Pakistan Strategy 2018 - To New Beginnings

Strategy 2018
Corporate Office: 8th Floor Bahria Complex III, M.T Khan Road, Karachi, Pakistan.
Tel: +(92 21) 36490023 Email: research@shajarcapital.com Web: www.shajarcapital.com
Pakistan Strategy 2018
To New Beginnings
Stock prices as of December 29, 2017
Research Entity Notification Number: REP-118
Wednesday, January 03, 2018

Strategy 2018
Table of Content
Market – To New Beginnings
Economy – Growth Gaining Traction
Banking – Flight to Quality
Exploration & Production – In The Sweet Spot
Cement – Expansion to Drive Growth
Oil Marketing Companies – Breaking the Status Quo
Fertilizer – Stable Earnings and High Yields
Auto Assemblers – Rocky Roads Lie Ahead
Power Generation – To FO or not to FO?
Alpha Plays
Valuation Summary
Contact Details
Disclaimer
3
12
16
21
23
29
37
41
47
49
53
54
55
2

Strategy 2018
MarketTo New Beginnings
 The Pakistani Equity markets have seen significant declines in 2017 where the market as of
CYTD (until 29th Dec’17) was down by 16% from its Jan 01’17 levels as Political Uncertainty,
Macro economic weakness along with continuing foreign selling dented sentiment of
institutional and retail local investors alike.
 Valuations are opening up with the KSE100 index now trading at a 2018 PE of 8.1x while for
2019 the market trades at an undemanding PE of 7.1x. We believe this is the ideal time for long
term value investors to start building portfolios.
 In the short term before Mar’18 we believe market performance is expected to continue to
remain lackluster as upcoming political uncertainty along with the associated electioneering is
expected to push the Government’s focus away from dealing in financial matters and more
towards handling the day to day political developments.
 We believe the market may witness some consolidation before it moves higher and advise
investors to focus on domestic growth themed stocks along with companies which have a strong
competitive edge/ brand positioning where we suggest building selectively in E&P’s, Banks,
Autos, Fertilizers, and Some Cement Stocks and OMCs.
 2018 is expected to be a Tale of 2 halves with the elections expected to be held by Jul-Aug18
where PM Abbasi has hinted towards Jul 15’18 as the tentative date for the elections. Post
elections we see clarity however a Coalition government may still not let the market reach
premium multiples.
 Our Conservative Dec-2018 index target of 46,000 points reflects an upside of 14% from
current levels where we see the index to trade higher in 2HCY18 as the Government’s
focus shifts back to the Economy. We believe Pakistani market may find it difficult to
trade at premium multiples in times of uncertainty and advise investors to be exposed to
turnaround stories along with companies having USD hedged revenues and strong
pricing power.
Valuation Snapshot P/E Div Yld Discount
MSCI Asia Pacific Ex. Japan 15.7 2.4 -48.5%
MSCI EM 15.4 2.4 -47.4%
India 21.7 1.4 -62.7%
Qatar 12.3 4.2 -34.2%
Indonesia 17.9 2.0 -54.7%
Philippines 20.7 1.5 -60.8%
UAE 11.0 4.5 -26.6%
Turkey 8.8 3.7 -8.1%
Pakistan 8.1 6.0
Source: Bloomberg, Shajar Research
Regional Peer P/E Snapshot
Source: Bloomberg, Shajar Research
0.0 5.0 10.0 15.0 20.0 25.0
MSCI Asia Pacific Ex. Japan
MSCI EM
India
Qatar
Indonesia
Philippines
UAE
Turkey
Pakistan
KSE-100 Performance CY17TD
Source: Reuters, Shajar Research
30,000
35,000
40,000
45,000
50,000
55,000
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
0
50
100
150
200
250
300
350
400
450
Trade Volume (RHS) Trade Close (LHS)
16% down CYTD
mn
3

Strategy 2018
PoliticsCoalition Time?
 We are going into peak election season where the jostling for power/ electoral politics may
impact market sentiments. With Senate elections due in Mar-18, we expect volatility to rise and
henceforth the role of smaller political parties may increase. The rise in power politics could
lead to the significance of smaller parties and their bargaining power where the top 3 parties
(PML-N, PPP and PTI) may have to get smaller parties help to form a government at the
center.
 Recently, PAT and its leader Dr Tahirul Qadri have once again started to stretch the provincial
Punjab government post the Model town incident and they may continue to do so until before
the elections.
 Should the power get transferred peacefully and on time, this would only be the second time in
Pakistan’s more than 70 year history to have that feat. A big positive indeed.
 Pakistan’s security situation post the Operation Radd-ul-Fasaad has improved significantly while
the KSE100 index has not seen a multiple rerating due to the improving security situation.
Recently, the country has seen respite from major terror incidents which has been rewarded on
the FDI side with major transactions being: Acquisition of management control of Engro
Foods by Royal Friesland Campina, Acquisition of management control of Admore Gas
Pvt Ltd by Singaporean based Puma Energy in the OMC space, Acquisition of Linde
Pakistan by Adira Capital Holdings in the Industrial Gases segment, Acquisition by EDOTCO
(an Axiata group company) of Deodar Private Limited in the Mobile Tower business along with
proposed acquisition of KEL by Shanghai Electric in the Electricity Distribution business.
National Assembly
Partywise Composition NA Total Seats
PML(N) 188
PPPP 47
PTI 33
MQM 24
JUI-F 13
IND 10
PML(F) 5
Others 20
Total 340
Source: ECP, Shajar Research
No. of Seats
13%
4%
55%
23%
5%
KHYBER PAKHTUNKHWA FATA PUNJAB SINDH BALOCHISTAN
NA Seats Composition by Political Party
55%
14%
10%
7%
4%
3% 1%
6%
PML(N)
PPPP
PTI
MQM
JUI-F
IND
PML(F)
Others
4

Strategy 2018
MarketElections and KSE-100 performance
 Over the past 25 years, Pakistan has held four general elections. 3 months prior to the elections,
the KSE-100 has historically rallied between 8% and 13%. The market has gained as much as
40% and lost as much as 3% in the year leading up to the elections.
 In the 90 days following elections, the KSE-100 has rallied by as much as 66% and been down
by as much as 7%. In the year following the elections, the index has rallied as much as 71% and
lost as much as 60%.
 With the next round of general elections expected to be held in July next year, there seem to be
grounds for the market to rally keeping in view the recent declines where the underlying
Pakistan theme has not changed a lot however the Government’s focus being diverted away
from Economy along with increased political uncertainty is making investors run for cover.
 Senate elections in Mar’18 may be the first test which the current government will have to go
through.
Date Key Events from 2013
December 16, 2017
PM Shahid Khaqan
Abbasi announces intention to
hold elections on July 15, 2018
December 15, 2017
PTI Secretary General Jahangir
Tareen disqualified,
Chairman Imran Khan is not
August 1, 2017
Shahid Khaqan Abbasi is sworn
in as PM of Pakistan
July 28, 2017 PM Nawaz Sharif Ousted
April 20, 2017
JIT formed under SC directive, to
investigate alleged financial
irregularities and money
laundering charges against Nawaz
Sharif and family.
November 1, 2016
PTI ends protests after Supreme
court agrees to launch inquiry
into corruption allegation against
PM Nawaz Sharif.
December 16, 2014
Six gunmen conducted a terrorist
attack on Army Public School in
Peshawar, killing more than 150
students and school staff
August 14, 2014
PTI starts nationwide protest due
to alleged rigging of 2013
Elections
June 15, 2014
First phase of Operation Zarb-e-
Azb began in North Waziristan
June 8, 2014
10 militants attacked Jinnah
International Airport, 36 people
were killed including the
attackers
June 5, 2013
Nawaz Sharif sworn in as PM of
Pakistan
Source: Shajar Research
Election Date Election Year Party Elected Before Election
3M 3M 1Y
Oct,6 1993 1993 PPP 8% 66% 71%
Feb,3 1997 1997 PML-N 9% -7% 1%
Feb,18 2008 2008 PPP 8% -4% -60%
May,11 2013 2013 PML-N 13% 16% 40%
After Election
5

Strategy 2018
Divergence of KSE-100 against MSCI Pakistan and Emerging Market
6
Performance of KSE-100 vs. Frontier Market, MSCI Pakistan and Emerging Market
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE-100 Index MSCI FM MSCI Pakistan MSCI EM
Divergence
how long
can it last
50%

Strategy 2018
Year in Review Market
KSE-100 Performance CY17TD Sector Performance - Top 5 Gainers vs. Top 5 Laggards
Source: Reuters, Shajar Research Source: PSX, Shajar Research
30,000
35,000
40,000
45,000
50,000
55,000
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
0
50
100
150
200
250
300
350
400
450
Trade Volume (RHS) Trade Close (LHS) mn
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
KSE-100Index
PaperandBoard
Tobacco
LifeInsurance
Electricity
MetalsandMining
ElectricalGoods
Media
Cement
HouseholdGoods
InvestmentandServices
7
Foreign Investors Portfolio Investments CY13TD (USDmn) Local Investors Portfolio Investments CY17TD (USDmn)
Source: NCCPL, Shajar Research Source: NCCPL, Shajar Research
398 383
-315
-361
-490
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
CY13 CY14 CY15 CY16 CY17
204 200
127
47
-0.4 -7 -14 -71
-100
-50
0
50
100
150
200
250
Insurance
MutualFunds
Companies
OtherOrg.
Banks/DFIs
BrokerProp.
NBFC
Individuals

Strategy 2018
Year in Review Market
8
Top 10 Best Performers on the KSE-100 Index Top 10 Worst Performers on the KSE-100 Index
Source: PSX, Shajar Research Source: PSX, Shajar Research
56%
47%
33%
29%
26%
23%
18% 17% 16%
13%
0%
10%
20%
30%
40%
50%
60%
COLG PAKT ASTL MTL NESTLE JLICL INIL SNGP PMPK POL
-51% -52% -52% -54% -55% -56% -57%
-60%
-64%
-73%-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
SEARL KOHC BWCL BOP PIBTL PIOC GHGL EFOODS FML FEROZ
Average Traded Volume KSE-100 Index CY17TD Net Inflow/Outflow since Jan'15
Source: Reuters, Shajar Research Source: NCCPL, Shajar Research
146
107
86
71
-
20
40
60
80
100
120
140
160
1QCY17 2QCY17 3QCY17 4QCY17
678
299 217 118 91 43
-72
-201
-1,172-1500
-1000
-500
0
500
1000
MutualsFunds
Insurance
NBFC
Individuals
OtherOrg
Companies
BrokerProp.
Banks/DFI
FIPINet

