Pakistan Equity Outlook 2018: What Would Warren Buffett Buy

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What Would Warren Buffett Buy in Pakistan?
Pakistan Equity Market Outlook 2018

January 01, 2018
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What Would Warren Buffet Buy in Pakistan?
Pakistan Equity Market Outlook 2018
This document has been prepared by Elixir Securities Pakistan (Private) Limited (“Elixir”)
and comprises of views / recommendations from Elixir Research Team and not of
Mr. Warren Edward Buffet, the renowned business magnate, investor and philanthropist.
Mr. Buffet’s name is used in this document out of respect and reverence for his work and
philosophies on Value Investing.
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Executive Summary
Macro Politics Economic Growth

Outlook
We expect the ongoing political disturbance to GDP Growth is projected to reach a 12-year
settle down before Senate Elections due in March. high of 5.8% in FY18, and stabilize at 6%
there onwards.
Currency Monetary Policy Twin Deficits

We estimate Current Account Deficit to stand at We project three interest rate hikes of 25 bps Driven by Election year spending, Fiscal
4.4% of GDP in FY18, while Pakistani Rupee (PKR) each, starting May 2018. We argue that Equity Account Deficit is projected to reach 5.0% of
is likely to depreciate by 5-9% to over 116/USD by Market Valuations have already discounted in a GDP in FY18, which should normalize post
the end of 2018. hike of 100 bps. entry into IMF Program in 2H2018.
Markets 48,900 KSE-100 Target Multi-Year Bull Run

Outlook
Our Index Target is a blend of Target Price Annual declines in Pakistan Equities have
Mapping and Forward Multiple of 9.0x. PKR been a rare phenomenon since 2000 and
depreciation has begun, implying that foreign have always been followed by multi-year bull
buying might just be around the corner. Our runs as valuations open up.
Target reflects a potential upside of 21% over
2012/13 Drawing Parallels

2018.
Thematics Warren Buffet
Shopping Cart
After facing political disturbances and External We are Overweight on Oil & Gas Exploration, UBL, BAFL, BAHL, OGDC, MARI, APL, HUBC,
Account pressures in 2012, timely Elections and Cement and Steel sectors. FFC, LUCK, CHCC, ISL, ASTL and INDU.
eventual entry into IMF Program allowed KSE-100
to gain 49% in 2013.
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Contents
Executive Summary......Pakistan Equity Market Outlook 2018 2

Capital Markets Strategy......The Pakistan Investment Case 4
Pakistan Economy......Decoupled from Politics 16
The Warren Buffet Shopping Cart......Top Sectors and Stock Picks 24
• 12 Tenets of How Warren Buffet Identifies Stocks 25
• Financials: Pakistan Banks 27
United Bank Limited......Stable Banking Enterprise 28
Bank Alfalah Limited......Sole Performer in the Sector 29
Bank AL Habib Limited......Risk High Leverage Banking Model 30
• Energy : Pakistan Oil & Gas......Upstream (E&P) 31
Oil & Gas Development Company Limited......Investment Plans to Raise Earnings 32
Mari Petroleum Company Limited......Exploring New Horizons 33
• Energy : Pakistan Oil & Gas......Downstream (OMCs) 34
Attock Petroleum Limited......Sector High Dividend Yield 35
• Energy : Pakistan Power & Utilities 36
The Hub Power Company Limited......For the Long Term Investor 37
• Industrials: Pakistan Chemicals & Fertilizers 38
Fauji Fertilizer Company Limited......Capitalizing on Closure of LNG Based Players 39
• Industrials: Pakistan Building & Construction Materials......Cements 40
Lucky Cement Limited......Diversification to Play its Role 41
Cherat Cement Company Limited......First Mover in the North 42
• Industrials: Pakistan Building & Construction Materials......Steel 43
International Steels Limited......Early CRC Expansion to help Expand Market Share 44
Amreli Steels Limited......Expansions & Anti-Dumping Duties to Drive Earnings 45
• Industrials: Pakistan Automobiles 46
Indus Motor Company Limited......Debottlenecking to Unlock Value 47
Other Interesting Ideas......In Search of Alpha 48
• Lalpir Power......Inefficiency is Good! 49
• Dolmen City REIT......Yield with Conviction! 50
Elixir Team......Contacts 51
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A Capital Markets Strategy
The Pakistan Investment Case
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Capital Markets Strategy | The Pakistan Investment Case
KSE-100 Decline of 23% from Peak - An Opportunity?
Eyeing 21% Gains for the Year
2
1 Equity Market Rout 3
Improved Economic has opened up Valuations to
Multi-year Lows 2018 Earnings Growth
Fundamentals
Clarity on timely elections to allow Projected at 21%
Economic growth has recovered to
a significant pullback. Excluding HBL’s one-off fine, EPS
decade high of 5.3% and is on path
growth is still estimated at a
to achieve 6% by FY19, driven by
healthy 14%, driven by Oil & Gas
CPEC projects, infrastructural
and Autos
improvement, corporate
expansions, robust consumer
demand and end of energy deficit
7 4
2018 Blended KSE-100 Target is
Our Economic Theme of PKR
a blend of KSE-100 Target of Depreciation
1) Elixir Universe TP Mapping:
52,170 (after incorporating 48,900 by Dec 2018 is positive from valuation,
economic and flows perspective
interest rate hikes) and
while market has already
2) Justified forward PE multiple
discounted in 100bps interest
of 9x: 45,672 (conservatively
rate hike
implying only a fraction of re-
rating witnessed in 2013)
6 5
Elections in Aug-17 to put an IMF Entry to bring Structural
end to Political Stalemate Reforms and Fiscal Discipline
KSE100 has historically returned KSE100 has historically returned
28% in Election year vs average 56% in the year of IMF entry vs
annual return of 25% since 1990. average annual return of 25%
Average historical return in the 6M since 1990.
leading up to Elections has been
14%.
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2017: Marred by Political Noise and Disappointment on MSCI – EM Upgrade…
55,000 Pakistan Included in

MSCI Emerging
Markets Index
53,000
Urea exports allowed PSX
FTSE includes six
Pakistani companies IPO ~3% Depreciation in
51,000 in its index PKR, followed by a MSCI Semi-Annual Review
sharp reversal (ENGRO demoted)
49,000 Panama Case verdict:

Supreme Court disqualifies
PM Nawaz Sharif
Miftah Ismail
47,000 Federal Budget New York appointed PM's
Retail Cement Unveiled for regulator fines adviser on Finance
Prices Weaken FY17-18 HBL $225 million
45,000 SECP approves NBP Loses Case on
changes to in-house Pension Liability
financing rules ~3%
International
43,000 Crude Oil Prices Depreciation
Bottom Out in PKR
JIT submits
41,000 Panama probe
report to SC
FTSE Semi-Annual
39,000 Review (5 more
companies added) New Round of
Regulatory Duties
37,000
Jun-17
Jun-17
Aug-17
Aug-17
Apr-17
Apr-17
Dec-17
Dec-17
May-17
May-17
Jul-17
Jul-17
Jul-17
Sep-17
Sep-17
Oct-17
Oct-17
Jan-17
Jan-17
Jan-17
Feb-17
Feb-17
Mar-17
Mar-17
Nov-17
Nov-17
Source: PSX, Elixir Research
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…But Opening Doors for the Next Bull Cycle…
Annual declines in KSE-100 have been a rare phenomenon since 2000 and have historically been followed by Multi-Year Bull Cycles
190%
16% correction in 2001

140% followed by 1006% gains
over the next 6 years

followed by 105% gains
90% over the next 2 years
followed by 321% gains
over the next 5 years
40%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
-10%
-60%
Source: PSX, Elixir Research

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…As Valuations Have Opened Up…
Forward PE has declined 30% to 8.2x Forward Dividend Yield has climbed to 6.5% i.e. 3x the EM average
20.0 10.0%
Average Forward PE of 11x when While economy is strongest in a 9.0% Recent market rout has
18.0
Pakistan was last classified as decade, valuations have come off to increased prospective
16.0 Emerging Market by MSCI the long term average 8.0% dividend yield by 200 bps
14.0 7.0%
12.0 6.0%
10.0 5.0%
8.0 4.0%
6.0 3.0%
4.0 2.0%
2.0 1.0%
- 0.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017
Discount to Emerging Markets has widened to over 35% Spread of Earning Yield to 6M T-Bill has reverted to 2012 levels
55% Pakistan Equities now offer 11.0%

a discount of 35% from EM, Following recent market rout, the spread has
45% compared to under 10% in recovered to 2012 / 13 levels
May-17 9.0%
35%
7.0%
25%
15% 5.0%
5%
3.0%
-5%2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1.0%
-15%
-25% -1.0%2010 2011 2012 2013 2014 2015 2016 2017
Source: Bloomberg, Elixir Research

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…A Stark Reminder of 2012 / 13?
The heightened political uncertainty and External Account pressures draw parallels from 2012 / 13
2012 / 13 2017 / 18
Current Account
• Shot up from 0.1% in FY11 to 2% in FY12 • Increased from 1.7% in FY16 to 4.0% in FY17
Deficit as % of GDP
• SBP Import cover dwindled from 4.1 months to 2.7
Forex Reserves • SBP Import cover declined from 4.3 months to 3.4 months
months
• Street agitations and protests by Opposition parties in • Street agitations and protests by Opposition parties in the run-
the run-up to Elections. up to Elections.
Politics
• Sitting Prime Minister Yusaf Raza Gilani disqualified by • Sitting Prime Minister Nawaz Sharif disqualified by Supreme
Supreme Court in June-2012 Court in June-2017
Pak Rupee • Depreciated by 10% over FY12 • Depreciated by 5% over 2H2017 with pressure likely to persist
• Forward PE: 6.5x (Dec-12)
• Forward PE: 8.2x
Valuations • Earning Yield Spread Over 6M T-Bill Yield: 6% (2012
• Earning Yield Spread Over 6M T-Bill Yield: spiked to 7%
average)
What Followed / May Follow?

• Announcement of Pakistan’s entry into 36 month IMF
• We project entry into IMF program of around USD6.3bn by
IMF Entry Program in July, 2013 under USD 5.3 billion Extended
2H2018 (details in section on Economy).
Fund Facility.
Elections • General Elections were held in May, 2013. • General Elections scheduled for Jul-Aug, 2018.
• KSE-100 rallied 49% during 2013, allowing Pakistan

• We project a KSE-100 return of 21% in 2018 with forward
Valuations equities to rerate from forward PE of 6.5x (Dec-12) to
multiples likely to normalize from 8.2x to ~9x
8.3x (Dec-13)
With valuations plummeting back to 2012 levels…

…timely Elections and eventual entry into IMF Program should pave the way for a strong recovery in 2018
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General Elections to put a Lid on Political and Economic Stalemate
• Political uncertainty and resultant economic stalemate have led to 23% KSE-100 Returns Leading up to General Elections
decline in Pakistan equities, since touching its highs in May-17. Feb-97 Oct-02 Feb-08 May-13
• Pakistan is however not new to street protests, political deadlocks and 25% Average: 14%
judicial activism in the run up to elections.
Average: 11%
• However a peaceful conclusion of General Elections have historically 20%
smoothened out the volatile political environment preceding it. Average: 8%
• Keeping this in view, Pakistan Equities have historically rallied significantly 15%
during the six months preceding and following the General Elections.
• With next General Elections due in Aug-17 and market having already 10%
discounted in the worst, Pakistan Equities are well positioned to post a
strong performance in 2018.
5%
• Sector specific news flow for Fertilizers and Tractors are likely to be positive
as incumbent Government rolls out incentives for farmers (majority of the
0%
vote bank). 6M Before 3M Before 1M Before
KSE-100 has posted higher returns during the Election Years KSE-100 Returns post General Elections
Feb-97 Oct-02 Feb-08 May-13
29% Average: 13%
28% 40% Average: 11%
28%
28% 30%
27% Risks
20% Average: 6%
27%
26% 10%
26% 25%
0%
25% 1M After 3M After 6M After
25% -10%
24% -20%
24%
Avg. Annual Return since 1990 Avg. Election Year Return -30%

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While Eventual Entry into IMF Program will bring Clarity on Economics
• Driven by burgeoning import bill and upcoming debt repayments, we

estimate Pakistan’s external financing requirement at USD20bn for FY18
(refer to the section on Economics for detailed commentary). KSE-100 has posted significantly higher returns in the
• While part of these can be bridged by commercial loans and capital market years Pakistan has entered IMF Programs
debt issuances, we foresee Pakistan’s return to another IMF program
sometime during 2H2018 (once the new government takes control, post
elections). 60% 56%
• We envisage the program to have an outlay of USD6.5bn. More importantly,

50%
the IMF program is likely to require the following reforms:
• Fiscal Discipline (limited fiscal deficit under 4% of GDP) 40%
 Curtailment of government borrowing from Central Bank, which will

30% 25%
increase government bond yields sharply and will profit accretive for
banks
20%
 Retirement of circular debt, which will bode well for the Energy Chain,
particularly Pakistan State Oil (PSO) 10%
 Pak Rupee depreciation to bring it to its fair value (which ties in with our
projection of 5-9% depreciation of PKR against USD over 2018) 0%
Avg. Annual Return since 1990 Return in the Year of IMF Entry
• While the public perception attached to IMF program is largely negative,
Pakistan equities have historically cheered the macroeconomic policies and
structural improvements that are required by the IMF.
• Resultantly, KSE-100 has rallied an average of 56% in the years Pakistan has
entered the IMF program (compared to annual average return of 25% posted
by the index since 1990).

