AKD Securities Limited – EFOODS

Karachi, January 27, 2015 (PPI-OT): Analyst briefing notes

Engro Foods (EFOODS) held its analyst briefing earlier today to discuss the company’s 4QCY14 results. Recall that EFOODS posted unconsolidated NPAT of PkR635mn (EPS: PkR0.83) in 4QCY14 vs. a loss of PkR77mn (LPS: PkR0.10) in 3QCY14. As a result, CY14 earnings stood at PkR888mn (EPS: PkR1.16) against NPAT of PkR211mn (EPS: PkR0.28) in CY13, translating into 314%YoY growth (pre-tax basis: -2.5%YoY). Key takeaways from the analyst briefing included:

Dairy Volumes grew by 22%QoQ/21%YoY: 4QCY14 turned out to be a very good quarter for EFOODS in terms of volumetric growth. Dairy volumes that suffered heavily on the back of distribution issues and intense competition, bounced back growing by 22%QoQ/21%YoY, taking company’s market share to 56% in Nov’14 versus 49% in Dec’13.

Olpers and Tarang continued to be the star performers, where consistent performance by the former increased its contribution to the dairy top-line to ~40% whereas Tarang continued to form a solid ~55% of the dairy revenues. Omung, however remains suspended till now as the company fights a legal battle with Punjab Food Authority for the classification of Omung in the official Gazette of Pakistan. Going forward, management expects industry volumes to grow in the range of 10%-12%p.a., boding well for EFOODS.

GMs- a healthy sequential recovery: Gross margins for 4QCY14 went up by a good 560bpsQoQ to 20.7% in 4QCY14 (CY14 average GMs: 18.8% vs. 22% in CY13) on the back of 1) seasonal weakness in milk procurement prices (+4% contribution to GMs), 2) price increment on Olpers (+3% contribution to GMs), 3) lower inflationary pressures (+1% contribution to GMs) and 4) price discount on Tarang (-2% contribution to GMs). While focus on volumes in CY15 will likely continue, AKD Securities Limited expects GMs to hover in the range of 22%-23% with room to grow should the company decides to increase product prices/ come up with high margin products (e.g. cream).

Ice-cream to underperform until power crisis resolves: Led by lower sales in the winter season, the ice-cream segment for EFOODS went into losses in 4QCY14 although the company was able to breakeven in full-year CY14. Consequently, the company’s market share in this segment improved by 3ppt to 28% in CY14 against 25% in CY13. However, management has ruled out an aggressive stance in this segment until a sustainable improvement in the energy situation.

Strategic shift brings back focus on core dairy segment: As part of a strategic move, EFOODS has done away with two of its product lines, (i) Mabrook (pasteurized milk to tap the loose milk market) and (ii) Al-Safa (international halal meat business) in CY14. This will allow EFOODS to now focus solely on the local dairy market.

Tax credits- a one-off in CY14: EFOODS has realized net tax reversal to the tune of PkR400mn (EPS impact: PkR0.52) in CY14 for its prior investments. The company plans no significant CAPEX in CY15F, hence AKD Securities Limited expects incremental tax credits to be nominal, if any.

Investment Perspective: While AKD Securities Limited awaits detailed accounts to ascertain sustainability of earnings uptick in order to update AKD Securities Limited’s investment case, 4QCY14 earnings have definitely brought back the lost growth momentum for EFOODS where volumetric growth remains the key positive. The stock has gained 23% CYTD to trade at a forward P/E of 58x. While AKD Securities Limited’s TP of PkR121/share implies a Reduce stance, AKD Securities Limited shortly looks to update AKD Securities Limited’s investment case for EFOODS.

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