Strategy 2018
KSE-100 Timeline of Key Events
KSE-100 Timeline: Key Events in the last 1.5 years
34,000
36,000
38,000
40,000
42,000
44,000
46,000
48,000
50,000
52,000
54,000
May-16
May-16
Jun-16
Jul-16
Jul-16
Aug-16
Sep-16
Sep-16
Oct-16
Nov-16
Nov-16
Dec-16
Jan-17
Jan-17
Feb-17
Mar-17
Apr-17
Apr-17
May-17
Jun-17
Jun-17
Jul-17
Aug-17
Aug-17
Sep-17
Oct-17
Oct-17
Nov-17
Dec-17
Policy
rate
set at
5.75%
Reserves
reach all
time high
of >$21bn
MSCI announces
upgrade of Pakistan
from frontier to
emerging
Pakistan
issues $1bn
in Sukuk
Bonds Reserves
reach new
all time high
of $24.5bn
Pakistan
Completes the
$6.63bn
Extended
Fund Facility
Program with
IMF
PSX ranked best
market in Asia&
Fifth best market
in the world
KSE-100 breaches
50,000 mark
KSE-100 touches all time
high of 52,876 points
PKR/USDgoes
up to 108
momentarily
Nawaz Sharif ousted
from PM office
Pakistan weight
reduced inMSCI
Emerging
Markets Index
Ishaq Dar
goes on leave
Rupee
Depreciates
4%
Euro
and
Sukuk
Bonds of
$3bn
floated
Market
9

Strategy 2018
Key Insights from Industry players
 We conducted a number of meetings with Industry players in the Banking, Energy and
Cement/ Construction industry. Key takeaways were:
 Banks: The treasury desks expect 2 interest rate hikes in 2018 one right after Senate
Elections and the other post 2018 elections. They expect the yield curve to trend
upwards however they do not expect any major increase in PIB yields in 2018 hence they
expect banks will continue to invest in short term instruments. By the middle of 2019
they expect the yield curve to slowly move towards normalization after a hike in interest
rates brought about by higher inflation. Key highlights: Flight to quality would be the
theme in the banking sector where banks with low ADR’s, a strong deposit franchise
and the ones which will reprice assets faster (with shorter long term lending) would be
key beneficiaries.
 Cements: Key Companies expect the cement capacities to come online on time however
capacities coming online in Punjab may have some delays post Environmental issues
there and stricter compliance from the EPA. Moreover, with PKR weakening from
current rates and a slight dip in margins due to higher coal prices some delays could be
expected in the timeline of North Players. Coming to the South, the degree of
competition is expected to heat up post ACPL’s and DGKC’s expansion and premium in
the Southern market could come down. However an important point to note is all the
major players (ACPL, LUCK and now DGKC post expansion) have generally been
compliant and they expect competition may rise however the ‘cement arrangement’ is
expected to remain intact though with some hiccups. Some export opportunities are
opening from the South.
Economic Outlook
52%
25%
23%
Positive Neutral Negative
Interest Rate Outlook
60%
30%
10%
Two Rate Hikes One Rate Hike Zero Rate Hike
GDP Growth Expectations
70%
20%
10%
5.5%-6% 5% Less Than 5%
Market
10

Strategy 2018
Key Insights from Industry players
 Energy: Expect upside in international oil prices to remain capped around USD 70/bbl
while on the downside they have room to go lower. However this is keeping in view no
major disturbance happens in the geo-politics space where tension in the ME as well as
with North Korea could potentially bring oil prices higher. Compliance of OPEC
members is at all time highs and with higher prices the benefit to ‘cheat’ the quota
becomes higher.
 On the OMC side, the changes brought about due to changes in Government policy will
continue to impact FO business where OMC’s focus will shift towards HSD. Smallers
players may face higher barriers to entry while larger players will use size to their
advantage. Deregulation will bring long term benefits.
Market
11

Strategy 2018
EconomyGrowth Gaining Traction, Macros to Take a Slight Hit
 Pakistan’s GDP growth rate gained further traction with GDP growth reaching a 9-yr high at
5.28% in FY17 on the back of: 1) Accommodative monetary policy; 42-yr low policy rate of
5.75% having been maintained since May’16, 2) uptick in development spending induced by
CPEC and other infrastructure projects, 3) substantial expansion in private sector credit
(especially that of fixed investment) and 4) improved energy and law and order situation.
 Aggregate demand is going strong although inflationary pressures are also muted however
inflation has started rising slowly. On the supply side, a significant amount of capacities are
expected to come online in Cements, Consumer Goods, Power, Steel and Infrastructure to name
a few in the next few years which will also help GDP to grow at a higher level. Our forecast
points to a GDP growth of 5.5% in FY18 to rise to 5.8% in FY19.
 To account for the faster growth in the Economy, imports have also started rising creating
pressures on the Balance of Payments position. A saving grace has been higher FDI which has
risen to USD 1.14bn from USD 0.72bn, up 58% YoY in 5MFY18.
Real GDP Growth Rate (%)
Source:Economic Survey, Shajar Research
3.7% 4.1% 4.1% 4.5%
5.3% 5.5% 5.8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
Budget Deficit as % of GDP
Source:Economic Survey, Budgetary Documents, Shajar Research
-8.20%
-5.50% -5.30%
-4.60%
-5.80%
-0.09
-0.08
-0.07
-0.06
-0.05
-0.04
-0.03
-0.02
-0.01
0
FY13
FY14
FY15
FY16
FY17
13
Key Highlights
USDbn FY16A FY17A FY18E
Exports 22.0 21.9 23.5
Imports 41.3 48.5 51.0
Trade Deficit (19.3) (26.6) (27.5)
Home Remittances 19.9 19.4 18.9
Current Account Deficit (4.9) (12.4) (16.3)
Foreign Direct Investment 2.3 2.6 3.5
Source: SBP, Shajar Research
Key Macro Highlights FY13 FY14 FY15 FY16 FY17 FY18E
GDP Growth 3.7% 4.1% 4.0% 4.5% 5.3% 5.5%
CPI 7.4% 8.6% 4.5% 2.9% 4.2% 4.2%
Fiscal Deficit (as % of GDP) 8.2% 5.5% 5.3% 4.6% 5.8% 6.3%
Current Account Deficit (as % of GDP) 1.1% 1.2% 1.0% 1.7% 4.0% 5.2%
Exports of Goods (US$ bn) 23.7 25.8 24.0 22.0 21.7 23.5
Imports of Goods (US$ bn) 43.5 46.3 46.4 40.3 48.6 51.0
Remittances (US$ bn) 13.9 15.8 18.7 19.9 19.3 18.9
Exchange rate (Rs) - Avg 96.9 102.9 101.5 104.3 104.7 108.5
External Debt (US$ bn) 51.2 54.7 54.7 61.4 66.1 73.0
Pakistan External Debt as % of GDP 22.7% 21.5% 20.3% 22.1% 21.8% 22.5%
Source: SBP, Shajar Research

Strategy 2018
 We believe Pakistan’s Current Account Deficit is expected to notch up to 16.3bn in FY18 and
although it will put pressure on the reserves, slowdown in imports could be witnessed next fiscal
year (FY19) as Pakistan imports lesser FO and replaces it with cheaper LNG along with slightly
lower machinery imports. Moreover, general imports are also expected to come down post
imposition of RD along with tightening of imports by FBR and PKR devaluation however
major impact we believe may be witnessed from FY19.
 The Economy could witness some type of ‘hard landing’ should the government not make
some structural changes in the way the economy is run primarily with regards to putting a lid on
imports of foodstuff and other general items.
 Pakistan’s inability to have a BoP surplus along with external debt servicing and a perpetual
trade deficit allow very little room for building foreign exchange reserves. Any further
weakening of the PKR against the USD could also lead to ‘dollarization’ and hurting the
purchasing power of locals and also inviting lesser FDI which in turn may lead to lower growth.
 The Equity market it seems is reflecting this ‘new normal’ which is why valuations may not
stretch for the foreseeable future however the market is trading at extremely undemanding
forward multiples.
Economy
FDI (USD bn)
Source:Economic Survey, SBP, Shajar Research
1.5
1.7
1.0
2.3
2.7
1.1
-
0.5
1.0
1.5
2.0
2.5
3.0
FY13
FY14
FY15
FY16
FY17
5MFY18
14
Growth Gaining Traction, Macros to Take a Slight Hit
Trend in Monetary Variables (%)
Source:Economic Survey, SBP, Shajar Research
80
85
90
95
100
105
110
-5%
0%
5%
10%
15%
20%
FY12
FY13
FY14
FY15
FY16
FY17
4MFY18
Exchange Rate (RHS) CPI
Money Supply M2 Growth 6 M Avg T Bill Yield

Strategy 2018
 We eye PKR to lose another 4% until FY18 (already lost 4.7% in FY18 till date) to settle
at ~115 against the USD. This could slightly hurt disposable income however on the domestic
consumption side we expect this to be passed on as aggregate demand is still quite strong. For
next year we could potentially see demand slightly tapering off.
 Strong GDP growth along with higher growth in LSM and improving supplies in other sectors
could lead to a pick up in the domestic economy albeit inflation can trend a bit higher.
 A key point to note is that should the Govt go to the IMF then we could potentially be looking
at slower growth for the next few years due to potentially harsh conditions attached with IMF
programs. Such conditions could lead to a faster rise in Inflation and a subsequent weakening
of the Rupee.
 We expect CPI to average 4.2% in FY18 with CPI potentially rising to around 5% in
FY19.
 FX reserves with the SBP are around USD 14.3bn while total forex reserves are around USD
20.3bn with the country at present having import cover of less than 3.3months.
 Our estimates for CAD point to the country incurring a deficit of USD 16.3bn which would be
the highest Deficits of recent times and SBP reserves could drop down to less than USD 8bn
by the end of FY18 or roughly less than 2 months import cover, a very dangerous possibility.
Economy
USD/PKR Trend CY13TD
85
90
95
100
105
110
115
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
15
Growth Gaining Traction, Macros to Take a Slight Hit

