CreditSuisse PDF

02 December 2011
Asia Equity Strategy: 2012 OutIook 88

Pakistan 2012 outIook
Farhan Rizvi
farhan.rizvi@credit-suisse.com 65 6212 3036
Macro and poIiticaI chaIIenges Iimiting upside
Figure 153: Most favoured stocks for 2012 and measures of stabiIity in previous crisis
5 yr 5-yr Lowest PB now/
5 yr avg SaIes avg net margin Net P/B 2008
Company BBG Upside avg 2008 saIes growth net in 5 debt/ (x) Iow Country
name code TP (%) ROIC ROIC growth in 2008 margin years capitaI FY1 P/B (x) rank*
PPL PPL.KA 250 41 76.8 95.7 20 18.9 49.0 44.1 0.00 1.88 1.20 1
Hub Power HPWR.KA 49 35.8
Engro Chemical EGCH.KA 205 61.1
Country rank is an equal weighted score on 12 measures of stability and profitability relative to all stocks under coverage. 1 is best.
Source: Company data, Credit Suisse estimates
Figure 154: VaIuation summary of most favoured stocks
Mkt YieId P/B ROE Net debt/
Target cap P/E (x) (%) (x) (%) equity (x)
Company RIC Rating Curr. Price price (mn) FY11A/E FY12E FY13E FY12E FY12E FY12E FY12E
PPL PPL.KA O PRs 171.49 250 2,553 5.88 5.88 5.51 8.48 1.81 33.9 -33.03
Hub Power HPWR.KA O PRs 36.08 49 473 5.27 5.27 4.8 15.74 1.3 25.4 91.45
Engro Chemical EGCH.KA O PRs 127.24 205 567 7.14 5.24 4.28 4.72 1.17 24.3 197.63
Starting from the bottom up: Three questions for
2012
1 - Which stock in the country has the strongest bottom up story, i.e., Iess
dependent on macro?
n the table above we have shortlisted stocks that have a record of performing in tough
times, and below we discuss why we like them qualitatively
HUB POWER (HPWR.KA, OUTPERFORM, PKR49.0, Raza Rawjani)
Why is the business modeI sustainabIe in a tough macro environment/recession?
Hub Power (Hubco) is a defensive stock with all projects enjoying a predetermined return
component, which is indexed to the US dollar, US CP and guaranteed by the government.
This makes future cash flows relatively predictable and provides strong downside support.
The entire cost of the company, including fuel, O&M costs and all taxes are pass-through
items and are built in the capacity purchase price (return component).
Where in the Iife cycIe is the business and why that wouId be good in the scenario
above?
Hubco is in a mature phase of its business cycle where cash flows from its flagship project
(a 1.2 GW power plant) are helping to pay for new projects. The company, even during
difficult times (peak of circular debt), has maintained its high historical payout ratio and is
therefore expected to do so in future.
Is there a structuraI muIti-year theme that this stock pIays into?
The company ventured into two new power plant projects namely Narrowal and Laraib in
FY09-10. We estimate that these new projects will start contributing materially towards
dividend payments from 2014. Moreover, we expect the company to set up new projects in
FY16-FY17 as leverage declines to pre-expansion levels by 2017.
Our shortlisted stocks that
have a record of performing
in tough times
02 December 2011
What is the track record of innovation, cost controIs/efficiencies?
HUBCO, as per its Power Purchase Agreement (PPA) with the government is required to
limit its costs within the parameters set by the government. Moreover, the company has to
maintain a minimum 85% availability of its power complex. Till date, the company has
been successfully carrying out its functions within the limits defined by the PPA. The
company has also received regular bonus payments for the last four years on account of
achieving a load factor in excess of 65% as stipulated in the PPA.
Pakistan PetroIeum Limited (PPL.KA, OUTPERFORM, PKR250.0, Raza Rawjani)
PPL is the second largest gas producer in Pakistan (an energy deficit country) accounting
for approximately one-fourth of total production. The average reserve life for existing fields
of the company is 15 years which ensures stable earnings and cash flows in future and
should also support company's aggressive exploration strategy. Moreover, its revenues
are pegged to USD while the slab based gas pricing structure also limits the impact of oil
price volatility.
above?
Formed in 1955, the company is into its mature stage wherein a healthy and a debt free
balance sheet along with a high reserve life of existing fields will allow the company to
enjoy both healthy cash flows and pursue its exploration activities.
