Pakistan Equity Strategy

2010

US ROADSHOW
Faraz Farooq
Head of Research &
Energy sector analyst

January 2010
I
Important Disclaimer
Di l i

ALL VALUATIONS IN THIS PRESENTATION ARE BASED ON THE

PRICES OF Jan 14, 2010

ANALYST CERTIFICATION
We, the authors of this presentation, hereby certify that all of the views expressed in
this research report accurately reflect our personal views about any and all of the
subject issuer(s) or securities. We also certify that no part of our compensation was,
is or will be directly or indirectly related to the specific recommendation(s) or view(s)
is,
in this presentation.

DISCLAIMER
The information and opinion
p contained in this p
presentation have been compiled
p by
y
our research department from sources believed by it to be reliable and in good faith,
but no representation or warranty, express or implied, is made as to their accuracy,
completeness or correctness. All opinions and estimates contained in the document
constitutes the department’s judgment as of the date of this document and are
j
subject to change
g without notice and p
provided in ggood faith but without legal
g
responsibility

2
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FCEL GROUP PROFILE

Telecom Division Financial Services Property Division

Worldcall Telecom Ltd First Capital Securities Corp Ltd Pace Pakistan Ltd
(HFC (Financial Services) (Shopping Mall/Apartments/Office
Broadband/Networks/Wireless/EVDO/ Blocks/ Supermarkets)
Long Distance & International Telephony
First Capital Equities Ltd
Fiber connect services)
(Brokerage/ Research )
Pace Barka Properties
Worldcall Telecom Lanka* PACRA Entity Rating: L-Term A; S-Term A1 Ltd
(Sri Lanka Payphone Network) (5-star Hotel/ Shopping Mall/ Apartment
First Capital Investment Ltd Block Complex 5-star resort & Villas)
(Investment Advisory)
Media Division Pacer Super Mall Ltd
(Business Centre)
First Capital Mutual Fund
(Closed End Quoted Mutual Fund)
Media Times Ltd Pace Woodlands Ltd
(Business Plus & Wikkid Plus satellite
Channels /Daily Times & Aaj Kal National
Lanka Securities Ltd (Residential Scheme)
Newspaper)
p p ) (Sri Lanka Brokerage)
Pace Gujrat Ltd
World Press Ltd Shaheen Insurance Co Ltd (Shopping Mall)
(General & Calling Card Printing) (General Insurance)

Trident Construct Ltd

((Construction Company)
p y)
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* Worldcall Telecommunications Lanka is a subsidiary of Worldcall Telecom Ltd.
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5
T bl off C
Table Contents

Economy: Downturn bottoming out

Economic structure & performance
Government finance
External sector
Macro indicators
Politics: Hot situation cooling off
Key events of 2009 & 2010
Market: Nice run but where next?
KSE: 11,300 by year end
..and 1Q appears
pp maximum return pperiod
Pakistan equities: Cheapest in the region
Regional valuations
Sector concentration and EPS outlook
KSE versus monetary indicators
Pakistan Stock Ideas
6
Economy: Downturn bottoming out

Pakistan underwent a series of economic shocks since 2008 that hurt the economic
growth (GDP grew by 2% in FY09); shocks that aroused from perpetual deterioration in
external accounts, mounting internal imbalances, sky-high inflation and portfolio de-
leveraging by offshore investors.

The financial assistance from IMF has trigged

gg much needed economic reforms while the
ensuing dollar inflows have provided a cushion for the vulnerable foreign exchange
reserves in terms of currency.

The growing macro stability is also indicated from Pakistan sovereign credit rating
upgrade.
pg S&P raised Pakistan’s rating g to ‘B-’ with a stable outlook and Moody’s
y
upgraded its outlook on Pakistan from negative to stable.

We strongly believe that the worst is over as the growth downturn is bottoming out.
Pakistan’s recent qualification for the fourth tranche (US$1.2bn) of IMF in Dec 2009 is a
crucial p
positive for the macro economic stability.
y

Declining inflation, improving liquidity as indicated by pickup in bank credit, softening

interest rates, growing remittances, rising portfolio investment and stabilizing global
macro conditions should enable 3.0-3.5% GDP growth for the country in FY10.

GDP growth expectation compares favorably with several rating peers. As per Moody’s,
Venezuela with B2 rating is projected to post -2% growth in 2009. Growth expectation for
B3 Argentina is 0% while B2 Ukraine is likely to suffer 12% decline. In fact, the
comparable and overall single-B rated peers are estimated to post GDP growth of 3% on
average. 7
Economy: Downturn bottoming out

YTD recovery FY09 FY10

DR 15.0% 12.5%

PIB 10yrs 16.1% 12.5%

KBOR (6m) 15.6% 12.3%

Inflation (CPI) (Dec) 23.3% 10.5%

Inflation (SPI) 25.8% 13.4%

CAD (US$bn) (Jul

(Jul-Nov)
Nov) (7 32)
(7.32) (1 36)
(1.36)

Export (US$bn) (Jul-Nov) 8.2 7.6

Import (US$bn) (Jul-Nov) 17.0 13.1

Trade Balance (US$bn) (Jul-Nov) (8.8) (5.5)

Fx Reserves (US$bn) 9.1 15.2

Pakistan CDS (Jan) 35% 6%

KSE-100 Index (Jan 14) 5,779 9,802

8
Economy: Downturn bottoming out

E
Economic
i recovery also
l confirmed
fi dbby R
Rating
ti agencies
i
Moody's Rating History Government Bonds
Outlook
Date Action FC LC
Aug-09 Outlook Changed B3 B3 Stable
B+ (stable)
Dec-08 Outlook Changed B3 B3 Negative B+ (Negative)
18 000
18,000 S&P Rating History & B+ (Positive)
O t 08
Oct-08 R i
Review for
f Downgrade
D d B3 B3 – B+ (Positive)
Oct-08 Rating Lowered B3 B3 – KSE-100 Index
16,000 B (Negative)
Sep-08 Outlook Changed B2 B2 Negative
May-08 Outlook Changed – – Negative B+ (stable) CCC+
14,000
May-08 Rating Lowered B2 B2 Stable (Negative)
Nov-07 Outlook Changed B1 B1 Negative 12,000
CCC
Nov-06 Rating Raised B1 B1 Stable (Developing)
Nov-06 Review for Upgrade
pg B2 B2 – 10,000 B+ ((Positive))
May-06 Rating Raised – – – B (stable) CCC+
Jan-05 Outlook Changed – – Positive 8,000
B- (stable) (Developing)
Oct-03 Rating Raised B2 B2 Stable
6,000
Nov-02 Outlook Changed – – Positive
Feb-02 Rating Raised B3 B3 Stable B- (Stable)
4,000
Oct-01 Rating Raised – – Stable
Jun-99 Rating Assigned – Caa1 – 2,000
Oct-98 Rating Lowered Caa1 – Negative
May-98 Rating Lowered B3 – Negative 0

Jul-01

May-02

Mar-03

Jul-06

May-07

Mar-08
Jan-99
Jun-99
Nov-99
Apr-00
Sep-00
Feb-01

Dec-01

Oct-02

Aug-03
Jan-04
Jun-04
Nov-04
Apr-05
Sep-05

Jun-09
Feb-06

Dec-06

Oct-07

Aug-08
Jan-09

Nov-09
Mar-97 Outlook Assigned – – Stable
Nov-96 Rating Lowered B2 – –
Sep-96 Review for Downgrade B1 – –
Oct-95 Rating Assigned – – –
Jul-95 Rating Lowered B1 – –
Nov-94 Rating Assigned Ba3 – –
Source: Moody's

9
Economy: Downturn bottoming out

As required
q by
y IMF,, major
j structural reforms have been initiated,, like framework for
introducing value-added tax, improving tax administration, elimination of subsidies and
allowing SBP to follow an independent monetary policy.
Fiscal deficit has come down to 4.3% in FY09 from 7.4% in FY08. FY10 projection is at
5.0% which is largely due to counter-insurgency operation in Sawat & Waziristan.
A surge in commodity prices is the key risk to the trade deficit and overall balance of
payment.
In its Nov 24, 2009, Monetary Policy Statement, the SBP cut the benchmark discount
rate byy 50bpsp to 12.5% amid declining g inflation and stabilizing
g macro-economic
indicators. This adjustment in the discount rate came around 100 days after the same
was reduced by 100bps.
With declining inflation, more flexibility would be available to the SBP when it comes to
monetary policy which could allow it to further cut the interest rates. However,
uncertainty over government
government’ss financing needs and risk on inflation would keep SPB to
follow a cautious monetary easing.
FY09 inflation rate was 20.8%, while for FY10, the CPI is forecasted at 11.8%.
Foreign
g exchange
g reserves stood at US$15.2bn,
$ , 2-year
y high,
g , as on Jan 9,, 2010.
The declining interest rates and government policy to control the power crisis are likely
to increase private sector credit. In FY09, we witnessed a marginal growth of
PRS18.8bn (0.64%) in the private sector credit compared with 25% avg. growth over the
last five years. 10
Economic structure & performance
f

