30,157
2021-22 166,267 30,127 170,645 30,921 177,416 32,147
5,000 5,000
2022-23 173,178 30,889 179,142 31,953 188,476 33,618 - -15,000

Jun-01

Jun-03

Jun-05

Jun-07

Jun-09

Jun-11

Jun-13

Jun-15

Jun-17

Jun-19
2023-24 181,051 32,294 188,914 33,696 201,374 35,919
2024-25 188,749 33,640 198,744 35,422 214,788 38,281
Scource: Indicative Generation Capacity Expans ion Plan 2018-40
Source: NEPRA, Insight Research
Pakistan Strategy 2020

IPPs Projected Energy Payments (PKR Bn)

EPP CPP Total

IMF Rescue: To solve the circular debt issue. GoP and IMF are 2500
collaborating to limit the amount to ~PKR50-70b annually by FY2023. 2000
Major recommendation of proposed plan includes efficiency upgrades
of DISCOs, subsidy rationalization, timely adjustment of tariff and 1500

autonomy of NEPRA in determination of tariff. In the meantime, IMF 1000

has nodded for the issuance of Pakistan Energy Sukuk II to ease the
500
liquidity concerns of energy sector. The proposed mechanism would
provide much needed respite to IPPs, while it would decrease the cost 0
2020 2021 2022 2023 2024 2025
of delayed payments for Gov’t. Currently, any delayed payments by the Source: CPPA-G, Insight Research
Gov’t are surcharged at 3M KIBOR+~4%, while Sukuk would be
offered at KIBOR+~1%, in our view.

RFO Plants To Come-back: Pakistan has tilted towards cheaper fuel Efficiency
Fuel Cost/ KWh
mix to generate electricity. While reliance on coal and RLNG has 25% 30% 35% 40% 45%
increased, the notable shift is seen in RFO which shrank by 60% YoY 40,000 13.1 10.9 9.3 8.2 7.3
basis to currently stand at 6,511GWH (TTM) as compared to FO Prices
45,000 11.5 9.5 8.2 7.2 6.4
50,000 11.5 9.5 8.2 7.2 6.4
16,280GWH last year. While current generation is sufficient to meet (Rs/Ton)
55,000 13.1 10.9 9.3 8.2 7.3
the demand, we believe that RFO plants are likely to come back once 60,000 16.4 13.6 11.7 10.2 9.1
electricity demand surge during summer given the fact that RFO prices Source: Insight Research
are on a downward trend due to IMO-20. Listed RFO plants having
higher efficiencies and lower EPP in merit order namely HUBC, NCPL,
NPL, LPL, etc., are likely to be operational on priority basis as compared
to others.
Pakistan Strategy 2020

CEMENT - Underweight
Cement Prices vs. Capacity Utilization
Supply glut to further enhance in FY20: We expect all major capacities
120% 700.0
to come online in FY20 and it is expected to enhance industry capacity Prices Capacity Utilization
up to ~67mn tons/per annum (FY19: ~57mn ton/per annum). 110% 600.0

Increasing capacities will put further pressure on prices in an already 100%

500.0

oversupplied market, hence formation of a cartel seems a distant 90%

400.0

reality. 300.0
80%
200.0

Lower retention Prices: Intense competition is resulting in lower 70% 100.0

profitability as each company is battling to increase its market share by 60% -
reducing prices. As better pricing in south region gives an arbitrage

FY02

FY04

FY06

FY08

FY10

FY12

FY14

FY16

FY18

FY20
opportunity for northern players to increase overall dispatches. ISL Source: Company Accounts, Apcma, Insight Research

cement universe retention prices came down to PKR273/bag vs. ISL Cements: Domestic Retention Price
PKR340/bag in SPLY.
400 Retention PKR/Bag Retention $/ton (RHS) 70
65
No respite to margins in FY20: Poor cement prices, lower retention, 350
60
additional capacities and intense competition hints margins recovery 300
55
would be delayed until demand starts picking up. Where any material 250 50

development on construction of dam and housing schemes will 200

45
40
significantly change sector dynamics. We believe FY20 will be the 150
35
worst year for cement players, as potential oversupply will put 100 30
downward pressure on prices coupled with higher operating leverage.

Sep-17

Sep-18

Sep-19
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016

Jun-18

Jun-19
Mar-18

Mar-19
Dec-17

Dec-18
Source: Company Accounts, Insight Research
Pakistan Strategy 2020

CEMENTS
Recommending Underweight: Reflecting slow dispatches and thinner ISL Cements: EV/EBIDTA vs. EV/Ton $

margins, ISL Cement Universe is trading at FY2020 EV/EBITDA of 20.4 180 EV/Ton $ EV/EBITDA (RHS) 35.0

vs. average 7x in last 5 years. In contrast, EV/ton has also dropped 18% 160
140
30.0

to US$60 in FY20 vs. US$73 in FY19 and average US$100 in last 10 120
25.0

years. 100
80
20.0
15.0
60
10.0
We recommend ‘Under-weight’ stance for the sector, in which LUCK 40
5.0
20
seems to be the safest BUY, attributable to its diversified profit 0 0.0
streams. As we believe cement prices would remain weak in next two

Sep-17

Sep-18

Sep-19
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016

Jun-18

Jun-19
Mar-18

Mar-19
Dec-17

Dec-18
quarters, the sector would provide decent entry points for value
investors. In this regard, DGKC, PIOC and MLCF are amongst the few Source: Company Accounts, Insight Research

stocks worth looking at P/B valuations.

