Engro Foods Limited – A seed turning into fruition – Research of the Day by ‘WE Financials’

Engro Foods Limited – A seed turning into fruition – Research of the Day by ‘WE Financials’

By: Research Team, WE Financialsfmcg sector in pakistan

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We initiate the coverage of Engro Foods Limited (EFOODS) with a Dec’13 Target Price of Rs 161/share, offers an upside of 29% -BUY. We have used (DCF, P/S ratio, P/E ratio and P/BV method) to arrive the target price as it’s a food group company and major players of the group are NESTLE, UNILVER, MFFL & NATF.  Our bullish view is on back of increasing market share, uptick in milk prices, diversion of masses towards UHT milk from unprocessed milk, followed by in-house milk procurement through Nara farm and continuous expansion in other food group segments.

We estimate top line average growth of 22.21% (2013-2015), gross margins to average at 27% (2013-2015), average market share of 56% (2013-2015), and milk price to grow at a CAGR of 5% (2013-2015). The key risks to our estimates are 1) No barriers to entry in the segment, 2) Upsurge in discount rate, 3) Failure of new business lines and 4) high inflationary environment.

CY13: A Booming Year

  • We expect CY13 to be a booming year for Engro Foods Limited as they are planning to re-launch juice segment and further new products are in the pipeline
  • Earnings to zoom +45% YoY in CY13 translating into PAT of Rs 3,769 million (EPS: Rs 4.95) and ROE to clock in at 37.50%
  • We expect Nara Farm and Ice-cream segment to come into operating profit and would support the bottom-line
  • Going forward launch of powdered milk plant would result cost efficiency and would help reaping higher margins
EFOODS Financial Snapshot

CY12A

CY13E

CY14F

CY15F

Net Sales (Rs mn)      40,169          53,570          62,396          72,881
Profit after Taxation (Rs mn)         2,595            3,769            5,308            7,212
EPS (Rs)           3.41              4.95              6.97              9.47
Book Value (Rs/share)         13.21            18.16            25.13            34.61
DPS (Rs)                -                   -              1.00              2.00
P/E (x)         35.83            24.67            17.52            12.89
P/BV (x)           9.25              6.73              4.86              3.53
P/S (x)           2.31              1.74              1.49              1.28
EBITDA margin (%)         18.40            19.60            22.40            25.10
ROE (%)         25.8            27.3            27.7            27.4
ROA (%)         11.70            13.87            16.52            19.01
Source: Company Reports & WE Research

 

 

A quick look to CY12

Engro Foods has posted PAT of Rs 2,595 million (EPS: Rs 3.40) up side of +191% YoY in bottom line versus PAT of Rs 891 million (EPS: Rs 1.17) in CY11. Earnings growth came from increase in top line by +35% YoY with support from increase in volumetric milk sales by 25% YoY, increase in market share to 51% and increase in gross margins to 25.7% from 22.2% in CY11. Engro Foods Limited juices segment still incurring losses but company is working in back yard to change their strategy for expansion. Ice cream business is incurring gross loss but volumes and value have improved, moreover market share is increasing gradually as Omore brand has established its significant presence in the market. Company’s indoor milk production farm finally made some gain but a good gesture for contribution in 2013 is expected.

What we see in 2013 and beyond

Engro Foods Limited is importing powdered milk plant in CY13 and as per our information plant likely to be commissioned between July-Aug’13, this would help company to improve cost efficiencies resulting in better gross margins. Moreover company is also considering launch of Halal meat Canada’s product into local market in order to tap the growing potential of packaged meat needs. In its analyst briefing, company revealed that it is planning to improve its market share in ice cream and juice businesses which still need to shoulder the single-handed growth from milk business.  We believe 2013 will be the big year for EFOODS in terms of profitability and further diversification in food business.

Foreigners Interest in Strategic Investment?

De-listing of UNILVER Pakistan is helping the company’s presence in the exchange, and foreigners are taking their positions in the stock along with big local institutions despite low free float of 12%. Lately there were rumours of Al Marai- KSA taking exposure in EFOODS but still no clarification from the management. We believe any stake sell off by the ENGRO Corp would be above Rs120/share particularly based on growth potential in the company.

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Engro Foods Limited

 

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