GDP Sub sector performance

25.0% GDP Composition
20.0%
Agriculture,
15.0% 22%
10.0%

5 0%
5.0%

0.0% Services,
-5.0%
54%
Manufacturing, 24%

FY10E
FY03

FY04

FY05

FY06

FY07

FY08

FY09
R l GDPG
Real GDP Grow th A iG
Agri Grow th I d t i lG
Industrial Grow th S i
Services G
Grow th

(%) Services share % of GDP Service sector Composition

Public Transport &
58 admin, 11% comm, 19%

55
Social
52 servies,
49 21%

46
43
Real estate,
Wholesale &
40 5%
Fin & Retail, 32%
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

insurance,
12%
11
 0%
2%
4%
6%
8%
10%
0
2
4
6
8
10
(%)
FY02 FY9
98

FY9
99
FY03

Agri
GDP
FY0
00

GDP
FY04 FY0
01

FY0
02
FY05
Services sector

FY0
03

FY06 FY0
04

FY0
05
FY07

(YOY real growth)

YOY real growth

FY0
06
FY08
FY0
07

FY09 FY0
08

FY0
09
FY10E
FY10
0E
f

Growt h -YoY
0%
10%
20%

-30%
-20%
-10%

0
2
4
6
8
10
0
12
'000

Ja n- 09 Aug--07
Oct--07
Economic structure & performance

Fe b -0 9

Ma r-0 9 Dec--07
Feb--08
A pr- 09
C ar sales
YoY growth

Apr--08
Ma y- 09
Jun--08
Ju n- 09
Aug--08
Ju l-0 9
Oct--08
A ug -0 9
Dec--08
S ep -0 9
Large Scale Manufacturing

Feb--09
O ct -0 9
Apr--09
Consumption on a clear upturn

No v-0 9
Jun--09
D ec -0 9
Aug--09
0%

12
50%

-50%
100%
150%
0%
200%

-100%
Economic structure & performance
f

GDP Growth ((% y y-o-y)

y)
Industrial Production (% y-o-y)
20% 25%
C PI, average (% y-o-y) (RHS)
20%
15%
15%
10% 10%
5% 5%
Break up of CPI
0%
0% Misc, 22%
-5%
-5% -10%
Y03

Y04

Y05

Y06

Y07

Y08

Y09

10E
Food, 41%

FY1
FY

FY

FY

FY

FY

FY

FY
Transport,
Inflation Trend 7%
30%
C PI (YoY change %) Fuel, 7%
25%
Average
20%
HRI, 23%
15%
10%

5%

0%
Jul-02
Nov-02
Mar-03
Jul-03
Nov-03
Mar-04
Jul-04
Nov-04
Mar-05
Jul-05
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09

13
G
Government finance
f

PRsbn Tax revenue 10.0% Tax to GDP (%)

(YoY) Gross tax collection
1,500 25%
1,250 Direct 9.5%
Indirect 20%
1,000 Total 15% 9.0%
750
10%
500 8 5%
8.5%
250 5%

0 0% 8.0%

F Y10E
F Y00
F Y01
F Y02
F Y03
F Y04
F Y05
F Y06
F Y07
F Y08
F Y09
F Y9 8
F Y9 9
F Y0 0
F Y0 1
F Y0 2
F Y0 3
F Y0 4
F Y0 5
F Y0 6
F Y0 7
F Y0 8
F Y0 9
F Y1 0
F Y1 0 E
F Y9 7
F Y9 8
F Y9 9
F Y0 0
F Y0 1
F Y0 2
F Y0 3
F Y0 4
F Y0 5
F Y0 6
F Y0 7
F Y0 8
F Y0 9

Summarized central government finance

Fiscal Deficit as % of GDP PRs bn 1QFY09 % of GDP 1QFY10 % of GDP
8.0%
Net tax revenue 279 2.1% 299 2.0%
6.5% Non-tax revenue 106 0.8% 128 0.9%

Total receipts 385 2.9% 427 2.9%

5.0%
Current exp. 456 3.5% 521 3.5%

3.5% Devp exp. 58 0.4% 116 0.8%

unidentified 9 0.1% 14 0.1%

2 0%
2.0%
Total exp. 523 4.0% 651 4.4%
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10E

Fiscal deficit (138) -1.1% (224) -1.5%

14
External sector

US$ bn Exports contribution to GDP US$ bn Export performance

25 20%
Export 25 Export 30%
Export (% of GDP) Export growth
20 16% 20 22%

15 12% 15 14%

10 8% 10 6%

5 4% 5 -2%

0 0% 0 -10%

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10
Import Composition (5MFY10)
Exports Break-up (5MFY10)
Leather Transport, Miscellaneou
Jewellary, C ement, manf, 3% Leather
4% s, 2%
3% 3% tanned,
C hemicals 1% Petrolum
Textile 4%
Textile,
& Pharm, prod, 29%
4% Metals, 7%
Petroleum
& coal, 5%
Others, 10%
Others, Textile,
11% 55%
Food, 10% Agri &
C hemicals,
18%
Food, 15% Machinary,
17%

15
External sector

Non-oil
Non oil imports (Index base Jun 08 = 100) US$/bbl Import of oil US$ bn
100
90 Oil improt bill (RHS) 14
90 75 Crude Oil Import Px (LHS) 12
10
60
80
8
45
70 6
30
4
60
15 2
50 0 -
Jul--08

Mar--09

May--09

Jul--09
Jun--08

Aug--08
Sep--08
Oct--08
Nov--08
Dec--08
Jan--09
Feb--09

Apr--09

Jun--09

Aug--09
Sep--09
Oct--09
Nov--09

FY10E
Y02

Y03

Y04

Y05

Y06

Y07

Y08

Y09
FY

FY

FY

FY

FY

FY

FY

FY
Per month Trade
Sensitivity of Oil price Oil Import Chg % Chg from TD %
impact deficit
t trade
to t d deficit
d fi it Bill (US$ mn)) (US$
(US$mn)) B
Base C
Case GDP
(US$ mn) (US$ bn)

+5 US$ 12,475 924 77 8% 16.7 9.4%

+1 US$ 11,705 154 13 1% 15.9 8.9%
Base Case (US$75/bbls) 11,551 - - 0% 15.7 8.8%
-1 US$ 11,396 (154) (13) -1% 15.6 8.8%
-5 US$ 10,624 (924) (77) -8% 14.8 8.3%

16
External sector

US$ bn C urrent account Components off balance off payments

US$bn
8.0 % of GDP (RHS) 6% 20
C apital account
4.0 3% 15 C urrent account
10
0.0 0%
5
(4 0)
(4.0) 3%
-3% 0
(8.0) -6% (5)
(10)
(12.0) -9%
(15)
(16.0) -12% (20)
FY03
3

FY04
4

FY05
5

FY06
6

FY07
7

FY08
8

FY09
9

FY10E
E

FY03

FY04

FY05

FY06

FY07

FY08

FY09
External debt as % of GDP Reserves Vs US$
US$bn PRs
40%
22 Reserves 90

18 Exchange rate 80
35%

14 70
30%
10 60
25%
6 50

20% 2 40
Mar-08

Mar-09
FY00

FY02

FY04

FY06

Sep-07

Sep-08

Sep-09

Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
17
Macro indicators

MACRO INDICATORS FY06A FY07A FY08A FY09A FY010E

GDP Growth rates (%) 6.6% 7.0% 5.9% 2.0% 3.5%

Agriculture (%) 1.6% 5.0% 1.7% 4.7% 4.5%

Manufacturing (%) 10 0%
10.0% 8 4%
8.4% 4 8%
4.8% -3 6%
-3.6% 1 5%
1.5%

Services (%) 9.6% 8.0% 8.2% 3.6% 4.0%

Tax revenue target (PRs bn) 713 840 1,000 1,157 1,380

Tax revenue as % of GDP 9.2% 9.6% 9.8% 8.8% 9.3%

Fiscal account as % of GDP -4.2% -4.2% -7.6% -4.3% -5.0%

Fiscal account (US$ mn) (5,333) (5,898) (12,738) (7,219) (8,900)

Trade balance (US$ bn) -12.1 -13.5 -20.9 -17.0 -15.7

Export
p g
growth ((%)) 14.4% 3.4% 13.1% -6.7% -2.0%

Import growth (%) 38.8% 6.9% 31.0% -12.9% -5.0%

Current account (US$ mn) (4,990) (6,878) (13,874) (9,339) (8,243)

Current account as % of GDP -3.9% -4.9% -8.3% -5.6% -4.7%

CPI (%) 7.9% 7.8% 12.0% 20.8% 11.8%

M2 growth (%) 15.2% 19.3% 14.0% 9.6% 12.0%

18
 ff
Politics: Hot situation cooling off

For the country, the year 2009 was engulfed in several unsettling issues that primarily
revolved around three major factors – political, law & order and economy. However,
quite encouragingly, the level of intensity of these issues has notably come down by the
end of the year.

