Foundation Research

Equities
[

Pakistan Strategy

PAKISTAN

Pakistan on investor screen; future

reforms to further catalyze flows

5 December 2013
KSE 100 index performance
70%
20%

Event

-30%
-80%
YTD13

CY12

CY11

CY10

CY09

CY08

CY07

CY06

CY05

CY04

PKR return
USD return
Source: Foundation Research, December 2013

Foreign Inflows
60,000

800

50,000

600

40,000
400

30,000
20,000

200

10,000
-

2013

2012

2011

2010

2009

2008

(10,000)

(200)

(20,000)
(400)

(30,000)
(40,000)

(600)

FIPI (PKR mn)

FIPI (USD mn)

Source: Foundation Research, December 2013

Regional Valuations
China

PER

EPS gr

DY

9.1

9.5

3.5%

Hong Kong

15.2

9.5

2.9%

India

14.5

14.2

1.7%

Indonesia

13.9

13.8

2.9%

Malaysia

15.6

3.2%

Philiphines

19.1

7.9

2.2%

Singapore

14

6.5

3.6%

Pakistan

7.8

20

7.0%

Source: Foundation Research, December 2013

Analyst
Mohammad Fawad Khan, CFA
92 21 5612290-94

Ext 338

fawad.khan@fs.com.pk

Our recent Far-East road-show on Pakistan substantiates our belief that

recent political changes, swift progress on economic reform agenda and
stellar market performance have brought Pakistan back on investors radar
screen. Flows have already started ticking in (US$182mn since elections,
US$302mn CYTD, up 30% YoY), and we believe further acceleration is
likely. Future power sector reform, privatization, and clamping down on tax
dodgers hold the key. Investors profile is shifting more towards long-only
funds hence valuation is not the biggest concern. Build-up of FX reserves
and continuity of reforms program received the most attention. We re-iterate
our June14 index target of 27,000. Our top picks include POL, PSO, HUBC,
ENGRO and LUCK.
Impact
Magnified interest on Pakistans investment case: We recently
concluded Pakistan road show in two financial capitals in the Far-East, Hong
Kong & Singapore. We present our key takeaways from our interaction with
the investors which included some of the biggest global names.
Relief on political stability and fiscal account slippage: The relative
political stability and roll-out of swift reforms in key areas have garnered
global investor attention. 41% returns of KSE-100 index YTD which comes
on the heels of 49% returns in CY12 has further added to positive sentiment
on Pakistan. At least 70% of investors we met were seeking to build better
understanding on Pakistans new economic and political landscape. We see
consensus on relative political stability. Progress on fiscal deficit (down to
merely 1.1% in 1QFY14 vs 8.8% in FY13) is not fully appreciated while
external account is seen as the biggest challenge though it is unlikely to
hinder future flows in the market given most of the funds are bottom-up value
player, in our view.
Progress on IMF program being closely watched: Given Pakistans notso-encouraging past record on completing IMF programs (11 out of 12
programs were rolled up before completion), Pakistans capacity to deliver on
future IMF targets received due attention. Investors were generally satisfied
with the economic management and understood that lack of other sources of
financing of external account and current BoP situation (<1mth of import
cover) does not allow big room for adventurism. Thus, investors largely
expect continued govt. commitment on reforms in near-term.
Energy sector reforms caught attention: We faced many questions on
govt. efforts to resolve energy sector problem given media attention around
Pakistans power sector issues. Major discussion points were centered on
energy sector debt, supply build-up and efforts to bring structural changes in
the power sector. Significant power tariff hike in 1Q (50% for industrial /
commercial consumers and 30% for domestic) and its implications for energy
sector and fiscal deficit are not completely understood, in our view.
Questions raised on corporate earnings growth: We opine that
Pakistans stock market peculiar characteristic i.e. disconnect b/w adverse

Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such
information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change
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Pakistan Strategy

December 05, 2013

movement in two major economic variables (exchange rate and interest rate) and corporate earnings growth is
poorly understood. Sectors/ stocks with ~70% weight in KSE-100 index either have positive relation with rupee
devaluation and interest rate hike (E&Ps, Power, OMCs, Textile) or have exhibited pricing power to pass down the
impact to end consumers (cement, fertilizer). A 20% estimated corporate earnings growth in FY14 vs 14% nominal
GDP growth looks impressive.

Consumers & Financial are two most-focused sectors: Valuation in big names in banks and liquidity were seen
as few challenges in two most talked about sectors in Pakistan. Stocks which were in top of investor mind are
Engro (issues with gas supply, EFertz IPO), MCB.

Investor have not forgotten 2008 market freeze: With FX reserves hovering around <1mth import cover, few
investors raised the questions about possibility of repeat of infamous 2008 market freeze. That said recent
progress on de-mutualization of stock markets ownership is seen positively. Eventual sell-off of 50% stake of KSE
to a strategic buyer may trigger further interest in Pakistan.

Long-only funds more attracted: Our key observation is emergence of higher number of long-only funds who have
already invested or considering Pakistan investment case. Almost 90% clients we met expressed the criteria of
investing for long-term. This largely explains lack of effective free float in some of most convincing stories in
Pakistan (MCB, LUCK, OGDC, PPL, etc). This aspect can play out more favorably when the govt. decides to move
ahead with its divestment plans.

Outlook
We remain positive on Pakistan investment case and re-iterate our June14 index target of 27,000. Despite stellar
performance in the past two years, valuations are not punchy at 7.8x FY14E earnings. Our top picks include POL,
PSO, HUBC, ENGRO and LUCK.

Foundation Securities (Pvt) Limited