Cement Price (PKR/bag)
Relative Comparisons 750 Price war
Company EV/EBIDTA 5-Year Average EV/Ton (US$) 5-Year Average P/B 5-Year Average
650
LUCK 29.5 7.7 89.9 163.7 1.5 2.4
550
DGKC N.M 7.2 66.7 150.6 0.5 0.8 450 Price war
Price war
MLCF 16.7 5.8 50.4 126.8 0.9 1.6 350

FCCL 8.4 6.4 50.4 115.1 1.1 2.1 250

PIOC 81.3 6.5 96.1 100.9 0.5 1.6 150

Jun-05
Jun-03

Jun-07

Jun-09

Jun-11

Jun-13

Jun-15

Jun-17

Jun-19
Source: Company Accounts, Insight Research *N.M= Not Meaningful
Source: PBS, InsightResearch
Pakistan Strategy 2020

CEMENTS
ISL Cement Universe: EPS/EBIDTA Sensitivity to different cement prices/bag
Cements Forward EBITDA Sensitivity to Bag prices
EBITDA* 650 600 550 500 450 400
LUCK 14.5 9.7 5.0 0.2 (4.5) (9.2)
DGKC 9.0 5.0 1.0 (3.0) (7.0) (11.0)
MLCF 9.2 6.0 2.9 0.2 (3.3) (6.5)
FCCL 8.4 5.9 3.4 1.0 (1.5) (4.1)
PIOC 6.0 4.0 2.1 0.2 (1.7) (3.7)
Source: Ins i ght Res ea rch *Annua l i zed
Cements Forward EPS Sensitivity to Bag prices
EPS* 650 600 550 500 450 400
LUCK 34.5 24.9 14.8 3.2 (9.2) (11.3)
DGKC 9.0 (2.8) (10.5) (20.2) (30.8) (39.5)
MLCF 2.4 - (2.5) (5.0) (7.5) (11.0)
FCCL 3.5 2.1 0.8 (0.6) (2.1) (2.4)
PIOC 7.2 0.9 (7.1) (15.4) (23.8) (24.3)
Source: Ins i ght Res ea rch *Annua l i zed

ISL Cement Universe: Breakeven prices

Cements Breakeven Points
ISL Universe Breakeven EBITDA Breakeven EPS
LUCK 480.0 490.0
DGKC 538.0 614.0
MLCF 505.0 601.0
FCCL 480.0 523.0
PIOC 496.0 594.0
Source: Ins i ght Res ea rch
Pakistan Strategy 2020

TEXTILE - Overweight PKR Depreciation vs. Textile Exports

Sectoral Theme: Textile sector is one of the most important sectors of Textile (USD 'Mn) PKR depreciation

Pakistan’s economy as it contributes ~60% in total exports. Textile 14,700 25%

sector underperformed in dollar terms despite of hefty PKR 12,700 20%

devaluation because of stiff competition, lower export prices and 10,700

15%

higher input costs. However, exports witnessed impressive volumetric 8,700

10%

growth of 23% in 5MFY20, whereas prices have gone down by 14%

6,700
5%

which kept export values stagnant.

4,700

2,700 0%

We believe exports are likely to pickup in 2HFY20, due to lagged

700 -5%

FY00

FY02

FY04

FY06

FY08

FY10

FY12

FY14

FY16

FY18
impact of currency devaluation (J-curve theory), In addition govt. is also
pushing hard to increase exports by giving different incentives to
Source: PBS, SBP, Insight Research

exporters. Furthermore, FTA-II with China is expected to benefit

Pakistan exports from Jan-20. This will eliminate tariffs on different
Pakistani exports to china which includes major share of textile
products.

Incentives to Exporters: Pakistan Govt. has taken several steps to

make an environment conducive for exporters and overcome the
current account deficit by increasing exports. To achieve this objective,
govt. gave several incentives to exporters including subsidized energy,
lower cost of borrowing under LTFF and EFS schemes and improving
tax refund mechanisms.
Pakistan Strategy 2020

TEXTILE International VS Local Cotton Prices

Increasing Cotton Prices: In recent months, cotton prices increased in 120
LOCAL PRICES INTER NATIONAL PRICES
10000

the range of ~500-800/maund, similar trend was witnessed in 100

9000
8000
international cotton prices. In the coming months, we expect cotton

Local Price / mounds in PKR

7000
80

prices to remain at current levels. Nevertheless, lower cotton prices will 6000

USD / lb
60 5000
fairly reduce textile manufacturers’ reliance on short term borrowings 4000

which can lead to reduced financial cost.