In politics,
politics though there still remain many controversial issues,
issues however,
however the major and
core issues i.e. reinstatement of deposed judges and cancellation of the NRO (National
Reconciliation Ordinance) that had the potential to destabilize the entire domestic
system has been resolved. In our opinion, these developments should be considered as
a sign of great relief for the nascent-cum-feeble democratic system in the country.

We do not anticipate any serious threat for the prevailing democratic setup of the country
though constitutional and political debate will continue to mesmerize the whole political
environment. All in all, the country's political scenario will also remain overheated during
upcoming few weeks as the constitutional debate on the fate of many NRO beneficiaries
will further heat-up with increasing pressure on the presidency.

In our opinion, besides this, the political debate to redefine the constitutional powers of
the offices of president and prime minister is also likely to be re-igniting in upcoming
months However,
months. However the democratic process in the country is likely to remain intact with an
expectation of both major parties – the PPP and the PML-N – reaching a consensus on
redefining the constitutional powers of both the president and the prime minister.

19
P liti
Politics: H
Hott situation
it ti cooling
li off
ff

As far as the law and order situation is concerned, contrary to previous attempts, the
Pakistan Army has gained notable successes in eliminating militancy from Swat and then
from South Waziristan this time. Under this new counter-insurgency strategy, the government
of Pakistan has achieved its target of establishing the writ of the state in Swat over the last
few months.

The government is likely to keep pursuing a multi-pronged approach under the new strategy -
including not only negotiations, but also an energetic response in the form of a high level of
attention from the local as well as the national political leadership.

However, keeping in view the pan-global nature of the issue, the resistance from the militants
in the form of guerrilla attacks on the army within the hot region as well as suicidal attacks in
the cities is likely to take some time to be completely eradicated. So far, as indicated by the
number of urban attacks,
attacks the army seems quite successful in impeding the reach of terrorist
network to the north-west region of the country.

In a nut shell, we anticipate 2010 to be a year of comparatively calm political scenario despite
carrying a few key negative triggers with it, while the security scenario is also likely to remain
more controlled than pervious year.

20
Key events in 2009 & 2010

2009 Key Events of the year

February Governor rule imposed in Punjab after the Supreme Court’s decision against the Sharif
brothers
Elections for senate and PPP emerges as the largest party
All deposed judges including the Chief Justice reinstated
March U.S. President Obama unveils new Af-Pak strategy, announces legislation giving $1.5 billion in
aid for development work in Pakistan
Governor Rule lifted in Punjab.
On PM’s call, the army launched a full-scale operation against militants in the Malakand
May
Division (Swat).
The Supreme Court bench declared the actions taken by General (r) Musharraf on November 3,
July 2007 as illegal.
Nawaz Sharif acquitted by the Supreme Court in the Oct 12 1999 plane hijacking case.
R
Reports
t emerge that
th t TTP leader
l d Baitullah
B it ll h Mehsud
M h d has
h been
b killed
kill d in
i a drone
d strike
t ik which
hi h later
l t
August
on was confirmed.
September Kerry-Lugar Bill passed by the US Senate
October Pakistan Army launches second ground offensive against militants in South Waziristan.
The Pakistan Army expresses its reservations on the conditions in the Kerry Lugar Bill
November Ordinances promulgated during the Musharraf government including the NRO lapse.
The Supreme
Th S Court
C declares
d l the
h National
N i l Reconciliation
R ili i O
Ordinance
di to b
be null
ll and
d void,
id says all
ll
pertinent cases are back to their pre-NRO position.
December
The unanimous approval of 7th NFC (National Finance Commission) Award after a period of 19
years
2010 Key political events to watch
January Supreme Courts detailed decision against NRO
F b
February B
By-elections
l ti on two
t seats
t off National
N ti l Assembly
A bl

April The constitutional period to hold Local bodies’ elections in all provinces will end in March 2010

October Retirement of General Parvez Kiyani and the appointment of new army Chief
Others Pressure on the government to implement Chartered of Democracy
21
 ?
Market: Nice run but where next?

After p
posting
g a hefty
y decline of 58% ((US$ 67%)) in 2008, equity
q y values resurged
g in 2009
and provided a handsome gain of 60% (US$ return of 50%).
In 2008, factors such as political disturbance, the economic downturn, worsening law
and order situation and liquidity shortages were responsible for the market’s resistance
to a bull rally despite cheap valuations.
Growing signs of economic recovery, IMF led structural reforms, achievement of targets
set by the IMF, improvement in rating scale/outlook by S&P and Moody’s, successful
back-to-back operations against Talibans and democratic resolution of key political
issues were the factors behind investors’ restorative confidence in the Pakistan market.
However, despite the strong upsurge in share values in 2009,
However 2009 Pakistan market still
provides some interesting buying opportunities, we believe.
Pakistan equities look cheap on a historical basis: Market’s 2010E PE of 7.9x reflects a
discount of 17% from its average of 9.5x over the last 15 years. On 2011E PE of 6.7x,
the spread arrives at 29%.
In 2009, Pakistan market’s US$ return of 50% was lower than regional average of 77% -
an underperformance of 27%.
In the regional context, Pakistan equities are available at a discount of 45% on PE and
17% on PBV while the dividend yield of 7.2% is also attractive versus regional average
off 3.3%
3 3% on 2010E numbers.
b
This indicates Pakistan as still the cheapest equity market in the region.

22
 S 11,300 by year end
KSE:

In our view, the Pakistan equity

q y market is one amongst g veryy few markets around the
world looking poised to advance on a long-term bull phase over the next several years.
Pakistan’s outlook is supported by a plethora of fundamental drivers.
Economic recovery, political stability, successful operations against militants, falling
interest rates, external inflows (IMF, Kerry
Kerry-Lugar,
Lugar, Friends of Pakistan) and improved
domestic liquidity would be responsible for the further re-rating of the market in 2010.
In the absence of other viable investment options, the market will keep attracting the
domestic liquidity, we believe. Meanwhile, the fundamental recovery would also attract
the foreign investment flows.
At a target PE of 8.5x and expected dividend yield of 7.2%, we have calculated the end-
Dec 2010 KSE-Index target of 11,300.
Ultimately, our investment opinion on the Pakistan equity market, on a prospective total
return basis, entails the potential for annualized return performance of 15% over the next
year.
year
While the political scenario of the country is becoming stable but we think the government
will keep facing problems and we might see political hiccups to continue. However, this is
inherited in the domestic political system of the country.
Such
S h outlook
tl k reflects
fl t (a)
( ) our expectation
t ti for
f an annualized
li d medium-term
di t earnings
i growth
th
outlook in the vicinity of 14-18% in rupee terms, (b) the potential for further decline in
Pakistan’s equity risk premium amid improving macro indicators and political stability, (c)
softening interest rates making equities more attractive (d) chance of further improvement
in sovereign ratings and (e) possible re-entry in MSCI EM Index.
23
 Q appears maximum return period
..and 1Q

KSE- Quarterly Returns

Byy analyzing
y g the data of last fifteen yyears ((1995-2009),
) we found an
interesting observation related to KSE’s performance in the opening
Year 1Q 2Q 3Q 4Q quarter (Jan-Mar) of the calendar years.
2009 17% 4% 31% 0%
Since last 8 years (2002-09), the market has yielded positive returns
2008 7% -19% -25% -36%
in 1Q on consistent basis. Even in the periods of ultra instability, 1Q
2007 12% 22% 3%
-3% 5% returns have remained in the ppositive zone. For instance,, MS Bhutto
was assassinated on Dec 27, 2007.
2006 20% -13% 5% -4%

