DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 9 February 2017 Asia Pacific/Pakistan Equity Research Strategy Pakistan Market Strategy Research Analysts Farhan Rizvi, CFA 65 6212 3036 [email protected]Fahd Niaz, CFA 65 6212 3035 [email protected]STRATEGY Re-rating done; time to track earnings growth Figure 1: P/E has risen to a nine-year high fueled by local liquidity Source: MSCI, NCCPL, Credit Suisse estimates ■ Breather ahead as index flirts with peak levels. Domestic liquidity has nudged up the index by another 4% YTD (following a 46% rally in 2016). With a 24% re-rating of P/E multiples (to 10.8x) already in the bag since the EM upgrade decision and the discount to MSCI EM Asia narrowing to 14%, we think market returns from here on should track EPS growth (2017E: +14%), rather than benefiting from multiple expansion. We expect some correction in the near term; however, with the EM inclusion date around the corner (estimated passive flows of US$220 mn), we suggest buying on dips. ■ Investment-led growth drivers intact. Infrastructure projects under both the China-Pakistan Economic Corridor (CPEC) and public sector development schemes are in full swing. Despite some slippages, we believe 3,500-4,000 MW (18-20% of existing capacity) will likely be connected to the grid before the 2018 elections. Corporate mood has been upbeat with private sector credit growth touching 14% YoY and greenfield/M&A activities under way in consumer, energy, cement and auto sectors. We expect GDP growth to exceed 5% this year; however, we see risks emerging on the C/A front (from a deteriorating trade deficit and slowdown in remittances). ■ Maintain selective preference for banks and cement. We set a Dec 2017 index target of ~57,000, implying 19% total return. Market liquidity should also get a boost from launch of new derivative products in 2H17 with Jan volumes already touching nine-year highs. Our top picks are HBL, UBL, DGKC and LUCK, which are pegged to the CPEC-led growth cycle. We have lowered estimates for HBL, UBL and DGKC by 1-11% but raised TPs by 5-20%. Key risks include deterioration in political and security environment, which could curtail investment activity, and higher oil prices. 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 MSCI Pak P/E (x) MSCI Pak P/E (x) LHS MSCI announces upgrade P/E has re-rated 24% (125) 47 59 (50) 18 9 20 22 (339) 57 303 (119) (88) 3 (41) 226 (400) (300) (200) (100) 0 100 200 300 400 FII's Retail Funds Banks Companies Others Broker prop books NBFC Net buy/(sell) US$mn 2017 YTD 2016
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Income Statement (PRs mn) 12/15A 12/16E 12/17E 12/18E
Interest income 144,232 141,739 156,083 179,394 Interest expense 66,064 60,918 67,636 77,643 Net interest income 78,169 80,820 88,446 101,750 Fee and commission income 17,089 20,114 23,593 27,678 Trading income 2,749 1,938 2,361 2,642 Total non-interest income 22,060 24,161 28,316 32,958 Total income 100,229 104,981 116,762 134,708
Personal expense 23,586 25,873 28,715 31,861 Other expenses 26,127 27,938 30,879 34,401 Total expenses 49,713 53,811 59,594 66,262 Pre-provision profit 50,581 51,240 57,248 68,538 Loan loss provisions 5,136 3,194 2,810 2,515 Operating profit 45,445 48,047 54,438 66,024 Other non-operating inc./(exp.) 11,443 3,888 3,756 3,306 Pre-tax profit 60,286 55,662 62,106 73,438 Taxes 25,185 21,835 21,753 25,713 Net profit before minorities 35,102 33,827 40,354 47,725 Reported net profit 34,827 33,596 40,079 47,399 Net profit (Credit Suisse) 34,827 33,596 40,079 47,399
Habib Bank is Pakistan’s largest commercial bank with more than US$19 bn in assets worldwide. The bank is engaged in all major business segments namely, retail, commercial, consumer, investment banking, treasury and Islamic banking.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (PRs) (from 500.00) 510.00
Historical peak P/B of 3.5x and 50 bp higher policy rates
Our Grey Sky Scenario (PRs) (from 72.00) 80.00
Historical trough P/B of 0.5x and 50 bp lower policy rates
Share price performance
The price relative chart measures performance against the KARACHI SE 100
INDEX which closed at 49,874.96 on 08-Feb-2017
On 08-Feb-2017 the spot exchange rate was PRs104.67/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates
9 February 2017
Pakistan Market Strategy 24
Asia Pacific/Pakistan Regional Banks
United Bank Limited (UBL.KA / UBL PA) Rating OUTPERFORM Price (08-Feb-17, PRs) 241.59 Target price (PRs) (from 230.00) 276.00 Upside/downside (%) 14.2 Mkt cap (PRs/US$ mn) 295,750/ 2,826 Number of shares (mn) 1,224 Free float (%) 39.0 52-wk price range 256.35-149.08 ADTO-6M (US$ mn) 1.9 Target price is for 12 months.