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Spillover Impact on Interest Rate Hikes and PKR Devaluation?
• While IMF entry is projected to 1) bring the much needed discipline on Impact of PKR Depreciation on Key Listed Sectors
Fiscal accounts and 2) provide the cushion on External front – it will also Positive Impacts
have its impact on Pak Rupee’s value and eventually inflation.
Oil & Gas Exploration
Retention prices denominated in USD
• Heading into 2018, we maintain our projections on PKR depreciation and (E&P)
eye the currency to close the year over PKR116/USD (5-9% depreciation).
IPP’s Guaranteed IRR’s indexed to USD
• Since devaluation has a direct impact on energy prices in Pakistan, CPI
Textile / Leather Export driven sectors
based YoY inflation is projected to edge up from the current range of 4% to
~7% by the end of 2018. PKR deval increases inflation, and will likely push SBP to increase
Financials: Banks interest rates earlier, helping NIMs
• This also forms part of our call of three interest rate hikes of 25bps each over Negative Impacts
2018.
Auto Assemblers Over 50% of parts are imported
Pharmaceuticals Highly reliant on imported materials

Equity Markets - Value Hunting by Foreign Investors may be around
Oil & Gas Marketing Exchange losses and higher circular debt
the corner:
Higher landed cost of coal to be partially neutralized by cement
• For Foreign investors (accounting for over 30% of free float market Cement exports
capitalization of Pakistan equities), PKR depreciation bodes well as it opens Foreign selling to abate now that PKR depreciation has started
up valuations.
FIPI - Net Flow (USDmn) PKR Depreciation
• Given the recent success of Eurobond/Sukook issuance at attractive rates, 300 8%
Foreign buying of USD1.6bn
the foreign selling in Pakistan equities appears to be largely a function of 250 during PKR’s cumulative Foreigners have been
overvalued currency rather than increased risk perception. With PKR net sellers amidst PKR’s 6%
depreciation of 27%
200 gradual overvaluation
depreciation now finally starting to take place, value hunting by foreign
150 4%
investors may be just around the corner!
100
• Barring Banking Sector, interest rate hikes are largely negative for most 2%
listed sectors in Pakistan. However Pakistan equities have already de-rated 50
from forward PE of 11.5x to 8.2x. We argue that even if just one-third of this 0%
-
decline is attributed to the aforementioned theme then the market has
Jul-09
Aug-11
Jan-12
Jul-14
Aug-16
Jan-17
Jun-12
Jun-17
Feb-09
Nov-12
Feb-14
Nov-17
Oct-10
Oct-15
Apr-08
May-10
Sep-08
Dec-09
Mar-11
Apr-13
Sep-13
Dec-14
May-15
Mar-16
(50) -2%
already discounted in a hike of 100bps
(100)
-4%
(150)
(200) -6%
Source: NCCPL, Bloomberg, Elixir Research
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Events Lined up in 2018
• ISL 450k Tons CRC

Expansion comes online
• ASTL 200k Tons Melting
Capacity comes online
• ASTL 425k Tons Rolling • 1,410 MW Tarbela IV
Capacity comes online Extension comes online
• 969 MW Neelum Jhelum • MSCI SAIR
comes online • Bi-monthly Monetary
• General Elections Policy Announcement
• INDU Completion
of Debottlenecking
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
• Senate Elections
• FTSE SAIR • Bi-monthly Monetary
• Bi-monthly Policy
Monetary Policy Announcement
Risks
Announcement
• ACPL 1.2mn expansion
comes online • FTSE SAIR
• PIOC Grinding Mill • Federal Budget FY18- • Bi-monthly Monetary
comes online 19 to be unveiled Policy Announcement
• KOHC Grinding Mill • MSCI SAIR
comes online • DGKC 2.8mn Expansion
• Banks' CAR in South comes online
requirement to • Bi-monthly Monetary
increase to 11.275% Policy Announcement
• Bi-monthly Monetary
Policy Announcement
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Elixir Stance on Key Listed Sectors
KSE-100
Sector Elixir Stance Rationale
Weight
• Positive correlation with interest rate hikes, with limited risk of NPL
Financial: Pakistan Banks 23% Marketweight acceleration due to low ADR’s and high quality loan book.
• However earning growth will come with a lag.
Energy: Pakistan Oil & Gas • Positive correlation with PKR depreciation, along with decent growth
16% Overweight
Upstream (E&P) projected in hydrocarbon production.
• Strong retail fuel growth, however we advise selective exposure given 1)

Energy: Pakistan Oil & Gas
6% Marketweight the structural changes in Furnace Oil segment, 2) potential Exchange
Downstream (OMCs) Losses and 3) expected build up of Circular Debt.
Energy: Pakistan Power & • Positive correlation with PKR depreciation. However given the changing
6% Marketweight
Utilities fortunes for FO based plays, we advise selective exposure.
Industrials: Pakistan • Higher oil prices and PKR depreciation will keep a check on LNG based
12% Marketweight
Chemicals & Fertilizers players’ production. With
• The valuations have more than priced in lower retail prices and projected
Industrials: Pakistan Building
increase in interest rates. We expect domestic demand to remain strong
& Construction Materials 8% Overweight
with progress on dam construction to act as additional cherry on top.
(Cement) Advise long term exposure in North plays.
Industrials: Pakistan Building

• Government protection and robust growth in infrastructure makes Steel
& Construction Materials 2% Overweight
Producers an ideal play on domestic demand. Advise tilt towards Flat Steel.
(Steel)
• While volumetric growth remains robust, we do not advise aggressive

Industrials: Pakistan exposure due to potential slow down in demand owing to projected
5% Marketweight
Automobiles interest rate hikes and PKR depreciation. Avoid plays that face direct threat
from upcoming competition.
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Elixir Rating Guide (Target Prices Rolled Forward to December 2018)
Current Price
Company % Upside EPS(PKR) DPS(PKR) Earnings Growth PER (x) Dividend Yield P/BV (x)
Price Target
29-Dec-17 Dec-18 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 2018 2019
Financials: Banks -20% 19% 12% 10.2 8.6 7.7 6.0% 6.6% 7.3% 1.2 1.1
MCB 212 230 8.3% 20.5 17.0 21.5 15.8 16.0 16.2 11% -17% 27% 10.4 12.5 9.9 7.4% 7.5% 7.7% 1.6 1.5
UBL 188 270 43.6% 20.8 20.4 21.4 13.0 13.0 13.0 -8% -2% 5% 9.0 9.2 8.8 6.9% 6.9% 6.9% 1.4 1.4
HBL 167 255 52.6% 7.1 23.3 28.2 7.0 10.0 14.0 -69% 226% 21% 23.4 7.2 5.9 4.2% 6.0% 8.4% 1.2 1.1
BAHL 58 75 28.5% 7.4 6.9 7.6 3.5 3.0 3.0 2% -7% 10% 7.8 8.5 7.7 6.0% 5.1% 5.1% 1.3 1.2
BAFL 43 55 29.4% 5.7 5.8 6.8 0.0 1.3 2.8 16% 2% 17% 7.4 7.3 6.3 0.0% 3.1% 6.5% 0.9 0.8
NBP 49 UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR
ABL 85 90 5.9% 11.3 11.1 9.9 7.0 7.0 6.5 -10% -1% -11% 7.5 7.6 8.6 8.2% 8.2% 7.6% 0.9 0.9
HMB 35 30 -13.0% 4.2 4.0 3.7 3.0 3.0 2.0 -29% -4% -8% 8.3 8.6 9.4 8.7% 8.7% 5.8% 0.8 0.8
FABL 21 25 17.6% 3.8 4.5 4.3 1.0 1.2 1.2 17% 19% -5% 5.6 4.7 4.9 4.7% 5.9% 5.9% 0.6 0.6
Energy: Oil & Gas 35% 28% 1% 11.0 8.6 8.5 4.1% 5.3% 5.3% 1.6 1.4
OGDC 163 193 18.6% 14.8 18.3 18.1 6.0 8.0 8.0 6% 23% -1% 11.0 8.9 9.0 3.7% 4.9% 4.9% 1.3 1.2
PPL 206 216 4.9% 18.1 24.4 22.6 9.0 11.0 10.2 107% 35% -7% 11.4 8.5 9.1 4.4% 5.3% 5.0% 1.7 1.5
POL 594 573 -3.6% 40.9 67.1 71.2 40.0 65.0 70.0 34% 64% 6% 14.5 8.9 8.3 6.7% 10.9% 11.8% 4.4 4.4
MARI 1451 2,282 57.3% 82.9 175.2 220.7 5.2 6.8 6.9 51% 111% 26% 17.5 8.3 6.6 0.4% 0.5% 0.5% 3.6 2.4
PSO 293 388 32.4% 55.9 46.9 46.3 20.8 20.0 19.0 77% -16% -1% 5.2 6.3 6.3 7.1% 6.8% 6.5% 0.9 0.8
APL 523 761 45.5% 63.9 60.5 63.1 42.5 54.0 57.0 38% -5% 4% 8.2 8.7 8.3 8.1% 10.3% 10.9% 2.4 2.3
HASCOL 247 291 17.8% 10.5 13.0 17.5 6.4 5.2 7.0 25% 24% 34% 23.5 19.0 14.2 2.6% 2.1% 2.8% 3.0 2.7
Energy: Power & Utilities -2% 10% 11% 6.8 6.2 5.6 10.7% 10.7% 11.8% 1.7 1.6
HUBC 91 145 59.3% 9.2 10.1 11.0 7.5 7.5 7.5 -10% 9% 10% 9.9 9.0 8.2 8.2% 8.2% 8.2% 2.6 2.5
KAPCO 54 55 2.0% 10.7 11.7 13.6 9.1 9.5 10.5 4% 9% 17% 5.0 4.6 4.0 16.8% 17.6% 19.5% 1.4 1.3
NPL 34 35 2.9% 8.1 9.0 9.3 4.0 3.0 4.0 1% 11% 3% 4.2 3.8 3.7 11.8% 8.8% 11.8% 0.7 0.7
NCPL 33 34 3.3% 8.2 9.3 9.7 2.5 2.0 4.0 9% 14% 4% 4.0 3.5 3.4 7.6% 6.1% 12.2% 1.0 0.9
KEL 6 UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR UR
Industrials: Chemicals & Fertilizers -5% 5% 18% 9.6 9.1 7.7 9.9% 10.6% 12.3% 2.6 2.6
FFC 79 90 13.8% 7.1 8.2 8.9 6.3 7.5 8.0 -23% 15% 9% 11.1 9.7 8.9 7.9% 9.5% 10.1% 3.3 3.2
EFERT 68 70 3.4% 8.1 7.9 10.0 8.3 8.0 10.0 17% -3% 27% 8.3 8.6 6.8 12.2% 11.8% 14.8% 2.2 2.1
Industrials: Building & Construction Materials -6% 6% 18% 9.3 8.8 7.5 4.1% 5.6% 6.0% 1.2 1.0
LUCK 517 827 59.8% 42.4 40.2 41.4 13.0 21.0 17.0 6% -5% 3% 12.2 12.9 12.5 2.5% 4.1% 3.3% 1.7 1.6
DGKC 134 234 75.1% 18.2 22.2 25.5 5.5 8.9 10.2 -9% 22% 15% 7.3 6.0 5.2 4.1% 6.6% 7.6% 0.6 0.5
ACPL 181 289 59.7% 26.5 24.9 18.3 10.5 18.5 13.5 5% -6% -27% 6.8 7.3 9.9 5.8% 10.2% 7.5% 1.6 1.6
KOHC 142 273 92.3% 22.9 20.8 27.3 14.0 8.5 11.0 -20% -9% 31% 6.2 6.8 5.2 9.9% 6.0% 7.7% 1.0 0.9
CHCC 111 170 53.1% 11.1 12.6 19.8 4.5 5.0 8.0 39% 13% 58% 10.0 8.8 5.6 4.1% 4.5% 7.2% 1.7 1.4
FCCL 25 39 55.8% 1.9 2.8 4.1 1.0 2.1 3.1 -51% 45% 51% 13.2 9.1 6.0 4.0% 8.3% 12.4% 1.3 1.2
MLCF 68 106 55.0% 8.0 9.5 12.7 3.3 4.0 4.5 -2% 18% 34% 8.5 7.2 5.4 4.9% 5.8% 6.6% 1.3 1.1
PIOC 63 154 143.7% 12.8 10.6 13.0 5.8 4.2 5.2 16% -18% 22% 4.9 6.0 4.9 9.2% 6.7% 8.2% 1.0 0.9
Automobile and Parts 27% 29% 6% 10.7 8.3 7.9 5.3% 7.0% 7.4% 3.8 3.1
INDU 1680 2,220 32.1% 165.4 194.7 200.6 115.0 136.0 140.0 13% 18% 3% 10.2 8.6 8.4 6.8% 8.1% 8.3% 3.7 3.3
HCAR 512 770 50.3% 43.0 65.2 72.4 13.0 26.0 29.0 73% 52% 11% 11.9 7.9 7.1 2.5% 5.1% 5.7% 3.9 2.9
Household Goods 55% 33% 21% 9.2 6.9 5.7 4.4% 5.8% 7.1% 1.3 1.2
TGL 95 122 28.4% 10.3 13.7 16.5 4.2 5.5 6.7 55% 33% 21% 9.2 6.9 5.7 4.4% 5.8% 7.1% 1.3 1.2
Industrial Metals and Mining 146% 55% 55% 17.4 11.2 7.2 2.4% 3.4% 5.7% 2.6 2.1
ASTL 93 165 78.1% 3.6 6.9 12.9 2.0 3.5 7.5 -16% 90% 87% 25.6 13.5 7.2 2.2% 3.8% 8.1% 2.2 1.8
ISL 106 182 71.1% 7.0 11.3 16.8 3.5 4.5 6.5 158% 61% 49% 15.2 9.4 6.3 3.3% 4.2% 6.1% 3.9 2.7
ASL 18 32 80.4% 1.2 1.2 1.3 0.0 0.0 0.0 -352% -2% 14% 15.1 15.4 13.5 0.0% 0.0% 0.0% 1.6 1.4
Industrials: Cable & Electrical Goods -8% 13% 12% 7.2 6.4 5.7 7.4% 8.4% 7.1% 1.2 1.1
PAEL 47 88 84.5% 6.6 7.4 8.3 3.5 4.0 3.4 -8% 13% 12% 7.2 6.4 5.7 7.4% 8.4% 7.1% 1.2 1.1
Elixir Universe 5% 21% 9% 10.3 8.5 7.8 5.3% 6.3% 6.8% 1.5 | 15
1.4
B Pakistan Economy
Decoupled from Politics
| 16
Pakistan Economy | Decoupled from Politics
Overview
• We expect Pakistan’s GDP growth rate to reach a 12 year high of 5.8%YoY in GDP growth recovery led by Services sector
FY18 compared with 5.3%YoY in FY17.
Agriculture Growth Contribution % Industrial Growth Contribution %
• The rising growth is expected to emanate from improvement in Services and
Industrial sectors’ output growth standing at 6.4%/6.0% in FY18F vs. Services Growth Contribution %
6.0%/5.0% in FY17. 10.0%
• CAD is expected to reach 4.4% of GDP in FY18 mainly led by increase in