2005 27% -4% 10% 16% On average basis, the market’s 1Q return in last 15 years arrives at
2004 15% 3% -1% 18%
12% versus -3%, 5% and 2% in 2Q, 3Q and 4Q, respectively.
Whereas, in last 5 years (2005-2009), 1Q average return was 17%
2003 2% 24% 17% 12% compared
co pa ed to respective
espect e -2%,
%, 4%
%a and
d -4%
% in 2Q,
Q, 3Q aandd 4Q.
Q
2002 46% -5% 14% 33%
1Q2010 would be loaded by plethora of fundamental drivers like;
2001 -12% 3% -17% 12%
further cut in discount rate, Kerry-Lugar tranche, US$ inflows from
2000 42% -24% 3% -4% FoDPs, talks on MSCI-EM re-entry, reaffirmation of sovereign rating
etc.
1999 12% 0% 14% 17%

1998 -11% -43% 26% -15%

Last 15-Year Avg Return Last 10-Year Avg Return Last 5-Year Avg Return
1997 17% -1% 18% -5%
15%
1996 3% 10% -19% -3%
10% 20% 20%
1995 -19% -3% 3% -10% 5% 10% 10%
0% 0% 0%
15-Year Avg 12% -3% 5% 2%
-5% -10% -10%
10-Year Avg 18% -1% 3% 5% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
5-year Avg 17% -2% 4% -4%

24
Pakistan equities: Cheapest
C in the region

PE2010E PE 2010E vs EPS g

growth 2011F
India 30%
C hina Taiwan
25% India
Taiwan
20% Hong
Malaysia C hina
Kong
Hong Kong Indonesi
15% Pakistan
Indonesia Thailand a Malaysia
Philippine 10% Korea Philippin
e
Thailand
5%
Korea
Pakistan 0%
5 7 9 11 13 15 17 19 21 23 25
5 7 9 11 13 15 17 19

Dividend Yield 2010E PBv 2010E

10% 4.0

8% 3.0

6%
2.0
4%
1.0
2%

0% 0.0

Indonesia
Philippine
Indonesia

Philippine

Hong
Hong

Malaysia
Malaysia

Pakistan

Taiwan
Thailand

Kong
Korea

India
Taiwan

Pakistan
Thailand
Kong
India

Korea

China
China

25
Regional valuations

Regional Valuations PE (x) PBV (x) Dividend Yield (%) PEG Ratio

Country 2010E 2011E 2010E 2011E 2010E 2011E 2010E

Pakistan 7.9 6.7 1.6 1.5 7.2 8.6 0.4

South Korea 10.3 9.1 1.3 1.2 1.5 1.7 0.8

Thailand 11.3 9.8 1.5 1.4 3.8 4.3 0.7

Indonesia 13.9 11.7 2.7 2.4 2.4 2.9 0.7

Philippine 13 3
13.3 11 7
11.7 19
1.9 18
1.8 35
3.5 38
3.8 10
1.0

Hong Kong 14.3 12.0 1.9 1.7 3.3 3.7 0.8

Taiwan 17.0 13.3 1.9 1.9 7.0 7.5 0.6

Malaysia 16.1 14.1 2.1 1.9 3.3 3.7 1.1

China 18.7 15.6 2.7 2.4 1.7 2.1 1.0

India 21.0 16.6 3.2 2.8 1.1 1.3 0.8

Median 14.3 12.0 1.9 1.9 3.3 3.7 0.8

a a discount
Pakistan d ou to o Region
go -45%
5% -44%
% -17%
% -19%
9%

26
S
Sector concentration and EPS
S outlook

Sector Concentration
FCEL universe Earnings growth
C onst & 25%
Paper Electricity
Goods 4% Mat 20%
Telecom 3% Fin
4% Services
Food Prod 3% 15%
2%
5% 10%
C hemicals Others
Oth
5%
9% 14%
0%

-5%

011F
2007

2008

2009

010E
Oil & Gas
Banks 31%

20
2

20
25%

Pakistan CDS (%) Euro Bond Yield

30

25

20

15

10

0
Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10
Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09
27
 0%
2%
4%
6%
8%
10%
12%
14%
16%

0%
20%
40%
60%
80%
100%
120%
140%
Jan-000
KSE
Jan-02
Jul-0
00
Jul-02
Jan-001
Jan-03 Jul-0
01
Jul-03 Jan-002
Jul-0
02
Jan-04
Jan-003
Jul-04 Jul-0
03
Jan-05 Jan-004
Jul-05 Jul-0
04
Jan-005
Jan-06
Jul-0
05
Jul-06 Jan-006
Jan-07 Jul-0
06

Price to money ratio

Discount rate vs KSE

Jan-007
Jul-07
Jul-0
07
100
KSE-100

Jan-08 Jan-008
Jul-08 Jul-0
08
Jan-09 Jan-009
Jul-0
09
Jul-09
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000

0%
2%
4%
6%
8%
10%
12%
14%
16%

2,000
4,000
4 000
6,000
8,000
10,000
12,000
14,000
14 000
16,000

-
Jan-02 Jul-0
01
Jun-02 Jan-002
S versus monetary indicators

Nov-02 Jul-0
02
Apr-03 Jan-003
Sep-03 Jul-0
03
Feb-04
T

Jan-004
Jul-04
Dec-04 Jul-0
04
T-Bills

May-05 Jan-005
Oct-05 Jul-0
05
T-bills (6m)

M2 Growth

Mar-06 Jan-006
KSE 100 Index
Bills vs KSE

Aug-06 Jul-0
06
Jan-07
Jan-007
100
KSE-100

Jun-07
Nov-07
Jul-0
07
Jan-008
M2 Growth vs KSE 100 Index
KSE-100

Apr-08
Sep-08 Jul-0
08
Feb-09 Jan-009
Jul-09 Jul-0
09
Dec-09
0%
5%
,

-5%
10%
15%
20%
25%
30%
35%
1,000
3,000
5,000
7,000
9,000
11,000
13,000
15,000
17,000

28
P ki
Pakistan S k Id
Stock Ideas

OGDC PSO

PPL NBP

POL UBL

HUBC BAFL

Engro DGKC

FFBL LUCK

PTCL NML

29
Oil & G
Gas D l tC
Development Co (OGDC PA)

OGDC, trades at an EV/boe of US$3.3, EV/DACF of 7.4x, EV/EBITDA of 5.1x and PEG of
0.46 on 2010 estimates.

Given its aggressive exploration strategy, we consider the company as a direct play on
Pakistan’s significant E&P potential.

OGDC’s asset portfolio includes some major discoveries in this decade. These fields are
currently in the appraisal/development stage. Overall, we expect OGDC’s net output to depict
a five-year CAGR – FY10 to FY14 – of 10% in boe terms.

Any revision in Qadirpur gas pricing discount would lead to an upward revision of earnings.
Qadirpur gas price should be up by at least PRs62/mmbtu after adjusting for ~40% Rupee
devaluation since last announcement (1HFY08). The future EPS of OGDC would be revised
up by 9-10%
9 10%, in addition to a one-time
one time gain of PRs0.8/share
PRs0 8/share as part of a retrospective impact.
impact

Envisaging organic growth in the company, revenues are projected to grow at 11% annually
over the next three years. Volume gains would, therefore, be converted into cash flow
growth.

Underlying earnings are projected to grow at 10% on average in next 3 years. The earnings
growth is purely volume driven given our stable-declining oil price assumption.
30
Oil & Gas
G Development
D l Co
C (OGDC PA)

Market Cap (PRs bn) 499.7 Curruent Price (PRs) 116.2

Market Cap (US$ bn) 5.9 1Yr Average Vol (mn) 8.5
Target Price (PRs) 131.0 1Yr Average Val (US$ mn) 8.3
No of Shares (mn) 4,300.9 1Yr High (PRs) 118.7
Free Float (%) 14.6 1Yr Low (PRs) 41.0
Free Float Value (US$ mn) 867.6 1Yr Average (PRs) 85.8
KATS Code OGDC
Reuters Code OGDC.KA
Bloomberg Code OGDC PA

OGDC- Key Statistics

Year end June 2008A 2009A 2010F 2011F
Earnings per share (PRs) 10.3 12.9 12.6 15.1
Price earning ratio (PERx) 11.3 9.0 9.2 7.7
Dividend yield (%) 8.2% 7.1% 7.6% 9.1%
Price/Book value (PBvx) 45
4.5 40
4.0 35
3.5 31
3.1
EV/EBITDA (x) 5.6 5.4 5.1 4.3

31
P ki t P
Pakistan t l
Petroleum Li it d (PPL PA)
Limited

At a 6.2x EV/DACF, 4.2x EV/EBITDA, 3.6x EV/EBITDAX, 7.7x PE and EV/boe of US$2.0 on
FY10E numbers, PPL trades at unwarranted discount compared to regional peers.