■ Credit offtake on the rise. UBL has also demonstrated a willingness to participate in the large syndicated infrastructure and energy financing, reflected by its commitments to motorways and IPP projects. Given acceleration in drawdowns on existing commitments starting 4Q16 and financial closure on some prior commitment projects, the outlook for credit growth remains positive. Moreover, after a long hiatus, UBL is looking to re-focus on SMEs, given increasing opportunities amid more attractive financing rates. These initiatives should help drive a 14% credit CAGR over 2017-19.
■ Margins to rise from 2H17 on higher rates. UBL’s active treasury management (high proportion of long-duration PIB bonds in the investment portfolio) has ensured superior domestic margins than peer banks. While this benefit will likely be diluted in 2017 against the backdrop of continued maturities in the PIB portfolio, margins could see an uptick in 2H17 driven by higher interest rates and better spreads on infra and energy loans. Higher loan growth domestically will also ensure better margins on a blended basis.
■ Risks from GCC largely contained. UBL international operations performed admirably in 2016 despite the challenging environment in the GCC region due to higher exposure in less oil-sensitive UAE and better risk management. The bank plans to maintain its focus on higher-quality credit and fixed income exposure with the Financial Institution Group also playing an important role in enhancing trade flows and revenues. UBL has significantly reduced its exposure to Yemen and remains comfortable on its asset quality outlook for the broader GCC.
■ Earnings growth to recover in 2017E. We expect EPS growth to recover sharply in 2017 to 12% (2016: 6%) with a three-year CAGR of 12%, led by improving margins from 2H17 and a recovery in fee income growth amid rising trade flows and syndicate financing. We tweak estimates by 2% and raise TP by 20% to PRs276 as we roll-forward our valuation to 2017E. Despite outperforming by 7% in 2016, UBL still trades at an attractive 2017E P/B of 1.85x (10% discount to historical average).
