Morning Call about – KSE to sail high on peaceful democratic transition – Arif Habib Limited

Karachi, May 13, 2013 (PPI-OT): 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.

According to Arif Habib Limited 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-favour 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. Moreover, implementing reforms at provincial level with key parties forming government (PTI in KPK, PPP+MQM in Sindh, Coalition in Balochistan) should yield even better overall results amid increased competition amongst parties to deliver.

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 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 Arif Habib Limited views.

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), Arif Habib Limited assigns KSE100 a target level at 22,755pts, an upside of 16% from current levels (total 32% in 2013). Key risk to Arif Habib Limited targets remains any delay in upcoming IMF deal. Arif Habib Limited sees 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, Arif Habib Limited expects Cement (infrastructure development), IPPs (circular-debt resolution, timely provision of gas/FO to increase generation), OMCs (circular- debt resolution and liquidity injections), Eand Ps (increased drilling activity on more favourable law and 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.

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