By: Zeeshan Afzal
Topline Securities Pvt Ltd
After the resolution of distribution issues and encouraging 1Q results, investors were of the view that Pakistan’s leading dairy producer, EFOODS, would be back on its growth path. But depressing profits in 2Q2014 has once again shaken investors’ confidence. In 2Q2014, EFOODS posted EPS of Rs0.14 which is 50% lower than 1Q2014 and 76% lower than 2Q2013. Lower sales and inability to timely pass on the rising costs is the major reason behind dismal results.
Taking into account recent result and expected persistence of the issues, we estimate revenues of the company will grow by meager 7% in 2014 to Rs40.5bn. The growth is even less than the inflation. On the other side, gross margins may show a slight dip of 60bps to 21% in 2014. We have revised down our EPS forecast by 41% to Rs1.2 for 2014. For 2015, EPS will improve Rs2.5 due to expected improvement in the demand and margins. As a result of this revision, we are downgrading EFOODS to ‘Sell’. The stock is trading at expensive 2014/15 PE of 90x/42x with PS of 2.0x/1.7x.
Low sales and marketing costs depressed 2Q2014 profits
In 2Q2014, EFOODS reported profits of Rs110mn (EPS Rs0.14) compared to Rs219mn (EPS Rs0.29) in 1Q2014, down 50%. During the quarter, revenues of the company declined by 2.2% to Rs9.8bn due to 9.3% decline in UHT dairy sales to Rs8.6bn. However, ice-cream sales showed seasonal increase of 128% to Rs1.2bn. Decline in UHT dairy sales seems company-specific as overall industry sales growth remained intact, disclosed by management. Gross margins remained stable at 20.5% despite price increases in May 2014 while gross profits declined by 1.7% to Rs2.0bn.
Earnings hit also came from 18.1% higher distribution cost to Rs1.2bn and 38.6% increase in finance cost to Rs351mn. Increase in distribution cost could be linked to higher marketing expenses for branding new products and seasonal ice-cream marketing. Finance cost increased due to higher financing related to new powder plant.
Similarly, on year-on-year basis, 2Q2014 profit of EFOODS is 76% lower than 2Q2013 profit of Rs460mn (EPS Rs0.6). During the quarter, sales increased by 5.5% in 2Q2014 in Pak Rupee terms but 14% surge in cost of sales to Rs7.8bn resulted in 18% fall in gross profits.