Nawaz Sharif wins Pakistani Elections

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Nawaz Sharif's Pakistan Muslim Party won the elections by a landslide. Ruling party as well as ex-cricketer Imran Khan were not able to make a difference.

LMG's local partner Arif Habib Bank believes that the victory of PMP is not bad for Pakistan. With interest in frontier markets growing and valuation levels relatively high, LMG looks ith interest to one of the largest, but internationally underinvested Islamic countries.

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Nawaz Sharif wins Pakistani Elections

  1. 1. Disclaimer: The information contained herein is compiled from sources AHL believes to be reliable, but we do not accept responsibility for its accuracy or completeness. It is not intended to be an offer ora solicitation to buy or sell any securities. AHL and its officers or employees may or may not have a position in or with respect to the securities mentioned herein and they do not accept any liabilitywhatsoever for any direct or consequential loss arising from the use of this publication and its contents. AHL may, from time to time, have a consulting relationship with a company being reported upon.All opinions and estimates contained herein constitute our judgment as of the date mentioned in the report and are subject to change without notice.1Morning CallMay 13, 2013Market Strategy EquitiesKSE to sail high on peaceful democratic transitionWith an unprecedented turnout ratio at the ballot box (~60%) following endlessqueues, the ‘change’ for a better Pakistan has finally come through the vote,the essence of a true democracy taking roots in the country. The politicaltransition took place with much ease against what was earlier thought as theriskiest polls ever. By looking at the initial poll results, with one party enjoying awide-margin lead heading towards ‘simple’ majority, one can easily decipherthe nation showed zero tolerance towards bad performance and deliverance.PML’N stands with strong mandate needed to deliver effectivelyBetter than initially expected as another ‘coalition’ setup, Pakistan MuslimLeague (Nawaz) has emerged as the clear winner of the polls 2013,expectedly pulling simple majority (137 required to make gov’t) where the partyhas a lead in ~126 seats. With simple majority, PML’N would stand as acombination of: 1) experience (veteran in politics, came in power two timesbefore), 2) performance (better economic performance than its peer PPP), and3) a strong mandate to deliver (expectedly simple majority this time around).That was all what exactly needed to timely enforce the much-needed economicreforms, in letter and spirit, to turnaround country’s below-par economy.PML’N’s economic performance and expectationsIn its earlier mandates (first in Nov90-Apr93, second in Feb97-Oct99), PML’Nwas proven to have efficient administration, good governance and pro-privatization attitude translating into good economics. This time around, with atargeted economic manifesto chained with broad action plans, PML’N shouldface no hurdles in implementing even toughest of decisions needed to undodeep economic dents. Some of them may include phasing out of hugesubsidies (PKR 512bn last year) through electricity price pass-on, restructuringand privatization of public sector entities (annual fiscal drain of PKR 400bn),and taxing the untaxed/least-taxed (Agriculture sector) to propel tax revenues.The most important deal that is expected to yield immediate positives will benew setup’s priority to secure IMF funding for instant support to the economy.In-favor Judiciary a plus, strong opposition for refined decision-makingUnlike the last ruling, PML’N enjoys high comfort factor from the Judiciary thatshould be considered as an added advantage for PML’N to run its officesmoothly. Strong opposition (more likely PPP’s) would also keep a critical eyethat should reflect in better decision-making by PML’N. However, except forPunjab, implementing reforms at provincial level would be concern due a splitmandate (primarily PTI in KPK, PPP+MQM in Sindh, Coalition in Baluchistan).Int’l relations and response from foreign donors/credit rating agenciesPML’N’s party chief (expected