8.0%
imports for machinery and petroleum products. CAD would likely drop to
manageable levels in two years as machinery imports fall post completion of
6.0%
power projects. Simultaneously, the government is also trying to control
CAD through export package, and higher import duties on non-
essential/luxury items. 4.0%
• However, this will likely continue to create significant pressure on FX 2.0%

reserves and exchange rate. This has already resulted in SBP’s FX reserves to
decline by 24% from its high of USD18.9bn (import cover: 4.5 months) in 0.0%
Oct-16 to USD14.3bn (import cover: 2.8 months). Resultantly, PKR after
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
sustaining its level (PKR/USD: ~105) for last two years, depreciated by 4% in -2.0%
Dec-17. We foresee PKR to depreciate by 5% based on RBER to 116 by the
year end. GDP Growth Projections
• This will likely create inflationary pressures where we estimate 1% FY18F FY19F FY20F FY21F FY22F
depreciation of PKR to result in 0.8%MoM increase in CPI inflation (based on
regression analysis), which strengthens our projection of 75bps increase in Elixir Research 5.8% 6.0% 6.0% 6.0% 6.0%
interest rates over 2018. IMF 5.6% 6.0% 5.7% 5.9% 5.9%
• Pakistan would likely opt for fresh IMF program to shore up its FX reserves World Bank 5.5% 5.8%
where we estimate the outstanding loan quota to stand at USD6.3bn. IMF
program will not only ensure fiscal discipline and curtail CAD, but would also ADB 5.5%
lead credence to borrow from other multilaterals and international sources GoP Target 6.0% 6.5% 7.0%
like Eurobonds/Sukuks/commercial debt.
SBP 6.0%
Source: Ministry of Finance, State Bank of Pakistan, Elixir Research

| 17
Growth Momentum Propelled by All Sub-Segments…
• Services sector output growth remains a wild card as it has the greatest Security improvement to pay dividends
weight (~60%) in GDP and is likely to remain the primary driver of growth on
Civilians Security Force Personnel
the back of rising retail sales (weight in GDP: 19%) and transport activity Terrorists/Insurgents Incidents - RHS
(weight in GDP: 13%).
14,000 80
 Retail sales growth will likely be backed by rising income levels and 12,000 70
growing consumption spending, where the robust growth in informal 60
10,000
economy (which is of significant size in comparison to formal economy) 50
8,000
led by rapid urbanization and improving security situation, is expected to 40
6,000
have spillover effect on rising income levels and changing consumption 30
spending patterns. 4,000 20
2,000 10
 At the same time, transport activity will continue to be boosted by trade 0 0
through CPEC which is evident through rising HSD sales (9%YoY in FY17)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
and truck sales (35%YoY in FY17).
• Growth in industrial sector output will likely continue to rise with 1)
Rebound in Agri-credit to support Agriculture growth
improving energy situation with 7,600MW power generation being added to
the system in FY18, 2) rising domestic demand, 3) growth in exports led by
Agriculture Loans (PKR bn) Agriculture Loans YoY Growth - RHS
export package & rising global growth, 4) record low interest rates which are
expected to remain low with softer inflation outlook, 5) increase in 350 20.0%
protectionism to promote domestic industries, and 6) increase in production
led by upcoming expansions. 300 15.0%
• Agriculture sector output growth is expected to remain modest at 3.5%YoY 250 10.0%
in FY18 same as last year, led by 1) better crop yield, 2) increase in cultivated
area, 3) investment in mechanization, 4) increase in agriculture credit, and 5) 200 5.0%
adequate support prices for major crops particularly wheat.
150 0.0%
100 -5.0%
Jul-09
Aug-11
Jan-12
Sept-13
Aug-16
Jan-17
Jun-07
Nov-07
June-12
Jun-17R
Feb-09
Nov-12
Feb-14
Oct-10
Oct-15
Nov-17P
Apr-08
Sep-08
Dec-09
May-10
Mar-11
Apr-13
Dec-14
May-15
Mar-16
July-14
| 18
…But Current Account Pressures to Persist…
• CAD is expected to remain elevated standing at 4.4% of GDP in FY18 owing Current Account Deficit projected to reach 4.4% of GDP
to persisting factors. We believe the spike in CAD is normal phenomenon
associated with fast paced infrastructure development. CAD would likely Current Account Balance Current Account Balance/GDP (RHS)
revert to its normal levels in two years’ time as machinery imports will likely
10 6%
recede with completion of power projects.
• Exports fell in recent years owing to rout in commodity prices as Pakistan’s 4%
5
major exports (~60%) comprised of cotton and textiles. However, exports
have started to pick up on the back of export incentive package and rising 2%
commodity prices. The setting up of special economic zones entailing tax 0
incentives/breaks would further help Pakistan in medium term to register 0%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18F
robust export growth.
-5 -2%
• Remittances have remained stagnant, as flows from GCC (accounting for
60% of total remittances) lagged behind due to decline in oil prices, which -4%
were compensated by strong growth from Non-GCC countries. With oil price -10
stabilizing, remittances from GCC region are expected to stabilize too. -6%
• The pressures on External Account have however not discouraged -15

-8%
international capital markets from lending to Pakistan – as evident from
recent Sukuk/Eurobond issuance at relatively attractive rates. -20 -10%
External Account Projections (USD bn) Eurobond/Sukuk’s Issuances

Amount
Tenor Date Type Yield Credit Rating (Moody's)
FY16 FY17 FY18E (USD mn)
Current Account Balance -4.9 -12.1 -14.8 5-year 8-Apr-14 Eurobond 1,000 7.25% Caa1
Exports 27.4 27.2 29.9 26-Nov-14 Sukuk 1,000 6.75% Caa1
Imports 50.1 57.7 63.6 5-Oct-16 Sukuk 1,000 5.50% B3
Trade Deficits -22.7 -30.5 -33.7 29-Nov-17 Sukuk 1,000 5.63% B3
Remittances 19.9 19.3 19.5 10-year 8-Apr-14 Eurobond 1,000 8.25% Caa1
25-Sep-15 Eurobond 500 8.25% B3
29-Nov-17 Eurobond 1,500 6.88% B3
Source: Ministry of Finance, State Bank of Pakistan, Bloomberg, Elixir Research

| 19
…Paving the Way into the Next IMF Program…
• Pakistan has experienced significant decline in FX reserves over the last year owing to Pakistan Transactions with IMF (SDR mn)
heightened CAD where its import cover has declined to 2.8 months from a high of 4.5
Charges and Interest
months last year. Year Disbursements Repayments
Paid
• While the government has been successful in issuing commercial debt in international 2021 0.0 762.2 56.1
markets, persistent external account imbalances would likely result in Pakistan seeking entry 2020 0.0 660.0 68.4
into fresh IMF program. We anticipate this decision to be taken post-elections in 2018.
2019 0.0 420.0 82.6
• Against its quota of USD2.9bn, Pakistan can get fresh loan of up to 435% (USD12.5bn) - 2018 0.0 150.0 90.8
adjusting for its outstanding loan (USD6.5bn) results in maximum available loan of
2017 0.0 0.0 54.8
USD6.3bn. However, the actual disbursement can be higher than this based on exceptional
circumstances. 2016 793.0 0.0 47.1
2015 1,440.0 303.0 27.6

• PKR has already depreciated ~4% since IMF’s post-program evaluation where the staff asked
for 20% devaluation. We believe PKR would further devalue before and around the entry into 2014 1,440.0 1,308.2 24.0
the new program, however, it would not be as much as hinted by IMF. 2013 720.0 2,399.6 41.4
• The government borrowing through State Bank (SBP) would be barred as under previous 2012 0.0 1,489.2 86.5
program. This would likely raise government’s reliance on borrowings through commercial 2011 0.0 172.3 111.7
banks.
2010 1,063.7 172.3 82.8
• Fiscal deficit which has slipped last year will likely be brought under manageable level 2009 2,101.9 146.4 42.2
through increase in tax net and further reduction in subsidies.
2008 2,067.4 116.2 4.6
• Privatization program did not kick off under previous program but this may materialize 2007 0.0 97.9 6.1
under the upcoming program. This would likely be a thorn in policy measures but its
2006 0.0 72.0 7.1
outcome remains to be seen.
2005 0.0 163.9 9.2
• Circular debt which has reached PKR421bn (against IMF’s target of PKR234bn) would likely
2004 172.3 383.0 14.0
be clipped to lower levels and policy reforms would be introduced to keep it to minimum.
2003 344.6 420.3 20.5
• Subsidies on electricity were already reduced under previous program, however, other
2002 258.4 201.8 29.9
subsidies on fertilizers and export package may also be called in to end, to ensure fiscal
discipline. 2001 401.2 137.1 40.7
2000 150.0 217.5 37.9
Current Conversion: 1 SDR = 1.417920 USD
Source: IMF, Elixir Research

| 20
…Strengthening Expectations of PKR Depreciation
Eyeing Pak Rupee at over 116 against the Greenback PKR has historically Depreciated in spurts
• PKR depreciation has been a bone of contention for the government. While
emerging market currencies depreciated significantly in recent years, PKR
withheld its level resulting in overvaluation. This strategy has been used to 110
keep import bill and external debt repayments in check. However it cannot
be pursued in longer term as it would exacerbate pressures on FX reserves. 100
• IMF has long said that PKR has been overvalued by more than 20% based on 90
Real Effective Exchange Rate. While the government remained stubborn in
not devaluing PKR, it has started to take the step in the right direction by 80
allowing a swift ~4% slide post-program evaluation meeting with IMF in
Dec’17. 70
• We believe that PKR may depreciate 5-9% in 2018 (likely in spurts) as 1) PKR
is overvalued by 5% against USD based on Real Bilateral Exchange Rate and 60
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2) expected inflation differential stands at ~4%. We prefer value of measure
of RBER over REER as the latter’s constituents particularly EUR (holding the
highest weight) has depreciated significantly due to its own fundamental
changes arising from 1) Greek Crisis, 2) Brexit, 3) EU’s quantitative easing, 4) PKR overvalued by 5% against USD
Negative interest rates 130
REER USD RBER
• There is a risk of overshooting exchange rate beyond fair value as the market
120
participants have formed expectations of significant PKR devaluation which
in turn may result in self-fulfilling prophecy. 110
100
90
80
70
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: Bloomberg, IMF, Elixir Research
| 21
Election Year Economics – Fiscal Deficit Likely to Shoot Up
Fiscal Deficit likely to be in the North of 5% of GDP in FY18 Fiscal Deficit / GDP has historically risen in election years
9% 8.8%
• Fiscal Deficit shot up to 5.8% of GDP in FY17 from 4.6% of GDP in FY16 as the
8.2%
Provincial Governments posted lower budget surpluses. Fiscal deficit is
8%
expected to remain high at 5% in FY18 compared with the target of 4.1% as 7.3%
the government spending would likely be higher to win mass vote ahead of 7% 6.5%
General Elections. 6.2%
5.8%
6% 5.5%
• Nonetheless, the government has seen significant improvement in fiscal 5.3% 5.2% 5.3%
deficit on the back of improved tax revenues and reduction in subsidies. 5% 4.3% 4.3% 4.6%
4.2% 4.2%
• With expectations of Pakistan entering into new IMF program post-Elections, 4% 3.4%
we anticipate fiscal deficit to return to manageable levels in FY19 as 3.0%
previously seen when fiscal deficit declined from 8.2% in FY13 to 4.6% in 3%
FY16. 2.1%
2%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
While Interest Rate Hikes should be gradual Interest Rates
• Inflation is expected to remain subdued due to stable prices in recent DR TR Repo

months. However, recent PKR depreciation and possibly further depreciation 15%
raises the risks of higher inflation and thus, interest rates. 13%
• We estimate 3 interest rate hikes in 2018 of 25bps each beginning from May- 11%
17. However, inflationary shocks attributable to food item prices and PKR 9%
depreciation, may require further increase in interest rates above our current 7%
estimates. 5%
• With regards to depreciation risk, we estimate that 1% slide in PKR may raise 3%
Jan '11
Jul '11
Jan '12
Jul '12
Jan '13
Jul '13
Jan '14
Jul '14
Jan '15
Jul '15
Jan '16
Jul '16
Jan '17
Jul '17
Jan '18
Jul '18
Jan '19
CPI inflation by 0.8%MoM based on regression. However, we believe this is
unlikely to occur within a month as it takes time to completely pass on
higher costs.

