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Morning Call July 24, 2013 FFC, FFBL Chemicals AKBL’s Right issue: FFC, FFBL dividends not to be hurt

As notified to the KSE yesterday, Limited (AKBL), alongside HOLD announcing its 1HCY13 financial results, declared a 55% right issue (447mn Target Price 129.2 additional shares over 813mn current, totaling 1,260mn). In this regard, since Last Closing 112.4 AKBL’s reins are now in ’s hands, post recent acquisition of the Upside 14.9% bank by the Fauji Foundation group, including the two major shareholders, Fauji KSE Code FFC Fertilizer Company Limited (FFC) and Fauji Fertilizer Bin Qasim (FFBL), we Bloomberg Code FFC PA expect these companies to fully subscribe to the issue and have a cash flow impact on the two fertilizer companies’ financials, albeit not a significant one. Stock Performance 170% Fauji Group’s stake in AKBL and the Right issue FFC KSE100 160% As notified to the KSE back in Jun’13, when AKBL transaction completed, FFC 150% 140% stood with its shareholding in AKBL of 43%, followed by FFBL with 22% and the 130% Fauji Foundation (FF) with 7%, collectively representing Fauji Consortium with 120% 72% of the bank’s shareholding with controlling stake at a price of PKR 110% 100% 24.32/share (50.57% from and 21.23% through a tender offer 90% to the public). The Fauji consortium’s total outflow from the deal was estimated at 12 12 12 13 13 13 12 13 13 13 12 12 13 ------PKR 14.22bn with respective share outlays of FFC (PKR 8.54bn), FFBL (PKR Jul Jul Oct Apr Jan Jun Nov Dec Feb Mar Aug Sep May 4.27bn) and Fauji Foundation’s (PKR 1.42bn).

FFC and FFBL stand with enough liquidity to fund the issue As far as subscription to AKBL’s right issue goes, FFC and FFBL are going to have further outflows of cash as per their respective shareholding in the bank. We HOLD expect a cash outlay of PKR 1.93bn for FFC and PKR 965mn for FFBL. Detailed Target Price 46.2 calculations are given below based on last financials (Mar’13): Last Closing 44.4 PKR mn (Calculations based on 1QCY13 figures) FFC FFBL Upside 4.0% Operating cashflow 1,684 -1,495 KSE Code FFBL Cash and bank balances 3,362 7,713 Bloomberg Code FFBL PA Short term highly liquid investments 10,625 1,680

Cash and cash equivalents 13,987 9,393 Stock Performance Cash dividend outflow 4,453 -

180% FFBL KSE100 Cash position adjusted for cash dividend 9,534 9,393 Cash outflow for AKBL deal* 6,536 4,266 160% Expected cash balance post-AKBL transaction 2,998 5,127 140% Short term borrow ings^ 2,024 7,541

120% Amount required for Right issue (full-subs at par) 1,931 965 Expected cash balance post-Right transaction 3,091 7,633 100% Per share cashflow impact of Right (PKR) 1.52 1.03 80% Expected Earnings per share CY13 15.73 6.67 Expected Dividend per share CY13 14.60 5.30 12 12 12 13 13 13 12 13 13 13 12 12 13 ------*FFC already paid PKR 2.0bn in advance for AKBL, ^FFBL's Running Finance only

Jul Jul Oct Apr Jan Jun Feb Mar Aug Sep Nov Dec May As far as cash availability is concerned, both the fertilizer players stand with adequate liquidity keeping the right issue, as well as outflows on account of AKBL Analyst deal, in perspective. Thus, keeping total cash outflows in perspective on both Tahir Abbas counts, while barring fresh cash generation in the 2QCY13 as well as the on-going [email protected] +92-21-32462589 quarter, FFC and FFBL should stand with at least net cash flows of PKR 3.09bn (netting PKR 2.0bn in advance paid by FFC for AKBL transaction) and PKR www.arifhabibltd.com 7.63bn, respectively.

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Morning Call July 24, 2013 And, the potential impacts of the right issue subscription on FFC (PKR 1.52/share) and FFBL (PKR 1.03/share) should not hurt companies’ upcoming cash dividends. Even, subscribing the issue through borrowing should only increase financial cost by a meager PKR 0.10/share for FFC (0.6% of full-year earnings) and PKR 0.07/share for FFBL (1% of full-year earnings).

Thus, given a not very significant impact on companies’ cash flows, and the expected liquidity generation, our full-year dividend expectation for FFC and FFBL stays intact for now. For the 2QCY13, we expect FFC to announce a cash dividend of PKR 3.0-3.5/share while FFBL to announce DPS in the range of PKR 1.75- 2.0/share.