PM) enjoys excellent relations with Middle-Eastern rulers (Saudis in particular), which should lead to resumed investmentflows from the ME region. He is also upbeat to have significantly improved tieswith India (to boost trade alongside India’s likelihood to join Iran-Pak gasParty 2008 2013*Pakistan Peoples Party 124 39Pakistan Muslim League (N) 91 156Pakistan Tehreek-e-Insaaf - 40Pakistan Muslim League (Q) 54 1Muttahida Qumi Movement 25 21Aw ami National Party 13 1Mutthida Majlis-e-Amal Pakistan 7 -Jamaat-e-Islami^ - 8Jamiat Ulema-e-Islam (F)^ - 13Independent 18 38Others 8 21Undecided 2 4Total 342 342*Results as per initial reports, ^Within MMA in 2008Indicators PMLN PPPGDP Grow th 4.6% 4.2%Inflation 9.8% 10.5%As % of GDPFiscal Deficit 6.8% 6.3%CAD 2.8% 3.6%Trade Deficit 4.6% 6.9%Tax-GDP 13.4% 12.1%Savings-GDP 20.9% 20.8%Inv-GDP 18.5% 17.5%IndicatorsGDP Grow thIndustrial Grow thInflationBudget DeficitTax-GDPInvestment-GDPHealth-GDPEducation-GDPT&D Loss of Pow er sectorImprove GovernanceTax ReformsIncrease in Tax RateLater Tax CutsInterest Rate CutsPSEs RestructuringPrivatization ProgramsFinancial Mkt. Reforms*PMLN Economic ManifestoAnalystResearch Teamresearch@arifhabibltd.com92-21-32460742Yes7-8%4%15%20%4%Yes2%www.arifhabibltd.comPolitical Party Position7-8%Historical Performance6%5-year TargetsYesYesPMLNs Next 5-Year Economic Plan10%YesYesNoYes
  2. 2. 2Morning CallMay 13, 2013pipeline), Iran (short-term gas import arrangements) and China (furtherprogress on Gwadar port alongside currency swap agreement). Thus, PML’N’sappointment as the ruling gov’t should not only payoff from enhanced regionaltrade ties but also resumption of desired investment flows to Pakistan.As far as relations with the US are concerned, the US has already offered afresh beginning with Pakistan at parallel length following new political setup.Thus, improving int’l relations along with smooth political transition mayincrease Pakistan’s standing with the donors as well as credit rating agenciesthereby positively impacting Pakistan’s ratings and funding issues, in our view.Finance Minister a scarce resource for PML’NPML’N may face scarcity when it comes to the right person managingcountry’s finances. PML’N stands low on this resource where the only optionremains Mr. Ishaq Dar (Chartered Accountant) who has been frequently citedas the one who blurted out fudging issues when made Finance Minister in thelast ruling (from the Opposition) that led to currency mess back in 2008.However, he is expected to act with more responsibility post lesson learned.Outlook: KSE100 target at 22,755pts, providing 32% total return in 2013Based on valuation models, including regional discount conversion to historicalaverages, earnings growth and target prices (see table alongside), we assignKSE100 a target level at 22,755pts, an upside of 16% from current levels (total32% in 2013). Key risk to our target remains any delay in upcoming IMF deal.We see market going northwards as an initial reflection of the on-time andsmooth political transition with winning party expectedly receiving simplemajority to bring in needed reforms. Followed by the new gov’t setup, next bigdevelopment will be budget-making for FY14 and the much-awaited progresson the new IMF loan that should boost overall confidence once the new andimproved political setup takes full charge of the gov’t office.Impact on sectors and stocksAs far as sectors are concerned that will benefit the most from the PML’N gov’tpolicies, we expect Cement (infrastructure development), IPPs (circular-debtresolution, timely provision of gas/FO to increase generation), OMCs (circular-debt resolution and liquidity injections), E&Ps (increased drilling activity onmore favorable law & order in KPK and Baluchistan), Banks (overall economicrevival and secondary public offerings), Textiles (immediate relief to industriesin Punjab following improvement in power crises) and Telecom (4G auction,better ME relations where most of the Telecom companies’ managementreside) to be the key ones. Please refer to the next page for detailed impactanalysis on key stocks.Valuation Basis Target Weight BreakupTarget Price Based 22,505 15% 3,376Earnings Grow th 21,145 15% 3,172Justified PE 23,349 