40
3000
2000
20
1000

Exports Performance in 5MFY20 0 0

Jul-19
Jul-18

Nov-18

Nov-19
Oct-18

Dec-18

Oct-19
Jan-18

Jan-19

Apr-19
Apr-18
May -18

May -19

Aug-19
Aug-18
Mar-18

Mar-19

Jun-19
Jun-18
Feb-18

Sep-18

Feb-19

Sep-19
Pakistan Textile Exports Breakup
US$ 'm Nov-18 Oct-19 Nov-19 YoY MoM 5MFY19 5MFY20 YoY
Source: Cotlook A index, KCA, Insight Research
Raw Cotton 1.7 1.4 2.1 25% 49% 50.2 14.3 -72%
Cotton Yarn 79.5 90.7 98.5 24% 9% 553.4 483.5 -13%
Cotton Cloth 167.0 179.4 168.3 1% -6% 888.0 847.1 -5%
Yarn Other than Cotton Yarn 2.3 2.7 2.7 17% 0% 12.8 14.9 16%
Basic Textiles 250.4 274.2 271.6 8% -1% 1,504.4 1,359.8 -10%
Knitwear 251.6 274.7 266.9 6% -3% 1,098.7 1,321.1 20%
Bed Wear 194.7 217.1 195.5 0% -10% 947.1 1,013.1 7%
Towels 64.7 71.5 65.4 1% -9% 317.2 317.0 0%
Readymade Garments 212.9 239.3 250.7 18% 5% 1,019.3 1,157.3 14%
Value Added 723.9 802.5 778.3 8% -3% 3,382.4 3,808.5 13%
Tents,Canvas & Tarpulin 7.6 8.5 7.5 -1% -11% 35.3 31.8 -10%
Art,Silk & Synthetic Textile 22.9 30.6 27.4 19% -11% 124.1 136.6 10%
Madeup Articles(incl.Others) 61.3 60.3 57.0 -7% -5% 282.7 266.9 -6%
Other Textile Materials 34.0 39.3 35.4 4% -10% 181.3 161.1 -11%
Total Textile Exports 1,100 1,215 1,177 7% -3% 5,510.3 5,764.7 5%
Total Exports 1,839 2,024 2,011 9% -1% 9,109.0 9,545.0 5%
Source: PBS, Insight Research
Preferred Picks
FAUJI FERTLIZER
COMPANY

OIL AND GAS HABIB BANK

DEVELOPMENT Ltd.
COMPANY PAKISTAN INT.
BULK TERMINAL
Ltd.
PAKISTAN
UNITED BANK
PETROLUEM
Ltd.
Ltd. TARIQ GLASS
INDUSTRIES
Ltd.
THE HUB POWER BANK ALFALLAH
COMPANY Ltd. Ltd.
SYSTEMS
Ltd.

LUCKY CEMENT NISHAT MILLS

` Ltd.
IGI HOLDING
Ltd.
Preferred Picks

Habib Bank (HBL PA) Habib Bank Limited

BUY HOLD SELL
Cost to income ratio will taper-off: HBL cost to income ratio is currently We recommend BUY with Dec 2020 DDM & P/Bv
hovering over 76.8% in 9MCY19 (Normalized 58.3%) vs. 5 years average of based Target Price of PKR200.4, providing 29%
Upside
~47%. Most of the business transformation cost have already being done,
Target Price 200
thus we believe that the cost to income ratio will come downwards from
Current Price 161
2HCY20.
Market cap PKR b 237
Market cap US$ b 1.53
Open foreign currency exposure: HBL has an open position of ~US$334mn
Free Float Market cap US$ b 0.76
which it borrowed from international financial institutions to pay penalty
52 wk Avg. turnover PKR m 193
($225mn) related to NY operations. Bank has paid 25% of its foreign
52 wk Range 102- 153
currency loan towards the end of this year and rest will be paid in the years
Shares Outstanding m 1,467
to come. This would reduce the earnings risk if Pak rupee depreciated Free float % 50%
further. Major Sponsors Aga Khan Fund
Bloomberg Ticker HBL PA
Recommendation: HBL remains our top pick in our banking universe on the
back of a recovery in ROE due to absences of expenses pertaining to NY Key Ratios 2019F 2020F 2021F
operations and exchange loss. We have a BUY recommendation with Dec-20
EPS 9.8 22.8 28.6
target price of PKR 200/share based on DDM and P/BV, currently trading at
DPS 5.0 7.0 12.0
P/E and P/Bv of 7.1x and 1.1x of CY20 estimates. Div. Yield 3.1% 4.3% 7.4%
P/E 16.5 7.1 5.6
Key risks: i) higher than expected NPLs ii) larger monetary easing than BVPS 130.4 148.3 167.3
expected iii) higher than expected operating expenses. P/Bv 1.2 1.1 1.0
ROE 8% 16% 18%
Source: Company Accounts, Insight Research
Preferred Picks

