By: Alfalah Securities Limited
We initiate coverage on Engro Foods Limited (Efoods) with a HOLD call and Dec’16 Target Price of PKR160/share, which offers an upside of 2% to the last close. Profitability of the company increased in 9MCY15 to PKR2,601mn as against PKR252mn during the same period last year. Earnings for 3QCY15 clocked in at PKR624mn versus a loss of PKR77mn in same quarter last year. Gross margins clocked in at 22.6%, up 7.5pp YoY owing to low milk prices internationally. The company managed to capture 56% of the dairy and beverages market as of Aug-15. Moreover, it also launched new high margin premium variants in ice-cream segment.
Dalda Foods (Pvt.) Limited recently launched Cup Shup, a tea whitener product. By the look of the TVC it seems that Dalda Foods is looking to capture the urban audience as against the rural Punjab audience targeted by Tarang. In addition to this, Fauji Group has recently acquired Noon Pakistan Ltd. which already has an established brand Nurpur. Hence, going forward, in the face of rising competition we cannot rule out the possibility of margin cut.
SMP prices, since Jul-15, have recovered increasing by 46% to USD2,694/MT. We expect the prices to receive further support with the likelihood of China’s re-entry in the export market given its depleting reserves. Moreover, a possible formation of El-Nino in Australia and New Zealand can result in dry weather affecting milk production and resulting in a price hike in near future.