PPL holds the most attractive exploration portfolio with stakes in all discoveries that would
drive the growth of the country’s oil and gas production in coming years.

After nearly eight years, the company re-launched development work at the Sui Field when it
received security clearance from the government in Dera Bugti region of Balochistan. This
would allow the company to arrest the natural decline of its heavyweight depleting asset
which
hich ma
may also lead to an earnings re
revision
ision for the compan
company.

PPL posses rising gas profitability profile in the wake of production addition from high priced
discoveries. Revenue growth is expected to be impressive at 9% (CAGR) despite a mere 2%
growth in headline volumes (FY10-14)
(FY10 14).

The operating cost is considerably lower than those of Asian peers.

While it realizes lowest price on per boe, most of its gas production arrives from the fields
which are exempted from the US$36/bbl pricing cap.

PPL would be the major beneficiary of the upcoming wellhead gas prices (effective Jan 1,
2010) revision where we expect 20-23% increase in the tariffs of PPL’s major gas fields.
32
P ki
Pakistan P
Petroleum
l Limited
i i d (PPL
(PP PA)

Market Cap (PRs bn) 196.9

196 9 Curruent Price (PRs) 197.7
197 7
Market Cap (US$ bn) 2.3 1Yr Average Vol (mn) 2.8
Target Price (PRs) 248.0 1Yr Average Val (US$ mn) 6.1
No of Shares (mn) 995.8 1Yr High (PRs) 235.3
Free Float ((%)) 20.7 1Yr Low ((PRs)) 126.0
Free Float Value (US$ mn) 483.6 1Yr Average (PRs) 180.0
KATS Code PPL
Reuters Code PPL.KA
g Code
Bloomberg PPL PA

PPL- Key Statistics

Year end June 2008A 2009A 2010F 2011F
Earnings per share (PRs) 19.8 27.8 25.8 35.1
Price earning ratio (PERx) 10.0 7.1 7.7 5.6
Dividend yield (%) 6.2% 5.7% 8.2% 10.6%
Price/Book value (PBvx) 4.5 3.1 2.6 2.2
EV/EBITDA (x) 5.4 4.1 4.2 2.8

33
P ki t Oilfi
Pakistan ld Li
Oilfields it d (POL PA)
Limited

POL’s current p
price suggests
gg a wide valuation g
gap
p from its regional
g p
peers with FY10E EV/DACF of
5.6x, EV/EBITDA of 4.7x, EV/EBITDAX of 3.8x, PE of 8.1x and EV/boe of US$3.6.

POL is all set to reap the benefit of production commercialization from the biggest discoveries of the
2000s. In this regard, production from Manzalai’s (first discovery in the block) CPF has recently
commenced with average daily gas volume of ~210mmcfd. Production would reach around
250
250mmcfd fd by
b 2010.
2010 POL h has 21% post-discovery
t di stake
t k iin T
Tall Bl
Block.
k

Production volumes to ramp up from 12.8k boe/day in FY09 to 34.1k boe/day by FY012, with a
post-2009 CAGR of 38%. This would translate into an average annual growth of 26% in revenues of
the company.

Besides, Manzalai, other key structures in Tal Block (Makori, Mami Khel, Maramzai) would ensue
growth in underlying volumes of the company in coming years. Besides, there are also other
structures which are yet to be tested in the block. Thus, exploration upside is quite high from its
exposure in Tal Block.

About three wildcat wells (2 operating

operating, 1 non
non-operating)
operating) are currently under drilling status
status. Positive
news flows from these exploration activities could trigger a string rally in the scrip and may led to
earnings revision.

While POL realizes highest EBITDA/boe in the domestic sector, its EBITDA/boe is also better than
Chinese,, Indian,, Indonesian and Russian peers.
p

Currently, POL’s sensitivity to crude oil is one of the highest amongst the local peers. However, the
expected shift in product mix from crude oil to gas would reduce its earnings sensitivity to oil prices.

34
P ki
Pakistan Oilfi ld Limited
Oilfields i i d (POL
(PO PA)

Market Cap (PRs bn) 58.3 Curruent Price (PRs) 246.4

Market Cap (US$ bn) 0.7 1Yr Average Vol (mn) 3.7
Target Price (PRs) 298.0 1Yr Average Val (US$ mn) 7.7
No of Shares (mn) 236.5 1Yr High (PRs) 251.6
Free Float (%) 45.6 1Yr Low (PRs) 81.5
Free Float Value (US$ mn) 315.5 1Yr Average (PRs) 172.8
KATS Code POL
Reuters Code PKOL.KA
Bloomberg Code POL PA

POL- Key Statistics

Year end June 2008A 2009A 2010F 2011F
g per
Earnings p share (PRs)
( ) 36.4 23.8 30.5 43.0
Price earning ratio (PERx) 6.8 10.4 8.1 5.7
Dividend yield (%) 5.4% 7.3% 8.0% 11.3%
Price/Book value (PBvx) 23
2.3 22
2.2 20
2.0 18
1.8
EV/EBITDA (x) 3.8 6.0 4.7 3.3

35
H bP
Hub Power C
Company (HUBC PA)

Hubco is trading
g at a 25% discount from our fair value estimate of PRs44/share (p
(parent p
project).
j )

Given its bond-like characteristics and the softening interest rate scenario – a reduction in discount
rates and NSS yield – should improve the attractiveness of Hubco.

Hubco’s dividend yield of 14% for FY10E and 18% for FY11E is one of the highest in our universe
and also compares well with other fixed-income securities in Pakistan.

There is inherent growth in the reference tariff of Hubco in real US dollar terms. That said, the
nominal rupee dividend – applying 2.5% US CPI and 2.5% devaluation – would grow at a CAGR of
14% during FY10-27.

Hubco has been provided a hedge against devaluation and an increase in input costs through
indexation of revenue to the US dollar, US inflation and fuel prices.

Based on the current price, Hubco’s remaining dividend stream (parent project) offers a lucrative
US dollar IRR of 19%.

Receivables risk for IPPs has come down significantly after recently issued TFCs by the
government to clear
l the
h circular
i l d debt.
b

We have worked out Hubco’s 225MW Narowal expansion value at PRs2.7/share while its share in
NPV of Laraib Energy (75.5% controlling interest) arrives at PRs1.7/share.
36
H b Power
Hub P C
Company (HUBC PA)

Market Cap (PRs bn) 38.1 Curruent Price (PRs) 32.9

Market Cap (US$ bn) 0.5 1Yr Average Vol (mn) 2.7
Target Price (PRs) 44.0 1Yr Average Val (US$ mn) 0.8
No of Shares (mn) 1,157.2 1Yr High (PRs) 34.3
Free Float (%) 65.0 1Yr Low (PRs) 14.3
Free Float Value (US$ mn) 293.9 1Yr Average (PRs) 26.2
KATS Code HUBC
Reuters Code HPWR.KA
Bloomberg Code HUBC PA

HUBCO- Key Statistics

Year end June 2008A 2009A 2010F 2011F
Earnings per share (PRs) 2.3 3.3 3.9 4.9
Price earning ratio (PERx) 14.6 10.1 8.4 6.7
Dividend yield (%) 6.5% 10.2% 13.9% 17.6%
Price/Book value (PBvx) 13
1.3 13
1.3 13
1.3 14
1.4
EV/EBITDA (x) 7.3 5.9 6.0 5.2

37
E
Engro Ch i l (ENGRO PA)
Chemical

g
Engro’s g capacity
attractiveness lies in its huge p y enhancement along g with an ideallyy diversified
investment portfolio. On the basis of FY10E, the scrip is trading at EV/EBITDA of 9.1x, PE of
12.6x and offers a dividend yield of 6%. At current trading level, the scrip is offering a decent
upside potential of 19%.

Engro
g is the only y listed fertilizer company
p y of the country
y that will be able to move its
profitability measures positively through volumetric thrust. The company is currently pursuing
a huge capacity expansion plan of almost 1.3mn tons (137% of the existing capacity), which
is scheduled to be online by mid-2010. Beside holding a growth prone core business, the
company also possesses a significant investment portfolio comprises of investments in
vigorously growing sectors of the country
country.

Though 2009 earnings will remain 26% lower YoY, the availability of new production capacity
in 2010 is expected to notably fuel the top as well as bottom line figures. For 2010, we
estimate the bottom-line of the company to depict 46% growth at PRs4,570mn (Diluted EPS
PRs15.3)
PRs15 3) as against PRs3
PRs3,123mn PRs10.5)
123mn (Diluted EPS: PRs10 2009E.
5) in 2009E

We recently has revisited our financial model of the company to incorporate the recently
released 9M2009 financials, rolling over the base year to 2010 besides some changes in the
risk assumptions and updating the market-multiples.