Last year, the company acquired 14 exploration blocksthe highest by any company
taking the number of concessions to 32. As a result, seismic data collection has
significantly increased over the past two years and potential leads are going to be
explored over CY12-15. With a better-than-industry success ratio of 1:2.8 over the past 11
years, high hopes are attached to the company's exploration programme.
The company has significantly lean operations and boasts of the lowest operating cost per
boe among its listed peers. Management has placed strict controls on costs and working
capital management which has allowed the PPL to be less impacted by the energy sector
circular debt.
Engro Corporation (EGCH.KA, OUTPERFORM, PKR205.0, Farhan Rizvi)
Engro Corp's business portfolio is focused predominately in the high growth yet defensive
fertiliser and consumer foods segments, benefiting from an agrarian economy and a large
untapped and growing population. The domestic centric business model is largely immune
from the global macro headwinds, with a urea deficit situation and cheaper domestic
pricing ensuring minimal demand side risks or margin pressures.
above?
Engro Corporation in currently in the growth phase in its business cycle having undertaken
major expansions across diverse businesses over the past few years. While these
expansions have led to a more leveraged balance sheet, a stable cash flow outlook amid a
healthy domestic demand in the defensive foods and fertiliser businesses would ensure
debt servicing challenges are comfortably dealt with.
Despite undergoing significant expansions over the past few years, the company remains
focused on identifying new growth opportunities domestically including the untapped coal
02 December 2011
exploration business. Engro has made significant progress on plans to set up of a 1,000
MW power plant in collaboration with the Sindh government while further expansions in
the food businesses are already in the pipeline.
Engro has a good track record of innovations in the fertiliser and food businesses with
highly efficient operations backed by a strong management team. Though the company
had faced some delays and cost over-runs with regards to expansions in the fertiliser and
petrochemical businesses, it managed to contain the impact on ongoing operations.
(2) Which stocks in Pakistan have the most vuInerabIe business modeI that couId
be exposed in 2012 (on European recession and if gIobaI growth gets revised down
further)?
Figure 155: Most favoured stocks for 2012 and measures of stabiIity in previous crisis
5 yr 5-yr Lowest PB now/
5 yr avg SaIes avg net margin Net P/B 2008
Company BBG Upside avg 2008 saIes growth net in 5 debt/ (x) Iow Country
name code TP (%) ROIC ROIC growth in 2008 margin years capitaI FY1 P/B (x) rank*
Pakistan State Oil PSO.KA 381 56.5
MCB Bank MCB.KA 210 41.0
Country rank is an equal weighted score on 12 measures of stability and profitability relative to all stocks under coverage. 1 is best.
Figure 156: VaIuation summary of Ieast favoured stocks
Mkt YieId P/B ROE Net debt/
Target cap P/E (x) (%) (x) (%) equity (x)
Company RIC Rating Curr. Price price (mn) FY11A/E FY12E FY13E FY12E FY12E FY12E FY12E
PSO PSO.KA OUTPERFORM PRs 243.47 381 473 3.71 3.71 3.59 18.85 0.98 28.5 10.33
MCB MCB.KA NEUTRAL PRs 148.97 210 1,411 6.02 5.37 4.87 8.57 1.19 23.5 na
Pakistan's economy is predominately driven by domestic centric and is less integrated with
the global macro environment compared to regional peers (nternational trade to GDP is
less than 30%). Majority of the listed corporations have a domestic centric business model
with textiles, the key export sector and energy (due to international oil price dynamics)
most susceptible to global macro challenges. Our least favoured stocks list takes into
consideration both the global and local macro challenges next year.
Pakistan State OiI (PSO.KA, OUTPERFORM, PKR381, Raza Rawjani)
While PSO's stock trades at attractive valuations (FY1 consensus P/E of 3.7x ), we expect
the company to continue underperforming the index over circular debt concerns which has
limited PSO's payout capacity (payout ratio has declined to 12% in FY11 from 75% in
FY06). n addition, volatile oil prices along with further PKR depreciation against the USD
next year are other challenges faced by the company.
MCB Bank (MCB.KA, NEUTRAL, PKR210, Farhan Rizvi)
MCB Bank is likely to suffer the most NM compression in case of further monetary easing
by the central bank given its static deposit cost due to highest CASA in the industry (81%).
Moreover, its premium valuations (1.4x 2012E P/B), 70% premium to listed peers and 1.7x
2009 lows due to superior asset quality could also be a drag on its performance in 2012.