Strategy 2018
Banking
Outlook
16

Strategy 2018
BanksInvestment Theme - Flight to Quality
 Shajar Capital’s Banking universe is down around 29% from the highs witnessed on May24’2017
where HBL along with NBP have contributed the most to the downside with HBL down by
45% while NBP is down around 37%.
 Although HBL and NBP had individual points of concerns for investors (Action in the US
through the payment of Fine for HBL along with the Pension case of NBP), other banks have
also witnessed declines post selling by EM Funds. No major change has been witnessed on the
policy rate too along with continuation of super tax has not brought major changes in Banks
profitability.
 We expect 2018 to be an inflexion year for Banks and their profitability. We foresee 2 hikes in
the Policy rate and an uptick to 6.25% with the DR also expect to move in lock step.
 We believe ‘flight to quality’ should be the theme to play the banking sector as going forwards
some risks could start hitting the surface on the Macro side- Expected higher inflation,
Increasing interest rates, Lower Margins expansion along with some further PKR weakening.
 Banks with lower ADR’s, a strong deposit franchise, no major compliance issues, along with a
liquid investment book (very few PIB’s) as proportion to total investments will turn out to be
winners we believe.
Total Advances of the Banking Industry
Source: SBP, Shajar Research Source: SBP, Shajar Research
Total Assets of the Banking Industry
-
2
4
6
8
10
12
14
16
18
20
CY13
CY14
CY15
CY16
9MCY17
PKR tn
-
1
2
3
4
5
6
7
CY12
CY13
CY14
CY15
CY16
9MCY17
PKR tn
Price Performance KSE-100 vs. Banking Sector
-30%
-20%
-10%
0%
10%
20%
30%
1-Dec-16
1-Jan-17
1-Feb-17
1-Mar-17
1-Apr-17
1-May-17
1-Jun-17
1-Jul-17
1-Aug-17
1-Sep-17
1-Oct-17
1-Nov-17
1-Dec-17
KSE-100 Shajar's Banking Universe
1M 3M 6M 1YR
Banking 4% -5% -20% -25%
KSE-100 0% -5% -14% -14%
Relative 4% 1% -6% -11%
Stock Performance
CY18F P/E CY18F P/B
UBL 7.4 1.3
MCB 8.8 1.4
HBL 7.8 1.1
BAFL 7.6 0.9
ABL 7.5 0.9
Average 7.8 1.1
Source: PSX, Shajar Research
17

Strategy 2018
BanksKey Developments
Investments & Advances of Banking Industry Risk Weighted CAR
44%
45%
46%
47%
48%
49%
50%
-
2
4
6
8
10
CY13
CY14
CY15
CY16
9MCY17
PKR tn Investments-net Advances-net ADR
14.9
17.1
17.3
16.2
15.4
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
CY13
CY14
CY15
CY16
9MCY17
Provisions to NPLs (Coverage Ratio)Distribution of Total Deposits of Banking Industry
77.1%
79.8%
84.9% 85.0% 85.30%
72.0%
74.0%
76.0%
78.0%
80.0%
82.0%
84.0%
86.0%
CY13
CY14
CY15
CY16
9MCY17
2.2 2.3 2.4 2.7 2.8
3.1 3.5 3.9 4.3 4.70.4 0.3 0.3
0.4 0.5
2.2
2.8
3.3
3.7 3.9
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
CY13
CY14
CY15
CY16
9MCY17
PKR tn
Fixed Deposits Saving Deposits
Current Account-Remunerartive Current Account- Non Remunerartive
18

Strategy 2018
Muslim Commercial Bank (MCB)
 MCB currently trades at 10x PE for CY17 Earnings and 9.1x PE for CY18 earnings while the on the
stock trades at a P/B of 1.4x for CY18. Our CY18 TP for MCB comes to PKR 240/share which
reflects an upside of 14% from current levels.
 In the last few years MCB’s strategy has been to go for sustained growth rather than chasing growth
which we believe will help the bank navigate the uncertain upcoming period better than its peers.
MCB we expect will come out much stronger and much more focused.
 We expect 2018 to be an inflexion year for Banks and their profitability. We foresee 2 hikes in the
Policy rate and an uptick to 6.25% with the DR also expect to move in lock step to 6.75%.
 We believe ‘flight to quality’ should be the theme to play the banking sector as going forwards some
risks could start hitting the surface- Expected higher inflation, Increasing interest rates, Lower
Margins expansion for corporates and in some cases margin declines along with some further PKR
weakening.
 Banks with lower ADR’s, a strong deposit franchise, no major compliance issues, along with a liquid
investment book (very few PIB’s) as proportion to total investments will turn out to be winner
where MCB will be one of the best placed to benefit from.
Key Risks Higher Provisioning, Delay in interest rate hike, Delay in reversal of provision in advances,
Higher infection in NIB’s advances portfolio.
1M 3M 6M 1YR 3YR
MCB -2% -5% -7% -14% -33%
KSE-100 -1% -7% -13% -15% 24%
Relative -1% 1% 6% 1% -58%
Stock Performance
Price Performance KSE100 vs MCB
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
KSE100 MCB.KA
Key Data
Recommendation Overweight
Target Price: PKR 240.0
Closing Price: PKR 212.3
Upside 13.0%
Outstanding Shares (mn) 1,185.1
Market Cap: PKRmn 251,611.9
Market Cap: USDmn 2,287.4
12M High/Low: PKR 262.1/190.4
12M Avg Daily Vol Shares 842,745
Key Highlights CY13A CY14A CY15A CY16A CY17F CY18F
EPS (PKR) 18.44 20.81 21.56 18.71 21.00 23.00
DPS (PKR) 14 14 16 16 16 17
BVPS (PKR) 97.4 114.9 120.0 123.0 138.0 147.0
P/E (x) 11.39 10.10 9.74 11.23 10.00 9.13
P/B (x) 2.2 1.8 1.8 1.7 1.5 1.4
Dividend Yield % 6.7% 6.7% 7.6% 7.6% 7.6% 7.9%
Earnings growth % 4.0% 12.8% 3.6% -13.2% 12.2% 9.5%
ROE % 19.7% 20.0% 18.4% 15.4% 16.3% 16.9%
Source: Company Reports, Shajar Research
19

Strategy 2018
United Bank Limited (UBL)
 UBL currently trades at an undemanding 9.2x PE for CY17 Earnings and 7.7x PE for CY18
earnings while the trades at a P/B of 1.4x for CY17 and a P/B of only 1.3x CY18. Our CY18
TP for UBL comes to PKR 212/share which reflects an upside of 13% from current levels.
 Over the last few years, UBL’s business has grown organically where deposit growth for CY17*
is around 7% while lending growth is expected to notch up by 12% YoY. Corporate advances
rose by a staggering 20% YoY while the bank also was able to grow its consumer portfolio, up
by 14% YoY.
 The bank’s ADR at 45% along with gradually reducing the investment duration of its book is
expected to help UBL notch higher NIM’s going forwards.
 Moreover, in its push towards digitization OMNI has become a market leader in the branchless
banking platform. UBL is expected to continue to innovate and lead competition.
 The bank offers a dividend yield of 6.9% for CY17 and 7.2% for CY18 where an uptick in rates
will also help bring in gains from its trading book once interest rates rise.
Key Risks Provisioning, Delay in interest rate hike, Uncertainty in Middle East.
1M 3M 6M 1YR 3YR
UBL 3% -7% -17% -25% 5%
KSE-100 -5% -10% -15% -19% 22%
Relative 8% 3% -2% -7% -17%
Stock Performance
Price Performance KSE100 vs UBL
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 UBL.KA
Key Metrics CY13A CY14A CY15A CY16A CY17F CY18F
EPS 15.75 17.91 21.4 22.7 20.4 24.5
DPS 8 11.5 13.0 13.0 13.0 13.5
BVPS 88.0 108.6 122.8 130.3 133.2 143.8
P/E (x) 11.9 10.5 8.8 8.3 9.2 7.7
P/B (x) 2.1 1.7 1.5 1.4 1.4 1.3
Dividend Yield % 4.3% 6.1% 6.9% 6.9% 6.9% 7.2%
ROE 18.6% 18.2% 18.5% 17.9% 15.5% 17.7%
Key Data
Upside 12.8%
Outstanding Shares (mn) 1,224.2
12M High/Low: PKR 275.4/163.4
12M Avg Daily Vol Shares 1,338,556
20

Strategy 2018
Investment Theme - In The Sweet Spot
 The E&P sector is expected to be a big beneficiary of the weaker PKR along with expected
higher production in FY18 and beyond. Major impact of higher oil prices along with gas prices
(lagged impact) to be visible from 2HFY18 and beyond along with benefit of PKR
depreciation.
 Pick up in drilling activity in Balochistan and KPK following improved security situation is
expected to help notch up production growth by 9-10% in FY18.
 International Oil prices already up (Arab Lite) are up around 17.8% YoY with prices having
risen by almost 37% since July1’17 non stop. Higher oil prices in the face of higher compliance
by OPEC along with some supply reductions due to security situation in ME and political
uncertainty has weighed on prices. Going into the next half with the winter season coming to an
end Oil prices are expected to consolidate here however realized prices for all the EnP’s should
improve significantly on a QoQ basis from here.
 OGDC Trades at a forward FY18 PE of 8.9x for FY18 earnings while for FY19 the stock
trades at an undemanding PE 8.3x. Our Dec-18 TP for OGDC comes to PKR 180/share
which reflects an upside of 11% from current levels along with a dividend yield of around
4.6%.
 PPL trades at a FY18 PE of 10.8x while on a FY19 basis the stock trades at a PE of 9.7x where
repricing in Sui along with production additions in Gambat South and PPL’s aggressive
exploration strategy is expected to also feed further in unlocking further upside from here. We
have a Dec-18 Target price of PKR 230/share, which reflects an upside of 12% from current
levels along with offering a dividend yield of 5.3%.
E&P
1M 3M 6M 1YR
E&Ps 4% 10% 19% 3%
KSE-100 1% -5% -13% -15%
Relative 3% 15% 32% 19%
Stock Performance
Price Performance KSE-100 vs. E&P Sector
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE-100 E&Ps
FY18F P/E Div Yield
OGDC 8.9 4.6%
PPL 10.8 5.3%
POL 10.8 8.4%
Average 10.2 6%
22