United Bank (UBL PA) United Bank Limited

BUY HOLD SELL
Duration of investment mix makes the difference: During low-interest-rate We recommend BUY with Dec 2020 DDM & P/Bv
environment, UBL invested heavily in PIBs which has restricted the based Target Price of PKR204.6, providing 22%
expansion of NII (Net Interest Income). Old PIBs were deployed at a yield of upside
7-8%, while current PIBs yield is hovering in a range of ~11-11.5%. PIBs Target Price 205
worth of PKR110bn (24% of total) are going to mature in 1HCY20 which can Current Price 175

be deployed at higher rates, as we expect SBP may start monetary easing Market cap PKR b 214

from 2HCY20. UBL’s investment mix has shifted more towards T-bills which Market cap US$ b 1.38

currently stands at 29% (16.3% in Dec-18) in-line with the yield curve shift. Free Float Market cap US$ b 0.55
52 wk Avg. turnover PKR m 216
52 wk Range 118 - 180
Foreign loan book adequately covered while local may require
Shares Outstanding m 1,224
adjustment: Bank domestic coverage currently stands at 84.7% (previously
Free float % 40%
93.3% in Dec-18) given weak economic scenario, while foreign loan coverage
Major Sponsors Bestway Group
is at 87% (previously 84.1% in Dec-18). Therefore, we are building further
Bloomberg Ticker UBL PA
provision of PKR5.8bn in our CY20 estimates.
Key Ratios 2019F 2020F 2021F
Recommendation: We have a ‘BUY’ recommendation with Dec-20 target
EPS 15.4 21.6 28.6
price of PKR 205/share based on DDM and P/BV, currently trading at P/E
DPS 11.0 12.0 12.0
and P/Bv of 8.2x and 1.3x of CY20 estimates which emanates from i) re-
Div. Yield 6.3% 6.9% 6.9%
pricing on PIB’s portfolio at better yield ii) lower provision charge on foreign
P/E 11.5 8.2 6.2
advances.
BVPS 128.7 139.4 157.1
P/Bv 1.4 1.3 1.1
Key risks: i) higher than expected NPLs on both local and international
ROE 12% 16% 19%
operations ii) higher than expected monetary easing iii) IFRS-9
Source: Company Accounts, Insight Research
implementation may increase provision by PKR5.5bn (PKR3.14/share).
Preferred Picks

Bank Alfalah (BAFL PA) Bank Alfalah Limited

BUY HOLD SELL

Investment Thesis: We have a ‘BUY’ recommendation with Dec-20 target We recommend BUY with Dec 2020 DDM & P/Bv
based Target Price of PKR65, providing 46%
price of PKR 65/share based on DDM and P/BV, currently trading at P/E and Upside
P/Bv of 4.9x and 1x of CY20 estimates. Our liking emanates from i) highest Target Price 65
ADR amongst peer banks ii) Strong deposit base which is tilted more towards Current Price 47
current account and lowest cost of deposits amongst peer banks. Market cap PKR b 84
Market cap US$ b 0.54
Highest Advance to deposit ratio Bank Alfalah Limited (BAFL) has one of the Free Float Market cap US$ b 0.22
highest ADR of 66% (industry ADR: 53%), and also higher CA ratio of 46% 52 wk Avg. turnover PKR m 55
(industry CA ratio: 36%) resulting in sharp NIMs expansion (5.5% in Sep-17 52 wk Range 34.7-51.5
vs 3.7% at Dec-18) which is expected to remain legacy in our universe. Shares Outstanding m 1,777
Free float % 40%
Aligning investment mix with yield curve: BAFL has increased its PIB Major Sponsors Abu Dhabi Group
portfolio to PKR111bn (PKR54bn at Dec-18), out of which ~50% are floating Bloomberg Ticker BAFL PA
and remaining are fixed-rate PIBs. This would keep investments yield upbeat.
Key Ratios 2019F 2020F 2021F
Key risks: i) higher than expected NPLs due to higher ADR ii) larger monetary EPS 7.2 9.6 11.8
easing than expected. DPS 4.0 4.0 4.0
Div. Yield 8.5% 8.5% 8.5%
P/E 6.5 4.9 4.0
BVPS 43.4 48.9 56.7
P/Bv 1.1 1.0 0.8
ROE 18% 21% 22%
Source: Company Accounts, Insight Research
Preferred Picks

Oil & Gas Development (OGDC PA)