02 December 2011
(3) What major structuraI (muIti-year) theme exists for the country and its
impIications for your stocks?
Energy
Key themes
(1) Ongoing reforms in the energy sector, lead by Asian Development Bank and World
Bank, will gradually improve energy sector finances over 2013-16 making the sector
self-sustainable by the 2016.
(2) Energy shortages along with the new petroleum policies offering significantly higher
realised prices than its predecessors will prompt upstream companies to be more
aggressive in their exploration activities.
ImpIications:
Returns for PSO and OGDC are most leveraged to circular debt resolution with the two
companies cumulatively financing more than PRs100 bn of the net circular debt through
bank borrowing and lower payouts. Hence, any breakthrough in relation to the resolution
of circular debt, will not only result in higher dividend payouts, but will also improve the
implementation of strategic plans. PPL and Hubco in contrast have been less impacted by
the circular debt situation, managing to maintain their historical payout levels. We believe
attractive pricing offered by new petroleum policies would favour large upstream
companies such as OGDC and PPL which have the most exploration concessions and
above average success rate.
FertiIisers
Key themes
(1) mproving gas availability outlook over the medium term as (a) new production comes
online, (b) commencement of gas imports and (c) ADB and World Bank led reforms to
gradually result in improved efficiency and lower line losses.
(2) Government may intervene to lower urea prices by ensuring better gas availability to
Engro Corp in a bid to support the agricultural community, a key vote bank for the
ruling PPP in the General Elections.
(3) Further expansion planned by Engro in the foods and energy businesses including the
progress on the Thar Coal exploration project paving the way for setting up of a
1,000MW coal power plant over the next four-five years.
ImpIications
Engro Corporation would be the key beneficiary of an improved gas availability situation
over the medium term as its new plant has been forced to operate at low operational levels
(35-40%) on account of regular gas supply outages. FFC would be most impacted by any
major fall in urea prices given windfall gains enjoyed by the company on account of Engro
led price hikes over the past 12 months.
Banks
Key themes
(4) nterest rates could fall by another 100-200 bp as the central bank may persist with its
monetary easing stance.
(5) High fiscal deficit and government dependence on domestic financing would keep
private sector credit muted resulting in further deleveraging of the balance sheet.
(6) Public sector NPLs particularly in the energy chain may continue to accumulate due to
slow resolution of the circular debt.
02 December 2011
ImpIications
Lower interest rates would result in further NM compression for banks with a steep fall in
interest yields on both commercial lending and risk free treasuries compared to the more
static funding cost amid high CASA (70%). MCB Bank would most impact by falling
interest rates as its deposit costs are the most static amid high CASA of approximately
81%. nterest yields would also remain under pressure from continued shift in asset mix
towards lower yielding treasuries as banks continue to favour risk free investments over
credit growth. The government guaranteed nature of the energy sector NPLs may not
result in incremental credit charge, however, they would continue to be a liquidity concern
for banks, particularly state-owned NBP.
02 December 2011
Strategy summary
Pakistan equities remained flat during 2011, failing to respond to a stellar 30% earnings
growth, expanding ROEs, and partial improvement in macros, particularly on the external
front with a relatively stable PKR. Though equities still outperformed the region by 13%,
increased political noise, deterioration in relations with the US and an exit from the MF
programme kept investors jittery. Signing up to a new MF programme for external account
stability and smooth conduct of the Senate elections in March to lower the political
temperature would be the key catalyst for the market in 2012.
We expect 2012 to be a volatile year for equities as domestic politics takes centre stage in
the run up to the Senate elections in March 2012 and General Elections in January 2013.
Moreover, 'Balance of Payment' challenges have resurfaced with a rising current account
deficit, commencement of MF repayments and possible reduction in direct aid from the
US and other multilateral agencies. This would result in a gradual drawdown of forex
reserves and may cause further PKR depreciation versus the USD. Fiscal vulnerabilities
are also expected to deepen with tax reforms hard to implement, while pre-election
spending pressures would be on the rise. Amid a tight liquidity situation, recourse to
central bank borrowings appears real and could result in an uptick in inflationary pressures.
n the backdrop of a muted GDP growth outlook, macro headwinds and political
uncertainties, stock picking would be crucial, with Pakistan still offering some attractive
bottom up opportunities.