After incorporating these factors, we have raised our target price of Engro Chemicals to
PRs230/share (core value of PRs135/share and investment value of PRs95/share) - 26%
higher as against the previous valuation of PRs185/share.
38
E
Engro Ch
Chemical
i l (ENGRO PA)

Market Cap (PRs bn) 57.6

57 6 Curruent Price (PRs) 193.3
193 3
Market Cap (US$ bn) 0.7 1Yr Average Vol (mn) 3.0
Target Price (PRs) 230.0 1Yr Average Val (US$ mn) 5.4
No of Shares (mn) 297.9 1Yr High (PRs) 194.1
Free Float ((%)) 40.0 1Yr Low ((PRs)) 98.8
Free Float Value (US$ mn) 273.5 1Yr Average (PRs) 146.7
KATS Code ENGRO
Reuters Code EGCH.KA
g Code
Bloomberg ENGRO PA

ENGRO- Key Statistics

Year end December 2008A 2009E 2010F 2011F
Earnings per share (PRs) 14.2 10.5 15.3 24.7
Price earning ratio (PERx) 13.6 18.5 12.6 7.8
Dividend yield (%) 3.7% 2.7% 5.6% 10.2%
Price/Book value (PBvx) 25
2.5 23
2.3 22
2.2 21
2.1
EV/EBITDA (x) 11.7 17.8 9.1 5.3

39
F ji F
Fauji tili
Fertilizer Bi Q i (FFBL PA)
BinQasim

FFBL holds a unique

q edgeg over other domestic fertilizer companies
p as being
g the only
ypproducer of
both granular urea and DAP in the domestic market. On the basis of FY10E, the scrip is trading at
EV/EBITDA of 4.1x and offers a decent dividend yield of 10.4%.

2007 and 2008 were two difficult years for FFBL in terms of extreme uncertainty that remained
tagged with its major business domain DAP,
DAP the company is expected to depict strong financial
performance in 2009 and onwards.

As international DAP prices and margins have now started to indicate a pretty stable outlook, the
factor of uncertainly that used to remain tagged with the earnings of the company during last few
quarters is likely to dilute going forward.

A persistently declining domestic DAP price assumption is argued on the basis of the ongoing
contraction in the international prices and the scheduled global additions of DAP production in the-
post 2010 scenario
scenario. Furthermore
Furthermore, Phos Acid prices are also anticipated to remain in tandem with
the international DAP price trend.

However, domestic urea prices are anticipated to remain higher as a result of the producers’ ability
to pass-on production cost hikes.

During the period 2009-2013, the net income of the company is likely to depict a healthy 5-year
CAGR of 10% with payout ratio for these years averaging at approx. 80%.

40
F ji Fertilizer
Fauji F ili BinQasim
Bi Q i (FFBL
(FFB PA)

Market Cap (PRs bn) 27.0

27 0 Curruent Price (PRs) 29.0
29 0
Market Cap (US$ bn) 0.3 1Yr Average Vol (mn) 4.2
Target Price (PRs) 32.0 1Yr Average Val (US$ mn) 1.0
No of Shares (mn) 934.1 1Yr High (PRs) 29.0
Free Float ((%)) 35.0 1Yr Low ((PRs)) 12.5
Free Float Value (US$ mn) 112.4 1Yr Average (PRs) 20.2
KATS Code FFBL
Reuters Code JORD.KA
g Code
Bloomberg FFBL PA

FFBL- Key Statistics

Year end December 2008A 2009E 2010F 2011F
Earnings per share (PRs) 31
3.1 32
3.2 40
4.0 41
4.1
Price earning ratio (PERx) 9.3 9.0 7.3 7.1
Dividend yield (%) 9.8% 10.4% 10.4% 12.1%
P i /B k value
Price/Book l (PB
(PBvx)) 26
2.6 27
2.7 26
2.6 25
2.5
EV/EBITDA (x) 5.3 4.1 4.1 4.0

41
P ki t T
Pakistan l i ti
Telecommunication C
Company (PTC PA)

Our SOTP based target price for PTC arrives at PRs45/share –an
an upside potential of 130%
compared to its current price level.

The value assigned to PTC’s fixed-line operations – through DCF valuation methodology – is
PRs27/share, while the wireless arm of the company – UFONE – has been valued at
PRs18/share by using benchmark based valuation.

The company’s valuation is duly supported by growth potentials that are primarily emanating
from its renewed product portfolio, rectified operational efficiencies and ideally balanced and
e panded network
expanded net ork penetration in both wire-line
ire line and wireless
ireless segments
segments.

FY09 was a year of financial recovery for the company with the profitability revival being
primarily attributable to the rectification of its long-lasting operating inefficiencies and poor
market responsiveness rather than pure demanddemand-based
based growth.
growth

FY10 and onwards, all leading P&L sheet margins – cash, EBITDA, gross, EBIT and net –
are expected to depict notable stretch in the post-FY09 period.

We consider the prevailing economic situation much less vulnerable for PTC than its peers.
The company’s timing of reshuffling and restructuring in FY08 provided it an all-important
edge over its domestic peers - who actually are now taking cost control steps that PTC has
already taken a year ago. 42
P ki
Pakistan T
Telecommunication
l i i Company
C (PTC PA)

Market Cap (PRs bn) 99.4

99 4 Curruent Price (PRs) 19.5
19 5
Market Cap (US$ bn) 1.2 1Yr Average Vol (mn) 6.6
Target Price (PRs) 45.0 1Yr Average Val (US$ mn) 1.4
No of Shares (mn) 5,100.0 1Yr High (PRs) 22.8
Free Float ((%)) 15.4 1Yr Low ((PRs)) 12.0
Free Float Value (US$ mn) 134.3 1Yr Average (PRs) 17.6
KATS Code PTC
Reuters Code PTCA.KA
g Code
Bloomberg PTC PA

PTC- Key Statistics

Year end June 2008A 2009A 2010F 2011F
Earnings
g per
p share (PRs)
( ) ((0.6)) 1.8 2.1 2.5
Price earning ratio (PERx) N/M 10.9 9.1 7.7
Dividend yield (%) 0.0% 7.6% 7.7% 9.2%
Price/Book value (PBvx) 10
1.0 10
1.0 10
1.0 09
0.9
EV/EBITDA (x) N/M 3.2 2.5 2.2

43
P ki t St
Pakistan t Oil (PSO PA)
State

PSO offers an upside potential of 13% to our target price of PRs345/share. On the basis of
FY10E, the scrip is trading at a PER of 6.5x, EV/EBITDA of 4.3x and offers a dividend yield
of 5%.

The attractiveness of the scrip lies in the company’s revived profitability after posting loss of
PRs6.6bn in FY09 and the likely settlement of issues related to circular debts in the near
future.

Beyond FY09, growth in the earnings of the company is expected to gain considerable
moment m on the back of stable oil prices and the e
momentum exchange
change rate co
coupled
pled with
ith rising ffurnace
rnace
oil sales. That said, we expect PSO’s earnings to rebound in FY10 to PRs46.9/share.
Thereafter, we estimate the company to depict a four-year (FY11 to FY14) earnings CAGR of
11%.

Increasing dependence on thermal power generation is raising the demand for furnace oil in
the country (5-year FY10 to FY14 CAGR of 8%). PSO being the largest supplier of furnace oil
(market share of 87%) – is certainly to be the prime beneficiary of this rising demand.

Elimination of inter-corporate circular debt through funds injection and removal of power
subsidy in the form of power tariff hikes are likely to adjust the liquidity issue of the company.
Therefore, with the improved cash flow position, the short term borrowing of PSO would be
reduced and thus lowering the financial charges. 44
P ki
Pakistan S
State Oil (PSO PA)

Market Cap (PRs bn) 52.4

52 4 Curruent Price (PRs) 305.7
305 7
Market Cap (US$ bn) 0.6 1Yr Average Vol (mn) 1.6
Target Price (PRs) 345.0 1Yr Average Val (US$ mn) 4.5
No of Shares (mn) 171.5 1Yr High (PRs) 343.0
Free Float ((%)) 43.0 1Yr Low ((PRs)) 96.2
Free Float Value (US$ mn) 266.9 1Yr Average (PRs) 233.8
KATS Code PSO
Reuters Code PSO.KA
g Code
Bloomberg PSO PA

PSO- Key Statistics

Year end December 2008A 2009A 2010F 2011F
Earnings per share (PRs) 81.9 (39.1) 46.9 54.6
Price earning ratio (PERx) 3.7 N/M 6.5 5.6
Dividend yield (%) 7.7% 1.6% 4.9% 9.8%
Price/Book value (PBvx) 1.7 2.5 2.0 1.7
EV/EBITDA (x) 2.6 NA 4.3 3.5

45
N ti lB
National k off P
Bank ki t (NBP PA)
Pakistan

National bank is available on cheapest

p multiples
p amongg Pakistani banks. Currently,
y, it trades at a discount of
16% to our SOTP based target price of PRs97/share with PBV10 & PBV11 multiples of 0.6x and 0.5x,
respectively against the sector’s average of 1.0x and 0.9x, respectively. Moreover, it offers a dividend yield
of 8% (2010E).

