Disclaimer: The information contained herein is compiled from sources AHL believes to be reliable, but we do not accept responsibility for its accuracy or completeness. It is not intended to be an offer or a solicitation to buy or sell any securities. AHL and its officers or employees may or may not have a position in or with respect to the securities mentioned herein and they do not accept any liability whatsoever for any direct or consequential loss arising from the use of this publication and its contents. AHL may, from time to time, have a consulting relationship with a company being reported upon. All opinions and estimates contained herein constitute our judgment as of the date mentioned in the report and are subject to change without notice.

1

Morning Call May 13, 2013

Market Strategy Equities KSE to sail high on peaceful democratic transition

With an unprecedented turnout ratio at the ballot box (~60%) following endless queues, the ‘change’ for a better Pakistan has finally come through the vote, the essence of a true democracy taking roots in the country. The political transition took place with much ease against what was earlier thought as the riskiest polls ever. By looking at the initial poll results, with one party enjoying a wide-margin lead heading towards ‘simple’ majority, one can easily decipher the nation showed zero tolerance towards bad performance and deliverance.

PML’N stands with strong mandate needed to deliver effectively

Better than initially expected as another ‘coalition’ setup, Pakistan Muslim League (Nawaz) has emerged as the clear winner of the polls 2013, expectedly pulling simple majority (137 required to make gov’t) where the party has a lead in ~126 seats. With simple majority, PML’N would stand as a combination of: 1) experience (veteran in politics, came in power two times before), 2) performance (better economic performance than its peer PPP), and 3) a strong mandate to deliver (expectedly simple majority this time around). That was all what exactly needed to timely enforce the much-needed economic reforms, in letter and spirit, to turnaround country’s below-par economy.

PML’N’s economic performance and expectations

In its earlier mandates (first in Nov'90-Apr'93, second in Feb'97-Oct'99), PML’N was proven to have efficient administration, good governance and pro-privatization attitude translating into good economics. This time around, with a targeted economic manifesto chained with broad action plans, PML’N should face no hurdles in implementing even toughest of decisions needed to undo deep economic dents. Some of them may include phasing out of huge subsidies (PKR 512bn last year) through electricity price pass-on, restructuring and privatization of public sector entities (annual fiscal drain of PKR 400bn), and taxing the untaxed/least-taxed (Agriculture sector) to propel tax revenues. The most important deal that is expected to yield immediate positives will be new setup’s priority to secure IMF funding for instant support to the economy.

In-favor Judiciary a plus, strong opposition for refined decision-making

Unlike the last ruling, PML’N enjoys high comfort factor from the Judiciary that should be considered as an added advantage for PML’N to run its office smoothly. Strong opposition (more likely PPP’s) would also keep a critical eye that should reflect in better decision-making by PML’N. However, except for Punjab, implementing reforms at provincial level would be concern due a split mandate (primarily PTI in KPK, PPP+MQM in Sindh, Coalition in Baluchistan).

Int’l relations and response from foreign donors/credit rating agencies

PML’N’s party chief (expected PM) enjoys excellent relations with Middle-Eastern rulers (Saudis in particular), which should lead to resumed investment flows from the ME region. He is also upbeat to have significantly improved ties with India (to boost trade alongside India’s likelihood to join Iran-Pak gas

Party 2008 2013*Pakistan Peoples Party 124 39 Pakistan Muslim League (N) 91 156 Pakistan Tehreek-e-Insaaf - 40 Pakistan Muslim League (Q) 54 1 Muttahida Qumi Movement 25 21 Aw ami National Party 13 1 Mutthida Majlis-e-Amal Pakistan 7 -Jamaat-e-Islami - 8 Jamiat Ulema-e-Islam (F)^ - 13 Independent 18 38 Others 8 21 Undecided 2 4 Total 342 342 *Results as per initial reports, ^Within MMA in 2008