| 22
Economic Indicators – At a Glance
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18F
Summary Data
Nominal GDP (PKR tn) 13.2 14.9 18.3 20.0 22.4 25.2 27.4 29.1 31.9 34.8
Nominal GDP (USD bn) 168.2 177.4 213.8 224.6 231.4 244.7 270.9 279.2 304.4 325.5
Per Capita Income (USD) 1,026.1 1,072.4 1,274.0 1,320.5 1,333.7 1,388.8 1,514.0 1,529.9 1,628.9 1,707.5
Activity
Real GDP growth (%) 0.4% 2.6% 3.6% 3.8% 3.7% 4.1% 4.1% 4.5% 5.3% 5.8%
Agriculture Growth (%) 3.5% 0.2% 2.0% 3.6% 2.7% 2.5% 2.1% 0.3% 3.5% 3.5%
Industrial Growth (%) -5.2% 3.4% 4.5% 2.5% 0.8% 4.5% 5.2% 5.8% 5.0% 6.0%
Services Growth (%) 1.3% 3.2% 3.9% 4.4% 5.1% 4.5% 4.4% 5.5% 6.0% 6.4%
Investments Growth (%) -4.3% -6.5% -6.7% 2.5% 2.8% 2.8% 14.6% 6.6% 8.0% 10.0%
Unemployment Rate (%) 5.5% 5.6% 6.0% 6.0% 6.2% 6.0% 5.9%
Prices, Money & Credit
Average CPI Inflation (%) 17.0% 10.1% 13.7% 11.0% 7.4% 8.6% 4.5% 2.9% 4.1% 4.8%
Money Supply Growth (%) 9.6% 12.5% 15.9% 14.1% 15.9% 12.5% 13.2% 13.7% 13.7% 15.0%
Private Sector Credit Growth (%) -0.4% 3.7% 6.1% 0.1% 2.6% 12.6% 8.1% 10.7% 17.6% 20.0%
Fiscal Account (% of GDP)
Tax Revenue (F+P) 9.1% 9.9% 9.3% 10.2% 9.8% 10.2% 11.0% 12.6% 12.5% 12.5%
Development Expenditures 3.4% 4.1% 2.8% 3.9% 3.5% 4.5% 4.1% 4.5% 3.6% 3.7%
Fiscal Balance -5.2% -6.2% -6.5% -8.8% -8.2% -5.5% -5.3% -4.6% -5.8% -5.0%
External Account (% of GDP)
Current Account Balance -5.5% -2.2% 0.1% -2.1% -1.1% -1.3% -1.0% -1.7% -4.0% -4.4%
Exports 13.8% 14.0% 14.6% 13.2% 13.6% 12.4% 11.1% 9.8% 8.9% 9.2%
Imports 23.3% 21.5% 20.4% 21.7% 20.9% 20.3% 18.5% 18.0% 19.0% 19.5%
Trade Balance -9.5% -7.5% -5.8% -8.4% -7.3% -7.9% -7.5% -8.1% -10.0% -10.3%
Remittances 4.6% 5.0% 5.2% 5.9% 6.0% 6.5% 6.9% 7.1% 6.3% 6.3%
SBP FX Reserves (USD bn) 9.1 13.0 14.8 10.8 6.0 9.1 13.5 18.1 16.1 13.5
SBP Import Cover (months) 2.8 4.1 4.1 2.7 1.5 2.2 3.2 4.3 3.4 2.5
Debt Indicators (% of GDP)
Public Debt (Gross) 58.6% 60.6% 58.9% 63.3% 63.8% 63.5% 63.3% 67.6% 65.5%
Domestic Debt 29.2% 31.3% 32.9% 38.1% 42.5% 43.3% 44.4% 46.8% 46.3%
External Debt 29.3% 29.3% 26.0% 25.2% 21.3% 20.2% 18.9% 20.8% 19.2%
| 23
C The Warren Buffet Shopping Cart
Top Sectors & Stock Picks
| 24
The Warren Buffet Shopping Cart | Top Sectors & Stock Picks
12 Tenets of How Warren Buffet Identifies Stocks
Is the Business easy and understandable?
Business
Does the company have consistent operating history?
Tenets
Does the business have long-term favorable prospects?
Is the management candid to shareholders?
Management
Is the management rational in business decisions?
Tenets
Can the management resist industrial imperative?
High profit margins
Calculate “owners earnings”

Financial
Tenets
Focus on high return on equity (not earnings per share) & low price to earnings (P/E) ratio
For every dollar retained, make sure the company has created one dollar market value.
What is the intrinsic value of the business?

Value
Tenets Can the shares be purchased at a significant discount off its intrinsic value (margin of safety)?
| 25
Elixir High Conviction Investment Ideas
Market Target
Company Ticker Price Price Rationale
(29-Dec-17) (Dec-18)
United Bank UBL 188 270 • Cheap on multiples despite strong ROE
Bank Alfalah BAFL 43 55 • Standing out on Earnings Growth
Bank Al Habib BAHL 58 75 • High Leverage, Premium ROE and High NPL Coverage
Oil & Gas Dev Co OGDC 163 193 • Production growth, bet on PKR deval
Mari Petroleum MARI 1,451 2,282 • Unwinding of Pricing Discount, bet on PKR deval
• Retail fuel growth, limited exchange losses, low exposure to circular debt,
Attock Petroleum APL 523 761 limited attrition in FO
Hub Power HUBC 91 91 • Extreme undervaluation, growth from coal based plants, bet on PKR deval
Fauji Fertilizer FFC 79 90 • Improving Urea dynamics, unprecedented stock price decline
Lucky Cement LUCK 517 827 • Largest & most efficient player, regional expansion, sector diversification
Cherat Cement CHCC 111 170 • First mover advantage, expected to outperform industry on dispatches
Indus Motors INDU 1,680 2,220 • Relatively hedged against new competition
International Steel ISL 106 182 • High sustainable spreads, expansion to drive growth
Amreli Steels ASTL 93 165 • Capitalizing on construction boom via aggressive expansion
| 26
Financials: Pakistan Banks
Investment Theme & Outlook Elixir Banking Universe ROE

Banks profitability to decline in 2018 as capital gains wear off and PIBs
mature… 20% 18.7%
• We expect our Banking Universe’ earnings to decline by 3.7%YoY in 2018 (ex of 18% 16.6%
15.6% 15.1% 15.8%
HBL’s fine) due to a 56.5% expected drop in realized capital gains, significantly 16% 15.1%
14.3%
higher provisions, and muted net interest income growth due to re-pricing 14%
amid an interest rate hike. 12%
• We expect a 75bps rise in interest rates in 2018, which would considerably 10%
reduce revaluation surpluses (which have already thinned considerably). This 08%
would lead to a drastic decline in capital gains. Provisions are expected to rise 06%
as 2017 set a low base due to one off reversals at MCB leading to decade low
04%
credit charges for the sector.
02%
• Lastly the benefit of rising interest rates is expected to be muted in 2018 as 00%
liabilities (mainly deposits) will re-price faster than assets which are mainly 2015A 2016A 2017E 2018F 2019F 2020F 2021F
concentrated in government securities (3Q 2017 IDR at 70.5%).
… But Double digit earnings growth a possibility beyond 2018, with Upcoming PIB Maturities
10.3% compounded growth over 2018-23 1,400 3Y 5Y 10Y
• After a weak year in 2018, we expect profitability to turn around sharply in
1,200
2019, with compounded earnings growth of 10.3% over 2018-23.
Risks
Despite near term earnings risks, sector remains undervalued 1,000
• The banking sector is a value play, with our Banking Universe trading at an 800
equally weighted PBV of 1.0x. Based on a 15.0% 3 year forward ROE and 13.4%
600
cost of equity, Justified PBV works out to 1.4x, suggesting ~40% undervaluation
in the banking sector. 400
• Our preference within the sector is tilted towards banks 1) holding high 200
yielding longer term PIB’s, 2) showing robust growth in Advances and 3) with
high coverage ratios. 0
Sep-16 Sep-17 Mar-18 Sep-18 Jun-19 Sep-19 Dec-19
Source: Company Accounts, State Bank of Pakistan, Elixir Research
| 27
United Bank Limited: Stable Banking Enterprise
Investment Theme & Outlook Stock Summary

Trading at a paltry 1.3x P/B; historically traded at 1.5x Price - Dec 29, 2017 PKR 188
• Over 2006-16, UBL has traded at PBV of 1.5x, and currently trades at a PBV of Target Price (December 2018) PKR 270
1.3x; a 15.0% discount Bloomberg UBL PA
Website www.ubldirect.com
• We expect the bank’s ROE to average 15.9% over 2018-22 while sector ROE is
expected to average 15.3% over the same period. Interestingly while MCB and 52-Weeks High/Low (PKR) 283.0 – 162.0
UBL have similar 3 year trailing ROEs of ~18.3%, UBL trades at a 16.5% discount Market Cap (PKR bn) 230.0
to MCB on PBV. Market Cap (USD mn) 2,078.7
Long maturity investment book to shield against reinvestment risk Avg Daily Turnover (mn) 2.7
Shares Outstanding (mn) 1,224.2
• The current low interest rate environment has exposed banks to reinvestment
risks, however UBL is significantly better off owing to a laddered maturity KSE-100 Index Weightage (%) 4.6
schedule, with an estimated 3 year average duration. Resultantly UBL has one Free Float (%) 40%
of the highest yields on government bonds at 8.0% as of 3Q2017.
Low risk business model centered around high CASA and low ADRs.
• The bank’s model is relatively low risk, with a 67% IDR. The bank’s strategy is Financial Summary
centered around attracting low cost deposits (72.4% CASA) and reinvesting
proceeds into high yielding low risk securities, primarily government bonds. 2016A 2017E 2018F 2019F 2020F
• The bank also has one of the lowest administrative costs/deposits ratio at 2.9%. EPS (PKR) 22.7 20.8 20.4 21.4 23.9
TheRisks
combination of low cost deposits, efficient expense management and low DPS (PKR) 13.0 13.0 13.0 13.0 14.5
risk investment portfolio has yielded stable double digit ROEs, and is expected
to continue into the future. BVPS (PKR) 133.8 137.2 142.8 149.5 157.3
Valuation P/E (x) 8.2 8.9 9.0 8.6 7.8

P/BV (x) 1.4 1.3 1.3 1.2 1.2
• Our Dec-18 PT of PKR270/sh offers total upside of 53% from last close BUY!
Div Yield 7.0% 7.0% 7.0% 7.0% 7.8%
ROE 17.5% 15.5% 14.6% 14.7% 15.6%
Source: Capital IQ, PSX, Elixir Research

| 28
Bank Alfalah Limited: Sole Performer in the Sector

11.4% Earnings Growth Expected Over 2016-21 Price - Dec 29, 2017 PKR 43
• On earnings we expect Bank Al-Falah to be the best performer in the sector Target Price (December 2018) PKR 55
with earnings growth of 11.4% over 2016-21 compared to industry earnings Bloomberg BAFL PA
growth of 4.6% over the same period. Website www.bankalfalah.com
• The bank’s current account mix has improved 3.6ppt in 2017 while operating 52-Weeks High/Low (PKR) 47.5 – 35.4
cost growth has reduced to 3.8%. We expect CASA to be maintained at ~82.5% Market Cap (PKR bn) 68.3
however BAFL has significant room to reduce costs. Market Cap (USD mn) 617.2
• The bank’s 3Q2017 administrative costs/deposits averaged 3.6% whereas the Avg Daily Turnover (mn) 0.7
industry average is 3.0%. Shares Outstanding (mn) 1,607.6
KSE-100 Index Weightage (%) 1.2
• With the recent management change, the bank plans on reducing costs even
further. We expect 5.2% compounded administrative cost growth over 2016- Free Float (%) 35%
21, compared to 10.5% growth over 2011-16.
Improved asset quality and fee income growth could counter industry
wide headwinds
Financial Summary
• Fee income is on track to grow by a massive 23.9% in 2017, with management
guidance of 15-20% pa fee income growth in the near term. 2016A 2017E 2018F 2019F 2020F
EPS (PKR) 4.9 5.7 5.8 6.8 7.3
• Asset quality has also improved with NPL/Gross Loans down from 8.9% in 2011
to Risks
4.2% in 3Q2017. We expect NPLs/Gross loans to remain flat till 2021 despite DPS (PKR) 0.0 0.0 1.3 2.7 3.0
expected interest rate hike of 75bps post elections. BVPS (PKR) 37.4 41.3 46.7 51.9 56.0
• We believe the combination of high fee income growth, muted provisioning P/E (x) 8.6 7.4 7.3 6.2 5.8
charges, high current account mix and high ADR have optimally positioned
BAFL to benefit from an interest rate increase. P/BV (x) 1.1 1.0 0.9 0.8 0.8
Valuation Div Yield 0.0% 0.0% 3.1% 6.6% 7.2%