Oil & Gas Development
Investment Thesis: We recommend ‘BUY’ on OGDC with Dec-20 reserve- BUY HOLD SELL
based target price of PKR223/share, attributable to cheap multiples despite
We recommend 'BUY' with Dec'20 reserves
robust earnings growth, dollar hedge and implied oil price of US$22/bbl. We
based DCF Target Price of PKR223, providing
have assumed long term crude at US$60/bbl.
50 % price upside.
Current Price 148.6
Continuous efforts to sustain production: During FY19, OGDC drilled 16
Market cap PKR b 638.9
wells (9 exploration and 7 development), while making 3 discoveries (33%
Market cap US$ m 4,122
success ratio vs. 33%/45% in FY18/17). However, oil and gas production fell
Free Float Market cap US$ m 618
by 1%/0.8%, thus aggressive efforts are expected to continue with plans to
30-day Avg. turnover m Shares 4.6
drill 30 new wells (18 exploratory, 8 development and 4 re-entry wells).
30-day Avg. turnover PKR m 636
Shares Outstanding m 4,301
Resolution of circular debt: Rising circular debt has been relentlessly
Free float % 15%
hampering Pakistan’s energy sector in shape of liquidity and cash flow
Major Sponsors Govt. of Pakistan
constraints. Where OGDC cash and short term investments dropped to
Bloomberg Ticker OGDC PA
~PKR8.5b vs. ~PKR20b in Jun-19, while trade receivables stood at
~PKR264b in 1QFY20 vs. ~PKR179b in SPLY, mainly on account of Key Ratios FY18 FY19F FY20F
increasing circular debt. This upon resolution could unlock huge investment EPS 18.3 27.5 28.4
avenues and dividends for investors. DPS 10.0 11.0 11.3
BVPS 128 145 166
Key Risks: i) significant change in crude oil price ii) lower than expected P/E 8.1 5.4 5.2
production iii) lower than expected PKR devaluation. P/BV 1.2 1.0 0.9
Dividend Yield 7% 7% 8%
ROE 15% 20% 18%
Source: Company Accounts, Insight Research
Preferred Picks

Pakistan Petroleum (PPL PA) Pakistan Petroleum

BUY HOLD SELL
Investment Thesis: We recommend ‘BUY’ on PPL with Dec-20 reserve-based
target price of PKR186/share, credited to cheap multiples (Forward FY20 We recommend 'BUY' with December 2020 reserves
P/E: 6.2), despite significant earnings growth and implied oil price of based DCF Target Price of PKR186, providing 33 %
US$28/bbl makes an attractive investment case. Assuming long term crude price upside .
at US$60/bbl. Current Price 140.0
Market cap PKR b 380.9
Focus to diversify revenue base: PPL is looking for exporting zinc to diversify Market cap US$ m 2,457
itself into minerals segments. Where company also plans to drill 14 Free Float Market cap US$ m 602
exploration and 18 development wells (FY19: 12 exploration and 18 30-day Avg. turnover m Shares 5.3
Development wells). The company is also looking for overseas opportunities 30-day Avg. turnover PKR m 704
to bid in oil and gas ventures, this will help secure long term availability of Shares Outstanding m 2,721

energy for the country. Free float % 24%

Major Sponsors Govt. of Pakistan
Bloomberg Ticker PPL PA
Rising circular debt to weaken liquidity position: PPL receivables has shoot-
up to PKR259b in 1QFY20 vs PKR159b in 1QFY19), mainly attributable to Key Ratios FY19 FY20F FY21F
low recoveries from customers arising from circular debt which is putting EPS 22.7 23.2 25.9
pressures on company’s liquidity. Company cash and short-term investments DPS 1.4 3.5 6.5
also dropped to PKR8.2b vs. PKR19.8b in SPLY. Where any resolution of BVPS 110 129 149
circular debt will enhance exploration and production activities. P/E 6.2 6.0 5.4
P/BV 1.3 1.1 0.9
Key Risks: i) significant change in crude oil price ii) lower than expected Dividend Yield 1% 2% 5%
production iii) lower than expected PKR devaluation. ROE 23% 19% 19%
Source: Company Accounts, Insight Research
Preferred Picks

Fauji Fertilizer Company (FFC PA)

Fauji Fertilizer
Stable Core Business with Higher Payout: Mature fertilizer business and
steady stream of cash dividend with limited downside risk makes FFC our top BUY HOLD SELL
pick in fertilizer space. We recommend “BUY” on FFC with Dec-20 SOTP
We recommend 'BUY' wi th Dec 2020 SOTP ba s ed Ta rget
based TP of PKR 124 per share, providing an upside of 24% along with Pri ce of PKR124, provi di ng 24% pri ce ups i de a l ong wi th
expected D/Y of 12%. FFC’s 5-year historical payout ratio stands at 86%. di vi dened yi el d of 12%.
Given stable urea demand and dividend income from associates we expect Current Price 99.84
the company's payout ratio will remain stable. Market cap PKR b 127.0
Market cap US$ m 819
GIDC Verdict: FFC has the largest accrual of outstanding GIDC in fertilizer Free Float Market cap US$ m 451
space with amount of PKR56.2b in Sep’ 19. A favorable verdict can help FFC 53 wk Avg. turnover m Shares 0.9
to record a significant one-off gain. On the other hand if verdict goes against 52 wk range PKR 84.7-109.75
the industry than company will record a one-off cash out flow. Being the Shares Outstanding m 1,272
market leader with almost 40% market share FFC has significant pricing Free float % 55%
power to pass on the cost side pressure. Major Sponsors Fauji Foundation
Bloomberg Ticker FFC PA
Diversification to Reap Fruits: FFC’s strategic investment gives its investors Key Ratios 2019F 2020F 2021F
diversified exposure in different sectors and positively impact its bottom line. EPS 13.2 13.6 14.5
Improvement in primary margins on DAP along with divestment of loss DPS 10.4 11.5 12.3
making business can significantly increase FFBL’s profitability. Easing of Div. Yield 10% 12% 12%
inflationary pressures and increase in government’s spending will provide a P/E 7.6 7.3 6.9
breather to FFC. Thar energy will further support net margins of the P/Bv 3.4 3.2 3.0
company. ROE 45% 44% 43%
Source: Company Accounts, Insight Research
Preferred Picks