We believe, despite restrained ROE, wider discount of 43% to the sector’s PBV multiple is unjustifiable given
the bank’s average (2009-11) ROE of 14% - only 3.4pps less than the sector.

2009 to be marked as the year of consolidation for the bank in which we expect its earnings to arrive at
PRs13.8bn (EPS PRs12.85) - 10% lower Y-o-Y. Thereafter, we project 3yrs (2010-12) average growth of
15% in the bank’s bottom-line at PRs20.8bn (EPS PRs20.31) in 2012.

The bank has one of the highest coverage ratio of 75% in the sector. It would be the major beneficiary of
recent relaxation in FSV benefit and loan restructuring/rescheduling rules. Total amount of NPLs as of
September 30, 2009 stood at PRs68bn (NPL ratio of 14%) out of which PRs32bn (accumulated in last 3yrs)
are applicable for FSV benefit. This may result in huge reverse provisions as the bank is likely to avail the full
benefit of recent FSV regulation
regulation.

With a CAR of 16.6%, NBP is well positioned to benefit from recovery in credit demand.

Reportedly, NIT is in process of an “in-kind” redemption of NIT units held by the LOC (Letter of Comfort)
holders. NBP is the largest stakeholder of NIT-LOC fund with 334mn units. Incase of redemption, NBP would
book a capital gain of PRs4.5bn or PRs4.2/share.

We believe potential capital gain due to NIT sell-off and reverse provisions will be quite notable short-term
share price’ catalysts.
46
N i
National
l Bank
B k off P
Pakistan
ki (NBP PA)

Market Cap (PRs bn) 87.3

87 3 Curruent Price (PRs) 81.1
81 1
Market Cap (US$ bn) 1.0 1Yr Average Vol (mn) 6.1
Target Price (PRs) 97.0 1Yr Average Val (US$ mn) 5.5
No of Shares (mn) 1,076.4 1Yr High (PRs) 107.8
Free Float ((%)) 24.0 1Yr Low ((PRs)) 46.6
Free Float Value (US$ mn) 245.0 1Yr Average (PRs) 73.4
KATS Code NBP
Reuters Code NBPK.KA
g Code
Bloomberg NBP PA

NBP- Key Statistics

Year end December 2008A 2009E 2010F 2011F
Earnings per share (PRs) 14.4 12.9 15.0 17.2
Price earning ratio (PERx) 4.9 5.4 4.6 4.1
Dividend yield (%) 9.3% 7.2% 7.9% 8.6%
Price/Book value (PBvx) 07
0.7 06
0.6 06
0.6 05
0.5

47
U it d B
United k Li
Bank it d (UBL PA)
Limited

UBL is trading at PBV10 and PBV11 multiples of 1.0x and 0.9x, respectively – at par with
sector. However, its average ROE (2009-11) of 18% is superior to the banking average of
17%.

Flow of fresh NPLs is largely checked due to recovery in business environment and cautious
lending by the bank. During the 3Q2009, the bank recorded additional NPLs of PRs2.0bn as
compared to PRs5.1bn in the preceding quarter (2Q2009). Importantly, the bank had booked
massive NPLs in 2Q2009. As a result, credit provisions swelled to PRs5.3bn in 1H2009 as
against PRs3.0bn in the same period of last year.

The bank has become cautious when it comes to private sector loan disbursement. However,
the priority is given to commodity finance against government guarantee and to public sector
which have lowest infection ratio.
With it
its greater
t ffocus on consumer and d commercial
i lb
banking,
ki UBL wouldld benefit
b fit the
th mostt
from recovery in credit cycle and improving macro indicators. UBL’s loan book is expected to
grow at 3-year CAGR of 13% post 2009.

The bank has substantially reduced its term deposits by PRs39bn or 21% to PRs147bn
PRs147bn. As a
result, share of fixed deposits fell from 39% to 33%. We believe this strategy to augur well for
UBL as reduction in high cost deposits will help the bank to mitigate the impact of declining
loan re-pricing rate amid monetary easing.
48
U i d Bank
United B k Limited
i i d (UBL
(UB PA)

Market Cap (PRs bn) 70.8

70 8 Curruent Price (PRs) 63.6
63 6
Market Cap (US$ bn) 0.8 1Yr Average Vol (mn) 3.0
Target Price (PRs) 70.0 1Yr Average Val (US$ mn) 1.8
No of Shares (mn) 1,112.9 1Yr High (PRs) 65.4
Free Float ((%)) 30.0 1Yr Low ((PRs)) 28.6
Free Float Value (US$ mn) 252.1 1Yr Average (PRs) 49.0
KATS Code UBL
Reuters Code UBL.KA
g Code
Bloomberg UBL PA

UBL- Key Statistics

Year end December 2008A 2009E 2010F 2011F
Earnings per share (PRs) 7.5 8.5 9.7 11.1
Price earning ratio (PERx) 7.8 6.9 6.0 5.3
Dividend yield (%) 1.7% 3.4% 6.0% 7.7%
Price/Book value (PBvx) 15
1.5 11
1.1 10
1.0 09
0.9

49
B k Al
Bank F l h (BAFL PA)
Al-Falah

Bank Al-Falah
Al Falah is available at discount of 13% from our SOTP target price of PRs16/share
with PBV10E and PBV11E of 0.6x and 0.6x, respectively. We have assigned PRs5.7/share
value to its holding in Warid Telecom.

The bank holds 317mn shares of Warid Telecom (Pvt). There have been rumors for potential
divestiture of its stake. This may render upswing rally in the scrip.

After posting 58% profitability decline in 2008, the bank is expected to depict a strong
rebound in its bottom-line in 2009. We expect earnings to rebound by 71% to PRs2.2bn (EPS
PRs1 6) Subsequent
PRs1.6). S bseq ent to 2009,
2009 we e anticipate average
a erage growth
gro th of 15% oover
er the ne
nextt 3 years
ears
(2010-12).

Accretion in NPL’s has slowed down to 6% in 3Q2009 versus 14% and 23% in the 1st and
2nd quarters of current year
year, respectively
respectively.

We believe that the ageing risk of infected portfolio would be mitigated by expected reverse
provisions in the wake of recent relaxations in FSV rules.

The opening quarter of 2009 was the toughest period for the bank where the deposit base
and net advances dropped by 9% and 8%, respectively. However, the bank is depicting a
gradual revival inline with the recovery in macro indicators.
50
B k Al
Bank Al-Falah
F l h (BAFL
(BAF PA)

Market Cap (PRs bn) 18.8

18 8 Curruent Price (PRs) 14.0
14 0
Market Cap (US$ bn) 0.2 1Yr Average Vol (mn) 6.9
Target Price (PRs) 16.0 1Yr Average Val (US$ mn) 1.1
No of Shares (mn) 1,349.2 1Yr High (PRs) 16.4
Free Float ((%)) 45.0 1Yr Low ((PRs)) 9.9
Free Float Value (US$ mn) 100.6 1Yr Average (PRs) 12.7
KATS Code BAFL
Reuters Code BAFL.KA
g Code
Bloomberg BAFL PA

BAFL- Key Statistics

Year end December 2008A 2009E 2010F 2011F
Earnings per share (PRs) 1.0 1.6 1.8 2.1
Price earning ratio (PERx) 14.1 8.3 7.5 6.3
Dividend yield (%) 0.0% 3.7% 3.7% 5.5%
Price/Book value (PBvx) 11
1.1 07
0.7 06
0.6 06
0.6

51
DG Kh
Khan C
Cementt C
Company (DGKC PA)

Our SOTP based target price for DGKC arrives at PRs56/share, indicating an upside
potential of 70%. This includes PRs18 for cement operations and PRs38 for its portfolio
value. On the basis of FY10E numbers, PE, EV/EBITDA and EV/ton multiples of the
company arrives at of 15.6x, 7.0x and US$72, respectively.