Share price performance
The price relative chart measures performance against the
Net interest margin (%) 5.29 4.33 4.20 4.17 Fee income (PKR mn) 12,203 12,953 14,244 16,375 Provision for non performing loans (PKR mn)
3,299 1,324 2,156 2,175 - - - - - - - -
Income Statement (PRs mn) 12/15A 12/16E 12/17E 12/18E
Interest income 94,353 96,580 108,110 120,483 Interest expense 38,511 41,443 47,638 53,269 Net interest income 55,842 55,137 60,473 67,213 Fee and commission income 12,203 12,953 14,244 16,375 Trading income 2,271 2,151 2,510 2,963 Total non-interest income 18,566 18,752 20,647 23,530 Total income 74,407 73,889 81,120 90,743
Personal expense 12,013 12,763 13,437 14,106 Other expenses 19,930 21,121 22,832 24,817 Total expenses 31,944 33,883 36,269 38,922 Pre-provision profit 42,647 40,206 45,080 52,088 Loan loss provisions 3,299 1,324 2,156 2,175 Operating profit 39,348 38,882 42,924 49,913 Other non-operating inc./(exp.) 2,826 6,040 4,229 3,246 Pre-tax profit 42,175 44,923 47,153 53,159 Taxes 16,448 17,623 16,444 18,428 Net profit before minorities 25,727 27,300 30,710 34,731 Reported net profit 25,727 27,300 30,710 34,731 Net profit (Credit Suisse) 25,727 27,300 30,710 34,731
United Bank Limited is a Pakistan-based company. The company is a banking company engaged in commercial banking and related services. It has 1,123 branches, including six Islamic banking branches, one branch in Karachi Export Processing Zone.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (PRs) (from 390.00) 480.00
100 bp higher policy rates and peak P/B multiple of 3.8x
Our Grey Sky Scenario (PRs) 78.00
100 bp lower policy rates and trough P/B multiple of 0.6x
Share price performance
The price relative chart measures performance against the KARACHI SE 100
INDEX which closed at 49,874.96 on 08-Feb-2017
On 08-Feb-2017 the spot exchange rate was PRs104.67/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates
9 February 2017
Pakistan Market Strategy 26
Asia Pacific/Pakistan Building Materials & Construction
DG Khan Cement Co Ltd (DGKH.KA / DGKC PA) Rating OUTPERFORM Price (08-Feb-17, PRs) 233.69 Target price (PRs) (from 275.00) 290.00 Upside/downside (%) 24.1 Mkt cap (PRs/US$ mn) 102,384 / 978.16 Enterprise value (PRs mn) 86,172 Number of shares (mn) 438.12 Free float (%) 40.0 52-wk price range (PRs) 245-149 ADTO-6M (US$ mn) 5.1 Target price is for 12 months.
■ Domestic demand momentum to continue. Domestic demand continues to remain robust, led by rising private sector construction activity in major cities and higher government infra spending. We expect domestic demand to continue to grow at a three-year (FY17-19E) CAGR of 13% helping capacity utilisation to rise to 95% by FY18, which should make it comfortable to absorb 28% of capacity additions by FY19 and keep price arrangement intact in the longer term. DGKC could also benefit from the sizeable capacity addition (~60%), which should ensure FY16-19 domestic demand CAGR of 14%.
■ Margins to remain upbeat despite rising coal prices. Despite the rise in international coal prices (+42% since July 2016), margins for DGKC are expected to remain upbeat (45% in FY17E), led by a shift towards higher-margin domestic offtake and an efficient energy mix. Robust domestic demand and recent price hikes also provide confidence on the continuity of the price arrangement.
■ Expansions to provide longer-term growth. The 2.7 mtpa (US$200 mn) South expansion is progressing well and management remains confident of a 4Q FY18 target Commercial Operations Date (COD), in time to avail the five-year tax holiday. Moreover, DGKC is working on the 2.2 mtpa brownfield expansion in the North, which is expected to achieve COD in FY20. These expansions should ensure sustained medium- to long-term growth.
■ Attractive valuation. Despite the recent run-up (+27% over 3M), DGKC trades at an undemanding adjusted FY17E EV/EBITDA of 6.0x (28% regional discount). Given the favourable dynamics, we expect margins and profits to remain upbeat with a 15% earnings CAGR over FY17-19E. We have cut FY17-19E EPS by 7-11% to incorporate higher coal price and distribution cost. We, however, increase our SOTP-based TP to PRs290 (from PRs275) as we roll forward our cement-business DCF value to FY18E and account for a sharp increase in its listed portfolio value. Breakdown in the price arrangement, volatility in coal prices, delays with South expansion, and a slowdown in infra spending remain the key risks.