15% 3,502PE-Grow th Ratio 23,902 15% 3,585Regional DY* 22,699 15% 3,405Regional PBV* 23,335 10% 2,334Regional PE* 21,482 5% 1,074Regional EV/EBITDA* 22,100 5% 1,105Current PE Basis 24,039 5% 1,202Average 22,729 100% -Weighted Target 2013 22,755Expected Total Return 2013 32%Country PE DY ROEIndonesia 16.3 1.9% 28%India 13.9 1.8% 25%Vietnam 11.8 3.5% 25%Philippines 21.6 1.9% 17%Sri Lanka 11.4 2.6% 14%Thailand 15.0 3.0% 24%China 10.7 2.4% 17%Taiw an 15.4 2.9% 15%S.Korea 9.6 1.3% 15%Peer Avg 14.0 2.4% 20%Pakistan 7.8 6.4% 26%Prem/(Disc) -44% -63% -24%*Source: Bloomberg, AHL Research EstimatesSymbol Target Upside Recom.PTC 29.6 56% BuyKOHC 115.0 45% BuyENGRO 196.0 40% BuyNBP 54.7 32% BuyBAFL 20.9 28% BuyNML 103.0 20% BuyMEBL 31.1 19% BuyFFBL 45.0 18% BuyDGKC 84.0 17% BuyHUBC* 64.0 14% BuyFCCL 11.5 13% BuyKAPCO* 60.0 7% BuyNCPL* 28.3 1% Buy*Buy rating includes DY as w ellAnalystResearch Teamresearch@arifhabibltd.com92-21-32460742Key StocksKSE100 Index Target Estimates 2013www.arifhabibltd.comForw ard Regional Multiples 2013
  3. 3. 3Morning CallMay 13, 2013Sector Development Impact Prefered StocksCementNew govt under the IMF program maycompell to raise pow er tariff and cut PSDPspending (in short run only) to contain fiscaldeficit. How ever post IMF program,infrastructural spending is expected toimprove as emphasized in the PMLNmanifesto.Volumetric grw oth to slow in the shortrun as PSDP is the major demand driverand rising cost as pow er constitutes15% of cost. Improvement in Medium-to-long term demand forecast intactKOHC, FCCL, LUCK, DGKCPowerNew gov’t w ill bring structural reforms(reducing subsidies, controlling T&D losses,sw itching to cheaper generation) w hich w illreduce the circular debt. Gov’t may also bediverting gas from other sectors to pow erin order to bring dow n load sheddingacross the country, w hich can be anotherpositive too.Easing circular-debt issue w ill improveliquidity, thus higher dividend payoutscannot be ruled out from the pow ercompanies.HUBC, KAPCO, NCPLFertilizerSuccessful implementation of long-term gasplan w ould be major trigger for the sector,how ever any change in the gas priority ofnew gov’t from fertilizer to pow er sector,keeping in consideration the severe energyproblems prevailing in the country, w ouldbe negative for the fertilizer sector.Plants operating on SNGPL w ould beaffected the most in both cases.ENGRO, FFBLBanksAs previously w itnessed, PMLN has hadstrategies that supported the bankingsector (UBL, HBL, NBP, MCB). They hadrevamped banks like HBL, NBP and MCBw ith better management and pro-privatization policies. This time around w emay see the same.If PML-N continues the same strategy ithad for the banking sector previously,w e see positive impacts on the overallsector. How ever, an economic revivalw ould be a bigger trigger for thebanking sector to perform ahead.BAFL, UBL, NBPOMCsReduction in energy subsidies is expectedto boost the liquidity of the energy chain. Inaddition, improved liquidity is expected toincrease FO avialability for pow er sector,adding volumetric grow ht for the sectorPSO to be the major beneficiary ofimproving circular-debt scenario.PSOTelecom3G auction w ith more interest now beshow n tow ards 4G spectrum auctioninstead,w ill yield massive benefits toTelecom Companies in offering betterquality services w ith greater efficiency inimproving their customer base and help thegovt raise much needed funds.PTCs Ufone revenues and Broadbandsegment stands to benefit from the 3Gpossibly 4G auction, going forw ard.PTCE&PPTIs government in KP and PML(N)srelationship w ith Baloch national factions, isexpected to improve the law and ordersituation in these provinces leadingtow ards improved drilling activities.Improved drilling activities andinvestment flow s from foreign partnersPOL, PPLTextilePML-N w ill be striving to overcome energyshortfall, mostly providing relief to theindustries in Punjab, thus primarilybenefitting the Textile sector.With improved production of Textile, w emay w itness higher contribution inoverall GDP grow th and exports, thushelping companies profitability toimprove alongside bringing in preciousforeign reserves.NMLSource: AHL Research

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