Lucky Cement (LUCK PA) LUCK PA

BUY HOLD SELL
Leading the chart: We recommend ‘BUY’ on Lucky cement with Dec-20 We recommend 'BUY' with June 2020 SOTP based
SOTP based TP of PKR582/share. This is attributable to minimal debt on Target Price of PKR582 providing 31% price
books, better breakeven prices than industry, diversified exposure to upside.
different sectors and healthy other income stream (20% of PBT) which makes Current Price 445
LUCK a safe bet in current scenario of cement industry. Market cap PKR b 144
Market cap US$ m 929
Expansion of PEZU plant added 2.8mn tons: Lucky cement has expanded its Free Float Market cap US$ m 371

north plant by adding capacity of 2.8mn tons. This has enabled Lucky to 30-day Avg. turnover m shares 0.9

grow its capacity up to ~17% in north region. 30-day Avg. turnover PKR m 398
Shares Outstanding m 323
Free float 40%
Investment in KIA lucky motors: KIA lucky motors posted loss of Major Sponsors Yunus Brothe rs Group
PKR~332mn in 1QFY20, LUCK invested PKR14b in Kia motors, which Bloomberg Ticker LUCK PA
started its commercial operation in Jul-19, Given current slowdown in
automobile demand we expect KIA motors to post losses in initial years of Ratios FY19 FY20F FY21F
operations. EPS - Cons 35.0 19.6 40.1
EPS - Uncon 32.4 15.6 26.5
660MW Coal based power plant: Lucky electric is scheduled to achieve DPS 6.5 3.0 11.0
commercial operation by Mar-21, which would further strengthen Lucky’s DY 1% 1% 2%
earning. The plant would add PKR73/share to the consolidated EPS from P/E 12.7 22.7 11.1
FY22 and PKR129/share in our TP. P/Bv 1.5 1.5 1.4
EV/Ton 91 79 72

Key Risks: i) Serious price competition ii) Slowdown in demand iii) change in EV/EBITDA 8.3 19.5 9.7
ROE 13% 7% 13%
regulatory environment.
Source: Company Accounts, Insight Research
Preferred Picks

Hub Power Company (HUBC PA)

Twofold EPS: The Hub Power Company Limited (HUBC) is all set to double Hub Power Company Ltd.
its EPS to PKR 21.9 in FY2020, thanks to its newly commissioned China
Power Hub Generation Company (CPHGC) in August 2019. HUBC’s BUY HOLD SELL
participation into CPEC power projects has further enhanced its generation We recommend BUY' wi th Dec 2020 SOTP ba s ed Ta rget
capacity to reach at ~2920MW. We have valued HUBC by DDM Pri ce of PKR122, provi di ng 28% pri ce ups i de.

methodology, assigning Dec’20 TP of PKR122/share. Any abrupt Rupee Current Price 95

devaluation further enhances its value. Market cap PKR b 124
Market cap US$ m 798

Liquidity Crunch to Blow Dividend: However, twofold EPS would not Free Float Market cap US$ m 599
30-day Avg. turnover m Shares 5
materialize into dividends given cash constrained balance sheet amid capital
30-day Avg. turnover PKR m 425
commitments on expansion projects. Any circular debt settlement via
Shares Outstanding m 1,297
proposed Energy Sukuk II can provide some token dividends for the ongoing
Free float % 75%
year. We opine that dividends would fully resume once financing round is
Major Shareholder Mega Congl omera te Pvt. Ltd.
completed while we forecast that CHPGC would carve out its maiden
Bloomberg Ticker HUBC PA
dividend in 1HY2022, easing out HUBC liquidity position.
Key Ratios FY19A FY20F FY21F FY22F
Higher Utilization Going Forward: With decreasing RFO prices post IMO, we
EPS 8.67 21.90 24.94 25.77
believe that RFO plants would remain in limelight during peak summer days.
DPS - 2.00 8.00 24.01
This would bode well for HUBC base plant having capacity of ~1200MW.
BVPS 44.27 66.86 92.51 99.76
P/E (x) 11.26 4.46 3.91 3.79
Key Risks: Liquidity risk will continue to hurt HUBC until circular debt is P/Bv (x) 2.20 1.46 1.05 0.98
managed effectively. Delay in commissioning of projects are associated with ROE 23.31% 39.41% 31.29% 26.81%
penalties. Source: Company Accounts, Insight Research
Preferred Picks