Share price performance
The price relative chart measures performance against the
Net debt/equity (%) (0.0) 9.3 14.8 11.0 Net debt/EBITDA (x) (0.00) 0.49 0.73 0.50
Company Background
DG Khan Cement is a leading cement producer in Pakistan with an installed capacity of 4.4 mn tpa. The company has two plants located in Deri Ghazi Khan and Chakwal and also holds a strategic 9% stake in MCB Bank being part of the Mansha Group.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (PRs) (from 315.00) 330.00
Peak EV/EBITDA multiple of 9.0x
Our Grey Sky Scenario (PRs) (from 130.00) 145.00
Trough EV/EBITDA multiple of 3.0x
Share price performance
The price relative chart measures performance against the KARACHI SE 100
INDEX which closed at 49,874.96 on 08-Feb-2017
On 08-Feb-2017 the spot exchange rate was PRs104.67/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates
9 February 2017
Pakistan Market Strategy 28
Asia Pacific/Pakistan Cement
Lucky Cement Co Ltd (LUKC.KA / LUCK PA) Rating OUTPERFORM Price (08-Feb-17, PRs) 854.44 Target price (PRs) 970.00 Upside/downside (%) 13.5 Mkt cap (PRs/US$ mn) 276,305 / 2,638 Enterprise value (PRs mn) 258,181 Number of shares (mn) 323.38 Free float (%) 45.0 52-wk price range (PRs) 889-449 ADTO-6M (US$ mn) 2.2 Target price is for 12 months.
■ Positive demand momentum to continue. Domestic demand has continued to remain strong (+11% in 6M FY17), led by rising private sector construction activity and higher government infra spending. Given likely acceleration in CPEC projects and more aggressive government spending in the run up to the 2018 general elections, demand momentum is likely to continue. We expect domestic demand to continue to post a three-year (FY17-19E) CAGR of 13%, helping capacity utilisation to rise to 95% by FY18, and comfortably absorb 28% of capacity additions by FY19.
■ Diversified cement expansions to provide sustained growth. Diversified
cement expansions should ensure sustained long-term growth. The 1.2 mtpa Congo plant started commercial production in December, while Lucky is also doubling capacity at its Iraq grinding facility. Moreover, 1.3 mtpa Karachi expansion is on track to achieve commercial operations in 1Q18. Lucky has not given up on the 2.3 mtpa greenfield expansion in Punjab and is seeking government approvals with a revised financial closure target of June 2017.
■ Coal IPP and auto diversification highlight growth vision. Lucky’s unique
strength has been its successful diversification, such as cement ventures in Iraq and Congo or the ICI acquisition locally. The company plans to continue its diversified growth strategy, led by a 660 MW Coal IPP (targeted financial closure May 2017) and the recent agreement with Kia Motors to set up a US$200 mn auto manufacturing and distribution facility in the next two years.
■ Valuation still at a discount despite superior growth pedigree. Despite rallying strongly (+21% over three months) and outperforming the market by 5%, Lucky remains attractively valued, trading at an FY18E adjusted EV/EBITDA of 7.3x (a 14% discount to the region) despite EBITDA margins nearly twice the regional average. We also see potential value from a US$115 mn automobile investment in Kia (not incorporated in our numbers). Breakdown in price arrangement, volatility in coal prices and pullback in development spending and private sector real estate activity are key risks.
