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Morning Call about – SC’s decision on ICH – UBL, NBP Results Preview – Arif Habib Limited

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by February 22, 2013 Brokerage

Karachi, February 22, 2013 (PPI-OT): 1) Supreme Court quashes Lahore High Court’s decision against ICH

As per news reports yesterday, a Supreme Court two-member bench nullified Lahore High Court’s (LHC) initial decision back in Nov’12 to disband the International Clearing House (ICH) arrangement saying it doesn’t hold the authorization to suspend ICH.

According to Arif Habib limited to recall, this pertained to a case of higher incoming int’l calling rates. Through this arrangement, Long Distance Int’l (LDI) operators were able to terminate call charges from USD 0.009/min to USD 0.088/min.

Even after the technical deformation of the ICH, LDI operators continued to terminate the incoming int’l calls at the same rates as an understanding remained. Though an interesting development with the SC directives yesterday was of remanding the case back to the Competition Commission of Pakistan (CCP) to further investigate the case in accordance of law and finally resolve the case in a 15-day time period, it is now to be seen if the CCP holds the authority in determining whether ICH arrangement and higher incoming int’l rates being charged (even when the deformation of ICH had already taken place) is in accordance to competitive industry pricing practices.

Likely scenario and the impact

Though there exists no formal ICH arrangement notification (ICH notification was already withdrawn by the PTA), still if the CCP comes up with a finding of a price arrangement, and imposes any penalty on the LDI operators, it may prompt LDI operators to file a petition against it that would eventually delay the case further.

A similarity can be drawn from the previous CCP-penalty imposed on the cement manufacturers (7.5% of their revenues) in the wake of the price arrangement while the case has been in courts to be settled since August 2009. Thus, the benefit of massively increased inflows (about USD 200 mn on quarterly basis) should turnaround LDI operators’ earnings going forward.

Earnings impact going forward…

Arif Habib Limited EPS estimates for PTC, WTL, TELE and WTCL are given below and when if due to the competition factor the int’l calling rates go down in the range between 10-50%. Arif Habib Limited reiterates Arif Habib Limited ‘BUY’ stance on PTC with a Jun-13 Price Target of PKR 29.6 (Jun’13), based on 10% margin cut assumption amid competition ahead.

Sensitivity LDI Rates on EPS for CY13F
Companies USD0.088-10%-20%-30%-40%-50%
PTC*4.944.614.314.053.813.59
PTC**3.292.962.662.402.161.94
WTL**1.161.040.940.850.760.68
TELE**3.142.822.542.292.061.85
WTCL**1.821.641.481.331.201.08

Source: Arif Habib Research *Total Earnings **Only LDI earnings

Background and its impact on PTCL’s earnings

LDI operators’ argument against the reduction in incoming int’l rates is that, it would only favor foreign operators in improving their margins while their own margins would be adversely affected. This has fueled positivity to investor’s sentiments towards the Telecom stocks, as even prior to this decision (with even the ICH deformation) Arif Habib Limited saw PTC in particular to book massive earnings in its 4QCY12 (EPS of PKR 1.85 against last full-year of PKR 2.24 in FY12). PTCL’s result is sufficiently evident to support that all LDI operators’ must have had a massive quarter with solid USD inflows from this segment since Oct-12, blossoming their loss infected bottom-line.

2) UBL: CY12 Earnings expected to jump by 19% YoY

The Board of United Bank Limited (UBL) is scheduled to meet on 24th February, 2013 to approve CY12 financial results. Arif Habib Limited expects the bank to achieve a 19% YoY earnings growth in CY12 with profit after tax (PAT) of PKR 18.5bn (EPS: PKR 15.07) compared to PKR 15.5bn (EPS: PKR 12.66) in CY11. In 4QCY12, a PAT of PKR 4.4bn (EPS: PKR 3.59) is expected against preceding quarter’s PKR 4.7bn (EPS: PKR 3.87). This healthy profitability growth is expected on account of a 5% YoY improvement in Net Interest Income (NII) to PKR 42bn as coupled with a 10% YoY jump in non interest income.