Nishat Mills (NML PA) NML PA

BUY HOLD SELL
Investment Thesis: We maintain ‘BUY’ stance on NML with Dec-20 SOTP
based target price of PKR140/share, attributable to 82% dollar linked We recommend 'BUY' with Dec'20 SOTP
revenue, diversified income streams and continuous focus towards value based Target Price of PKR140, providing 30%
added products. price upside.
Current Price 103
Target Price 140
Diversification supports bottom-line: Apart from core textile operations,
Upside 36%
NML has diversified portfolio including Cements (DGKC), Power (PKGP, LPL,
Market cap PKR m 36,183
NPL), Bank (MCB) and Autos. This derives dividend income of PKR3.0b
Market cap US$ m 233
(PKR8.6/share) in FY19 which is likely to drop to PKR2.4b (PKR6.9/Share) in
Free Float Market cap US$ m 117
FY20, due to lower dividend income from DGKC and absence of dividend 30-day Avg. turnover m Shares 1.2
from NPL in FY19. We value NML portfolio at PKR85/share. Any relief from 30-day Avg. turnover PKR m 123
group taxation would also bode well for the bottom-line. Shares Outstanding m 352
Free float % 50%
Entry into Towel business: NML is planning to establish towel manufacturing Major Sponsors Nishat Group
plant of PKR~1.5b having capacity of 10tons/day. Whereas entry into towel Bloomberg Ticker NML PA
business could open new growth avenues for company as towel business has
better margins. Key Ratios FY19A FY20F FY21F
EPS - standalone 16.7 14.9 14.6
Key risks: i) Slowdown in global demand, ii) unable to keep pace up with DPS 4.0 4.0 6.0
technological advancement iii) Devaluation by competing countries iv) P/E 6.2 6.9 7.1
increase in energy prices iv) decline in market value of investment portfolio. Div. Yield 3.9% 3.9% 5.8%
GP Margin 12.1% 13.1% 12.6%
NP Margin 9.2% 7.4% 6.6%
Source: Company Accounts, Insight Research
Preferred Picks

Tariq Glass Limited (TGL PA)

LTFF to support profitability: TGL has approached banks to obtain an LTFF Tariq Glass Limited
facility for the financing of the debt portion of its expansion plan of PKR BUY HOLD SELL
6.5bn (Debt portion is PKR3.5bn). As company’s annual export sales is more
than US$ 5mn. We estimate this will result in a cost saving of PKR ~150mn We recommend 'BUY' wi th Dec 2020 DCF ba s ed Ta rget
(PKR ~1.65/share) once the financing approved under LTFF, subject to Pri ce of PKR142, provi di ng 39% pri ce ups i de a l ong wi th
di vi dened yi el d of 3%.
achievement of minimum export target.
Current Price 102.06
Market cap PKR b 7.5
Change in energy mix: HSFO prices have declined by ~33% since Sept-19.
Market cap US$ m 48
TGL’s fuel and power make almost 35% of the cost of sales. Previously, TGL
Free Float Market cap US$ m 19
mainly relied on RLNG to meet its fuel requirements. Now the situation has 52 wk Avg. turnover m Shares 0.2
changed, as of now TGL has shifted most of its fuel requirement to the 52 wk range PKR 58.75-116
furnace oil (FO). As per our back of the envelop working, this change in fuel Shares Outstanding m 73
mix will result in a energy cost saving of ~15% on annualize basis (PKR ~2.5 - Free float % 40%
3 /share). Major Sponsors Mr Omer Baig
Bloomberg Ticker TGL PA
Investment Thesis: We recommend “BUY” on TGL with Dec-20 DCF based Key Ratios 2019F 2020F 2021F
TP of PKR142 per share, providing an upside of 39% along with expected EPS 16.4 18.4 22.0
D/Y of 3%. The stock is trading at a forward FY20/FY21 P/E of 6.2x/5.6x DPS 3.0 4.0 4.0
against a discount of 25% to its historical 5-year average. Div. Yield 3% 4% 4%
P/E 6.2 5.6 4.6
Key risks i) higher than expected increase in energy prices, ii) increase in raw P/Bv 1.1 0.9 0.8
material prices, iii) longer than expected furnace closure for maintenance ROE 17% 16% 17%

and repair, iv) competition from new entrants. Source: Company Accounts, Insight Research
Preferred Picks