Indicators PML'N PPPGDP Grow th 4.6% 4.2%Inf lation 9.8% 10.5%As % of GDPFiscal Deficit 6.8% 6.3%CAD 2.8% 3.6%Trade Deficit 4.6% 6.9%Tax-GDP 13.4% 12.1%Savings-GDP 20.9% 20.8%Inv-GDP 18.5% 17.5%

IndicatorsGDP Grow th Industrial Grow thInf lationBudget DeficitTax-GDPInvestment-GDPHealth-GDPEducation-GDPT&D Loss of Pow er sectorImprove GovernanceTax ReformsIncrease in Tax Rate Later Tax CutsInterest Rate CutsPSEs Restructuring Privatization Programs Financial Mkt. Reforms*PML'N Economic ManifestoAnalystResearch Teamresearch@arifhabibltd.com92-21-32460742

Yes

7-8%4%15%20%

4%

Yes

2%

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Political Party Position

7-8%

Historical Performance

6%5-year Targets

YesYes

PML'N's Next 5-Year Economic Plan

10%YesYesNo

Yes

2

Morning CallMay 13, 2013

pipeline), Iran (short-term gas import arrangements) and China (further progress on Gwadar port alongside currency swap agreement). Thus, PML’N’s appointment as the ruling gov’t should not only payoff from enhanced regional trade ties but also resumption of desired investment flows to Pakistan.

As far as relations with the US are concerned, the US has already offered a fresh beginning with Pakistan at parallel length following new political setup. Thus, improving int’l relations along with smooth political transition may increase Pakistan’s standing with the donors as well as credit rating agencies thereby positively impacting Pakistan’s ratings and funding issues, in our view.

Finance Minister a scarce resource for PML’N

PML’N may face scarcity when it comes to the right person managing country’s finances. PML’N stands low on this resource where the only option remains Mr. Ishaq Dar (Chartered Accountant) who has been frequently cited as the one who blurted out fudging issues when made Finance Minister in the last ruling (from the Opposition) that led to currency mess back in 2008. However, he is expected to act with more responsibility post lesson learned.

Outlook: KSE100 target at 22,755pts, providing 32% total return in 2013

Based on valuation models, including regional discount conversion to historical averages, earnings growth and target prices (see table alongside), we assign KSE100 a target level at 22,755pts, an upside of 16% from current levels (total 32% in 2013). Key risk to our target remains any delay in upcoming IMF deal.

We see market going northwards as an initial reflection of the on-time and smooth political transition with winning party expectedly receiving simple majority to bring in needed reforms. Followed by the new gov’t setup, next big development will be budget-making for FY14 and the much-awaited progress on the new IMF loan that should boost overall confidence once the new and improved political setup takes full charge of the gov’t office.

Impact on sectors and stocks

As far as sectors are concerned that will benefit the most from the PML’N gov’t policies, we expect Cement (infrastructure development), IPPs (circular-debt resolution, timely provision of gas/FO to increase generation), OMCs (circular-debt resolution and liquidity injections), E&Ps (increased drilling activity on more favorable law & order in KPK and Baluchistan), Banks (overall economic revival and secondary public offerings), Textiles (immediate relief to industries in Punjab following improvement in power crises) and Telecom (4G auction, better ME relations where most of the Telecom companies’ management reside) to be the key ones. Please refer to the next page for detailed impact analysis on key stocks.

Valuation Basis Target Weight BreakupTarget Price Based 22,505 15% 3,376 Earnings Grow th 21,145 15% 3,172 Justif ied PE 23,349 15% 3,502 PE-Grow th Ratio 23,902 15% 3,585 Regional DY* 22,699 15% 3,405 Regional PBV* 23,335 10% 2,334 Regional PE* 21,482 5% 1,074 Regional EV/EBITDA* 22,100 5% 1,105 Current PE Basis 24,039 5% 1,202 Average 22,729 100% - Weighted Target 2013 22,755 Expected Total Return 2013 32%