Provisioning against advances is expected to decline 28% YoY to PKR 4.4bn in CY12,

When compared with PKR 6.2bn in the corresponding period last year. Operating expenses during CY12 are expected to augment by 19% YoY. Arif Habib Limited expects the bank to declare a final cash dividend of PKR 3 /share, taking CY12 payout to PKR 8/share in CY12. At last closing price of PKR 94/share, the stock is trading at a CY12E PBV and dividend yield of 1.31 and 8.5%, respectively. With Jun’13 target price of PKR 92.7 /share, Arif Habib Limited recommends a HOLD.

UBL Financial Highlights(PKR mn)4QCY12E3QCY12AQoQCY12ECY11AYoY
Mark-up/ return/ Interest earned

22,010

19,214

15%

77,483

70,450

10%

Mark-up/ return/ Interest expensed

9,703

9,286

4%

36,033

31,026

16%

Net mark-up/ Interest Income

12,308

9,928

24%

41,449

39,425

5%

Provision against non-performing advances

1,747

1,735

1%

4,442

6,195

-28%

Interest Income after provisions

10,249

8,025

28%

36,185

32,134

13%

Total Non Mark-up/ Interest Income

2,643

5,481

-52%

15,803

12,718

24%

Administrative expenses

6,219

6,058

3%

23,562

19,785

19%

Profit Before Tax

6,325

7,232

-13%

27,36

24,223

13%

Profit after Taxation

4,400

4,734

-7%

18,453

15,500

19%

EPS

3.59

3.87

-7%

15.07

12.66

19%

DPS

3.00

2.00

8.00

7.50

Source: Company Accounts and Arif Habib Research

NBP to post a decline of 10% YoY in CY12E

National Bank of Pakistan (NBP) is scheduled to announce its CY12 result on 25th February, 2013. Arif Habib Limited  expects the bank to post net earnings of PKR 3.9bn (EPS: PKR 2.12) in 4QCY12 compared to PKR 3.6bn (EPS: PKR 1.95) in the preceding quarter, a rise of 9% QoQ.

This will translate into a PAT of PKR 15.9bn (EPS: PKR 8.58) in CY12, a decline of 10% on YoY basis from CY11’s PAT of PKR 17.6bn (PKR: 9.52). The bank’s net interest income is anticipated to decrease from PKR 46.8bn in CY11 to PKR 41.4bn in CY12, depicting a fall of 11% YoY. The provisioning during this period is expected to rise by 17% to PKR 7.2bn compared to PKR 6.2bn in CY12.

NBP is expected to pay a final cash dividend of PKR 7.5 per share along with bonus of 10%. At last closing price of PKR 53/share, the stock is trading at a CY12E PBV and dividend yield of 0.6 and 14.4%, respectively. With Jun’13 target price of PKR 54.7/share, the stock is offering an upside potential of 3%, thus Arif Habib Limited recommends HOLD.

Financial Highlights(PKR mn)4QCY12E3QCY12AQoQCY12ECY11AYoY
Mark-up/ return/ Interest earned25,55225,1941%100,85095,3256%
Mark-up/ return/ Interest expensed15,60315,3801%59,40348,51622%
Net mark-up/ Interest Income

9,948

9,814

1%

41,447

46,810

-11%

Provision against non-performing advances

2,134

1,934

10%

7,226

6,201

17%

Interest Income after provisions

8,021

8,236

-3%

34,247

37,470

-9%

Total Non Mark-up/ Interest Income

6,114

5,402

13%

21,945

19,337

13%

Administrative expenses

8,577

8,510

1%

29,964

30,117

-1%

Profit Before Tax

5,555

5,123

8%

22,566

26,011

-13%

Profit after Taxation

3,913

3,609

8%

15,869

17,605

-10%

EPS

2.12

1.95

9%

8.58

9.52

-10%

DPS

7.00

7.50

Source: Company Accounts and Arif Habib Research

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