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AKD Securities Limited

Member Karachi Stock Exchange

Equity Research / Pakistan

Todays Daily
We re-initiate coverage on DAWH with a 'Buy' recommendation
where our SoTP based Dec'13 end TP of PkR68/share offers 31%
upside from current levels. We have assumed a 40% holding company
discount (HCD) to arrive at out SoTP based TP. Our Buy stance for
DAWH is underpinned on expectations of a sustainable long-term
gas supply scenario for the fertilizer sector, particularly for ENGRO,
where DAWH's 38% holding in the company accounts for 74% or
PkR50/share of our TP. From an investment perspective, every
PkR5/share price increase in ENGRO represents a ~2ppt increase
in DAWH's SOTP value, while HUBC's value for DAWH (14% stake)
clocks in at PkR21/share (PkR12.5/share after accounting for HCD).

KSE 100 - Index

Previous

100.55

News and Views

Chg.

103.3%

The government has approved a reduction in petroleum prices of


PkR0.77/liter for petrol and PkR0.62/liter for diesel. This was against a
proposed decrease in prices by Ogra of PkR1.45/liter and PkR1.8/liter
on HSD and petrol respectively. In this regard, PSO may reportedly incur
inventory losses due to the decrease in HSD price as they have imported
a significant quantity of HSD at higher rates.

Value Traded (PkRmn/U S$mn)

The Planning Commission of Pakistan has expressed its concern to the


Ministry of Finance on the ballooning fiscal deficit. Planning Commission
expects the FY13 fiscal deficit to clock in at 8% of the GDP due to high
subsidies in the power sector.

26-Mar-13 299.63

The federal government has released PkR141.1bn as of Mar 29'13 from


it development budget for 1,113 projects, which amounts to 32% of the
total target development budget for FY13. In this regard, the government
had allocated PkR360bn for the purpose, which includes PkR100bn as
the foreign exchange component.

0.53%

Mkt Cap. (PkRbn/US$bn)


Current

4,447 / 45.19

Previous

4,406 / 44.77

Chg.

0.94%

Daily Turnover (mn)


Current

204.39

Current

4,972 / 50.53

Previous

2,554 / 25.95

Chg.

94.7%

SCRA Flow FYTD (US$mn)


27-Mar-13 300.67
Val. Chg

1.04

500
400
300
200
100

Volume (LHS)

Jan-13

Nov-12

Mar-13

(Index)
19,500
18,500
17,500
16,500
15,500
14,500
13,500
12,500
11,500
10,500

(mn)
600

Sep-12

FBR has pointed out a conflict in sales tax legislations pertaining to dairy
tea whiteners, where sales tax exemption is currently being provided on
both dairy whitener inputs and the final product itself. In this regard, FBR
believes the Sales Tax Act will prevail and dairy whitener will not be
entitled for benefit of zero rating on its inputs and raw materials. In related
news,

17,947.76

Chg.

Jul-12

The FBR has managed to provisionally collect PkR1.3trn during the


period staring Jul 1'12 and ending Mar 29'13. The collection target for
9MFY13 stands at PkR1.478bn where FBR officials have expressed
confidence that they will achieve the figure in the remaining two days.

18,043.31

Previous

May-12

SBP on Friday announced that the refinance rate under the Export
Finance Scheme (EFS) will be increased by 20bps to 8.4%p.a. w.e.f.
Apr 1'13.

Current

Mar-12

Monday April 01, 2013

AKD Daily

DAWH: Poor mans exposure to ENGRO

KSE-100 Index

Raza Hamdani
raza.hamdani@akdsecurities.net
UAN:111-253-111 Ext: 646

Important disclosures, including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do business with
companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the
report. Investors should consider this report as only a single factor in making their investment decision.
Find AKD research on Bloomberg
(AKDS<GO>), firstcall.com
and Reuters Knowledge
UAN: 111-253-111

Copyright2013 AKD Securities Limited. All rights reserved. The information provided on this document is not intended for distribution to, or use by, any person or entity in any jurisdiction
or country where such distribution or use would be contrary to law or regulation or which would subject AKD Securities or its affiliates to any registration requirement within such jurisdiction
or country. Neither the information, nor any opinion contained in this document constitutes a solicitation or offer by AKD Securities or its affiliates to buy or sell any securities or provide any
investment advice or service. AKD Securities does not warrant the accuracy of the information provided herein.