Strategy 2018
Cement
Outlook
23

Strategy 2018
Investment Theme - Expansion to Drive Growth
 Expansionary phase: The cement sector is currently undergoing its third wave of expansion with
industry capacity to increase by 50% from 42mn MT in FY16 to 63mn MT in FY21 on the back of
strong demand due to improved economic outlook and significant investment expected in
infrastructure (Local dispatches are expected to grow at a 5-year CAGR of 9% between FY17-FY20).
 We have an overweight stance on the sector due to its strong domestic demand dynamics, high
expected capacity utilization (average expected capacity utilization for the next 5 years is ~88%).
 Our liking for the sector is compounded by cement scrips being some of the worst performers in
terms of sectoral performance in the recent market decline, with the top 9 companies losing ~55% of
market capitalization from their respective highs during the first half of CY17.
 As a result of declining cement prices in the country along with fears of an oversupply of cement
emerging because of the industry’s ambitious expansion plans there are concerns about the marketing
arrangement governing the industry breaking down. We feel that even after incorporating price cuts
moving forward, the fundamentals still warrant an overweight stance at current levels.
 Recent action by the Punjab EPA could lead to delays in expansion by companies in Punjab which
could potentially contain the price indiscipline that has affected the North region in the short to
medium term.
 Our top picks for the sector are DGKC, CHCC and KOHC due to the strong fundamentals and
potential for earnings growth along with them trading at undemanding valuations.
Key Risks to our investment thesis include, 1) a breakdown of the cement quota arrangement can pose a
threat to cement company’s margins, 2) decline in PSDP allocation, 3) earnings decline due to a rise in coal
prices and 4) A further devaluation of the rupee will increase production costs.
FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Capacity (mn MT) 44.64 44.64 45.62 45.62 46.39 50.40 53.50 60.60
Capacity Utilisation % 75% 77% 78% 85% 87% 94% 86% 82%
Source: APCMA, Shajar Research
1M 3M 6M 1YR 2YR
Cements -9% -15% -25% -41% -1%
KSE-100 -3% -8% -15% -16% 20%
Relative -6% -7% -10% -25% -21%
Sector Performance
Cements
Price Performance KSE100 vs. Cement Sector
Source: Reuters, PSX, Shajar Research
-20%
0%
20%
40%
60%
80%
100%
120%
1-Dec-15
1-Feb-16
1-Apr-16
1-Jun-16
1-Aug-16
1-Oct-16
1-Dec-16
1-Feb-17
1-Apr-17
1-Jun-17
1-Aug-17
1-Oct-17
1-Dec-17
KSE-100 Cement Stock Returns
FY18F P/E EV/Ton (USD)
DGKC 7.6 97
KOHC 6.6 47
CHCC 8.9 93
LUCK 13.6 136
PIOC 6.6 31
FCCL 12.7 84
MLCF 8.6 118
Average 9.2 86.6
24

Strategy 2018
CementsKey Developments
FY19E Breakeven Retention Prices/bag (PkR) FY18E Market Share
Source: Shajar Research Source: APCMA, Shajar Research
180 190 200 210 220 230 240 250
DGKC
KOHC
CHCC
LUCK
PIOC
FCCL
MLCF
16%
16%
10%
7%7%
6%
4%
5%
5%
24%
Bestway Lucky D.G.Khan Fauji Maple Leaf
Kohat Pioneer Attock Cherat Others
Average Price/Bag (PkR) Cement Industry Dispatches
Source: PBS, Shajar Research Source: APCMA, Shajar Research
0
100
200
300
400
500
600
700
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18TDNorth South
0
10
20
30
40
50
60
70
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
FY21E
FY22E
Local Dispatches Export Dispatches
25

Strategy 2018
DG Khan Cement Company Limited (DGKC)
 Hub Expansion: DGKC’s greenfield expansion of 2.72mn MT at Hub is the single largest
plant to be set up in the country, the expansion is expected to come online by the end of FY18.
This will help trigger dispatch growth with 3-year volumetric CAGR for FY17-FY20 expected
to be around 13% as significant public and private development is taking place in and around
Karachi and Gwadar along with CPEC related projects.
 Portfolio Investments: DG Khan cement has exposure to Banking (DGKC owns 9.2% of
MCB), Textiles (9% ownership in NML & 3% in NCL), Packaging (55% ownership in Nishat
Paper Products), Insurance (6% ownership in Adamjee Insurance), Hospitality (10% ownership
in Nishat Hotels) and Dairy sectors (55% ownership of Nishat Dairy); with an improved
outlook for these sectors moving forward, DGKC’s earnings are expected to be positively
impacted.
 Volumetric growth expected to offset margin erosion: DGKC’s strong volumetric growth is
expected to help offset the impact of any price indiscipline on margins thus stabilizing earnings.
Key Risks to our investment thesis include, 1) a breakdown of the cement quota arrangement can
pose a threat to DGKC’s margins, 2) decline in PSDP allocation could cause a decline in dispatches,
3) earnings decline due to a rise in coal prices and 4) A breakdown of Balochistan’s law and order
situation could impact DGKC’s operations at Hub. Price Performance KSE100 vs DGKC
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 DGKH.KA
1M 3M 6M 1YR 3YR
DGKC -17% -26% -41% -47% 2%
KSE-100 -6% -11% -16% -19% 21%
Relative -11% -15% -26% -28% -20%
Stock Performance
Key Data
Target Price: PKR 183
Closing Price: PKR 134
Upside 37%
Outstanding Shares (mn) 438
Market Cap: PKRmn 58,585
Market Cap: USDmn 537
12M High/Low: PKR 245/117
Key Highlights FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
EPS(PkR) 12.6 13.6 17.4 20.1 18.2 17.5 17.2 16.0
DPS(PkR) 3.0 3.5 5.0 6.0 7.5 7.0 6.9 6.4
Dividend Yield 2% 3% 4% 4% 6% 5% 5% 5%
P/E (x) 10.6 9.8 7.7 6.7 7.3 7.7 7.8 8.4
P/S (x) 56.9 60.6 59.6 67.8 68.8 68.0 85.2 96.0
EV/EBITDA 6.9 5.9 5.1 3.9 5.7 6.6 5.1 4.4
26

Strategy 2018
Kohat Cement Company Limited (KOHC)
 New Grinding Mill: KOHC is undertaking a debottlenecking operation by installing a new
Grinding Mill that is expected to come online by 4QFY17, this will trigger dispatch growth
(Dispatches are expected to grow at a 3-yr CAGR of 13% between FY17 and FY20) and improve
capacity utilization that has historically lagged the industry (average capacity utilization for the next
5 years is expected to be ~93%).
 New Line: KOHC recently announced that it had established letters of credit for its new 7800tpd
expansion. At a D:E of 25:75 and a modest ROE of 10%, this is expected to have an earnings
impact of ~PkR12/sh (KOHC has a current ROE of ~20%) once online. However we have not
incorporated this into our estimates owing to a lack of clarity on the timeline of the project.
 Strong Balance Sheet: Currently KOHC holds Cash, Short Term Investments and Investment
Property of PkR62.3/sh which would allow it to incur capex from internally generated funds
without it having to curtail dividends; it has an undemanding forward dividend yield of 11%.
 Investment Property: KOHC’s diversification into real estate that already has an unrealized gain of
PkR4.9/sh is expected to unlock further value for investors once realised.
Key Risks to our investment thesis include, 1) a breakdown of the cement quota arrangement can pose
a threat to KOHC’s margins, 2) decline in PSDP allocation could cause a decline in dispatches, 3)
earnings decline due to a rise in coal prices and 4) A fall in property prices could impact adversely impact
KOHC’s earnings.
Price Performance KSE100 vs KOHC
-70.0%
-60.0%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 KOHC.KA
1M 3M 6M 1YR 3YR
KOHC -19% -28% -43% -59% -39%
KSE-100 -6% -10% -15% -19% 22%
Relative -14% -17% -28% -41% -61%
Stock Performance
Key Data
Upside 58%
EPS(PkR) 17.0 20.4 21.5 28.5 22.9 21.3 19.8 21.0
DPS(PkR) 5.0 2.0 9.0 6.0 14.0 13.0 12.0 13.0
Dividend Yield 4% 1% 6% 4% 10% 9% 8% 9%
P/E (x) 8.3 7.0 6.6 5.0 6.2 6.7 7.2 6.8
P/S (x) 1.9 1.7 1.8 1.6 1.6 1.5 1.4 1.3
EV/EBITDA 4.9 4.1 4.1 3.4 3.7 3.7 3.7 3.2
27

Strategy 2018
Cherat Cement Company Limited (CHCC)
 Multiple Expansions: CHCC’s Line 2 of 1.3mn MT was the first cement company to achieve
commercial operation as part of the cement industry’s third expansionary cycle. The company is
undertaking another expansion of 2.2mn MT with commercial operation expected by the end of
FY19.
 We revise our estimates for FY18 as a result of the company taking a 10% tax credit on its
new line. Recall, the company was expected to avail a 5 year tax holiday on its new line however, as
per industry sources, the government may not allow the company to take the tax holiday on
technical grounds where our numbers incorporate these changes.
 The company is expected to have a lower cost structure due to its newer, more efficient lines.
With coal prices on the rise, CHCC’s lower cost structure is expected to put it in a more competitive
position.
 CHCC’s location puts it in close proximity to several hydel projects many of which including
Diamer-Bhasha, Munda and Dasu dams, which will allow it to service the demand coming from
dam construction such that it is expected maximize dispatch growth.
Key Risks to our investment thesis include, 1) a breakdown of the cement quota arrangement can pose
a threat to CHCC’s margins, 2) decline in PSDP allocation could cause a decline in dispatches, 3) earnings
decline due to a rise in coal prices and 4) With a significantly leveraged balance sheet post third
expansion, any hike in interest rates is expected to adversely affect CHCC’s earnings
1M 3M 6M 1YR 3YR
CHCC -10% -30% -44% -48% 32%
KSE-100 -6% -11% -15% -19% 22%
Relative -4% -20% -29% -29% 10%
Stock Performance
Price Performance KSE100 vs CHCC
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 CHRC.KA
Key Data
Upside 44%
12M High/Low: PKR 212/88.5
EPS(PkR) 12.8 12.5 7.3 8.0 11.1 12.4 9.9 19.6
DPS(PkR) 2.5 4.0 3.0 3.3 4.4 5.0 4.0 7.8
Dividend Yield 2% 4% 3% 3% 4% 4% 4% 7%
P/E (x) 8.6 8.9 15.2 14.0 10.0 8.9 11.2 5.7
P/S (x) 3.1 3.1 3.0 2.8 2.1 1.4 1.4 1.0
EV/EBITDA 10.3 10.1 10.0 10.0 7.3 5.3 5.1 5.2
28