Share price performance
The price relative chart measures performance against the
Net debt/equity (%) (38.7) (15.3) (7.1) (12.9) Net debt/EBITDA (x) (1.26) (0.52) (0.24) (0.45)
Company Background
Lucky is the second largest cement producer in Pakistan with an installed capacity of 7.6 mtpa with two plants located at Pezu and Karachi. It also has a JV for 0.9 mtpa grinding facility in Iraq and a 1 mtpa plant under construction in Congo.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (PRs) 1,080
Peak target EV/EBITDA multiple of 7.7x for FY18E and 2% higher domestic demand growth
Our Grey Sky Scenario (PRs) 580.00
Trough EV/EBITDA multiple of 2.4x and 40% discount on portfolio value
Share price performance
The price relative chart measures performance against the KARACHI SE 100
INDEX which closed at 49,874.96 on 08-Feb-2017
On 08-Feb-2017 the spot exchange rate was PRs104.67/US$1
Source: Company data, Thomson Reuters, Credit Suisse estimates
9 February 2017
Pakistan Market Strategy 30
Companies Mentioned (Price as of 08-Feb-2017) Anhui Conch Cement Co. Ltd. (0914.HK, HK$25.8) Arcelik (ARCLK.IS, TL21.96) Bank Alfalah (BAFL.KA, PRs42.49) DG Khan Cement Co Ltd (DGKH.KA, PRs233.69, OUTPERFORM, TP PRs290.0) Dewan Cement (DECE.KA, PRs34.14) Engro Corporation Ltd (EGCH.KA, PRs371.03) Engro Fertilizer (ENGR.KA, PRs69.68) Engro Foods (ENFL.KA, PRs203.76) Fatima Fertilizer Co Ltd (FATF.KA, PRs39.51) Fauji Fert Bin Qasim Ltd. (JORD.KA, PRs52.21) Fauji Fertilizer Company Limited (FAUF.KA, PRs112.46) Ghandhara Nissan (GHLT.KA, PRs351.85) Habib Bank Limited (HBL.KA, PRs266.88, OUTPERFORM, TP PRs305.0) Honda Atlas Cars (HATC.KA, PRs787.41) Hub Power Company (HPWR.KA, PRs142.96) Hyundai Motor Company (005380.KS, W139,000) Indus Motor Company (INDM.KA, PRs1727.45) KAPCO (KAPCO.KA, PRs80.93) Kia Motors (000270.KS, W36,800) Lucky Cement Co Ltd (LUKC.KA, PRs854.44, OUTPERFORM, TP PRs970.0) MCB Bank Limited (MCB.KA, PRs230.98) Maple Leaf Cmt (MPLF.KA, PRs134.06) National Bank of Pakistan (NBPK.KA, PRs78.58) Nishat Mills (NISM.KA, PRs181.37) Oil & Gas Development Company (OGDC.KA, PRs157.51) Pak Elektron (PKEL.KA, PRs86.42) Pak Suzuki Motors (PKSU.KA, PRs714.82) Pakistan Oilfields Ltd (PKOL.KA, PRs498.08) Pakistan Petroleum Limited (PPL.KA, PRs179.63) Pakistan State Oil (PSO.KA, PRs481.14) Pakistan Telecommunication Co Ltd (PTCA.KA, PRs18.41) Renault (RENA.PA, €83.6) The Coca-Cola Company (KO.N, $42.02) United Bank Limited (UBL.KA, PRs241.59, OUTPERFORM, TP PRs276.0)
Disclosure Appendix
Analyst Certification Farhan Rizvi, CFA, and Fahd Niaz, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for DG Khan Cement Co Ltd (DGKH.KA)
DGKH.KA Closing Price Target Price
Date (PRs) (PRs) Rating
09-Dec-14 102.34 124.00 O
20-Jan-15 123.82 148.00
27-Apr-15 137.62 158.00
22-Sep-15 138.77 175.00
04-Feb-16 158.09 220.00
03-Aug-16 211.84 275.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
9 February 2017
Pakistan Market Strategy 31
3-Year Price and Rating History for Habib Bank Limited (HBL.KA)
HBL.KA Closing Price Target Price
Date (PRs) (PRs) Rating
18-Aug-14 187.65 260.00 O *
30-Oct-14 214.60 265.00
16-Jan-15 215.70 R
07-Jul-15 212.91 250.00 O
24-Aug-15 208.99 265.00
07-Mar-16 191.37 260.00
25-Apr-16 172.82 255.00
23-Aug-16 218.98 252.00
24-Oct-16 226.36 263.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
3-Year Price and Rating History for Hyundai Motor Company (005380.KS)
005380.KS Closing Price Target Price
Date (W) (W) Rating
24-Apr-14 242,000 294,000 O
24-Jul-14 229,000 287,000
23-Oct-14 171,000 252,000
03-Mar-15 166,500 NR
21-Apr-15 171,000 170,000 N *
10-Jun-15 134,500 150,000