We prefer a combination of defensives with high yields and USD linked returns as well as
growth stocks with a domestic focus but relatively immune from the macro and political
challenges. Trading at a 2012E P/E of 6.1x, the Pakistan market still remains at a deep
discount of 37% to the region (10-year historical average 25%) while offering a 16%
consensus earnings growth next year (MSC EM Asia 14%), 33% ROE (2x regional
average) and the highest dividend yield of 8.5%. Our December 2012 KSE 100 index
target of 13,300 implies a 15% potential upside and a conservative 2012E P/E of 7.1x ( a
15% discount to the KSE's 10-year historical P/E of 8.4x).
Prefer energy and fertiIisers
We remain OVERWEGHT on energy and fertilisers. Despite limited progress on the
circular debt resolution, valuations remain undemanding in the energy sector with some
high yielding defensive stocks continuing to maintain healthy historical payouts. Moreover,
a combination of higher oil prices and rising production volumes would drive double-digit
earnings growth in 2012, with USD linked pricing offering a currency hedge against further
PKR depreciation. Fertilisers on the other hand, should benefit from an agri focused
government strategy in a pre-election year with higher crop support prices likely to keep
demand upbeat, while urea margins are expected to remain near record highs. Policy risks
in relation to further interest rate cuts would however make banks a more risky investment
proposition despite attractive valuations. Our top ideas include Hubco, PPL and ENGRO
while our least preferred stocks are PSO and MCB.
PoIitics back at the forefront
Politics, as always, demands an important consideration in Pakistan, as it dictates a large
part of the macro risk in the country. The degree of political noise remained loud
throughout 2011, as the government faced numerous challenges both domestically and
internationally. The US administration and the army, the two key players in the Pakistan
political landscape remained at odds throughout the year starting with the Raymond Davis
saga and relations hitting a new low following the unilateral US raid inside Pakistan to
eliminate Bin Laden. The PPP-led government viewed as pro US by the hawks in the
political spectrum as well as the armed forces has been walking a tight rope trying to keep
itself afloat amid one challenge after another. Talks of regime change fervently floated in
Signing a new MF
programme and smooth
conduct of the Senate
elections in March would be
key catalysts for the market
in 2012
We prefer a combination of
defensives with high yields
and USD linked returns and
growth stocks with a
domestic focus but relatively
immune from macro,
political challenges
Politics back in the limelight
with markets likely to remain
edgy in 1Q12
02 December 2011
the media in the past has picked up momentum once again, with opposition intensifying its
campaign for early General Elections (GE) prior to the Senate elections in March. The
PPP-led coalition looks set to obtain a two-thirds majority in the Senate elections next year
which would place the party in a strong position for the GE currently scheduled for 1Q13.
We expect the heightened political noise to keep markets edgy in 1Q12. However, the
smooth conduct of the Senate elections in March would considerably ease the political
temperature and serve as a positive catalyst for the market next year.
Macro chaIIenges on the rise
2011 was a mixed year for macros which witnessed some positive developments on the
external front, notably a minor current account surplus in fiscal year ending June (for the
first time in seven years) helping to keep forex reserves and PKR at a stable level. The
fiscal account on the other hand faced continued challenges with another 6% plus fiscal
deficit in FY11, as revenues and other key structural reforms remained absent ultimately
leading to Pakistan exiting the MF programme with about US$3.3 bn of tranches still
outstanding. The free fall in cotton prices since 1Q11, a contrasting rise in international oil
prices and a possible cut in US assistance due to budgetary constraints has made the
external account outlook challenging next year. Moreover, difficulties to implement tough
reforms in a pre-election year coupled with likely incremental election-driven spending
should keep fiscal deficit at a higher level in the next year as well.
ExternaI account no Ionger in the comfort zone
The external account which remained comfortable throughout most of 2011(forex reserves
hitting a peak of US$18.3 bn and PKR relatively stable versus the USD) is starting to feel
the pressure from a combination of lower cotton prices, higher oil prices and cut back in
US assistance on account of budgetary constraints. Though reserves still remain at a
comfortable level of US$17 bn, about US$8 bn (46%) of the build up in foreign reserves is
on account of the MF assistance which needs to be repaid over the next three years.
Figure 157: C/A back in deficit after a minor surpIus in
FY12 whiIe .
