AKD Quotidian about – EFOODS – Valuation Update

Karachi, March 22, 2013 (PPI-OT): EFOODS reported a 191%YoY rise in CY12 profits with bottom-line growth underscored by i) 35%YoY increase in revenues, ii) 349bps YoY hike in Gross Margins (GMs) and iii) 14%YoY fall in financial charges.

According to AKD Securities Given the relative insulation of the non-discretionary consumer sector to economic downturns, exchange rate volatility and high pass4hrough ability, the consumer goods sector will likely continue to trade at premium multiples in the foreseeable future. AKD Securities has increased AKD Securities Dec’13 end TP for EF000S to PkR158/share on the back of 40% increase in AKD Securities earnings estimates over the next five years (CY13-CYI7) and upgraded AKD Securities stances from `Neutral’ to `Buy’. Lower than expected rise in dairy product prices as well as higher fodder prices leading to margin erosion are key risks to AKD Securities outlooks.

CY12 Result Review: EFOODS reported a 191%YoY rise in CY12 profits with bottom-line growth underscored by I) 35%YoY increase in revenues, ii) 349bps VoY hike in Gross Margins (GMs) and iii) 14%YoY fall in financial charges. On a sequential basis, FOODS recorded the highest ever profits in 4QCY12 of PkR977mn (+63%QoQ) following 50% sequential jump in Dairy Segment profitability, with segment profits driven by milk price hike in Sep’12.

On a segment wise basis, the Dairy Segment remained the star performer in CY12 with revenue and profitability growth of 37%YoY and 114%YoY, respectively. In this regard, volumetric sales of Ambient UHT milk increased by 25%YoY taking EFOODS’ market share in the category to 51%. Ice Cream segments revenues grew by 1O%YoY on the back of higher prices as volumes slipped by 3%YoY.

Acquisition of Al Safa Foods: EFOODS is in the process of acquiring Engro Foods Netherlands (Al-Safa) from ENGRO Corp., where the purchase is subject to regulatory approval. Business activities of Al-Safa relate to selling of halal meat and frozen food products in North America. Al-Safa revenues reached CA$llmn in CY12, which was its second year of operations. With Al-Safa, EFOODS will get exposure in the high growth halal meat market.

Low risk growth to demand premium multiples: Given the relative insulation of the non-discretionary consumer sector to economic downturns and exchange rate volatility coupled with high pass-through ability, the consumer goods sector will likely continue to trade at premium multiples in the foreseeable future. Multiples are likely to get pricier in the event of ULEVER successfully delisting from the KSE, in AKD Securities views.

Valuation: AKD Securities has increased Dec’13 end TP for EFOODS to PkR1 58/share on the back of 40% increase in AKD Securities earnings estimates over the next five years (CY1 3-CY1 7), where AKD Securities has increased AKD Securities margins assumption for the Dairy segment post above line 4QCY12 results.

Furthermore, AKD Securities has reduced capex assumption following clarity on capex plan by the company management, which in turn has led to lower than previously estimated financial charges.

Furthermore, AKD Securities has reduced fundamental beta from 1.25 previously to 1.0, leading to a lower COE. Strong organic cash flow generation could lead to fast track deleveraging (CY1 2 Debt to equity down to 44% from 47% ri CY1 1) and an earlier than expected dividend payout (AKD Securities expects the company to initiate dividend payout from CY16F). Lower than expected rise in dairy product price as well as higher fodder prices are key risks to AKD Securities outlooks.

   

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