ROE 13.9% 14.5% 13.2% 13.8% 13.5%

| 29
Bank Al Habib Limited: Low Risk High Leverage Banking Model

BAHL to maintain a 3.5% ROE premium over peers Price - Dec 29, 2017 PKR 58
• We expect BAHL to deliver 3.5ppt ROE premium compared to peer banks over Target Price (December 2018) PKR 75
2017-21. Premium is due to higher leverage, higher investments yield, low Bloomberg BAHL PA
credit charges and high asset growth. Website www.bankalhabib.com
BAHL commands higher leverage than other banks 52-Weeks High/Low (PKR) 64.0 – 50.0
Market Cap (PKR bn) 64.9
• BAHL has had a Deposits / Equity ratio of 14.2x vs. 9.3x for other banks. While
other banks have lower leverage and focus on maximizing yields (ROE is a Market Cap (USD mn) 585.9
function of PAT/Deposits x Deposits / Equity), BAHL has historically attracted Avg Daily Turnover (mn) 0.2
deposits at a premium to MDR in order to maintain superior asset growth. Shares Outstanding (mn) 1,111.4
Laddered PIB portfolio should cushion yields KSE-100 Index Weightage (%) 2.2
Free Float (%) 65%
• Nearly 56% of the bank’s PIB portfolio matures beyond 2019 with on average
PKR20bn of maturities per year. We like that the bank has not gone into low
yield PIBs during the past 5 quarters, as a result of which we expect it to
maintain a 100bps higher investments yield compared to peers over 2017-21.
Financial Summary
• We also like that the bank has channeled excess liquidity into smaller maturity
instruments. Over 9M2017 the bank has grown advances by a whopping 2016A 2017E 2018F 2019F 2020F
26.5%YoY EPS (PKR) 7.3 7.4 6.9 7.6 8.1
AssetRisks
quality has remained consistently high with NPLs over-provided
DPS (PKR) 3.5 3.5 3.0 3.0 3.0
for
BVPS (PKR) 38.3 41.5 44.5 48.6 53.4
• BAHL has had an average 2.0% NPL/Gross loans ratio over 2006-16. As of this
3Q2017 this number has fallen to 1.8%. The bank also maintains the highest P/E (x) 7.9 7.7 8.4 7.6 7.1
provisioning in the industry at 138% of NPLs which provide it with a P/BV (x) 1.5 1.4 1.3 1.3 1.2
PKR3.6/share before tax cushion to earnings in adverse circumstances.
Div Yield 6.1% 6.1% 5.2% 5.2% 5.2%
Valuation
ROE 20.2% 18.6% 16.0% 16.3% 15.9%

| 30
Energy: Pakistan Oil & Gas Upstream (E&P)
Investment Theme & Outlook International Oil price recovery to drive earnings
Stronger Earnings Growth on Higher Oil Prices and weakness in PKR 70
• Earnings of E&Ps in Elixir space are estimated to grow by 37% in FY18 on the
back of i) average ~USD12/bbl (i.e. 25%) higher expected oil prices, ii) 4% 60
PKR/USD depreciation, iii) 6% volumetric growth, & iv) unraveling of
entitlement factor on Mari’s wellhead gas prices. Our estimates incorporate oil 50
prices of USD60/bbl in FY18 and onwards. While higher than estimated oil
prices could unlock further upside with every USD5/bbl increase in oil prices 40
adding PKR1.1/1.2/3.7/6.0 per share to our earning estimates for
OGDC/PPL/POL/MARI, respectively.
30
Improved Regulatory Pricing Amidst High Exploration Potential
• Progressive improvement in gas prices on subsequent policies (2012 policy 20
offers a 17/34/63% premium gas prices to 2001/2007/2009 policies), in the
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Nov-15
Nov-16
Nov-17
Mar-15
May-15
Sep-15
Mar-16
May-16
Sep-16
Mar-17
May-17
Sep-17
backdrop of high exploratory potential with i) drilling density of 2.85
wells/1000 sq.km, ii) overall success rate of 1:2.8x (global average 1:5x) & iii)
improved security situation, especially in Balochistan, could open up the region
for further exploration (i.e. drilling density of >1 well/1000 sq. km). Moreover, GoP has improved incentives for local Gas Supply
Pakistan E&P’s boast low lifting cost of ~USD4-5/bbl relative to global average
USD/mmbtu
of USD11-12/bbl.
7.0 PP2001 PP2007 PP2009 PP2012
• Pakistan produces 1/5th & 2/3rd of its Oil & Gas demand respectively. In the
Risks
back drop of heavy import burden and upward trajectory in oil, direction of the
6.0
policy is expected to remain favorable with local E&Ps continuing with 5.0
aggressive exploration activities. Such was visible in PPL being granted an
4.0
extension on its biggest gas producing field (Sui) on lucrative terms.
Volumes to Grow 6% in Our Sample Space 3.0
• Cumulative volumes for our sample space are estimated to grow by 6% YoY in 2.0
FY18, with volumes for OGDC/PPL/POL/MARI increasing by 6/4/11/11%, with 1.0
production increase coming mainly from TAL, Gambat South & KPD-TAY fields.
0.0
20 25 30 40 50 60 70 80
Source: Bloomberg, Ministry of Petroleum & Natural Resources, Elixir Research USD/bbl
| 31
Oil & Gas Development Company Limited: Investment Plans to Raise Earnings

Flows from Development Projects to Raise Earnings Price - Dec 29, 2017 PKR 163
• OGDC has added 4,000bpd/250mmcfd/410tpd of oil/gas/LPG in FY17 through Target Price (December 2018) PKR 193
development projects KPD-TAY Phase-II and Uch II. Further additions of Bloomberg OGDC PA
1,120bpd/30mmcfd/340tpd of oil/gas/LPG are expected to come from Website www.ogdcl.com
Nashpa/Mela and Soghri during FY18. 52-Weeks High/Low (PKR) 191.3 – 130.3
• Incremental flows are expected to raise FY18 EPS by 23%YoY to PKR18.3. Market Cap (PKR bn) 700.1
Eyeing International & Local Acquisitions Market Cap (USD mn) 6,324.7
Avg Daily Turnover (mn) 2.8
• OGDC is currently eyeing acquisitions of a number of local and international
projects (in Middle East, Africa and Central Asia). Shares Outstanding (mn) 4,300.9
• The company has signed MoU with Gazprom for local joint ventures and
Free Float (%) 15%
technology transfer to enhance production. This is expected to bring USD3-4bn
in investments.
Ramped up Exploration for Reserves Replenishment
• With improvement in security situation in Balochistan, OGDC has ramped up its Financial Summary
exploratory efforts in the province with seismic activity being carried out in 3
FY16A FY17A FY18E FY19F FY20F
out of the total 11 blocks in the province.
EPS (PKR) 13.9 14.8 18.3 18.1 18.0
• The exploratory efforts have already resulted in 5 new discoveries during the
Risks
year. DPS (PKR) 5.2 6.0 8.0 8.0 8.0
BVPS (PKR) 111.3 119.3 129.6 139.7 149.7
• OGDC plans to spud 25 wells during FY18 vs. 22 wells spud in FY17. The capex
planned for FY18 stands at PKR55bn vs. PR45bn in FY17. P/E (x) 11.7 11.0 8.9 9.0 9.0
Valuation P/BV (x) 1.5 1.4 1.3 1.2 1.1
• OGDC trades at FY18F/FY19F PE of 8.9x/9.0x and is significantly discounted in Div Yield 3.2% 3.7% 4.9% 4.9% 4.9%
terms of implied oil price of USD40/bbl vs. prevailing price of USD64/bbl. Our ROE 13.0% 12.9% 14.7% 13.4% 12.4%
Dec-18 PT of PKR193/share offers capital upside of 19% from last close.

| 32
Mari Petroleum Company Limited: Exploring New Horizons

Unwinding Entitlement Factor to Deliver Earnings Growth Price - Dec 29, 2017 PKR 1,451
• Unwinding of pricing discount of its core asset (i.e. Mari field), where the Target Price (December 2018) PKR 2,282
entitlement factor of pricing currently stands at 80%, would completely unwind Bloomberg MARI PA
by 2HFY19. The well head gas prices are expected to increase from Website www.mpcl.com.pk
USD1.17/mmbtu to USD1.57/mmbtu by FY19 (based on our oil price 52-Weeks High/Low (PKR) 1,859.0 – 1,195.0
assumption of USD60/bbl for FY19.)
• Improved flows from Mari field as the company optimizes production from its Market Cap (USD mn) 1,445.0
core asset: the incremental flows i.e. over 525mmcfd from Mari (HRL reserves)
would fetch 4x higher prices relative to base price for Mari field. MARI recently
discovered hydrocarbons in Tipu-1 Exploratory Well of Mari field where the well Shares Outstanding (mn) 110.3
flowed 21.4mmcfd gas which is expected to result in incremental annualized KSE-100 Index Weightage (%) 1.6
EPS impact of PKR11.5, likely to come online in FY19. Free Float (%) 20%
Best in Class Exploration Play
• Tie-in of flows from recent discoveries is underway which are entitled 3x higher
prices relative to current weighted average well head prices. The implication of Financial Summary
this would be that a fraction (i.e. 1/3rd) of replenishment is required to replace
current production in value terms. FY16A FY17A FY18E FY19F FY20F
High Exploration Success Rate & Aggressive Exploration Plans EPS (PKR) 54.9 82.9 175.2 220.7 238.4
Risks
• The company enjoys a high exploration success rate of 65% compared to local DPS (PKR) 5.1 5.2 6.8 6.9 6.9
industry’s 33% and international 17%. BVPS (PKR) 153.9 231.6 400.1 613.8 845.3
• MPCL drilled eight wells during FY17 that resulted in the discovery of 123bcf of P/E (x) 26.4 17.5 8.3 6.6 6.1
new reserves addition. Besides, the drilling target has been increased to 8-9
P/BV (x) 9.4 6.3 3.6 2.4 1.7
wells from 2-3 wells in the past.
Valuation Div Yield 0.4% 0.4% 0.5% 0.5% 0.5%
ROE 42.5% 43.0% 55.5% 43.5% 32.7%
• The stock trades at FY18F/FY19F PE of 8.3x/6.6x where our DCF based Dec-18 PT
of PKR2,282/share, offers capital upside of 57% from last close.

| 33
Energy: Pakistan Oil & Gas Downstream (OMCs)
Investment Theme & Outlook Retail Fuels Continue Growth in Importance

Retail Fuels to Lead Volumetric Growth
Furnace Oil HSD MS Others
• Following impressive growth in Retail fuel sales in FY17, we foresee FY17-20 100%
CAGR of 6/9% for HSD/MS. 90%
80%
• This will support the OMC volumes as FO sales fall owing to RLNG and Coal
70%
based power plants coming online. We forecast FO Volumes to fall at a CAGR of
38% over FY17-20. 60%
50%
HSD Deregulation to Lead to Pricing Plays
40%
• The ECC recently decided to deregulate HSD, thus empowering companies to 30%
set their own margin and prices. While we estimate HSD margins to come to 20%
par with those on MS, aggressive market share competition will limit further
10%
increase in margins. In essence, deregulation will suit companies with strong
0%
supply chains and efficient procurement.
FY12A
FY13A
FY14A
FY15A
FY16A
FY17A
FY18E
FY19E
FY20E
High Infrastructure Spending Ahead of New Competition
• The OMC segment continues to prepare for oncoming competition as OGRA PSO Receivables Rise Ahead of Elections
has issued over 20 licenses and Puma Energy has entered the space by
acquiring a majority stake in Admore Gas. PKRmn Buildup of circular debt leading up to last elections
• Consequently established players have embarked on infrastructure spending 250,000
RisksPSO intends to spend PKR44 bn over the next three years while Hascol is
where
expanding its storage capacity by 366,200MT from current levels of 143,050MT. 200,000
150,000
Circular Debt to Rise in Election Year
100,000
• Moving ahead into election year, circular debt will remain a concern for OMC
players especially PSO as fiscal slippages and pre-election strategies lead policy 50,000
decisions.
-
1QFY18
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
• This will likely strain the company’s liquidity thereby limiting its CAPEX
expenditure.
Source: OCAC, Company Accounts, Elixir Research

| 34
Attock Petroleum Limited: Sector High Dividend Yield

Drive towards Retail Fuel PKR 523
Price - Dec 29, 2017
• APL has continued to focus towards retail fuels as it looks to capitalize on the Target Price (December 2018) PKR 761
strong growth momentum in the segment. Retail fuels currently contribute 66% Bloomberg APL PA
of the overall fuel volumes of the company.
Website www.apl.com.pk
• As the company continues to invest in retail outlets and storage we foresee the 52-Weeks High/Low (PKR) 765.0 – 486.4
retail fuel sales to increase by 11% in FY18 further reducing its dependence on Market Cap (PKR bn) 43.4
declining FO segment.
Market Cap (USD mn) 391.9
Projecting Strength in OMC Arms Race Avg Daily Turnover (mn) 0.3
• APL as continued to add ~50 retail outlets per annum over the past five years Shares Outstanding (mn) 82.9
while it is also establishing storage capacities at Sahiwal and Shikapur which are KSE-100 Index Weightage (%) 0.6
expected to come online by FY18 end. It is also setting up a jet fuel farm at the
Free Float (%) 25%
new Islamabad airport in partnership with PSO.
• Moving ahead, APL’s strong cash position and unlevered balance sheet gives it
the flexibility to finance investments internally as compared to its competitors
who may have to raise funding to make investments. Financial Summary
Synergies to Provide Stability in Choppy Waters FY16A FY17A FY18E FY19F FY20F
• Amidst declining FO demand from power generation, APL’s backward EPS (PKR) 46.2 63.9 60.5 63.0 70.0
Risks
integration with ATRL will benefit the company by ensuring stable supply. DPS (PKR) 40.0 42.5 54.0 57.0 63.0
Moreover, forward integration with Attock Gen (one of the most efficient FO
based power plant) means the company will witness lower attrition in FO sales BVPS (PKR) 172.6 196.5 215.6 223.8 234.3
when compared to peers. P/E (x) 11.3 8.2 8.7 8.3 7.5
Valuation P/BV (x) 3.0 2.7 2.4 2.3 2.2
• Our Dec-18 PT of PKR761/sh offers potential capital upside of 45% while also Div Yield 7.6% 8.1% 10.3% 10.9% 12.0%
offering sector high dividend yield of 10% from last closing price.
ROE 27.5% 34.6% 29.3% 28.7% 30.6%

| 35
Energy: Pakistan Power & Utilities
Investment Theme & Outlook Power Generation Mix