01

AKD Securities Limited


Member Karachi Stock Exchange

Monday April 01, 2013

AKD Daily

DAWH: Poor mans exposure to ENGRO


We re-initiate coverage on DAWH with a 'Buy' recommendation where
our SoTP based Dec'13 end TP of PkR68/share offers 31% upside
from current levels. We have assumed a 40% holding company
discount (HCD) to arrive at out SoTP based TP. Our Buy stance for
DAWH is underpinned on expectations of a sustainable long-term
gas supply scenario for the fertilizer sector, particularly for ENGRO,
where DAWH's 38% holding in the company accounts for 74% or
PkR50/share of our TP. Moreover, while DAWH's impressive 60% gain
in 1QCY13TD is primarily underpinned by the government's approval
of ENGRO's existing Mari gas allocation, we believe there are additional
upsides in the form of improving outlook for DH Fertilizers and the
company's plan to diversify into bran oil production. From an
investment perspective, every PkR5/share price increase in ENGRO
represents a ~2ppt increase in DAWH's SOTP value, while HUBC's
value for DAWH (14% stake) clocks in at PkR21/share (PkR12.5/share
after accounting for HCD).
Core profitability to increase: After a dismal performance by DH Fertilizers
in CY12 amid a gas supply crisis, which led to operating profit to decline
by ~2xYoY, we expect an imminent resolution of gas supply constraints
and improving fertilizer dynamics going forward to augment earnings. In
this regard, we expect operating profit of the company to grow at an
impressive 3-year CAGR of 83% post CY14 on the back of enhanced
capacity utilization post materialization of the long-term gas supply plan.
In addition, we highlight DH Fertilizer's edge over competitors (old pants)
in terms of plant efficiency, where the company's fuelstock consumption/ton
has been lower by ~10% over industry peers, at full load. On a relative
basis, our portfolio value of DH Fertilizers for DAWH comes to PkR8.4/share
and contributes 7% to our TP after accounting for the 40% HCD.
Diversification: DAWH has announced an investment of PkR1bn in a
greenfield project to extract bran oil from rice husk in Muridke, Punjab.
The project, which is to be financed with a debt component of 25%
(PkR250mn), is expected to achieve COD in 3QCY14 while the BoD has
already approved an investment of PkR300mn (CY13 cash outflow of
PkR0.62/share), which constitutes 40% of the total equity component.
While we still await guidance regarding the details of the venture, assuming
a 50% ROE (in line with historic average ROE for consumer plays), we
estimate the project to have an annualized EPS impact of PkR0.78/share
for DAWH. In addition, the company has also stated that the projected ROI
of the project is well above the company's benchmark. Bran oil, a viable
and globally popular alternative to various kinds of cooking oil would be
a welcome addition to Pakistan's rapidly growing consumer market and
also holds export potential, in our view.

DAWH Price Performance


1M

6M

21.9

60.6

31.4

Rel. Index (%) 22.6

54.1

-1.7

52.5

Absolute (PkR) 9.3

19.6

12.4

19.3

Absolute (%)

12M CYTD
59.3

Source: AKD Research

DAWH SOTP Valuation (PkR/sh.)


DH Fertilizer (Dec'13 TP)

ENGRO @ PkR207/share

84

HUBC @ PkR61/share

21

Holding Company Discount

40%

DAWH TP

68
Source: AKD Research

DH Fertilizers Snapshot
CY13F
Cap. Utilization
Urea sales (k tons)
NPAT (PkR mn)

CY14F CY15F

20%

50%

89

223

70%
312

(448)

409

1,525

Source: AKD Research

DAWH Share of Profits


(PkRmn)

CY13F CY14F CY15F

ENGRO

2,801

3,865

HUBC

1,039

1,076 1,113

DH Fertilizers

5,081

(448)

409 1,525

NPAT

3,392

5,350 7,718

EPS

7.05

11.12 16.04

Source: Company Reports & AKD Research

Investment Perspective: DAWH has gained 60% in absolute terms in


1QCY13TD, in line with its associate company ENGRO, which has gained
44% in the same period largely on expectations of sustainable gas supply.
www.akdsecurities.net

02

AKD Securities Limited

Monday April 01, 2013

AKD Daily

Member Karachi Stock Exchange

In this regard, while the preceding government approved ENGRO's existing DAWH Listed PF value at
current market price (PkR/share)
Mari gas allocation to SNGP for onwards supply to Enven, we still await
ENGRO
53
clarity on the price for feedstock gas and the long-term gas supply from HUBC
17
dedicated fields, which could result in production from both plants. Value Listed Portfolio Value
70
of listed portfolio of DAWH (ENGRO and HUBC) at current market price Holding Company Discount
40%
arrives at PkR70/share, 35% higher than DAWH's market price. It is LPV after Discount
42
Source: AKD Research
noteworthy to mention that DAWH is subject to two layers of discount in
the form of discount of ENGRO subsidiaries (particularly EFOODS) on
ENGRO's share price and the second layer of discount of ENGRO on
DAWH's share price. Every PkR5/share price increase in ENGRO
represents a ~2ppt increase in DAWH's SoTP value. Additionally, HUBC's
portfolio value for DAWH at the current 14% stake clocks in at PkR21/share
(PkR12.5/share after 40% HCD) where we expect the company to benefit
from the steady stream of dividends from HUBC. Importantly, cost of
HUBC is at only PkR33/share compared with current market price of
PkR50/share, implying an unrealized gain of PkR2849mn(EPS Impact of
PkR5.92). Uncertainty over gas additional supply to ENGRO as well risks
to non-materialization of the fertilizer industries long term gas supply plan
are key risks to our call.

I, Raza Hamdani, hereby certify that the views expressed in this research
report accurately reflect my personal views about the subject securities and
issuers. I also certify that no part of my compensation was, is/or will be, directly
or indirectly, related to the specific recommendations or views expressed in
this research report. I further certify that I do not have any beneficial holding
.
of the specific securities that I have recommendations on in this report.
.

Rating Definitions
Buy

> 20% upside potential

Accumulate

> 5% to < 20% upside potential

Neutral

< 5% to > -5% potential

Reduce

< -5% to > -20% downside potential

Sell

< -20% downside potential

www.akdsecurities.net

03