Strategy 2018
OMCsInvestment Theme - Breaking the Status Quo
 A paradigm shift: The OMC sector is undergoing a status quo shift where the new norm is
expected to require each and every OMC to increase storage capacity rapidly and invest in supply
chain in tandem. Recent storage expansions by HASCOL (>400,000MT), PSO (~250,000MT) and
APL also plans to double its storage capacity show the changing dynamics of the sector.
 The black oil dilemma: The government’s recent decision to curtail the use of FO by IPPs caught
everyone by surprise. We foresee this problem to remain in CY18 as the government is adamant to
reduce the use of this residual product. We expect PSO, HASCOL and APL to be most affected by
this respectively as they sell ~74.5%, 5.9% and 7.4% of the total industry’s FO while topline and GP
contribution of FO for each company is 26.2%/23.1%, 10.1%/6.4% and 16.5%/13.6% respectively.
 Our top picks for the sector are PSO, HASCOL and APL due to the strong fundamentals and
potential for earnings growth.
Key Risks to our investment thesis include, 1) any sharp fluctuation in international oil, 2) further
devaluation of the Pakistani Rupee, 3) new entrants in the OMC space and 4) delays in above mentioned
and other projects of the OMCs
Price Performance KSE-100 vs. OMCs Sector
-10%
0%
10%
20%
30%
40%
50%
60%
70%
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
KSE-100 OMCs
1M 3M 6M 1YR
OMCs -11% -21% -23% -24%
KSE-100 -3% -8% -15% -16%
Relative -8% -13% -8% -9%
Stock Performance
Ex-FO Volumes (mn MT)
Source: OCAC, Shajar Research
6.67
1.14
2.11
1.14
6.92
1.38
1.77 1.90
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
PSO APL SHELL HASCOL
11MCY16 11MCY17
C/FY18F P/E
Market Share
(Ex-FO)
APL 9.5 8.8%
PSO 6.1 44.3%
HASCOL 13.1 12.2%
SHELL 7.9 11.4%
30

Strategy 2018
OMCs
 Shifting market shares seen during the year: Looking at 11MCY17 volumes, PSO remained
well ahead of the pack with a market share of 54.8%, this number was down from 11MCY16
share of 56.7%. The biggest jump in market share was seen in HASCOL which saw an increase of
2.8% in its market share with 11MCY17 market share amounting to 10.0%, this helped the
company jump to become the largest private sector OMC in the country. APL is picking up the
pace again in its market share with an increase of 1.1% in its market share to get to 8.3% till
11MCY17. Things are looking gloomy for SHEL as the company’s market share decreased by
~2.0% ending at 7.5% till 11MCY17. We expect HASCOL to gobble more market share in CY18
while PSO, given its significant exposure to FO could end up losing a slight chunk of its market
share in the coming year.
 Volumes show paltry increase, HASCOL remains on top: 11MCY17 volumes clocked in at
23.9.mn MT which was up 2.9% from 11MCY16’s volumes of 23.2mn MT. Looking at different
players in the OMC space HASCOL was the leader of the pack while SHEL was the uncontested
laggard in the sector. 11MCY17 volumes from HASCOL and APL were up 43.5% and 19.1%
while PSO and SHEL showed a decrease in volumes of 0.5% and 17.7% respectively. We expect
HASCOL, PSO and APL to show an increase in volumes of MS and HSD while the dilemma of
FO will likely reduce overall industry volumes by quite a bit.
 Substitution extremely likely: The government’s inclination towards LNG as a substitute for FO,
given the fuel’s added efficiency, shows a likely shift from residual fuel to LNG in CY18. We expect
a gradual shift in this segment during next year as the government is already looking at new LNG
contracts and will most likely curtail imports of FO (~6.0mn MT) by CY18.
MS Volumes (mn MT)
HSD Volumes (mn MT)
FO Volumes (mn MT)
2.34
0.46
0.99
0.48
2.61
0.54
0.90 0.81
0.0
0.5
1.0
1.5
2.0
2.5
3.0
11MCY16 11MCY17
3.71
0.64
0.96
0.66
3.55
0.80 0.75
1.09
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
11MCY16 11MCY17
6.48
0.53
0.08
0.52
6.17
0.61
0.02
0.49
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
11MCY16 11MCY17
OMC Volumes (mn MT) CY13 CY14 CY15 CY16 CY17E CY18E CY19E CY20E
MS 2.89 3.19 4.87 6.32 7.34 7.71 8.09 8.50
HSD 5.95 5.73 6.81 8.35 8.80 9.06 9.33 9.61
Industry 17.87 18.05 21.00 25.29 26.69 22.89 23.38 23.91
Investment Theme - Breaking the Status Quo
31

Strategy 2018
OMCsKey Developments
MS Market share% OMCs Market Share
Source: OCAC, Shajar Research Source: OCAC, Shajar Research
40.2%
8.3%
13.9%
12.4%
40.4%
8.0%
17.1%
8.3%
11MCY1711MCY16
56.7%
7.2%
9.4%
7.2%
11MCY16
54.8%
8.3%
7.5%
10.0%
11MCY17
HSD Market share% FO Market share%
43.5%
9.8%
9.2%
13.3%
48.5%8.3%
12.5%
8.6%
11MCY1711MCY16 11MCY1711MCY16
74.5%
7.4%
0.3%
5.9%
73.0%
6.0%
0.9%
5.9%
32

Strategy 2018
MS Product mix% HSD Product mix% FO Product mix%
Source: OCAC, Shajar Research Source: OCAC, Shajar Research Source: OCAC, Shajar Research
24.9%
27.2%
17.8%
20.0%
27.8% 27.1%
29.0% 33.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
11MCY16 11MCY17
INDUSTRY PSO APL HASCOL
33.0% 34.1%
28.2% 27.1%
38.2% 40.0%
39.5% 45.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
11MCY16 11MCY17
38.3%
34.7%
49.3% 47.1%
31.7%
30.6%31.5%
20.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
11MCY16 11MCY17
11MCY16 Ex-FO Market Share% 11MCY17 Ex-FO Market Share%
46.54%
7.96%
14.72%
7.95%
44.34%
8.83%
11.37%
12.17%
OMCsKey Developments
33

Strategy 2018
Pakistan State Oil (PSO)
 Expansionary policy likely to bode well : The Oil Marketing giant recently announced Capex
plans of ~PkR44bn which would be used for storage and infrastructural development over the
new few years.
 Improved cash earnings just around the corner: With the recent FO hysteria going on in the
country and the decision to curtail furnace oil’s imports sometime next year, we see a slight jolt
to the company’s earnings (EPS impact: ~PkR10/sh should FO be completely phased out) but
the result would be a much cleaner balance sheet and cash earnings. Alongside this, the OMC
giant is also looking to venture out into JP-1 sales to other foreign airlines instead of the state
owned entity which would result into further advance cash sales and better earnings.
 Auto volumes to help sales of the sector: With new entrants entering the automobile market
of Pakistan, low interest rates spurring buyers to get more financed cars, capacity enhancements
and new variants about to be launched by existing well established players. We foresee all these
positive factors to play well for the biggest OMC in the country with the biggest retail footprint
of ~3,500 outlets.
Key Risks to our investment thesis include, 1) any sharp fluctuation in international oil prices, 2)
further devaluation of the Pakistani Rupee, 3) new entrants in the OMC space and 4) delays in above
mentioned and other projects of the company
Price Performance KSE100 vs PSO
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 PSO.KA
1M 3M 6M 1YR 3YR
PSO -16% -28% -15% -23% -11%
KSE-100 -6% -10% -15% -19% 22%
Relative -10% -18% 0% -4% -33%
Stock Performance
Key Data
Upside 29.8%
Outstanding Shares (mn) 326.0
Market Cap: USDmn 868.7
12M High/Low: PKR 486.1/265.2
Key Highlights FY13 FY14 FY15 FY16 FY17 FY18E FY19E
EPS(PkR) 38.9 67.6 21.9 32.2 55.9 48.0 43.1
DPS(PkR) 5.0 8.0 10.0 12.5 25.0 20.0 25.0
Dividend Yield 1.7% 2.7% 3.4% 4.3% 8.5% 6.8% 8.5%
P/E (x) 7.5 4.3 13.4 9.1 5.2 6.1 6.8
34

Strategy 2018
Hascol Petroleum Limited (HASCOL)
 Aggressive Storage Expansion: HASCOL is bringing a massive change to its storage
footprint across the country. The company’s current storage capacity of ~142,000 MT will be
transformed into a whopping ~560,000 MT by the end of CY18.
 Lube Plant set to drive profits: The company has a lube oil and grease blending plant
underway which is expected to be completed towards the end of CY18. The plant will have a
capacity of ~10,000 MT and would raise the company’s current standing in the segment
(current share ~2.7%). This would drive profits as lubricants are usually a high margin product
for OMCs.
 Efficient supply chain: The Company is investing heavily in its supply chain by buying/leasing
its own fleet of tankers to ensure efficient inventory management, along with delivering fuel
promptly to its pumps. The company currently owns/leases ~70 tank lorries and we expect this
number to increase more than 3x by CY21.
 Robust growth on all fronts: HASCOL showed the most resilience in terms of market share
with an ~2.8% increase in overall market share taking the total up to 10.0% till 11MCY17. On
the volumetric front the company showed astounding sales increase of 43.5% in overall sales
volumes whereas the industry only grew 2.9%.
Key Risks to our investment thesis include, 1) any sharp fluctuation in international oil prices, 2)
further devaluation of the Pakistani Rupee, 3) new entrants in the OMC space and 4) delays in above
mentioned and other projects of the company
1M 3M 6M 1YR 3YR
HASCOL -23% -20% -33% -31% 309%
KSE-100 -6% -10% -15% -19% 22%
Relative -18% -10% -17% -13% 287%
Stock Performance
Price Performance KSE100 vs HASCOL
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 HASC.KA
Key Data
Upside 31.7%
12M High/Low: PKR 389.4/211.6
Key Highlights CY13 CY14 CY15 CY16 CY17E CY18E CY19E CY20E
EPS(PkR) 3.2 5.3 9.4 10.0 11.5 18.9 24.4 28.4
DPS(PkR) - 3.2 5.0 7.0 5.0 7.5 10.0 11.0
Dividend Yield - 1.3% 2.0% 2.8% 2.0% 3.0% 4.0% 4.5%
P/E (x) 76.2 46.6 26.3 24.7 21.5 13.1 10.1 8.7
35

Strategy 2018
Attock Petroleum Limited (APL)
 Strategic storage expansion: APL has its eyes set on new strategic locations to increase its storage
facilities across the country. The current storage capacity of ~80,000 MT is expected to double in
CY18 with new facilities coming online during the year.
 CPEC set to drive Bitumen sales: With infrastructure development on the rise due to CPEC we
see additional use of bitumen going up substantially. APL currently owns a lion’s share of this non-
energy product we expect a jump in this segment of the company which will drive profits as this is a
relatively high margin product.
 Fuel farm to ramp up JP Volumes: APL entered into a joint arrangement with PSO for the
operation, maintenance and establishment of a fuel farm at the New Islamabad Airport. We expect
this to significantly boost sales of JP-1, a product currently dominated by PSO. APL’s current
market share in JP-1 is less than 1% but we believe this number will change significantly for the
better.
 Volumes picking up the pace again: The company’s volumes have started to rebound after a
substantial market share loss of ~3.0% in FY15-16. APL effectively controls ~8.3% of the total
OMC market and has fared well in comparison to other players in 11MCY17 the company has
gained a market share of ~1.1% whereas most other players showed a declining market share trend.
Key Risks to our investment thesis include, 1) any sharp fluctuation in international oil prices, 2) further
devaluation of the Pakistani Rupee, 3) new entrants in the OMC space and 4) delays in above mentioned
and other projects of the company
Price Performance KSE100 vs APL
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 APL.KA
1M 3M 6M 1YR 3YR
APL -16% -22% -27% -29% -8%
KSE-100 -6% -10% -15% -19% 22%
Relative -11% -11% -12% -11% -30%
Stock Performance
Key Data
Upside 33.9%
12M High/Low: PKR 749.4/490.0
EPS(PkR) 47.1 52.2 39.6 46.2 63.9 55.1 59.4 66.4
DPS(PkR) 45.0 47.5 34.5 40.0 42.5 39.0 42.0 46.5
Dividend Yield 8.6% 9.1% 6.6% 7.6% 8.1% 7.5% 8.0% 8.9%
P/E (x) 11.1 10.0 13.2 11.3 8.2 9.5 8.8 7.9
36