Power Sector is undergoing structural change as new capacities come Hydel RFO Gas Dual Fuel Coal Nuclear Others
online
100%
• We expect 14,316MW of capacity additions between FY16-19, 5,277MW of 90%
which have been added. Remaining capacity additions through coal, LNG and
80%
hydroelectric power plants will tilt the energy mix away from furnace oil with
ramifications for IPPs that have benefited from/suffered from fuel savings/fuel 70%
losses. 60%
Furnace oil based power plants to drop in utilization going forward 50%
40%
• We expect utilization levels for RFO power plants to fall going forward with the 30%
most efficient power plants seeing utilization levels drop to 29.7% by FY20,
20%
while the least efficient power plants on RFO will close down. Middle of the
road power plants will drop to 15.9% utilization by FY20. 10%
0%
Reduction in gas shortage through LNG imports could further reduce FY16A FY17E FY18F FY19F FY20F
furnace oil generation
• We have assumed current gas based power plants namely Saphire, Halmore, Utilization Levels Forecast
Saif and Orient Power to operate at 39% utilization rates. RLNG allocation to
Base Load Tier 1 RFO Tier 2 RFO Tier 3 RFO
these plants could lead to further increase in generation on gas and speed up 70%
the decline of RFO generation even further.
60%
NCPLRisks
and NPL will lose out while LPL and PKGP will benefit
50%
• Drop in utilization levels will benefit Lal Pir Power (LPL) and Pak Gen Power
(PKGP) as these IPPs suffer fuel losses when utilization levels rise. On the other 40%
hand Nishat Power (NPL) and Nishat Chunian Power (NCPL) will loose out as 30%
drop in utilization levels will reduce fuel savings for these IPPs. We expect HUBC
20%
and KAPCO to be largely unaffected by these changes provided that overheads
are controlled and costs are reduced in this new low utilization regime. 10%
0%
FY16A FY17E FY18F FY19F FY20F
-10%
Source: NEPRA, Elixir Research
| 36
The Hub Power Company Limited: For the Long Term Investor

HUBC has underperformed over disappointed earnings and furnace oil Price - Dec 29, 2017 PKR 91
fiasco Target Price (December 2018) PKR 145
• KSE100 has fallen 10.4% since 1st July 2017, while HUBC has fallen by 17.8% Bloomberg HUBC PA
owing to disappointing 1QFY18 earnings and concerns over capacity payment Website www.hubpower.com
issues following furnace oil plants closure. However we highlight that 1QFY18 52-Weeks High/Low (PKR) 146.0 – 88.9
earnings were slightly disappointing due to plant overhauls at Narowal and
capacity payments are unlikely to be withheld for HUBC given its strategic
importance in eliminating the power deficit. Market Cap (USD mn) 951.2
Dividends expected to remain flat in the near term
• Owing to financing needs of PKR30bn for HUBC for their new projects, we KSE-100 Index Weightage (%) 3.3
expect dividends to remain flat at PKR7.5/share in the near term which may
Free Float (%) 60%
keep the stock under pressure.
HUBC is essentially a long term play
• We expect HUBC to deliver a PKR20.0/share dividend in FY21 following
commercial operations of its new plants. We expect the 330MW Thar Energy to Financial Summary
come online by 1st September 2020 and the 1,320MW imported coal project to
FY16A FY17A FY18F FY19F FY20F
come online by 1st January 2020.
EPS (PKR) 10.3 9.2 10.1 11.2 12.0
Valuation
Risks DPS (PKR) 11.0 7.5 7.5 7.5 7.8
• Our Dec-18 PT of PKR145/sh offers total upside of 66.2% from last close. We
believe the recent price decline is unwarranted due to strong growth BVPS (PKR) 28.7 30.2 38.2 42.3 45.2
prospects, however due to flat dividends in the near term, we do not see HUBC P/E (x) 8.9 9.9 9.1 8.2 7.6
performing significantly on a 1 year time horizon.
P/BV (x) 3.2 3.0 2.4 2.2 2.0
• For long term investors however, the stock appears to be one of the best bets,
Div Yield 12.0% 8.2% 8.2% 8.2% 21.8%
offering FY17-21 EPS CAGR of 21%.
ROE 35.7% 33.3% 31.2% 29.2% 28.9%

| 37
Industrials: Pakistan Chemicals & Fertilizers
Investment Theme & Outlook Urea Production, Sales and Inventory (Ktons)
Supportive Regulatory actions in the run up to Elections Production Sales Inventory
7,000
• Amidst relatively better farm economics (agri product prices are up 15%),
decline in Urea prices (~23% largely due to government subsidies) is projected 6,000
to increase Urea sales to 6 year high of 5.78mnT in 2017.
5,000
• Farmer centric policies ahead of election campaigns are likely to keep sales
growth intact by maintain favorable pricing structures. 4,000
Inventory levels expected to finish at 507ktons by Dec-17 3,000
• Urea inventory is expected to decline to 400k tons by the end of 2017, a 2,000
significant improvement from 1.7mnT recorded in May-16. This has been driven
by i) 12.6%YoY increase in Jan-Nov local sales ii) export allowance of 600Ktons, 1,000
and iii) a 59% drop in production by LNG players -
• Resultantly, Urea retail prices have already shown a rebound as trade discounts 2014A 2015A 2016A 2017E 2018F 2019F
have come down from PKR110/bag (Jun-17) to PKR25/bag.. Owing to
decreasing inventory levels and the price cap on urea we have assumed
PKR1,400/bag urea price for 2018 (up 3.7% from 2017). Fertilizer Prices
DAP dynamics to Support Bulk Importers DAP NPK NP Urea
4,000
• DAP demand has recorded a 10 year CAGR of 4%, led by i) increased sugarcane
Risks
and wheat cultivation, and ii) lower DAP prices. With continued move towards 3,500
optimal mix, bulk importers stand out as biggest beneficiaries (Engro Fertilizer
3,000
and Fauji Fertilizer).
Stocks with limited production risks the best bet 2,500
• Given the recent underperformance, we flag Fauji Fertilizer (FFC) as our top pick 2,000
from the sector.
1,500 1,875 1,912
1,614 1,351 1,400 1,456
1,000
2014A 2015A 2016A 2017E 2018F 2019F
Source: NFDC, Elixir Research
| 38
Fauji Fertilizer Company Limited: Capitalizing on Closure of LNG Based Players

Domestic Urea/DAP dynamics to support the bottom-line Price - Dec 29, 2017 PKR 79
• We project FFC to sell 2.5mnT of Urea over 2017-22 owing to i) continuation of Target Price (December 2018) PKR 90
subsidy, ii) improving farm economics, iii) brand loyalty, iv) extensive Bloomberg FFC PA
distribution network and v) curtailment of production from LNG based players. Website www.ffc.com.pk
• Excess demand for DAP in the country will also keep FFC’s market leadership 52-Weeks High/Low (PKR) 120.0 – 70.0
position intact as we believe it stands to gain the most amongst bulk importers. Market Cap (PKR bn) 100.6
Annual DAP sales for the company are projected to hover at 400Ktons over Market Cap (USD mn) 909.2
2017-22 Avg Daily Turnover (mn) 1.4
Foray into the power sector should enhance earnings growth in the Shares Outstanding (mn) 1,272.2
long term KSE-100 Index Weightage (%) 2.8
• FFC has a stake of 30% in Thar Energy Limited’s (TEL) 330MW coal based power Free Float (%) 55%
plant (USD37.5mn stake in the project). We expect this outlay to occur evenly
over 2018-19. We have assumed commercial operations by 1st October 2020
against company guidance of commercial operations by mid 2020. The project
offers a 30.65% ROE over a 30 year Power Purchase Agreement. Financial Summary
• We welcome this strategic shift towards power as the fertilizer sector, while 2016A 2017E 2018F 2019F 2020F
stable, has limited growth prospects in the future.
EPS (PKR) 9.3 7.3 7.6 8.3 8.6
High single digit dividend yield is a welcome during turbulent times
Risks DPS (PKR) 7.9 6.3 7.0 7.5 7.8
• Given the recent underperformance (vis-à-vis peers), our DCF based Dec-18 PT
BVPS (PKR) 22.2 22.6 23.5 24.3 25.1
of PKR90/share (including TEL) and forward dividend yield of 8.8% makes the
stock the best bet in the sector. P/E (x) 8.5 10.8 10.4 9.5 9.2
P/BV (x) 3.6 3.5 3.4 3.3 3.2
Div Yield 10.0% 8.0% 8.8% 9.5% 9.9%
ROE 42.4% 32.6% 32.9% 34.9% 34.7%

| 39
Industrials: Pakistan Building & Construction Materials (Cements)
Investment Theme & Outlook Northern Region: Offtake Assumptions (mn tons)
Domestic Cement Demand Estimated at 5 year CAGR of 8.5% FY18 FY19 FY20 FY21
North Local Demand 31.5 34.2 37.1 40.3
• We expect domestic cement demand to grow at 5 year CAGR of 8.5% primarily Growth 8.3% 8.5% 8.5% 8.5%
on the back of i) improving macro-economic environment and ii) upbeat Dams Demand 0.4 0.7 0.9 1.0
impetus stemming from materialization of CPEC’s projects. % of total Demand 1.4% 2.1% 2.5% 2.7%
• We have erred on the conservative side for Exports (5 year CAGR decline of Total Local Demand 31.9 34.9 38.0 41.3
4.3% from FY18-23F). 9.6% 9.2% 8.9% 8.7%
Total Exports Demand 2.7 2.7 2.6 2.6
Robust Utilization Levels should cushion retail price decline in North
Total Dispatches 34.6 37.6 40.6 43.9
• North based manufacturers are placed in a sweet spot, as total utilization levels Growth 7.2% 8.5% 8.1% 8.0%
have already crossed 100%; while we expect retail prices in the region to Capacity - North 38 39 45 53
modestly recover by Mar-18, predatory pricing approach will begin in later Capacity Utilization - Local 84% 90% 85% 78%
FY19 when major capacity additions start to come online. Capacity Utilization - Total 91% 97% 91% 83%
• With significant capacity addition of 5.3mnT slated to come online by 4QFY18

in South, we expect retail cement prices to decline by at least PKR25/bag in the Robust Capacity Utilization to cushion retail prices
region, hence losing its premium over North.
Dams To Strengthen Local Demand 80 Capacity (mn tons) Utilization 100%
70 95%
• 7-8 large scale power projects are currently at various stages of completion,
including Neelum Jhelum and Tarbela Extension IV. Major boost to demand is 90%
60
Risks from 3 medium sized hydropower projects under the umbrella of
expected 85%
CPEC which include Karot, Suki Kinari and Kohala. 50 80%
• The total cement demand of upcoming hydropower projects is projected at 40 75%

15mnTpa. However we have conservatively incorporated only ~5mnT in to our 30 70%
base case over FY19-23F on gradual basis. 65%
20
The recent rout has priced in weakness retail prices 60%
10 55%
• While our models conservatively incorporate declining margins and capacity
expansions, we highlight that emerging environment concerns and difficulties 0 50%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
in procuring foreign funding can delay / shelve a number of announced
capacities – thus posing significant upside risks to our forecasts.
Source: APCMA, Elixir Research
| 40
• We thus believe that the recent rout in cement stock prices is a reflection of
market overplaying pricing concerns, Hence we advise an Overweight stance
Lucky Cement Limited: Diversification to Play its Role

South Expansion; A Bid to Remain Market Leader Price - Dec 29, 2017 PKR 517
• LUCK has increased its capacity by 1.3mnT at its South plant in Dec-18, which Target Price (December 2018) PKR 827
combined with improvements in its North plant, has increased the capacity of Bloomberg LUCK PA
the company by 21% to 9.35mnT. Website www.lucky-cement.com
• While entry of DGKC in South poses downside risks to retail prices in South, 52-Weeks High/Low (PKR) 1,005 – 435
LUCK’s increased market share should neutralize the impact of lower retention Market Cap (PKR bn) 167.3
prices. Market Cap (USD mn) 1,511.4
Regional expansions in high growth areas Avg Daily Turnover (mn) 2.8
Shares Outstanding (mn) 323.4
• With stabilizing market dynamics in DR Congo, LUCK’s production from its
recently established manufacturing unit has depicted healthy growth. KSE-100 Index Weightage (%) 3.3
Installation of another grinding mill (0.85mnT) in Iraq has come online ahead of Free Float (%) 40%
time.
• We estimate Congo and Iraq Projects to add EPS of PKR2.0/3.7 and PKR4.2/4.6 in
FY18 and FY19F, respectively.
Financial Summary
Diversification in Other Ventures
FY16A FY17A FY18E FY19F FY20F
• LUCK has entered into a JV with KIA to assemble and market Korean cars in
Pakistan. Enjoying tax benefits for a period of 5 years (under Auto Development EPS (PKR) 40.0 42.4 40.2 41.4 38.3
Risks the project requires maximum capital outlay of PKR14bn based on
Policy), DPS (PKR) 10.0 13.0 21.0 17.0 15.0
LUCK’s share of 78%. The management is eyeing lucrative 800-1000cc, SUV and
LCV segments and targets commercial production by 2020. BVPS (PKR) 214.4 246.7 266.0 290.4 313.7
P/E (x) 12.9 12.2 12.9 12.5 13.5
• LUCK’s tariff for 660MW coal based power plant has been finalized with
financial close expected in Jun-18. At 27-29% RoE, the project accounts for P/BV (x) 2.4 2.1 1.9 1.8 1.6
PKR100/share in our TP. Div Yield 1.9% 2.5% 4.1% 3.3% 2.9%
Valuation
ROE 20.1% 18.4% 15.7% 15% 13%
• Our Dec-18 PT of PKR827/share incorporates local and international cement
operations, investment in ICI, coal power project and cash.
| 41
Cherat Cement Company Limited: First Mover in the North

