Morning Shout

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2 July 2009 KASB Research [email protected] (9221) 111-222-000

Pakistan Daily Notes

Textiles: Near term export growth not likely ƒ ƒ ƒ ƒ ƒ

Pak textile exports rose 16% MoM in May-09 but we put this down to seasonal up tick and likely timing difference of exports vis-à-vis Apr-08. Weakness is on account of both volume (-15% YoY) and prices (US$: -3% YoY) though Rupee devaluation of ~28% has cushioned earnings to some extent so far. We expect challenges for textile exporters due to (1) stiff competition from Asian peers and (2) uncertainty over support through trade agreements or GoP support. We maintain our cautious stance on Nishat Mills (NML) as we expect core earnings to drop by 32% YoY in FY10E (to PRs3.07/sh) due to weak pricing power. We highlight (1) higher exports to EU post anti-dumping duty removal, (2) lower cotton prices in FY10E and (3) higher demand from smaller markets such as Africa and ME as the upside risks.

Export growth not likely in the near term While Pak textile exports rose 16% MoM in May-09, we put this down to a seasonal up tick and likely timing difference of exports vis-à-vis Apr-08 (where exports dropped 6% MoM & 14% YoY). That said, May-09 textile exports are still a hefty 12% lower YoY and have dragged 11MFY09 exports down by 9.5% YoY to US$8.72bn. Weakness is on account of both volume and prices (US$ based) though Rupee deval of ~28% has cushioned earnings to some extent so far. Details of May-09 exports show 15% and 3% YoY lower volume and prices respectively. YTD FY09, average export volume for the sector is down 6% while prices are 5% lower YoY - note that the average is still relatively cushioned on account of a decent 1QFY09. As expected, the weakest link in the textile equation has been yarn where volumes (-7% YoY) and price (-10% YoY) have both been hit hard. Bed wear (volume: -4%; price: -7%) has also had a shaky run though fabric (volume: -4%; price: 2%) is relatively stable.

Farrah Marwat [email protected] Ph. No. (9221) 263 5501

Table-1: Textile Industry of Pakistan FY07A FY08A FY09E FY10E Exports (US$bn) 10.76 10.56 9.41 YoY growth 8% -2% -11% Key categories share in total textile exports: Yarn 14% 13% 11% Fabric 19% 18% 23% Bedwear 18% 18% 15% Garments 13% 14% 10% Knitwear 18% 17% 22% Cotton Crop (mn bales) 13.00 11.60 11.58 Price (PRs/maund) 2,549 3,160 3,478 YoY change price 7% 24% 10%

9.21 -2% 11% 23% 15% 10% 21% NA 3,548 2%

Source: KASB Estimates, FBS, KCA

A negative base-case… The government has reversed its proposal to withdraw export tax incentives (tax paid at 1% of net sales vs. 35% of income) which we view as a notional positive for the sector. That said, we continue to see challenges for textile exporters over the next 12-mths where (1) stiff competition from Asian peers and a scramble to maintain market share could delay potential gains from global growth recovery and (2) direct support to textile exporters via trade agreements, duty free access and govt budgetary support is uncertain though clearer picture would emerge post announcement of textile policy. We estimate 11% lower exports in FY09E and a further 2.2% drop in FY10E. In this scenario, we maintain our cautious stance on Nishat Mills Ltd where we eye 32% decline in FY10E core earnings (to PRs3.07/sh) as benefits of sharp FY09 currency devaluation taper off and weak pricing power squeezes margins. Note that yarn contributes ~23% to NML’s revenue, fabric has 37% share and processing and bed wear etc contribute the rest (40%).

…where lie the upside risks While our textile export outlook is weak, we attempt to identify areas where upside could exist. We however do not see major boost on account of the same Removal of Anti Dumping Duty on EU bed wear exports could be a net (albeit small) positive where every 5% increase in EU demand would have ~0.5% impact on overall exports. Improved FY10 cotton yield: Better price returns on cotton vs other crops could motivate higher cotton application and play out positively for output and prices in FY10. We continue to see the risk however that with poor pricing power, potential gains may end up being transferred to customers. Diversifying exports base: Smaller markets like Africa and the Middle East have emerged as key buyers in smaller sub-categories which could dilute the US/EU whammy. Another round of Rupee deval: We incorporate 4-5% exchange rate deval in FY10E; weaker Rupee would boost revenue & earnings as costs are almost entirely local currency based.