Figure 158: IMF repayments wouId exert pressure on
financiaI accounts posing chaIIenges for BoP
-1100
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Curr. a/c oa|.(u3S rr) ol 00P (Rl3)

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1,000
2,000
3,000
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5,000
,000
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CY12 CY13 CY11 CY15
0.0
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1.0
1.5
2.0
2.5
lVF 0l|ers as ol 00P (Rl3)
u3S rr
Source: SBP, Credit Suisse estimates Source: SBP, IMF, Credit Suisse estimates
External outlook has
weakened amid rising
current account deficit and
cut back in foreign
assistance
02 December 2011
PKR may depreciate sharpIy amid reserves drawdown forcing a return to the IMF
Substantial external debt servicing obligations over the next three to four years (US$15.3
bn over 2012-14E) including MF repayments (average annual repayments of US$2.3 bn
starting February 2012), mean that Pakistan would ultimately have little choice but to opt
for another MF stabilisation programme in the next 6-12 months. We believe an early
return to the MF programme would be positive for macroeconomic stability and will be
viewed favourably by domestic and international investors alike. Nonetheless, political
dynamics would have a major bearing on the timing with Senate elections (Upper House)
due in March next year, and GE in January 2013. Moreover, with the opposition
intensifying its anti-government campaign, the near-term focus is likely to remain more on
populist measures with less inclination towards painful economic reforms required under
an MF programme. Even in the case of a new US$4-5 bn MF programme by 2H12 , the
drawdown of forex reserves would continue, resulting in an average annual PKR
depreciation of approximately 4% over FY12-13E.
Figure 159: Rupee may depreciate sharpIy over the next
two years given BoP pressures .
Figure 160: . after enjoying reIative stabiIity against the
doIIar in the past 12-18 months
10
12
11
1
18
20
FY0Z FY08 FY09 FY10 FY11 FY12E FY13E
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15
20
FX reserves Rupee deprec|al|or
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Source: Bloomberg, Credit Suisse estimates Source: Bloomberg
FiscaI deficit to remain high in the backdrop of GE in January 2013
Despite repeated MF pressure and efforts undertaken by the government, containment of
fiscal deficit (> 6% on average since FY08) has remained a major economic challenge.
Failure to implement much-needed tax reforms, including MF advocated VAT mechanism
along with non resolution of circular debt and elimination of line losses in the energy chain
have made containment of fiscal deficit extremely challenging. n a GE backdrop in 2013,
fiscal vulnerabilities are expected to deepen with tax and other structural reforms such as
elimination of energy subsidies hard to implement, while election related spending would
rise. We believe fiscal deficit will exceed 5% of GDP next fiscal and amid weak
international flows (NFA contraction of PRs103 bn YTD) the burden of budgetary financing
should fall solely on domestic sources, predominantly banks.
PKR may depreciate 4%
annually against the USD in
FY12-13E
Fiscal deficit would exceed
5% of GDP next year amid
difficulties in implementing
key structural reforms
02 December 2011
Figure 161: Heavy reIiance on domestic sources for budgetary financing Iimits the
desired benefit of a rate cut
0
250,000
500,000
Z50,000
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FY08 FY09 FY10 FY11 FY12E
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Source: MoF, Credit Suisse estimates
PoIicy rates may faII by 100 bp but higher deficit wouId keep infIation sticky
Pakistan central bank embarked upon a monetary easing stance over the past few months
slashing policy rates by 200 bp since July, citing lower inflation and need to spur private
sector credit as major reasons. Though headline CP aided by a combination of lower food
prices and recomposition of the CP basket fell to 11% in Oct 2011 (recent peak of 15.7%
in Sep 10), core inflation remains sticky at 12%. Moreover, given the scale of budgetary
financing needs and a tight liquidity situation, a recourse to inflationary central bank
borrowings appears real with the SBP already lending indirectly to the government by
regularly injecting liquidity through OMOs (PRs342 bn net injection since July) into the
system. While the higher deficit and financing challenges have raised inflationary
expectation over the next 6-12 months, we still don't rule out a 100 bp cut in policy rate
over the next two-three policy announcements as SBP appears to be growth focused,
possibly swayed by political considerations.