Strategy 2018
Fertilizer
Outlook
37

Strategy 2018
Investment Theme - Stable Earnings and High Yields
 Turnaround: The fertilizer sector is undergoing a turnaround of sorts after the companies were
able to sell most of the surplus inventory off that had dampened earnings for the past few
quarters and improved export scenario due to higher international Urea prices. We expect the
sector’s capacity utilization to remain stable in CY18 with a slight increase in offtake expected
thus greatly reducing chances of another inventory buildup.
 Non Continuation of Government subsidies could lead to higher fertilizer prices and
improved cashflows for the companies along with support prices that would encourage farmers
to invest more into their fields thus ensuring fertilizer offtake.
 High payout and attractive dividend yields together with consistent expected future earnings
make fertilizer ideal for investors seeking stable stocks. Fertilizer stocks have averaged a payout
of ~85% in the last 5 years owing to the maturity of the sector and strong cashflow generation.
 Our top pick for the sector is EFERT due to its strong dividend yield at current levels, lower
production costs compared to peers and stable forward earnings.
Key Risks to our investment thesis include, 1) Drop in international urea prices will reduce pricing
power, 2) a drop in government subsidies could dampen fertilizer off-take 3) A disruption of gas
supplies to fertilizer companies may cause production to halt thus decreasing productivity and 4) Any
upwards revision in gas tariffs is expected to adversely impact earnings
Fertilizer
Price Performance KSE100 vs. Fertiliser Sector
Source: Reuters, PSX, Shajar Research
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
KSE-100 Fertilizer Market Cap
CY13 CY14 CY15 CY16 CY17E CY18E CY19E
Local Urea Offtake ( '000 MT) 4,760 4,871 5,076 5,465 5,492 5,657 5,883
Imported Urea Offtake ( '000 MT) 1,071 760 520 30 274 224 116
Local Capacity Utilisation % 76% 78% 81% 87% 88% 90% 94%
Source: NFDC, Shajar Research
1M 3M 6M 1YR 2YR
Fertilizer -4% 9% 8% 11% 36%
KSE-100 -3% -8% -15% -16% 20%
Relative 0% 17% 23% 27% 16%
Sector Performance
FY18F P/E Div Yield
EFERT 9.0 10%
FFC 9.3 10%
FFBL 39.5 1%
FATIMA 8.1 11%
Average 16.5 8%
38

Strategy 2018
Key Developments Fertilizer
Offtake vs. Prices Urea Market Share
Source: NFDC, Shajar Research Source: NFDC, Shajar Research
Fertiliser Usage DAP Market Share
Source: NFDC, Shajar Research Source: NFDC, Company Reports, Shajar Research
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
0
200
400
600
800
1000
1200
1400
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
PkR'000 tons
Urea LHS DAP LHS Urea Prices RHS DAP Prices RHS
65%
20%
15%
Urea DAP NP, CAN, NPK & Others
39%
22%
10%
29%
FFBL EFERT FFC Others
3% 5%
25%
32%
7%
28%
5%
Dawood Hercules Fatima Fertiliser EFERT FFC FFBL Others Imported
39

Strategy 2018
Engro Fertilizers (EFERT)
 Concessionary gas prices on its EnVen plant allow EFERT to be in a more competitive
position compared to peers, with it receiving feed gas at a subsidized rate of USD0.7/mmbtu.
These rates are to continue until at least FY23 for EFERT.
 Market Share: EFERT is expected to aggressively defend market share, since it is the second
largest Urea manufacturer (Market share of 31%) and a market share in the imported DAP
segment of 21%. With it currently operating at ~80% capacity utilization, it can also ramp up
production in case of an increase in demand.
 Import substitution unlikely: With international Urea prices on the uptake as a result of
increased global commodity prices, import substitution is expected to be unlikely in the near-
term.
 High payout and dividend yield (CY18E dividend yield of ~10%) along with stable future
earnings make EFERT an attractive investment at current levels.
Key Risks to our investment thesis include, 1) Drop in international urea prices will reduce value of
imports thus increasing the chance of import substitution, 2) a drop in government subsidies could
dampen fertilizer off-take, 3) Any upwards revision in gas tariffs is expected to adversely impact
earnings and 4) Overutilization of export quota in CY17 might affect export volumes in CY18
1M 3M 6M 1YR 3YR
EFERT -4% 5% 14% -2% -3%
KSE-100 -6% -11% -16% -19% 22%
Relative 1% 16% 30% 17% -25%
Stock Performance
Price Performance KSE100 vs EFERT
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 ENGR.KA
Key Data
Upside 9%
Key Highlights CY13 CY14 CY15 CY16 CY17 CY18E CY19E CY20E
EPS(PkR) 4.1 6.1 11.1 7.0 7.5 6.9 7.1 7.8
DPS(PkR) 0.0 3.0 3.0 2.5 7.0 6.5 6.5 7.0
Dividend Yield 0% 4% 4% 4% 10% 10% 10% 10%
P/E (x) 16.4 11.0 6.1 9.7 9.1 9.8 9.5 8.7
40

Strategy 2018
Auto Assemblers
Outlook
41

Strategy 2018
AutosInvestment Theme - Rocky Roads Lie Ahead
 Auto sales remain buoyant: The total auto industry grew by ~10.8%YoY till 11MCY17 where
major growth was seen in the tractors sales which jumped ~55.4%YoY, passenger cars also
performed well with a sturdy increase of ~20.6%YoY. We expect auto sales to continue on this
upwards trajectory as low interest rates increase overall auto financing in the market while
CPEC remains a top contributor to increased transportation and agriculture of the country thus
increasing trucks, buses and tractor volumes in the forthcoming year.
 Devaluation and rising steel prices pose a big threat: Auto incumbents import a significant
portion of their raw material (~40-50% of the raw material is imported) and at our expectation
of PkR/USD of 115 till FY18 we foresee a slight decrease in margins during the year.
 New entrants, an imminent threat: After AIDP and AIDP-II new entrants are setting up
their assembly lines in the country. This would bring a shift in the regular models seen on the
roads and would significantly increase competition in the Auto space. The main target of these
new players would be the lower end segment (800cc-1000cc) which signals looming problems
for PSMC and imported cars segment in the country.
 Our top picks for the sector are INDU, ATLH due to the strong fundamentals and potential
for earnings growth.
Key Risks to our investment thesis include, 1) any sharp fluctuation in international steel prices, 2)
further devaluation of the Pakistani Rupee, 3) new entrants in the Auto space especially after AIDP-
II and 4) delays in capacity expansions of the companies.
Price Performance KSE-100 vs. Auto Sector
0%
20%
40%
60%
80%
100%
120%
140%
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
KSE-100 AUTOS
1M 3M 6M 1YR
Autos -5% -2% -23% -8%
KSE-100 -3% -8% -15% -16%
Relative -2% 6% -8% 7%
Stock Performance
C/M/FY18F P/E Div. Yield
INDU 9.6 6.8%
PSMC 9.9 1.1%
HCAR 10.5 2.5%
ATLH 14.9 3.3%
Auto Sales (000's) CY13 CY14 CY15 CY16 CY17E CY18E CY19E CY20E
Passenger Car Volumes 138.0 137.2 223.9 206.6 241.6 258.5 289.5 332.9
Tractor Volumes 41.5 34.8 37.2 42.5 66.6 73.3 77.0 80.8
Trucks and Buses Volumes 1.7 2.2 4.0 6.7 6.7 7.4 7.8 8.1
Motorcycle Volumes 754.2 874.8 1,204.8 1,436.0 1,696.3 1,865.9 1,959.2 2,057.1
Source: PAMA, Shajar Research
42

Strategy 2018
AutosKey Developments
Auto Assemblers Market Share % Passenger Cars, LCVs and Jeep Sales (000's)
Source: PAMA, Shajar Research Source: PAMA, Shajar Research
Motorcycles and Passenger Car Sales (000's) Trucks, Buses and Tractor Sales (000's)
Source: PAMA, Shajar Research Source: PAMA, Shajar Research
148.2
42.3
178.7
42.0
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
Passenger Cars (Ex-LCVs and Jeeps) LCVs and Jeeps
11MCY16 11MCY17
6.1
39.3
6.9
61.1
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Trucks and Buses Tractors
11MCY16 11MCY17
1,303.8
190.5
1,552.0
220.7
-
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
1,600.0
1,800.0
Motorcycles Passenger Cars
11MCY16 11MCY17
52.9%30.1%
17.0%
PSMC INDU HCAR
11MCY16 54.2%
25.6%
20.2%
11MCY17
43

Strategy 2018
AutosKey Developments
Auto Sales to thrive going forward
Source: PAMA, Shajar Research
Auto Loans vs Auto Sales
Source: PAMA, SBP, Shajar Research
0
5,000
10,000
15,000
20,000
25,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Auto Sales (RHS) Auto Loans
137.2
874.8
223.9
1,204.8
206.6
1,436.0
241.6
1,696.3
258.5
1,865.9
289.5
1,959.2
332.9
2,057.1
0
500
1,000
1,500
2,000
2,500
Passenger Car Volumes (000's) Motorcycle Volumes (000's)
CY14 CY15 CY16 CY17E CY18E CY19E CY20E
44