Systems Limited (SYS PA) System Limited

BUY HOLD SELL
Investment Thesis: Dollar-based revenues, recurring clientele, expanding
We recommend 'BUY' with Dec 2020 DCF based
local business segment reaffirm promising results. Lucrative tax and policy Intrinsic Value of 160 PKR/share, providing
incentives of the Gov’t for IT exports further consolidates the operations of 34% price upside.
SYS. We maintain our ‘BUY’ stance with DCF based Dec-20 TP of
Current Price 119.3
PKR160/share, offering 34% upside.
Market cap PKR b 14.7
Market cap US$ m 95.0
Devaluation to Enhance Competitiveness: Historically, even in the era of
Free Float Market cap US$ m 57.0
overvalued PKR, SYS’ dollar-based revenues have shown impressive 5-year
30-day Avg. turnover m Shares 0.4
CAGR of 26% as compared to Pakistan IT exports of 20%. As SYS’s major
30-day Avg. turnover PKR m 48.9
chunk of revenue is earned overseas, PKR devaluation against Greenback has
Shares Outstanding m 123.4
strengthened the company’s competitiveness as major cost are local currency
Free float % 60%
based. As PKR is now hovering below 100 REER Index, this will open up new
business opportunities for SYS. Major Sponsors Arshad Masood
Bloomberg Ticker SYS PA
Source: Company Accounts, Insight Research
Sector Dynamics to Favor SYS: Pakistan Software House Association, SBP
and Govt. are currently working to provide incentives to shore up IT exports. Key Ratios CY19F CY20F CY21F
Major proposals include permission to raise funds on owner’s pledged EPS 12.6 12.9 16.4
properties, 5% cash incentive on exports remittances through legal channel DPS 3.3 4.5 7.5
and retention of 35% of foreign remittance in foreign account and its usage. P/E 9.5 9.3 7.3
SYS is ideally placed to reap these benefits. Div. Yield 3% 4% 6%
GP Margin 32% 32% 34%
NP Margin 21% 18% 21%
Source: Company Accounts, Insight Research
Preferred Picks

PIBTL (PIBTL PA)

Pakistan International
Rising coal demand to drive earnings Pakistan coal demand likely to touch Bilk Terminal Limited
~32.5mntpa in FY22, primarily driven from the power (due to change in BUY HOLD SELL
energy mix) and cement sector, which will lead to 100% capacity utilization
of coal handling post FY22. We recommend BUY with Dec 2020 DCF based Target Price
of PKR15, providing 35% Upside

Rupee appreciation to provide breathing space PIBTL’s debt to equity stands Target Price 15
Current Price 11
at 1.1x (total debt PKR14.9bn of which 52% foreign currency loan). We Market cap PKR b 20
believe that volatility associated with the exchange rate has ended due to Market cap US$ b 0.13
improved SBP FX reserves and continued adjustment in CAD. As per our Free Float Market cap US$ b 0.06
back of the envelope working every 1% depreciation in PKR will reduce the 52 wk Avg. turnover PKR m 49.40

bottom line by PKR0.05/share and vice versa. 52 wk Range 6.82- 12.97

Shares Outstanding m 1,786
Free float % 50%
Recommendation We maintain “Buy“ stance on PIBTL with a target price of Major Sponsors Marine Group Company
Rs15/share (Dec-20) based on DCF considering a gradual rise in coal Bloomberg Ticker PIBTL PA
demand, stable exchange rate outlook and potential dividend-paying capacity
from FY21. PIBTL currently offers around 31% upside from the current Key Ratios 2020F 2021F 2022F

market price. EPS 0.4 0.6 1.1

P/E 27.5 19.0 10.5
BVPS 7.6 8.2 9.3
Key risks to our investment stance include i) Higher than the estimated P/Bv 1.5 1.4 1.2
increase in US$ ii) Lower tariff realization than estimated, iii) delay in ROE 1% 7% 12%
commissioning of power and cement plant iv) increased competition through Source: Company Accounts, Insight Research

the new bulk cargo terminal.

Preferred Picks

IGIHL (IGIHL PA)

Investment Thesis: IGI holding has three subsidiaries IGI Life Insurance Limited (100%), IGI Investment (Pvt) Limited (100%), IGI
General Insurance Limited (82.69%) and IGI Finex Securities Limited (100%). It indirectly holds 29.9% and 9.75% of the free float
of PKGS and Nestle through its subsidiary IGI investment (Pvt) Limited.

FMCG sector constitutes 71% and packaging 25% of total investment value investment. IGIHL’s total investment portfolio size is
~PKR 58.9bn (PKR399/share) and currently trading at discount of 47% from its portfolio value.
IGI HOLDINGS: IGIHL (Portfolio Value before conglomerate discount)
Share Shares Price - PKR Value Value Valuation
Investments
Holding % Held (mn) Per share (PKR mn) (PKR/share) Methodology
Associates
Quoted
Packages Limited 29.9% 26.71 392 10,471 73 Market Value
Un Quoted
Packages Real Estate (Private) Limited 24.8% 100 10 825 6 Book Value
MTB & PIBs through profit and loss 1,821 13 Book Value
PIBs- Held to maturity 1,878 13 Book Value
Investments in term deposits 1,636 11 Book Value
Investment in Equity Securities
Nestle - Quoted 9.75% 4.42 8,175.00 36,146 253 Market Value
Other equity securities (quoted & unquoted) (Based on Dec-18 holdings) * 2,838 20 Market Value
Investments in mutual fund (NAV) 3,161 22 Book Value
AFS : Term Finance Certificates 175 1 Book Value
Less: Total Debt (2,023) (14) Book Value
Total Value 58,952 399
Current Market Price (01-Jan-2019) 210
Total Discount of portoflio value against current market price - % -47%
Source: Company Accounts, Insight Research * Prices as of 03-Jan-2020
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