14-Jul-15 125,500 137,000
08-Sep-15 156,500 150,000
27-Jan-16 137,000 145,000
29-Feb-16 147,500 190,000 O
18-Jul-16 132,000 175,000
05-Oct-16 140,000 168,000
25-Jan-17 142,000 163,000
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N O T RA T ED
N EU T RA L
3-Year Price and Rating History for Kia Motors (000270.KS)
000270.KS Closing Price Target Price
Date (W) (W) Rating
25-Apr-14 57,300 60,000 N
22-May-14 60,100 72,000 O
18-Sep-14 54,400 88,500
24-Oct-14 54,400 98,900
26-Jan-15 46,450 70,400
03-Mar-15 46,700 NR
21-Apr-15 47,900 42,000 U *
10-Jun-15 44,250 48,000 N
08-Sep-15 50,600 61,000 O
27-Jan-16 48,600 57,000
23-Mar-16 49,800 61,000
06-Jul-16 41,400 50,000
24-Nov-16 36,950 40,000 N
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
O U T PERFO RM
N O T RA T ED
U N D ERPERFO RM
9 February 2017
Pakistan Market Strategy 32
3-Year Price and Rating History for Lucky Cement Co Ltd (LUKC.KA)
LUKC.KA Closing Price Target Price
Date (PRs) (PRs) Rating
20-Apr-15 479.75 NR
04-Feb-16 520.31 685.00 O *
03-Aug-16 705.45 855.00
02-Sep-16 661.38 848.00
26-Jan-17 889.18 970.00
* Asterisk signifies initiation or assumption of coverage.
N O T RA T ED
O U T PERFO RM
3-Year Price and Rating History for United Bank Limited (UBL.KA)
UBL.KA Closing Price Target Price
Date (PRs) (PRs) Rating
06-May-14 171.41 177.00 O
12-Jun-14 170.02 R
13-Jun-14 170.02 177.00 O
18-Aug-14 182.39 235.00
30-Oct-14 193.42 230.00
29-Apr-15 176.18 220.00
27-Jul-15 178.93 218.00
22-Jul-16 179.53 212.00
21-Oct-16 203.72 230.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
REST RICT ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equa l to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
9 February 2017
Pakistan Market Strategy 33
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (54% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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Target Price and Rating Valuation Methodology and Risks: (12 months) for DG Khan Cement Co Ltd (DGKH.KA)
Method: Our target price of PRs 290 for DGKC is based on sum-of-the-parts methodology with separate valuations for the firm's core cement operations and its investment portfolio. We have valued the cement operations using a cost of equity of 15.5%, cost of debt of 7% and WACC of 14.5% with a target value value of PRs238, while the investment portfolio, which includes mainly strategic investments in group companies, has been valued at market price less portfolio discount of 40% amounting to PRs52/share. We value DGKC as OUTPERFORM due to its attractive medium to long term growth profile driven by rising cement demand and planned expansion in the South.
Risk: The major risks for our OUTPERFORM rating and target price of PRs290 for DGKC include: (1) breakdown of the price arrangement between manufacturers; (2) increase/decrease in international coal prices beyond estimates; (3) delays in commissioning of new plant in the South(4) decline in PSDP spending by the government and/or private sector real estate investment which could result in weakening of domestic demand
Target Price and Rating Valuation Methodology and Risks: (12 months) for Habib Bank Limited (HBL.KA)
Method: Our PRs305 target price for Habib Bank is derived using the Gordon growth model. We have used 2017E BVPS and a target P/B multiple of 2.15x based on a sustainable ROE of 20.5%, COE of 14.9% and growth internal equity of 9.9%. COE is based on an RFR of 8.5%, market premium of 5.8% and beta of 1.1. We have an OUTPERFORM rating on HBL due to its dominant deposit franchise, best exposure to CPEC and infrastructure projects and superior long term growth profile.
