By: InterMarket Securities Limited
Engro Foods Limited has gained 49.2%CYTD, outperforming the Index by a massive 43.6%CYTD on robust 1HCY15 earnings growth of 6.0xYoY driven by GM expansion. That said, the stock lost 2.7% in 3QCY15 on (i) weakness in global equity markets incl. Pakistan and (ii) rebound in int’l milk powder prices (current: US$2,870/ton; 21% higher than 9MCY15 avg).
With the company’s result due on Oct 19’15, we expect EFOODS to post 3QCY15F NPAT of PkR799mn (EPS: PkR1.04), lower by 12%QoQ but significantly better coming from a loss of PkR77mn (LPS: PkR0.10) in 3QCY14. This will take 9MCY15F NPAT to PkR2.78bn (EPS: PkR3.62), +11x YoY. 9M GMs should average 25.6% (+7.1ppt YoY).
Going forward, we expect GMs to come off given trickle‐down effect of global milk powder prices. If global prices continue to rise, EFOODS’ GMs may converge towards historical levels (CY07‐CY14 avg. GMs: 18%). In this regard, while the LT demand theme stands firm, failure to sustain high sales/profit trajectory could raise question marks on forward P/E of 32x.