Country PE DY ROEIndonesia 16.3 1.9% 28%India 13.9 1.8% 25%Vietnam 11.8 3.5% 25%Philippines 21.6 1.9% 17%Sri Lanka 11.4 2.6% 14%Thailand 15.0 3.0% 24%China 10.7 2.4% 17%Taiw an 15.4 2.9% 15%S.Korea 9.6 1.3% 15%Peer Avg 14.0 2.4% 20%Pakistan 7.8 6.4% 26%Prem/(Disc) -44% -63% -24%*Source: Bloomberg, AHL Research Estimates

Symbol Target Upside Recom.PTC 29.6 56% BuyKOHC 115.0 45% BuyENGRO 196.0 40% BuyNBP 54.7 32% BuyBAFL 20.9 28% BuyNML 103.0 20% BuyMEBL 31.1 19% BuyFFBL 45.0 18% BuyDGKC 84.0 17% BuyHUBC* 64.0 14% BuyFCCL 11.5 13% BuyKAPCO* 60.0 7% Buy

NCPL* 28.3 1% Buy

*Buy rating includes DY as w ellAnalystResearch Teamresearch@arifhabibltd.com92-21-32460742

Key Stocks

KSE100 Index Target Estimates 2013

www.arifhabibltd.com

Forw ard Regional Multiples 2013

3

Morning CallMay 13, 2013

Sector Development Impact Prefered Stocks

Cement

New govt under the IMF program may compell to raise pow er tariff and cut PSDP spending (in short run only) to contain fiscal def icit. How ever post IMF program, infrastructural spending is expected to improve as emphasized in the PML'N manifesto.

Volumetric grw oth to slow in the short run as PSDP is the major demand driver and rising cost as pow er constitutes 15% of cost. Improvement in Medium-to-long term demand forecast intact

KOHC, FCCL, LUCK, DGKC

Power

New gov’t w ill bring structural reforms (reducing subsidies, controlling T&D losses, sw itching to cheaper generation) w hich w ill reduce the circular debt. Gov’t may also be diverting gas from other sectors to pow er in order to bring dow n load shedding across the country, w hich can be another positive too.

Easing circular-debt issue w ill improve liquidity, thus higher dividend payouts cannot be ruled out from the pow er companies.

HUBC, KAPCO, NCPL

Fertilizer

Successful implementation of long-term gas plan w ould be major trigger for the sector, how ever any change in the gas priority of new gov’t from fertilizer to pow er sector, keeping in consideration the severe energy problems prevailing in the country, w ould be negative for the fertilizer sector.

Plants operating on SNGPL w ould be affected the most in both cases. ENGRO, FFBL

Banks

As previously w itnessed, PML'N has had strategies that supported the banking sector (UBL, HBL, NBP, MCB). They had revamped banks like HBL, NBP and MCB w ith better management and pro-privatization policies. This time around w e may see the same.

If PML-N continues the same strategy it had for the banking sector previously, w e see positive impacts on the overall sector. How ever, an economic revival w ould be a bigger trigger for the banking sector to perform ahead.

BAFL, UBL, NBP

OMCs

Reduction in energy subsidies is expected to boost the liquidity of the energy chain. In addition, improved liquidity is expected to increase FO avialability for pow er sector, adding volumetric grow ht for the sector

PSO to be the major beneficiary of improving circular-debt scenario.

PSO

Telecom

3G auction w ith more interest now be show n tow ards 4G spectrum auction instead,w ill yield massive benef its to Telecom Companies in offering better quality services w ith greater ef ficiency in improving their customer base and help the govt raise much needed funds.

PTC's Ufone revenues and Broadband segment stands to benefit from the 3G possibly 4G auction, going forw ard.

PTC

E&P

PTI's government in KP and PML(N)'s relationship w ith Baloch national factions, is expected to improve the law and order situation in these provinces leading tow ards improved drilling activities.

Improved drilling activities and investment f low s from foreign partners

POL, PPL

Textile

PML-N w ill be striving to overcome energy shortfall, mostly providing relief to the industries in Punjab, thus primarily benef itting the Textile sector.

With improved production of Textile, w e may w itness higher contribution in overall GDP grow th and exports, thus helping companies' prof itability to improve alongside bringing in precious foreign reserves.

NML

Source: AHL Research