Strategy 2018
Indus Motor Company Limited (INDU)
 Optimizing paint shop capacity: INDU’s recent plans to increase production capacity by
4QFY18 which would lead to a total plant capacity of 65,000 units. This would help lessen
burden on the paint shop, which runs on some Saturday’s too to meet the burgeoning demand.
The increased capacity will allow the plant to create an extra ~10,000 units working overtime
and will decrease the lead time.
 New variants to help: The company’s recent shift in sales mix from Corolla (down ~5% in the
sales mix of 11MCY17) to Fortuner and Revo/Hilux (up ~3% and 1% respectively in the same
period) shows growing customer attraction towards high margin vehicles which is a great sign
for the company, alongside this the trading segment has also spiked in FY17 (up ~48% from
FY16)
 Ability to pass on increased RM cost and lucrative payout: INDU has been historically the
best at passing on increased RM cost onto customers. The company’s recent price hike of
PkR60,000 is proof of that. Alongside this the company’s historical dividend payout (~70% in
FY17) has been lucrative and one of the highest amongst competitors in the auto space, we
expect the company to post a similar payout going forward.
Price Performance KSE100 vs INDU
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 INDM.KA
1M 3M 6M 1YR 3YR
INDU -3% -3% -2% 5% 92%
KSE-100 -6% -11% -16% -19% 21%
Relative 3% 8% 13% 24% 71%
Stock Performance
Key Data
Target Price: PKR 2,018.3
Closing Price: PKR 1,680.2
Upside 20.1%
12M High/Low: PKR 2044.3/1580.2
EPS(PkR) 42.7 49.3 115.9 145.7 165.4 174.9 181.2 190.1
DPS(PkR) 25.0 29.5 80.0 100.0 115.0 120.0 125.0 130.0
Dividend Yield 1.5% 1.8% 4.8% 6.0% 6.8% 7.1% 7.4% 7.7%
P/E (x) 39.3 34.1 14.5 11.5 10.2 9.6 9.3 8.8
45

Strategy 2018
Atlas Honda Limited (ATLH)
 Recent Capex and BMR to meet annual demand : In MY17, the company incurred CAPEX
of PkR2bn for capacity expansion and BMR of existing facilities thereby increasing production
capacity from 0.75mn units to 1.35mn units. Additionally, ATLH revealed in its Annual Budget
to invest PkR2.1bn as CAPEX for MY18 which we believe will be used to enhance its
production capability further.
 Planned capacity expansion : The company has planned a Capacity Expansion of
USD100mn in a span of 3 years to spur significant topline growth and allow the company to
capitalize on the demand that would be generated in the upcoming years with the rise in
purchasing power of consumers.
 New models to help target high-end customers: The company recently launched a 150cc
variant called CB150F which was well received by the public. Our channel checks revealed that
the 150cc model was selling like wildfire and the company had to halt booking for the variant.
 Unparalleled sales growth: The company’s sales volumes grew by a whopping 20.5%YoY
according to 11MCY17 numbers. We expect this upwards trajectory in volumes to remain in
CY18.
1M 3M 6M 1YR 3YR
ATLH -5% -10% -15% -15% 59%
KSE-100 -1% -7% -13% -15% 25%
Relative -4% -4% -2% 0% 34%
Stock Performance
Price Performance KSE100 vs ATLH
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 ATHO.KA
Key Data
Upside 28.8%
12M High/Low: PKR 653.5/480.0
Key Highlights MY13 MY14 MY15 MY16 MY17 MY18E MY19E MY20E
EPS(PkR) 15.5 19.4 22.7 29.0 36.3 47.0 53.5 59.2
DPS(PkR) 7.5 10.0 12.0 14.5 18.5 24.0 27.0 30.0
Dividend Yield 1.3% 1.8% 2.1% 2.6% 3.3% 4.2% 4.8% 5.3%
P/E (x) 36.4 29.2 24.9 19.5 15.6 12.0 10.6 9.6
46

Strategy 2018
Power
Outlook
47

Strategy 2018
Investment Theme - To FO or not to FO?
 Ambitious expansion: The power sector in Pakistan is currently undergoing an ambitious
turnaround where it is set to add a further 12,600MW of generation capacity by FY21. The bulk
of this will be generated from fossil fuels and Hydel plants along with smaller Nuclear, Wind
and Solar plants. These newer, more efficient plants are likely to have a higher position on the
merit order list, hence would lead to lower capacity utilization for existing plants thus reducing
efficiency and increasing costs.
 The recent cutback on FO based power has been a cause of concern for investors since
several plants including NCPL, NPL, PKGP, LPL and HUBC’s base plant rely on FO for power
generation. The PPA obliges the government to make capacity payments regardless of the plant
being operational, however there are concerns that dividend might be curtailed in case the
government fails to making timely payments.
 Further Rupee devaluation is expected to have a positive impact on the Power sector due to
their dollarized returns. A further devaluation of ~5% is expected during CY18 which is
expected to positively impact the IPPs’ returns.
 Refineries are dependent on IPPs since 25% - 30% of their output is FO, with IPPs
consuming 85% - 90% of all FO utilized in the country. Some of the more efficient FO
operated plants are expected to be operational to help offload FO coming out of these
refineries; however, in case FO exports become feasible GoP could continue using minimal FO
without having to allow its use domestically.
 Our top pick for the sector are NPL, LPL and PKGP due to their strong dividend yield and
HUBC because of its expansion that would move it away from FO to coal.
Key Risks to our investment thesis include, 1) Higher crude prices, 2) Inadequate Transmission and
Distribution capacity and 3) Delay in capacity payments leading to constrained cashflows
Power
1M 3M 6M 1YR
Power -3% -20% 12% -29%
KSE-100 1% -5% -13% -15%
Relative -4% -16% 25% -14%
Stock Performance
Price Performance KSE-100 vs. Power Sector
-30%
-20%
-10%
0%
10%
20%
30%
12/1/2016
1/1/2017
2/1/2017
3/1/2017
4/1/2017
5/1/2017
6/1/2017
7/1/2017
8/1/2017
9/1/2017
10/1/2017
11/1/2017
12/1/2017
KSE-100 POWER
FY18F P/E Div Yield
HUBC 9.3 8%
KAPCO 4.8 18%
NPL 4.1 10%
NCPL 4.2 7%
LPL 5.2 13%
PKGP 4.7 14%
Average 5.4 12%
48

Strategy 2018
Ferozsons Laboratories Limited (FEROZ)
 New Product launches: The company is revamping its HCV product portfolio by launching
lower cost products such as Daklana that will bring down treatment cost by around 50% along
with plans to launch Epclusa, a pan-genotypic agent for treatment of HCV pending DRAP
approval. The company is also launching products in the Erythropoeitin portfolio for Chronic
Kidney through its subsidiary, BF Biosciences.
 Capacity Expansion: The company has increased production capacity to cater to rising
demand. New lines are under construction to add production in the topical gels, lotion and
creams segments of around 1000kg that is expected to come online by 4QFY18. These are
expected to help topline recovery from the setback in the Gilead product portfolio last year.
Further enhancements are expected to the product portfolio moving forward.
 Institutional Business: The company recently signed a MoU with Punjab Government to
supply medical devices and drug treatments for HCV. The company has also managed to secure
orders for import of 60 portable ultrasound machines from GE Healthcare that is expected to
boost earnings.
Key Risks to our investment thesis include, 1) Rupee Devaluation 2) Sales tax increase on raw
materials could affect margins, and 3) counterfeit drugs pose a risk to the sales and brand value of
the company Price Performance KSE100 vs FEROZ
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 FERO.KA
1M 3M 6M 1YR 3YR
FEROZ -20% -22% -40% -72% -62%
KSE-100 -6% -11% -16% -19% 22%
Relative -14% -12% -24% -52% -85%
Stock Performance
EPS(PkR) 13.5 13.8 24.8 69.7 13.0 10.6 15.8 24.2
DPS(PkR) 7.0 12.0 19.0 22.0 7.0 4.2 6.3 9.7
Dividend Yield 3% 5% 8% 10% 3% 2% 3% 4%
P/E (x) 16.6 16.3 9.1 3.2 17.3 21.2 14.2 9.3
Key Data
Upside 76%
50

Strategy 2018
Abbott Lab (Pakistan) Ltd (ABOT)
 Diversification: The company has a diversified product portfolio with presence in Pharma,
Nutrition, Diagnostics and Diabetes care segments.
 Refocus into consumer segment: Pharma as a whole is gradually transitioning towards a
consumer play since players are refocusing into Over The Counter products. ABOT is already
an industry leader in this regard with ~30% market share in the Nutrition segment.
 Stable Margins: ABOT’s business cycle is in a mature phase therefore its margins in the last 5
years have remained relatively stable as a result of well established brands in both the pharma
and nutrition segments. With Pharma prices linked to inflation moving forward, ABOT is
expected to have minimal sales or profitability risk.
 New Products: ABOT launched several new products in CY16 to further strengthen their
respiratory, gastroenterology and diagnostic devices portfolio, these are expected to continue to
contribute to sales growth.
Key Risks to our investment thesis include, 1) Rupee Devaluation 2) Sales tax increase on raw
materials could affect margins, and 3) this scrip is relatively illiquid which could make exit/entry
cumbersome.
1M 3M 6M 1YR 3YR
ABOT -4% -17% -23% -28% -11%
KSE-100 -6% -11% -16% -19% 22%
Relative 2% -7% -7% -9% -33%
Stock Performance
Price Performance KSE100 vs ABOT
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 ABBT.KA
Key Highlights CY13 CY14 CY15 CY16 CY17E CY18E CY19E CY20E
EPS(PkR) 25.8 28.8 36.6 41.1 41.2 47.0 55.0 62.6
DPS(PkR) 7.0 7.8 30.0 40.0 40.0 45.0 54.0 60.0
Dividend Yield 1% 1% 4% 6% 6% 7% 8% 9%
P/E (x) 25.9 23.2 18.2 16.3 16.2 14.2 12.1 10.7
Key Data
Upside 35%
51

Strategy 2018
Shabbir Tiles and Ceramics Limited (STCL)
 Anti-Dumping duty: With the final imposition of Anti-Dumping duty on Chinese tiles, STCL
is expected to have improved pricing power along with volumetric growth.
 Capex: STCL is undertaking BMR at its plant with a planned capex of PkR1,250mn of which it
has already incurred ~PkR580mn; this is expected to improve margins as well as allow the
company to expand its product portfolio.
 Pent up demand: With record cement dispatches in the preceding years, STCL’s volumes have
lagged considerably. However with a more competitive outlook, STCL is expected to reap the
full benefits of the pent up demand for local tiles.
 STCL is one of our conviction ideas in the construction space due to the company’s
turnaround status as a result of a more favorable business environment and diversification of
business as it is investing in improving its product line.
Key Risks to our investment thesis include, 1) Influx of imported tile from markets other than
China, 2) The moratorium on building permits for high rises might adversely affect demand for tiles
and 3) Hike in gas tariff: With Fuel and Power being the major cost of STCL, an upwards revision in
gas prices can hurt STCL’s margins going forward.
1M 3M 6M 1YR 3YR
STCL -15% 2% -15% 21% 61%
KSE-100 -6% -10% -15% -19% 22%
Relative -10% 13% 1% 40% 39%
Stock Performance
Price Performance KSE100 vs STCL
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Nov-17
Dec-17
KSE100 SHAB.KA
Key Data
Upside 63%
EPS(PkR) 0.34 (0.11) (0.26) (0.49) (0.63) 0.89 1.58 1.91
P/E (x) 42.7 NA NA NA NA 16.6 9.3 7.7
P/S (x) 0.7 0.7 0.8 0.7 0.7 0.6 0.5 0.5
EV/EBITDA 7.2 8.9 10.2 18.8 22.9 5.4 4.3 3.7
52