Recommendation Currently, on CY13E earnings, FFC and FFBL offer DY of 13% and 12%, with their respective price targets of PKR 129/share and PKR 46/sh. We have a ‘Hold’ recommendation on both FFC and FFBL.

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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 2 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.

Morning Call July 24, 2013

Market Review All share KSE-100 Today’s News KSE - Closing 16,789.84 23,683.27  JCR-VIS Credit Rating Company (JCR-VIS) has reaffirmed the entity ratings of Points Change 26.77 25.46 National Bank of (NBP) at ‘AAA/A-1+’ (Triple A/A-One Plus) with ‘Stable’ % Change 0.16% 0.11% Outlook. Ratings assigned to NBP are driven by the bank’s prominent position in MTD Change 1,802.31 2,677.58 the Pakistani banking sector, as reflected in sizeable market share of deposits. YTD Change 4,825.60 6,777.94 Ratings also derive support from the bank’s healthy capitalization levels and Turnover (m) 333.01 261.05 adequate liquidity profile. (The News) Source: KSE Volume Leaders Volume(m) Close  Pakistan would have to spend approximately Rs452 billion annually on urea BOP 69.08 14.03 imports if the government decides to close down fertiliser industry by FCCL 26.18 15.18 disconnecting gas permanently to seven fertiliser plants with an annual production NBP 23.84 57.16 capacity of 6.9 million tonnes, said Shahab Khawaja, executive director of Fertilizer PTC 20.77 27.95 Manufacturers Pakistan Advisory Council (FMPAC) Tuesday. He said the cost of MLCF 13.56 29.77 importing six million tonnes of urea would be about Rs312 billion and if the Major Gainers Change Close government also decides to subsidise this imported urea, it would need additional BATA 85.00 1,786.00 Rs140 billion to match the prevailing urea prices. (The News) WYETH 53.81 1,918.81 SAPL 24.96 589.95 LIBM 14.62 373.20 Margin Trading System July 23, 2013 ATRL 11.25 236.42 Day Vol Day Value Wght Avg Op. Vol Op. Value % open Major Losers Change Close (mn) (PKR mn) (mn) (PKR mn) MFFL -14.85 500.00 NBP 1.92 93.03 14.7% PSO 2.04 576.59 19.3% PMPK -12.25 287.75 PPL 0.39 82.16 13.9% NBP 5.90 270.18 9.0% PRET -9.01 171.27 PSO 0.20 60.85 15.3% HUBC 4.81 267.22 8.9% ABOT -8.25 392.93 ATRL 0.21 41.56 15.8% ENGRO 1.71 249.42 8.3% APL -5.71 572.29 DGKC 0.47 38.01 14.1% PPL 1.21 246.56 8.2% Source: KSE Settlement Data Volume % Settled Total 10.20 520.56 14.6% Total 58.02 2,991.32 BOP 35.0 48.3% Source: NCCPL FCCL 8.5 27.7% PTC 7.7 33.3% HUBC 7.4 78.9% FIPI (USDm) Net Buy/(Sell) MSCI Index Last Day YTD BAFL 6.8 40.4% 23-Jul-13 -141.03 Pakistan 129.9 -0.1% 29.5% * data of July 23, 2013 MTD -111.3 Frontier Mkt 556.2 0.0% 13.5% Future Open Int Shares(m) Values(m) FYTD -111.3 Emerging Mkt 969.0 1.6% -8.2% PSO-JUL 2.3 785.9 CYTD 291.9 EM Asia 424.1 1.9% -5.2% ENGRO-JUL 4.2 630.9 Source: NCCPL Source: MSCI PPL-JUL 1.3 302.8 EFOODS-JUL 1.8 277.9 DGKC-JUL 2.6 232.6 Board Meetings Date Time Location Total 64.6 4977.8 Engro Fertilizer Ltd 2Q 24-Jul-13 9:30 AM Source: KSE Thal Industries Corp. Ltd 3Q 24-Jul-13 10:30 AM Lahore Fixed Income (23-Jul-2013) Mirza Suagr Mills Ltd 3Q 24-Jul-13 10:30 AM Karachi 6M KIBOR (%) 9.08% EFU Life Assurance Ltd 2Q 24-Jul-13 10:30 AM Karachi T-Bill 12M (%) 9.15% PIB 10Yrs (%) 11.76% Pangrio Sugar Mills Ltd 3Q 24-Jul-13 12:00 PM Karachi Source:SBP EFU General Insurance Ltd 2Q 24-Jul-13 12:00 PM Karachi Currency Rates (23-Jul-2013) Mills Ltd 3Q 25-Jul-13 11:45 AM USD 100.68 Source: KSE EUR 133.13 GBP 154.74 Source: SBP Commodity Prices (23-Jul-2013) Gold ($/oz) 1,345.18 WTI ($/bbl) 107.23 Source: Bloomberg

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