Refer to important disclosures on page 2

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morning shout Morning News ` Mr. Lawai to acquire 59% stake in Arif Habib Bank (KSE Notice) As per a notice given by Arif Habib Securities (AHSL), Mr. Hussain Lawai & consortium and Arif Habib group have finally executed the share purchase agreement for sale of 297.03mn shares or 59.4% of the bank to Suroor Investment which is currently held with AHSL. Acquisition price of PRs9/sh, reflect P/BV of 0.77x (Mar-09 BV: PRs11.70) and a 28.5% upside from current stock price. Arif Habib Bank currently has a branch network of 34 and paid up capital of PRs5bn compared to SBP minimum capital requirement of PRs6bn by Dec-2009. As per the memorandum of understanding signed with Mr. Lawai & consortium in Dec-2008, the new investor will inject fresh equity at PRs10/sh in the bank to meet prevailing SBP MCAR requirements.

KSE-100 Intra-day Movement 7296

High 7292.64

7276 7255 7235 7214 7194

Low 7177.55

7173 9:31 AM 10:44 AM 11:58 AM 1:11 PM 2:24 PM

Source: KSE

Technical View Aiyaz M. Hassan [email protected]

Index Data & Volume Leaders

Buy Between 7,130 Points- 7,220 Points; First Resistance 7,338 Points, Second Resistance 7,428 Points The index opened on a positive note which was its day’s low and took to a sharp uptrend staying well positive throughout the day to close well into the green. Volume continued to register modest gains increasing by 4.57% and stood at 104.62 mln. The index confirmed yesterday’s (30-06-09) bullish divergence and closed well positive. Moreover it is on the verge of giving a breakout above its channel’s resistance trendline. The Stochastic Oscillator continues to rise, maintaining its steady uptrend. Also the MACD maintains its uptrend which translates into a buy signal. Additionally, the 30-DMA has finally started to show some improvement and in the near-term could cut the 50-DMA from below. It is suggested to buy between 7,130 - 7,220 points. The first resistance is at 7,338 points and the second resistance is at 7,428 points. Gold Spot Strategy: Buy Gold dipped to test its 100-DMA on Tuesday and is presently trading between the 50- and 100DMAs. The momentum indicators as well as cyclical indicators suggest consolidation. The overall trend remains bullish. It is suggested to buy between $922.37 - $926.30 with stops below $918.44. The first resistance is at $935.84 and the second resistance is at $939.95.

Close

% Chg

Vol. US$mn

KSE30

7,711.91

1.86%

55.10

KSE100 KSE All Share

7,270.72

1.52%

59.45

5,194.43

1.42%

60.65

80.28

2.09%

6.74

POL

148.97

2.10%

5.21

MCB

156.15

0.72%

4.38

PSO

218.33

2.19%

4.34

AICL

88.03

4.81%

4.11

OGDC

Source: KSE

KSE-100: Top Gainers & Losers SCBPL PRL ARL AICL PSEL FCSC

West Texas Intermediate (WTI) Spot Strategy: Sell on Strength WTI reacted from its resistance trendline and registered a lower high and a lower low to close well into the red. The Stochastic Oscillator has leveled off around the overbought region and could likely generate a sell signal. Other momentum indicators have also assumed a downtrend. It is suggested to sell between $71.08 – $71.97 with stops above $72.87. The first support is at $69.02 and the second support is at $68.18.

PNSC KASBB IBFL PPTA -8%

-4%

0%

4%

8%

Source: KSE

KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi

This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no accounts of the investment objectives, financial situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors. KASB, as a full-service firm, has or may have business relationships, including investment-banking relationships, with the companies in this report.

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