Strategy 2018
Valuation Summary
53
Earnings per share (EPS) Earnings Growth Dividend Yield PE PBV
2017* 2018F 2019F 2017* 2018F 2019F 2017* 2018F 2019F 2017* 2018F 2019F 2017* 2018F 2019F
Banks
MCB Overweight 210 Dec 21 23 25 12% 10% 9% 8% 8% 9% 10.0 9.1 8.4 1.5 1.4 1.3
UBL Overweight 190 Dec 20.4 24.5 26.2 -10% 20% 7% 7% 7% 8% 9.3 7.8 7.3 1.4 1.3 1.2
HBL Marketweight 171 Dec 7.5 22 26 -68% 193% 18% 4% 0% 7% 22.8 7.8 6.6 1.4 1.1 1.0
E&Ps
OGDC Overweight 162.79 Jun 14.8 18.2 19.4 6% 23% 7% 4% 5% 6% 11.0 8.9 8.4 1.3 1.1 1.1
POL Marketweight 594.26 Jun 40.9 55.0 61.0 -4% 34% 11% 7% 8% 9% 14.5 10.8 9.7 4.6 4.3 4.1
PPL Overweight 205.91 Jun 18.1 19 21.2 122% 5% 12% 4% 5% 6% 11.4 10.8 9.7 1.8 1.7 1.5
Cements
DGKC Overweight 134 Jun 18.2 17.5 17.2 -9% -4% -2% 5% 5% 4% 7.6 7.8 7.8 0.5 0.5 0.5
KOHC Overweight 142 Jun 22.94 21.3 19.8 -20% -7% -7% 10% 9% 8% 6.7 7.2 7.2 1.4 1.3 1.2
CHCC Overweight 111 Jun 11.08 12.44 9.93 39% 12% -20% 4% 5% 4% 10.0 8.9 11.2 1.9 1.7 1.5
LUCK Overweight 517 Jun 42.3 38.1 33.4 6% -10% -12% 3% 3% 3% 12.2 13.6 15.5 2.1 1.9 1.8
PIOC Overweight 63 Jun 12.84 9.66 8.53 16% -25% -12% 9% 6% 5% 4.9 6.5 7.4 1.5 1.3 1.2
FCCL Marketweight 25 Jun 1.89 1.97 2.58 -51% 4% 31% 4% 8% 8% 13.2 12.7 9.7 1.8 1.7 1.6
OMCs
PSO Overweight 293 Jun 55.9 48.0 43.1 74% -14% -10% 9% 7% 9% 5.2 6.1 6.8 0.9 0.8 0.8
HASCOL Overweight 247 Dec 11.5 18.9 24.4 15% 64% 29% 2% 3% 4% 21.5 13.1 10.1 3.0 2.6 2.3
APL Overweight 523 Jun 63.9 55.1 59.4 38% -14% 8% 8% 7% 8% 8.2 9.5 8.8 2.7 2.4 2.2
Fertilizer
EFERT Marketweight 68 Dec 7.5 6.9 7.1 11% -8% 3% 10% 10% 10% 9.0 9.8 9.5 2.2 2.1 2.1
Autos
INDU Overweight 1680 Jun 165.4 174.9 181.2 13% 6% 4% 7% 7% 7% 10.2 9.6 9.3 4.2 3.7 3.3
ATLH Overweight 566 Mar 36.3 47.0 53.5 25% 30% 14% 3% 4% 5% 15.6 12.0 10.6 4.4 3.7 3.2
Power
HUBC Overweight 91 Jun 8.29 9.5 10.7 -17% 15% 13% 8% 8% 8% 11.0 9.6 8.5 2.99 2.8 2.6
NPL Overweight 34 Jun 8.15 7.8 8.2 1% -4% 5% 18% 9% 10% 4.2 4.4 4.1 0.8 0.7 0.6
PKGP Overweight 22.13 Dec 3.3 3.9 4.8 137% 18% 23% 9% 11% 14% 6.7 5.7 4.6 0.5 0.45 0.4
LPL Overweight 22.53 Dec 2.65 3.4 3.9 1% 28% 15% 9% 11% 13% 8.5 6.6 5.8 0.65 0.6 0.5
Alpha Plays
ABOT Overweight 697.61 Dec 41.2 47.0 55.0 0% 14% 17% 6% 6% 8% 16.6 14.6 12.5 4.6 4.6 4.7
FEROZ Overweight 203.81 Jun 13.0 10.6 15.8 -81% -18% 49% 3% 2% 3% 16.8 20.6 13.9 1.3 1.2 1.2
STCL Overweight 15 Jun -0.63 0.89 1.58 29% -241% 78% NA NA NA NA 16.6 9.3 2.0 1.8 1.5
Source: Shajar Research *Expected Values fo Dec. Year End Companies
Symbol Stance
Current
Price (PkR)
Year End

Strategy 2018
Our Team
Rehan Ateeq
Chief Executive Officer
Equity Research Team
Suleman Rafiq Maniya
Head of Research
Ext: 400
Email: suleman.maniya@shajarcapital.com
Naima Ali
Research Analyst/Economist
Ext: 404
Email: naima.ali@shajarcapital.com
Danial Kodvavi
Research Analyst
Ext: 402
Email: danial.kodvavi@shajarcapital.com
Ahmed Bilal
Research Analyst
Ext: 401
Email: ahmed.bilal@shajarcapital.com
Raj Chouhan
Database Officer
Ext: 408
Email: raj.chouhan@shajarcapital.com
Corporate Office: 8th Floor Bahria Complex III, M.T Khan Road, Karachi, Pakistan.
Tel: +(92 21) 36490023 Email: research@shajarcapital.com Web: www.shajarcapital.com
Shahrukh Naqvi
Director Equity Sales
Ext: 250
Email: shahrukh.naqvi@shajarcapital.com
Equity Sales Team
Fahad Raza
Senior Trader
Ext: 256
Email: fahad.raza@shajarcapital.com
Samad Tariq
Senior Trader
Ext: 251
Email: samad.tariq@shajarcapital.com
Faisal Kapadia
Senior Trader
Ext: 257
Email: faisal.kapadia@shajarcapital.com
Arshad Raza
Trader
Ext: 260
Email: arshad@shajarcapital.com
54

Strategy 2018
Analyst Certification
The Research Analyst(s), if any, denoted by AC on the cover of this report, certifies that (1) the views expressed in this report are unbiased and independent opinions of the Research Analyst(s) which accurately reflect
his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Furthermore, he/she does not hold any beneficial holding in the scrip. Also, research analyst(s) or his/her close relatives have not traded in the subject security in the past 7 days and will not trade in next 5 days.
Disclaimer
This research report is for information purposes only and does not constitute nor is it intended as an offer or solicitation for the purchase or sale of securities or other financial instruments. Neither the information
contained in this research report nor any future information made available with the subject matter contained herein will form the basis of any contract. Information and opinions contained herein have been compiled or
arrived at by Shajar Capital Pakistan Private Limited (“Shajar Capital”) from publicly available information and sources that are believed to be reliable. Whilst every care has been taken in preparing this research report, no
research analyst, director, officer, employee, agent or adviser of any member of Shajar Capital gives or makes any representation, warranty or undertaking, whether express or implied, and accepts no responsibility or
liability as to the reliability, accuracy or completeness of the information set out in this research report. Any responsibility or liability for any information contained herein is expressly disclaimed. All information contained
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stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. Furthermore, past performance is not
indicative of future results.
The investments and strategies discussed herein may not be suitable for all investors or any particular class of investor. Investors should make their own investment decisions using their own independent advisors as they
believe necessary and based upon their specific financial situations and investment objectives when investing. Investors should consult their independent advisors if they have any doubts as to the applicability to their
business or investment objectives of the information and the strategies discussed herein. This research report is being furnished to certain persons as permitted by applicable law, and accordingly may not be reproduced or
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effect transactions in the securities or financial instruments referred herein or in the investments of any issuers discussed herein, may engage in securities transactions in a manner inconsistent with the research contained in
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report or may perform any other investment banking or other services for, or solicit investment banking or other business from any company mentioned in this research report. By accepting this research report, you agree
to be bound by the foregoing limitations.
Shajar Capital Research Policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer/company prior to the publication of a research report
containing such rating, recommendation or investment thesis.
Rating System
We uses a 3-tier rating system i.e. Overweight, Market weight and Underweight, based on the level of expected return (New rating system effective Jun 23, 2016). Ratings are frequently updated and can be changed because
of a movement in the stock's price, revision in the analyst's estimate of the stock's fair value, a change in the analyst's assessment of a company's business risk, or a combination of any of these factors. In addition, research
reports contain information carrying the analyst’s views and investors should carefully read the entire research report and not infer its contents from the rating ascribed by the analyst(s). In any case, ratings or research
should not be used or relied upon as investment advice. An investor’s decision to buy, sell or hold a stock should depend on individual circumstances (such as the investors existing holdings or investment objectives) and
other considerations. Bearing in mind the prevailing low interest rate environment, the revised ratings are tabled below:
Time Horizon
Time horizon of the Shajar Universe companies is generally the year-end financial reporting period of the company (unless otherwise mentioned).
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Shajar Capital is fully committed to disseminate research to all clients (without any preference, prejudice or biasness) in a timely manner through either physical or electronic distribution such as mail, fax and/or email.
Nevertheless, not all clients may receive the material at the same time.
Valuation Methodology
To arrive at our Target Price, we using following valuation techniques:
 Dividend discount Model
 Discount cash flow Model
 Assets based Approach
 FCFF (Free cash flow for the firm)
 Comparable Method (P/E, P/BV, P/S)
 Sum of Parts Valuation
Rating Definitions Old Rating Definitions*
Overweight >10% Total return Buy =+15% Potential
Marketweight +/-10% Total return Hold =-5% to +15% Potential
Underweight <-10% Total return Sell More than 5% down side
55

Pakistan Strategy 2018 - To New Beginnings

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