Figure 162: Interest have faIIen as a resuIt of a decIine in
HeadIine CPI
Figure 163: ReaI interest rates near zero with upward bias
to core infIation
8
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11
1
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Source: FBS, SBP Source: FBS, SBP

02 December 2011
Figure 164: Recourse to indirect centraI bank borrowing is aIready underway
Outstanding OMOs
PRs bn Mop up Injection Net mop up Amount Maturity
FY10 489.7 3,621.0 -3,131.0
Q1 153.6 506.9 -353.4
Q2 14.3 1,610.7 -1,596.4
Q3 93.8 1,234.9 -1,141.1
Q4 228.0 268.5 -40.5
FY11 961.3 1,252.8 -291.5
Q1 74.9 436.2 -361.3
Q2 402.6 138.5 264.1
Q3 62.7 457.1 -394.1
Q4 421.2 221.0 200.2
FY12 32.4 3,264.2 -3,231.8
Jul 408.5 -408.5
Aug 640.4 -640.4
Sep 32.4 1,025.1 -992.7
4-Oct 40.0 -40.0
7-Oct 264.3 -264.3
14-Oct 327.2 -327.2
28-Oct 216.0 -216.0
18-Nov 342.8 -342.8 -342.8 25-Nov
Source: SBP
Index target of 13,300, stock seIection to be the key
n the backdrop of a muted GDP growth outlook, macro headwinds and political
uncertainties, stock picking would be crucial with Pakistan still offering some attractive
bottom up opportunities. Our December 2012 KSE 100 index target of 13,300 implies a
15% potential upside and a conservative one-year forward P/E of 7.1x ( a 15% discount to
the KSE's 10-year historical P/E of 8.4x) and an attractive 2012E consensus ROE of 30%
(2x regional average).
VaIuations stiII remain attractive; regionaI discount unchanged from Iast year
Pakistan equities remained flat during 2011, failing to respond to a stellar 30% earnings
growth, expanding ROEs (30%) and a partial improvement in macros particularly on the
external front with a stable PKR. Though equities still outperformed the region by 13%,
Pakistan's discount to MSC EM Asia remained unchanged at 37%, with the market failing
to respond to 2x earnings growth compared to the region. As a result, the KSE 100 still
trades at 2012E P/E of 6.1x on a 30% ROE (2x regional average). Valuations also appear
attractive on P/B matrix with KSE trading 12% below historical levels.
KSE 100 could reach
13,300 by Dec 2012
Pakistan market trades at
37% discount to regional
peers despite offering 2x
regional ROE
02 December 2011
Figure 165: KSE 100 12-month forward P/E Figure 166: KSE 100-traiIing P/B
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Vear = 8.3x

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c
l
-
0
5
0
c
l
-
0
0
c
l
-
0
Z
0
c
l
-
0
8
0
c
l
-
0
9
0
c
l
-
1
0
0
c
l
-
1
1
P/8 x
Vear = 2.2x
Source: Factset, Credit Suisse estimates Source: Factset, Credit Suisse estimates
Index couId reach 13,300 by December 2012
Our December 2012 index target of 13,300 implies a P/E multiple of 7.1x (6.1x currently)
and assumes the discount to the region would remain near current levels of 37%. We
believe macro challenges, political uncertainties and a more muted growth outlook of 16%
(30% in 2011) will restrict any sharp expansion in valuation multiples.
Figure 167: KSE 's P/E discount to MSCI EM Asia remains weII above historicaI average
-80
-0
-10
-20
0
20
10
0
3ep-01 Au-02 Ju|-03 Jur-01 Vay-05 Apr-0 Var-0Z Feo-08 Jar-09 0ec-09 Nov-10 0cl-11
Vear = (25)

Source: IBES, Data Stream, Credit Suisse estimates
Prefer high-yieIding defensives in the energy sector and fertiIisers
We prefer a combination of high yield defensives as well as growth stocks with a sound
business model and domestic demand focus. We are OVERWEGHT energy and
fertilisers Despite limited progress on the circular debt resolution, valuations remain
undemanding in the energy sector with some defensive stocks continuing to maintain
healthy historical payouts. Moreover, a combination of higher oil prices and rising
production volumes would drive double-digit earnings growth next year, with dollar linked
pricing offering a currency hedge against further PKR depreciation against the USD.
Fertilisers, on the other hand, should benefit from an agri-focus government strategy in a
pre-election year, with higher crop support prices likely to keep demand upbeat while urea
The market multiple could
expand to 7.1x but still
remain 15% below historical
levels

We prefer high-yielding
defensives in the energy
sector and fertilisers
02 December 2011
margins are expected to remain near record levels. Wheat support has already been
raised by 11% and we don't rule out another 10-15% price hike next year as politics
continue to take centre stage. Policy risks in relation to further interest rate cuts though
make banks a risky investment proposition despite attractive valuations. Our top ideas
include HUBCO, PPL and ENGRO while our least preferred stocks are PSO and MCB.

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02 December 2011

Asia Equity Strategy: 2012 OutIook 88

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