omc: no mention; hence safe - BMA Capital Management

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FERTILIZER MARKETWEIGHT Budget Impact Neutral Omar Rafiq Fertilizer Analyst 22 FERTILIZER: STILL FAVORED! June 7, 2010 Being the cornerstone of GDP growth, agriculture and consequently the fertilizer sector continued to remain the favored child of the country. Contrary to earlier expectations of potential removal of subsidies attached to fertilizer production, no outlined plans towards the same was hightlighted. Thus fertilizer manufacturers are expected to continue to benefit from a lower feed stock gas price (although fuel stock gas price is expected to go up due to increased FED). Status-Quo maintained: Viable opportunities still exist within the sector No mention whatsoever of a possible removal of indirect subsidy (in the form of feed-stock gas price) is expected to bode well for the sector and investors as qualms towards possible declines in farming incomes inducing lower appetite for fertilizer consumption stand abated. Unlike feed stock gas prices, however, fuel stock gas price is expected to increase as FED on natural gas is to be increased from PKR5/mmbtu to PKR10/mmbtu. Although this increase is marginal (1.3%), we expect that this increase will merely be a pass through for fertilizer manufacturers as the current demand-supply for urea continues to be stretched by farmer appetite. With low to negligible chances of increasing support prices and lack of structural issue resolution for the agriculture sector in sight, farmer payrolls are expected to decline in the coming period owing to increased urea prices. Urea retail prices have already touched PKR900-925/bag compared to 1QFY10 average of PKR800-810/bag. In current circumstances, viable opportunities continue to exist for the sector via improvement in structural issues such as balanced fertilizer usage, improved seed varieties and better water management. Although VAT was expected to increase fertilizer prices (as fertilizer manufacture is currently exempt from GST), delay in implementation of the same will temporarily bode well for the sector. A little down hill Agrarian economic growth in the next year is to be watched carefully particularly on account of decrease in PSDP allocation to the sector. Food and agriculture division is expected to receive PKR10.8bn during FY11 compared to PKR12.0bn in FY10. Live-stock and dairy development division is expected to receive PKR886mn during FY11 compared to PKR1,400mn last year. Thus lower availability of the development budget for agrarian economy is a potential risk factor for the fertilizer sector. Outlook FY11E; ENGRO to benefit from recently announced incentives Our top pick amongst the fertilizer manufacturers remains ENGRO. The company provides an internal hedge as it operates in multiple business lines while being a market leader in most. The stock offers a potential upside of 28% from current levels to our SoTP based fair value of PKR232/share. Additionally, with budget FY11 allowing for tax free repatriation of interest income to foreign lenders together with beneficial tax credit provisions for new IPO’s, we expect ENGRO to benefit from lower cost of foreign debt and from formal listing of its subsidiaries.
CEMENTS OVERWEIGHT Budget Impact Neutral Omar Rafiq Cement Analyst 23 CEMENTS: STILL LURKING! June 7, 2010 While development budget (PSDP) seemed to be continually showing an upward trend (standing at an estimated value of PKR663bn; up 30% over last year’s revised allocation), no major development plans were announced during the budget of FY11E, particulalry regarding higher infrastructure development. Further, increase in the minimum wage of workers from PKR6,000/month to PKR7,000/month is expected to affect cash flows for the concerned. Despite growing needs of power and water management, dam development continued to remain as allusive as ever. Moreover, increase in GST from 16% to 17% is expected to increase cement prices, which though should be passed on to the end consumer. Major Development: the resounding shush No new major infrastructure development was announced in the coming year’s budget proposal while stress was laid on the successful completion of current projects. Although the country continues to be in profound demand for dams (both as a means for electricity production as well as better water management), no proposal/allocation to fund the same was clearly highlighted. Although completion of Gomal Zam Dam, Satpara Dam and the rising of Mangla Dam were highlighted, these projects are medium sized projects already reaching completion. The earlier indications of commencement of Daimer-Bhasha Dam construction by October looks like a ‘back to square one’ situation. Further, no major infrastructure development plan (other than dams) was announced despite continuous demands for improved road networks catering to both the urban as well as rural parts of the country. FED steady, GST North Despite anticipation of increase in FED rates applied to cement production, the same has been kept unchanged at current levels i.e. PKR700/ton. Although this bodes well for the demand scenario (especially given the capacity over-hang), increased GST by 1% to 17% is expected to impact the sector mildly negatively. We however believe that the producers will pass through any related tax incidence to final consumers. Moreover, we expect that when in place, this may be used as a pretext by manufacturers to improve margins by increasing prices. Loss making entities An important dimension (potential consequence) for the sector emanates from the higher tax charge on loss making entities. Under the new rules, tax collections from such organizations will be done at a rate of 1% of revenues compared to 0.5% earlier. Given the current scenario, companies such as Gharibwal, Javedan and Maple Leaf might have increased tax consequences potentially having a negative impact on their cash flow position. Outlook FY11E Our top pick amongst the cement sector continues to be Attock Cement (ACPL) particularly on account of premium pricing of its product, low leverage in a high interest rate environment and substantially positive cash flow from operations compared to its peers. At current levels the stock provides potential upside of 48% to our DCF based fair value of PKR98/share.
Page 1 and 2: 65 Federal Budget 2010-11 Cautious
Page 3 and 4: 3 TABLE OF CONTENTS Budget FY11: No
Page 5 and 6: 5 June 7, 2010 package will have li
Page 7 and 8: 7 June 7, 2010 against an average o
Page 9 and 10: 9 Sector wise Budget Impact and BMA
Page 11 and 12: ECONOMY Budget Impact Positive Abdu
Page 13 and 14: 13 June 7, 2010 announced in the bu
Page 15 and 16: 15 KEY MEASURES Income tax June 7,
Page 17 and 18: E&P MARKETWEIGHT Budget Impact Neut
Page 19 and 20: OMC OVERWEIGHT Budget Impact Neutra
Page 21: 21 June 7, 2010 Moreover, seemingly
Page 25 and 26: CHEMICALS MARKETWEIGHT Budget Impac
Page 27 and 28: 27 Outlook FY11E June 7, 2010 Incre
Page 29 and 30: 29 Top Investment Ideas June 7, 201
Page 31 and 32: BUY Fair Value: PKR 282 Current Pri

omc: no mention; hence safe - BMA Capital Management

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