On core operations (cement business), DG Khan’s FY10E EV/EBITDA and EV/ton arrives at
4.7x and US$39, respectively. This is being done by segregating DG Khan’s cement
operations and its equity portfolio under SOTP methodology.

During
D ring FY10
FY10, the stable rrupee
pee dollar parit
parity is anticipated to res
result
lt in lo
lower
er e
exchange
change losses
for the company that had previously been the major reason for losses. Moreover, declining
interest rates also bode well for the underlying profits of the company, going forward.

Besides its cement business,

business DGKC also holds a healthy investment portfolio (market worth
PRs16.5bn) with exposure in banking, textile and insurance sector. The company receives a
decent amount of other income in the form of dividend receipts from these holdings.

From a premium of 3% in August 2009, DG Khan Cement’s share price is now at ~39%
discount from its equity portfolio worth. The per share investment worth of D.G. Khan Cement
now arrives at PRs54/share. Currently, the scrip is trading even lower than the discounted
worth of its portfolio at PRs38/share.
52
DG Kh
Khan C
Cement C
Company (DGKC PA)

Market Cap (PRs bn) 10.0

10 0 Curruent Price (PRs) 32.9
32 9
Market Cap (US$ bn) 0.1 1Yr Average Vol (mn) 7.8
Target Price (PRs) 56.0 1Yr Average Val (US$ mn) 2.8
No of Shares (mn) 304.3 1Yr High (PRs) 41.2
Free Float ((%)) 50.0 1Yr Low ((PRs)) 13.0
Free Float Value (US$ mn) 59.4 1Yr Average (PRs) 27.6
KATS Code DGKC
Reuters Code DGKH.KA
g Code
Bloomberg DGKC PA

DGKC- Key Statistics

Year end June 2008A 2009A 2010F 2011F
Earnings per share (PRs) (0 2)
(0.2) 17
1.7 21
2.1 25
2.5
Price earning ratio (PERx) N/M 19.2 15.6 13.2
Dividend yield (%) 3.8% 0.0% 0.0% 0.0%
Price/Book
/ k value
l (PBvx)
( ) 03
0.3 0
0.5 0
0.5 0
0.4
EV/EBITDA (x) 9.9 5.9 7.0 6.1

53
L k C
Lucky Cementt Li it d (LUCK PA)
Limited

The current trading levels of the Lucky Cement’s share price suggest an upside potential of
approx 14% to our target price of PRs80/share.
On the basis of relative valuations, the scrip is trading at cheap multiples with FY10F PE of
7.8x, EV/EBITDA of 5.0x and EV/ton of US$45, respectively.
The company
company’s s major focus on exports has
has, to some extent
extent, insulated it from the domestic
economic slowdown. Therefore, the company posted a decent cement sales growth as
against the declining sales by other cement companies.
Currently, Lucky Cement is the lowest cost producer amongst its peers. In order to uphold
this position the company has recently signed a MoU for the supply of indigenous coal
(cheaper than imported coal) for its cement plants with M/S Oracle Coal Fields PLC.
Incorporating this, our earnings projections for the company would increase by 4% on
average.
Moreover, another MoU has also been signed with the KESC (Karachi Electric Supply
Corporation) for the supply of 49.5MW electricity for a period of 10-years. Our initial
calculations suggest a positive earnings impact of around 8-9%.
The company is located in both regions (North and South) that allows it to enjoy tremendous
logistical
g advantage,
g , thereby,
y, p
providing
g an edge
g over its p
peers.
Furthermore, stable rupee dollar parity and decline in interest rates are likely to result in lower
financial charges & exchange losses for the company.

54
Lucky
k CCement Limited
i i d (LUCK
( UCK PA)

Market Cap (PRs bn) 22.7

22 7 Curruent Price (PRs) 70.2
70 2
Market Cap (US$ bn) 0.3 1Yr Average Vol (mn) 4.9
Target Price (PRs) 80.0 1Yr Average Val (US$ mn) 3.8
No of Shares (mn) 323.4 1Yr High (PRs) 85.2
Free Float ((%)) 45.0 1Yr Low ((PRs)) 26.5
Free Float Value (US$ mn) 121.2 1Yr Average (PRs) 59.2
KATS Code LUCK
Reuters Code LUKC.KA
g Code
Bloomberg LUCK PA

LUCK- Key Statistics

Year end June 2008A 2009A 2010F 2011F
Earnings per share (PRs) 85
8.5 14 2
14.2 90
9.0 95
9.5
Price earning ratio (PERx) 8.2 4.9 7.8 7.4
Dividend yield (%) 0.0% 5.7% 2.9% 2.9%
P i /B k value
Price/Book l (PB
(PBvx)) 12
1.2 10
1.0 09
0.9 08
0.8
EV/EBITDA (x) 9.6 4.3 5.0 4.8

55
Ni h t Mill
Nishat Mills Li it d C
Limited Company (NML PA)

NML’s SOTP based target price of PRs86/share indicates a decent upside potential of 29% from its
prevailing trading levels.

Nishat Mills also carries a huge equity portfolio with investments in cement, banking and power
sector. The cumulative market value of the portfolio arrives at PRs16.5bn or PRs69/share. As per
g NML’s p
our calculation, the market is discounting portfolio by
y 45% to its market value as against
g the
historical discount of 20-30%.

In order to abate inherited business risk in textile business, the company is diversifying its operation
towards safe investment avenues. The company has invested PRs2.0bn in new power project
(Nishat Power Limited). The project has started commercial production and dividend receipts are
likely to begin from 2010.

Furthermore, Mansha Group also announced an acquisition of two power companies (AES Lalpir
Pvt. Ltd and Pak Gen Pvt. Gen). As per the management, NML plans to participate up to US$60mn
or PRs5
PRs5.0bn also.
0bn investment in this acquisition also

As reported by the management, both the acquisitions are calculated at US$0.188 (PRs15.8) and
US$0.175 (PRs14.7) for AES Lalpir and AES Pak Gen, respectively. However, as power projects
(IPPs’ capacity 727MW) purchase prices are below their respective book values of PRs27.78 and
PRs32
PRs32.2424 per share basis
basis, we believe this would translate into negative goodwill and would result in
a one-time gain on acquisition for NML.

As per our calculation, AES Lalpir and AES Pak Gen are to offer respective PRs based IRR of 24%
and 23%. We estimate both projects would cumulatively add PRs9.1/share to NML’s fair value. 56
Ni h Mill
Nishat Mills Limited
i i d Company
C (NML
(NM PA)

Market Cap (PRs bn) 16.1

16 1 Curruent Price (PRs) 66.5
66 5
Market Cap (US$ bn) 0.2 1Yr Average Vol (mn) 4.1
Target Price (PRs) 86.0 1Yr Average Val (US$ mn) 2.3
No of Shares (mn) 242.5 1Yr High (PRs) 73.7
Free Float ((%)) 50.0 1Yr Low ((PRs)) 21.7
Free Float Value (US$ mn) 95.7 1Yr Average (PRs) 43.6
KATS Code NML
Reuters Code NISM.KA
g Code
Bloomberg NML PA

NML- Key Statistics

Year end June 2008A 2009A 2010F 2011F
Earnings per share (PRs) 24.2 5.2 6.2 9.9
Price earning ratio (PERx) 2.7 12.5 10.6 6.6
Dividend yield (%) 3.8% 3.0% 3.8% 3.8%
Price/Book value (PBvx) 0.6 0.8 0.7 0.6
EV/EBITDA (x) 8.0 5.7 5.7 5.0

57
First Capital Equities Limited (92 21) 111 226 226

Mian Ehsan-ul-Huq (CEO) ceo@firstcapital.com.pk

Pakistan Research Team
Faraz Farooq faraz.farooq@firstcapital.com.pk
Abrar Hussain abrar.hussain@firstcapital.com.pk
Muhammad Rehan Khan rehan.khan@firstcapital.com.pk
Kamran Rehmani kamran.Rehmani@firstcapital.com.pk
Kishan Sidi kishan.siddi@firstcapital.com.pk
Hayat Khan hayatkhan@firstcapital.com.pk

Pakistan Sales Team

Farooq Habib (COO) farooq.habib@firstcapital.com.pk
Hamid Siddiqui
q hamid siddiqui@firstcapital.com.pk
q p p
Rabia Hussain rabia@firstcapital.com.pk
Farhana Saba farhana.saba@firstcapital.com.pk
Harris Ahmed Batla harris.batla@firstcapital.com.pk

North American Sales Partner

Auerbach Grayson
Anshuman Ray aray@agco.com

58