Risk: Potential risks to our target price of PRs305 and OUTPERFORM rating for Habib Bank include: (1) asset quality deterioration in the bank's corporate and international loan portfolio which could hurt earnings and negatively impact on the bank's capital base 2) changes in policy rate impacting margins as ~75% of HBL revenue is denominated from interesting bearing assets and 3) changes in the minimum statutory saving deposit rate and/or imposition of special taxes such as super tax.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Lucky Cement Co Ltd (LUKC.KA)
Method: Our target price of PRs970 for Lucky Cement is based on a sum-of-total-parts (SOTP) methodology where we value the core domestic cements business using discounted cash flow (DCF) based on a cost of equity (Ke) of 14.2% and terminal growth of 5%. Moreover, we value the investment in the cement plant in Congo using DCF with a ke of 18.6% and terminal growth of 5%, 660 MW Coal IPP using DCF with cost-to-equity of 13% and investment in grinding facility in Iraq using DCF with Ke of 17% and terminal growth rate of 5%. Lucky's investment in ICI Pakistan limited is valued at market price less 20% portfolio discount broadly in line with market implied discount for other conglomerates. We rate Lucky OUTPERFORM due to robust growth outlook across its core cement business as well as investments in Congo, Iraq, ICI and new venture with Kia in the automobile sector.
Risk: The major risks to our OUTPERFORM rating and target price of PRs970 for Lucky Cement include: (1) a breakdown of the price arrangement between manufacturers; (2) volatility in international coal prices beyond estimates; (3) operational challenges in running the new cement plant in Congo and delays with the 660 MW coal IPP; (4) deterioration in the security situaiton in Iraq and Congo; and (5) a weakening of demand in domestic and export markets
Target Price and Rating Valuation Methodology and Risks: (12 months) for United Bank Limited (UBL.KA)
Method: Our PRs276 target price for United Bank is derived using the Gordon growth model. We have used 2017E BVPS and a target P/B multiple of 2.1x based on a sustainable ROE of 19.8%, COE of 14.5% and growth internal equity of 8%. COE is based on an RFR of 8.2%, market premium of 5.8% and beta of 1.05. We rate UBL as OUTPERFORM due to better near term earnings momentum, strong balance sheet and attractive valuations.
Risk: Potential risks to our OUTPERFORM rating and target price of PRs276 for United Bank include: (1) asset quality deterioration in the bank's corporate and international loan portfolio which would impact earnings and potentially the bank's capital base and (2) political turmoil in the Middle East which could severely impact the international operations of the bank. Industry risks include changes in policy rate and/or the minimum statutory saving deposit rate than currently estimated.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (UBL.KA, LUKC.KA, OGDC.KA, EGCH.KA, PKOL.KA, PPL.KA, NBPK.KA, 000270.KS, 005380.KS, ARCLK.IS, KO.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (OGDC.KA, EGCH.KA, PKOL.KA, PPL.KA, NBPK.KA, 000270.KS, 005380.KS, KO.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (UBL.KA, KO.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (EGCH.KA, KO.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (OGDC.KA, EGCH.KA, PKOL.KA, PPL.KA, NBPK.KA, 000270.KS, 005380.KS, KO.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LUKC.KA, OGDC.KA, EGCH.KA, PKOL.KA, PPL.KA, MCB.KA, NBPK.KA, FATF.KA, HPWR.KA, 0914.HK, 000270.KS, 005380.KS, ARCLK.IS, KO.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (UBL.KA, KO.N) within the past 12 months Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (000270.KS, 005380.KS).
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=283395&v=-4uo124qlm6adn9gnfsg9aj281 .
Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (HBL.KA, UBL.KA, EGCH.KA, 005380.KS, KO.N) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse AG, Singapore Branch .............................................................................................................. Farhan Rizvi, CFA ; Fahd Niaz, CFA To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch .............................................................................................................. Farhan Rizvi, CFA ; Fahd Niaz, CFA
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For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
9 February 2017
Pakistan Market Strategy 36
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