Capacity Expansion has started to bear fruits… Price - Dec 29, 2017 PKR 111
• With industry already reaching its all-time high utilization levels (~100%), CHCC Target Price (December 2018) PKR 170
stands to gain the most owing to its recent capacity addition in Jan-17 Bloomberg CHCC PA
(1.35mnT). The market share of the company has almost doubled to 6.2% while Website www.cheratcement.com
exports have also dramatically increased by 155%YoY. 52-Weeks High/Low (PKR) 214.0 – 85.6
• Going forward we expect the company to continue to outperform industry Market Cap (PKR bn) 19.6
peers in FY19 owing to availability of substantial spare capacity. Market Cap (USD mn) 177.0
…While Cost Savings will be an Added Sweetener Avg Daily Turnover (mn) 0.5
• CHCC is also witnessing major cost savings emanating from its new plant, as we
estimate it to be accounting for 55% of the total production. We expect energy KSE-100 Index Weightage (%) 0.6
savings stemming from new plant to translate into annualized incremental Free Float (%) 60%
earnings PKR3-4/share.
• Furthermore, CHCC also enjoys 5 year tax holiday on the earnings emanating
from its new capacity (average tax rate to hover between 15-20%) due to i)
production mix and ii) deferred tax adjustments. Financial Summary
Brownfield expansion to jack up market share by ~5ppts FY16A FY17A FY18E FY19F FY20F
• After being a laggard during the last three industry expansionary waves, CHCC EPS (PKR) 8.0 11.1 12.6 19.8 17.2
hasRisks
emerged as the most aggressive player, expanding its capacity by ~3.5x to DPS (PKR) 3.3 4.5 5.0 8.0 7.0
4.5mtpa (including 1.3mtpa that was recently completed in Jan-17).
BVPS (PKR) 51.8 59.3 66.9 78.7 88.9
• The financial close for another cement line of 2.1mnT has been achieved at an
P/E (x) 13.9 10.0 8.8 5.6 6.5
estimated capital outlay of PKR13.5bn. This will allow CHCC to jack up its
capacity based market share by ~4.5ppts to 7.4% (in case all announced P/BV (x) 2.1 1.9 1.7 1.4 1.2
capacities materialize). Div Yield 2.9% 4.1% 4.5% 7.2% 6.3%
Valuation
ROE 16.4% 20.0% 19.9% 27.2% 20.5%
• Our Dec-18 PT of PKR170/share offers potential capital upside of 53% from last
closing price while the stocks offers EPS growth of 13% in FY18.
| 42
Industrials: Pakistan Building & Construction Materials (Steel)
Investment Theme & Outlook Domestic Flat Steel Manufacturers to Expand Market Share
Robust Domestic Demand led by Rising Consumerism '000 tons ISL ASL Imports
1,800
• Steel sector has experienced boom in recent years led by rising consumerism as
a result of improving incomes. As such, steel sector has remained the fastest 1,600
growing sector in FY17 registering 20.5%YoY growth. The underlying sectors 1,400
have shown similar performance namely: 1) Construction activity (proxy for 1,200
mainly re-bars demand) has grown at 9.0%YoY in FY17, 2) Electronics Sector
1,000
(serviced by flat steel products) remained the second fastest growing sector
with 17.0%YoY growth in FY17, 3) Automobiles (also serviced by flat steel 800
products) registered 11.2%YoY growth. 600
Protectionist Measures Provide Further Boost to Indigenous Production 400
• National Tariff Commission (NTC) has levied high anti-dumping duties and 200
regulatory duties on imports of billets, re-bars, cold rolled coil (CRC) and -
FY18F
FY19F
FY20F
FY14
FY15
FY16
FY17
galvanized coil (GC). In this regard, anti-dumping duties recently imposed on
re-bars/billets/CRC/GC stand at 19%/24%/13-19%/6-40%. As a result, the steel
sector companies have seen impressive growth in output, gross margin (GM)
improvement, and earnings. Real Construction Activity to Remain Robust
Expansions to Bridge Demand and Production Gap
PKR bn Real Construction Real Construction Growth (RHS)
• The favorable dynamics provided breath of fresh air for the steel sector that has 340 16%
planned
Risks a number of expansions to take better advantage of rising 320 14%
consumerism and construction activity. While we do not have knowledge about 300
12%
the size of expansions planned by the unlisted companies, but within the listed 10%
280
space 400k/425k/930k/250ktpa of melting/rolling/CRC/GC capacities are 8%
expected to come online between FY18-19 that cumulatively account for 260
6%
~USD157mn associated capital expenditure. The expansions are expected to 240
4%
bridge the gap between demand and production which stood at 4.2mn tons
220 2%
(2.9mn tons steel production vs. 7.1mn tons steel consumption) in 2015.
200 0%
FY12
FY13
FY14
FY15
FY16
Source: Company Accounts, Pakistan Bureau of Statistics, Elixir Research
| 43
International Steels Limited: Early CRC Expansion to Help Expand Market Share

CRC Expansion to Support Existing GC Capacity Price - Dec 29, 2017 PKR 106
• ISL is setting up a CRC capacity of 450k tpa making it the first domestic listed Target Price (December 2018) PKR 182
steel company to pass million ton capacity milestone. The CRC expansion is Bloomberg ISL PA
expected to come online by 4QFY18 with expected capex of PKR5.6bn. As such, Website www.isl.com.pk
we expect FY18F/FY19F EPS to grow by 61%/49%YoY to PKR11.3/PKR16.8. 52-Weeks High/Low (PKR) 167.8 – 86.0
Improvement in Capital Structure to Continue Market Cap (PKR bn) 46.3
• ISL’s capital structure has improved remarkably over the years led by improving Market Cap (USD mn) 418.0
profitability and debt repayments where its D/E has come down to 102% as at Avg Daily Turnover (mn) 3.6
Sep-17 from 264% as at Jun-12. Despite the planned debt financing for Shares Outstanding (mn) 435.0
expansion, D/E is expected to continue to improve thereafter.
Stronger Spreads Likely to Sustain Free Float (%) 40%
• ISL’s GM profile has improved over the last two years due to better realized
spreads (USD108/ton in FY17 vs. USD95/ton in FY15) led by improvement in
realized spreads of both CRC-HRC and GC-HRC. The stronger spreads are likely
to sustain due to anti-dumping duties (on both CRC and GC products). Financial Summary
Diversification through Captive Power Plant FY16A FY17A FY18E FY19F FY20F
• ISL has 19.2MW gas fired power plant in place that is self-sufficient in its EPS (PKR) 2.7 7.0 11.3 16.8 18.7
electricity
Risks requirements and also sells the excess electricity to Karachi Electric DPS (PKR) 1.3 3.5 4.5 6.5 7.5
(KEL), which contributed ~PKR0.19/share in FY17 earnings.
BVPS (PKR) 16.4 19.7 27.5 39.8 52.0
Valuation
P/E (x) 39.2 15.2 9.4 6.3 5.7
• Despite the robust growth in offing, the stock still trades at FY18F/FY19F PE of
9.4x/6.3x indicating that there is still room left in valuations. Our FCFF based P/BV (x) 6.5 5.4 3.9 2.7 2.0
Dec-18 PT of PKR182/share offers capital upside of 71% from last close. Div Yield 1.2% 3.3% 4.2% 6.1% 7.1%
ROE 18.6% 38.8% 47.9% 50.0% 40.8%

| 44
Amreli Steels Limited: Expansions & Anti-Dumping Duties to Drive Earnings

Expansions to Ease Capacity Constraints Price - Dec 29, 2017 PKR 93
• ASTL’s 200ktpa melting capacity has been completed whereas its 425ktpa Target Price (December 2018) PKR 165
rolling capacities at Dhabeji is expected to come online in Feb-18, 200ktpa Bloomberg ASTL PA
second melting capacity at Dhabeji is expected to come online in Jun-18, and Website www.amrelisteel.com
145ktpa rolling capacity at SITE is expected to come online by the end of FY19. 52-Weeks High/Low (PKR) 144.2 – 65.9
• In this regard, we estimate the latest set of expansions to result in incremental Market Cap (PKR bn) 27.5
FY19-23F EPS of PKR1.23-5.70 and have augmented our PT by PKR48/share Market Cap (USD mn) 248.6
(assuming re-bar dispatches of 250k/350k in FY18/FY19 compared to the
management’s target of 350k/450ktpa, respectively).
Construction Activity to Keep Demand Growth Robust
• Construction demand boom is expected to persist where re-bars demand has Free Float (%) 25%
grown at 15-17% in recent years. ASTL would be relatively well placed as it aims
to eat the pie of ungraded re-bars (50% share in overall re-bars market).
Anti-Dumping Duties on Re-bars Would Likely Help Maintain GM’s
Financial Summary
• 19% anti-dumping duty levied on re-bars imports originating from China would
likely keep imports at bay. While we do not foresee a significant increase in local FY16A FY17A FY18E FY19F FY20F
re-bars prices, it significantly reduces the risk of heightened re-bars imports, as EPS (PKR) 4.3 3.6 6.9 12.9 15.9
seen in 2016, while providing domestic players enough power to easily pass on
Risksraw material costs.
rising DPS (PKR) 2.0 2.0 3.5 7.5 12.5
Valuation BVPS (PKR) 36.0 37.5 42.4 51.8 60.2
• The stock trades at FY18F/FY19F PE of 13.5x/7.2x, where our Dec-18 PT of P/E (x) 21.5 25.6 13.5 7.2 5.8
PKR165/share offers total upside of 77%. P/BV (x) 2.6 2.5 2.2 1.8 1.5
Div Yield 2.2% 2.2% 3.8% 8.1% 13.5%
ROE 15.4% 9.8% 17.2% 27.3% 28.4%

| 45
Industrials: Pakistan Automobiles
Investment Theme & Outlook Strength in Auto Demand Expected to Continue

Volumetric Growth to Continue in FY18
1000 units Completely Built Units Used Imports
• The domestic auto segment has witnessed volumetric CAGR of 16% over FY14- 400
17 while we expect FY17-20 sales CAGR to clock in at 12%. Waiting time in the
350
passenger car segment ranges between 2-6 months, which is indicative of the
strong demand. 300
250
• We anticipate strength in sales due to i) cheap auto financing, ii) ongoing
construction emanating from CPEC projects and subsequent transit activity, iii) 200
government policies i.e. Kissan package and reduced GST on Tractors while the 150
announcement of a Taxi scheme is also possible. 100
Change in Import Mechanism to Drive Import Substitution 50
• The government has changed the mechanism of importing preowned cars -
FY2014A
FY2015A
FY2016A
FY2017A
FY2018E
FY2019E
FY2020E
thereby making them difficult to import. In FY17, ~70,000 units were imported
which were dominated primarily by the small car segment.
• We identify PSMC as the core beneficiary of the resulting shift in demand
towards domestic cars. However some customers may move towards the entry Lower Interest Rate Lead to Higher Auto Demand
level sedan car segment owing to comparative luxury and pricing levels.
On New Competition and Reversal In Economic Cycle Passenger Cars KIBOR - 3M (RHS)
25,000 12%
Risks
• With several new players joining the automobile sector, current assemblers will
20,000 10%
experience a decline in pricing power. However it will also enable the sector to
reach scales where more localization is possible while also affording more 8%
15,000
bargaining power to the sector with other stakeholders. 6%
10,000
• Reversal in the interest rate cycle will negatively impact auto demand as ~40% 4%
of the cars are financed through loans. However the waiting time will provide 5,000 2%
the sector some buffer from falling demand. - 0%
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Apr-14
Apr-15
Apr-16
Apr-17
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jan-14
Jan-15
Jan-16
Jan-17
• Depreciation in PKR will negatively impact the cost of manufacturing but we
identify that the segment currently holds high pricing power and can therefore
pass along the cost.
Source: PAMA, SBP, Elixir Research
| 46
Indus Motor Company Limited: Debottlenecking to Unlock Value

Debottlenecking to Resolve Chronic Production Constraints Price - Dec 29, 2017 PKR 1,680
Target Price (December 2018) PKR 2,220
• Despite strong demand, INDU faces continued production constraints which
can be ascertained from 2-6 month waiting time for Toyota Corolla. Bloomberg INDU PA
Website www.toyota-indus.com
• The company’s paint shop debottlenecking, expected to come online in
52-Weeks High/Low (PKR) 2,110.0 – 1,565.0
4QFY18, will increase its annual production capacity from 54,800 units to 65,000
units (75,000 units including overtime). In addition to volumetric sales growth, Market Cap (PKR bn) 132.1
this will also reduce finance cost arising out of delayed deliveries. Market Cap (USD mn) 1,193.0
Strong Product Lineup Avg Daily Turnover (mn) 0.6
• Strong volumetric growth in the Toyota Fortuner of ~7x YoY in 5MFY18 has
enabled INDU to diversify its exposure on flagship Corolla while also
establishing its footprint in the high margin SUV segment. It also plans to Free Float (%) 17%
introduce a new diesel engine in 2018 for the Fortuner.
• Rumors are ripe in the market about the abandonment of the 1300cc engine in
Corolla and the launch of Toyota Vios. While the management has refuted
these reports, this move may result in the customers moving towards 1600cc Financial Summary
and higher engine while the introduction of the Vios may also enable the FY16A FY17A FY18E FY19F FY20F
company to launch Toyota Yaris in the hatchback space.
EPS (PKR) 145.7 165.4 194.7 200.6 246.2
Resilient to Reversal in Economic Cycle
Risks DPS (PKR) 100.0 115.0 136.0 140.0 172.0
• Higher sales in rural Pakistan, which are cash based, makes the company
comparatively less sensitive to interest rate hikes. BVPS (PKR) 351.5 396.9 455.6 516.2 590.5
P/E (x) 11.6 10.2 8.6 8.4 6.8
• Despite high localization, PKR depreciation will increase the cost of production
drastically; however INDU enjoys significant pricing power and can pass along P/BV (x) 4.8 4.2 3.7 3.3 2.9
the cost increase to customers and shied margins. Div Yield 6.0% 6.8% 8.1% 8.3% 10.2%
Valuation ROE 44.3% 44.2% 45.7% 41.3% 44.5%
• Our Dec-18 PT of PKR2,220/sh offers total upside of 40% from last close.

| 47
D Other Interesting Ideas
In Search of Alpha
| 48
Other Interesting Ideas | In Search of Alpha
Lalpir Power Limited: Banking on Inefficiency Gains

LPL has traditionally suffered fuel losses Price - Dec 29, 2017 PKR 23
Target Price (December 2018) PKR 35
• Lalpir Power’s (LPL) cumulative EPS over 2014-16 totaled PKR6.9 while fuel
losses per share amounted to PKR9.0. Fuel losses over this period have Bloomberg LPL PA
essentially halved LPL’s earnings. Website www.lalpirpower.com
52-Weeks High/Low (PKR) 283.0 – 165.0
Reduction in furnace oil based generation will reduce fuel losses
• 14,316MW of capacity additions to the grid till FY19 will result in an energy Market Cap (USD mn) 77.3
surplus as the power deficit is estimated at 5000-6000MW. This is already Avg Daily Turnover (mn) 2.9
leading to substitution of RFO based power plants with cheaper fuels. Due to
the high cost of generation by LPL (owing to fuel losses), we expect LPL’s
KSE-100 Index Weightage (%) NA
utilization rate to drop from 52% in 2016 to 49% in 2017 and drastically drop to
17.5% by 2019. Free Float (%) 40%
• As a result fuel losses are expected to reduce to PKR2.2/share in 2017,

PKR1.5/share in 2018 and PKR1.1/share in 2019.
Lalpir offers a huge margin of safety Financial Summary
• Lower utilization will reduce LPL’s importance to the national grid which could 2016A 2017E 2018F 2019F 2020F
lead to excessive delays in capacity payments. Global phase out of furnace oil EPS (PKR) 2.6 3.3 4.5 5.6 6.4
Risksplants also raises concerns over the book value of the plant and whether
power DPS (PKR) 2.0 2.3 3.0 3.3 3.8
that will be realized at PPA expiry in 2028. Therefore we have assumed 30% of
BVPS (PKR) 33.2 34.6 36.5 38.9 41.8
capacity payment (each quarter) build up as additional receivables which will
be paid at PPA expiry and that the plant sells for 25% of its 2028 book value.. P/E (x) 8.7 6.8 5.0 4.0 3.5
Valuation P/BV (x) 0.7 0.7 0.6 0.6 0.5
Div Yield 8.9% 10.2% 13.3% 14.6% 16.9%
• In addition to employing conservative assumptions on cash flows and terminal
value, we have also incorporated an additional 200bps premium into our cost ROE 8.0% 9.8% 12.6% 15.0% 15.9%
of equity for LPL (taken at 14.5%). Our Dec-18 PT of PKR35/sh still offers total
upside of 65% from last close.
| 49
Other Interesting Ideas | In Search of Alpha
Dolmen City REIT: Yield with Conviction

Standing out in Uncertain Times Price - Dec 29, 2017 PKR 11
• DCR stands out from the rest of the listed space in Pakistan due to captive Target Price (December 2018) PKR 21
demand, relative protection against economic risks, ability to pass on Bloomberg DCR PA
inflationary pressures and limited competition. Website www.arifhabibdolmenreit.com
• While the stock may have limited capital gains in the offing, it offers one of the 52-Weeks High/Low (PKR) 12.75 – 10.55
highest FY18E / FY19E dividend yields of 11/12% - and that too with high Market Cap (PKR bn) 24.5
conviction! Market Cap (USD mn) 221.0
Recurring built-in growth in cash flows Avg Daily Turnover (mn) 0.04
• Boasting occupancy rates of 100% for Harbor Front and 96% for Dolmen Mall
Clifton, the fund generated rental income of PKR2.8bn in FY18 (up 12% YoY). In KSE-100 Index Weightage (%) 0.3
line with most commercial agreements, the tenancy contracts dictate a 10% pa Free Float (%) 25%
increase in rents.
• Given the hefty Capex that the tenants have to incur upfront, the very nature of
DCR’s business ensures that the tenants are sticky. In fact, as at Jun-17, the
Weighted Average Lease Expiry for all tenants stood at 3.4 years (4.0 years for Financial Summary
Harbor Front and 3.1 years for Dolmen Mall Clifton).
FY16A FY17A FY18F FY19F FY20F
• Our Distributable Income based EPS estimates for FY18F/19F stand at EPS (PKR) 8.0 1.7 1.3 1.4 1.5
PKR1.26/PKR1.38.
Risks At regulatory requirement of 90% payout, respective DPS
estimates stand at PKR1.25 and PKR1.35 for FY18F and FY19F. DPS (PKR) 1.0 1.2 1.3 1.4 1.5
Valuation BVPS (PKR) 18.1 18.8 18.6 19.0 19.2

P/E (x) 1.4 6.5 8.5 7.9 7.3
• Using Income Capitalization Approach, we estimate the accounting NAV for
DCR to stand at PKR18.6 by FY18 end, implying a market price discount of 40% P/BV (x) 0.6 0.6 0.6 0.6 0.6
to NAV. Other approaches (eg Forced Sale Value results in even higher NAV
Div Yield 9% 11% 12% 13% 14%
estimates).
ROE 56% 9% 7% 7% 8%
• Our Dec-18 DDM based TP stands at PKR21/share.

| 50
Elixir Team
Contacts
Contact Email
Fawaz Valiaani CEO T +92 21 3569 4617 E fawaz@elixirsec.com
Pakistan Research Team

Hamad Aslam, CFA - Strategy Director, Head T +92 21 356 946 09 E hamad@elixirsec.com
Sharoon Ahmad - Economy, E&P, Steel, Cement T +92 21 111 354 947 Ext. 3144 E sharoon.ahmad@elixirsec.com
Ovais Hussain - Automobile, OMC T +92 21 111 354 947 Ext. 3122 E ovais@elixirsec.com
Syavash Pahore - Banking, IPP, Fertilizer T +92 21 111 354 947 Ext. 3122 E syavash@elixirsec.com
Syed Tahseen - Head of Database T +92 21 111 354 947 Ext. 3116 E tjaved@elixirsec.com
Pakistan Equities Team

Foreign
Ali Raza T +92 21 3569 4695 E aliraza@elixirsec.com
Institutions
Murtaza Jafar Head T +92 21 3569 3911 E murtaza.jafar@elixirsec.com
Jawwad Aboobakar T +92 21 3565 3180 E jawwad@elixirsec.com
M. Zain-ul-Abedin T +92 21 3565 3180 E mzain@elixirsec.com
Muhammad Arbash T +92 21 3569 4676 E marbash@elixirsec.com
Adil Abid T +92 21 3569 3918 E aabid@elixirsec.com
Retail
Abdul Samad Head T +92 21 3569 3922 E asgaba@elixirsec.om
Mohammad Sikandar T +92 21 3569 3914 E srahim@elixirsec.com
Kamran Kaludi T +92 21 3569 3920 E kkaludi@elixirsec.com
Khurram Malik T +92 21 3569 4602 E kmalik@elixirsec.com
Noman Ullah Baig T +92 21 3568 0755 E nbaig@elixirsec.com
Mehmood Adam T +92 21 3569 4608 E amehmood@elixirsec.com
Waseem Khan T +92 21 3569 4604 E mwkhan@elixirsec.com
Lahore Office
Tahir Maqbool Branch Head T +92 42 3577 2643 E tmaqbool@elixirsec.com
Shahzad Ahmad T +92 42 3577 2643 E sahmed@elixirsec.com
Fawad Ilyas Khan T +92 42 3577 2643 E fikhan@elixirsec.com
Usman Ali T +92 42 3577 2642 E uali@elixirsec.com
Ali Raza T +92 42 3577 2642 E araza@elixirsec.com
Islamabad Office
Asim Ghafoor Qureshi Branch Head T +92 51 2272 341 E aghafoor@elixirsec.com
| 51
Disclaimer and Disclosures for Equity Research
Disclaimer
This research document has been prepared by Elixir Securities Pakistan (Private) Limited (“Elixir”).It has been prepared for the general use of Elixir’s clients and may not be redistributed,
retransmitted or disclosed, in whole or in part, or in any formal manner, without the express written consent of Elixir. Receipt and review of this research document constitute your agreement not to
redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Elixir. The information
contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Elixir makes no representations or warranties (express or implied) regarding the data
and information provided and Elixir does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research
document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment
products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and
the particular needs of any specific person who may receive this document.
Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document
and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the
price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments.
Accordingly, investors may receive back less than originally invested. Elixir or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the
issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Elixir or its affiliates may from time to time perform
investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Elixir, together with its affiliates and employees, shall
not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document.
This research document and any recommendations contained are subject to change without prior notice. Elixir assumes no responsibility to update the information in this research document. Neither
the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for
distribution or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be
contrary to law or which would subject Elixir or any of its affiliates to any registration or licensing requirement within such jurisdiction.
Disclosures
1. Explanation of Elixir Securities Pakistan (Private) Limited Rating System
Elixir uses a three-tier rating system based on Total upside or downside potential for all stocks under its coverage.
Overweight / BUY: The expected Total Return (Capital Upside and Forward Dividend Yield) is more than 15% from last closing price.
Marketweight / HOLD: The expected Total Return (Capital Upside and Forward Dividend Yield) is between -15% and +15% from last closing price.
Underweight / SELL: The expected Total Return (Capital Upside and Forward Dividend Yield) is less than -15% from last closing price.
2. Definitions
Time Horizon: Our analysts make recommendations on a 1 year or a specific date. In other words, they expect a given stock to reach its target price within or by that time.
Fair Value: We estimate fair value per share for every stock in our Universe. This is normally based on widely accepted methods appropriate to the stock or sector under consideration e.g. DCF
(discounted cash flow), DDM (Dividend Discount Model), relative valuation methods (PER, PBV, EV/EBITDA etc.) and/or SOTP (Sum of the Parts) analysis.
Target Price: This is similar to Fair Value, except a Target Price is calculated for a specific point in time in future (example as at June or December of the next 12 months).
Please note that the achievement of any Target Price may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed
or fall short of our expectations.
3. Risks
The following risks may potentially impact our valuations/forecasts:
Interest Rate Risk, Exchange Rate Risk, Operational Risk and Regulatory Risk.
| 52

Pakistan Equity Outlook 2018: What Would Warren Buffett Buy

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What Would Warren Buffett Buy in Pakistan?

Pakistan Equity Market Outlook 2018

Macro Politics Economic Growth

Currency Monetary Policy Twin Deficits

Markets 48,900 KSE-100 Target Multi-Year Bull Run

2012/13 Drawing Parallels

Executive Summary......Pakistan Equity Market Outlook 2018 2

Eyeing 21% Gains for the Year

55,000 Pakistan Included in

49,000 Panama Case verdict:

16% correction in 2001

58% correction in 2008

Source: PSX, Elixir Research

55% Pakistan Equities now offer 11.0%

-25% -1.0%2010 2011 2012 2013 2014 2015 2016 2017

Source: Bloomberg, Elixir Research

What Followed / May Follow?

• KSE-100 rallied 49% during 2013, allowing Pakistan

With valuations plummeting back to 2012 levels…

Source: Bloomberg, Elixir Research

• Driven by burgeoning import bill and upcoming debt repayments, we

• We envisage the program to have an outlay of USD6.5bn. More importantly,

 Curtailment of government borrowing from Central Bank, which will

Source: Bloomberg, Elixir Research

Pharmaceuticals Highly reliant on imported materials

• ISL 450k Tons CRC

• Strong retail fuel growth, however we advise selective exposure given 1)

Industrials: Pakistan Building

• While volumetric growth remains robust, we do not advise aggressive

• CAD is expected to reach 4.4% of GDP in FY18 mainly led by increase in

• However, this will likely continue to create significant pressure on FX 2.0%

Source: Ministry of Finance, State Bank of Pakistan, Elixir Research

• The pressures on External Account have however not discouraged -15

External Account Projections (USD bn) Eurobond/Sukuk’s Issuances

Source: Ministry of Finance, State Bank of Pakistan, Bloomberg, Elixir Research

2015 1,440.0 303.0 27.6

2000 150.0 217.5 37.9

Current Conversion: 1 SDR = 1.417920 USD

Source: IMF, Elixir Research

• Inflation is expected to remain subdued due to stable prices in recent DR TR Repo

Source: Ministry of Finance, State Bank of Pakistan, Elixir Research

Is the Business easy and understandable?

Is the management candid to shareholders?

High profit margins

Calculate “owners earnings”

What is the intrinsic value of the business?

Bank Alfalah BAFL 43 55 • Standing out on Earnings Growth

Investment Theme & Outlook Elixir Banking Universe ROE

Investment Theme & Outlook Stock Summary

Valuation P/E (x) 8.2 8.9 9.0 8.6 7.8

Source: Capital IQ, PSX, Elixir Research

Investment Theme & Outlook Stock Summary

Valuation Div Yield 0.0% 0.0% 3.1% 6.6% 7.2%

Source: Capital IQ, PSX, Elixir Research

Investment Theme & Outlook Stock Summary

Source: Capital IQ, PSX, Elixir Research

Investment Theme & Outlook Stock Summary

Source: Capital IQ, PSX, Elixir Research

Investment Theme & Outlook Stock Summary

Source: Capital IQ, PSX, Elixir Research

Investment Theme & Outlook Retail Fuels Continue Growth in Importance

Source: OCAC, Company Accounts, Elixir Research