JS Securities Limited – Morning Briefing

Karachi, January 31, 2018 (PPI-OT): NATF: Robust sales growth to take 2QFY18E EPS up 32% YoY, ‘Buy’ intact

National Foods Ltd (NATF) is expected to announce its 2QFY18 earnings at Rs220mn (EPS: Rs2.13), up 32% YoY.

We expect top-line to post 43% YoY growth during 2QFY18 as we expect export sales trend to continue during 2Q as well, posting 4x YoY growth in the same.

On a sequential basis, we expect earnings to drop by 35% QoQ. Lower earnings are a result of expectations of 15% QoQ decline in sales and 140bps QoQ lower gross margins due to seasonality.

Cumulatively in 1HFY18, we expect earnings to clock in at Rs559mn (EPS: Rs5.40), up 15% YoY.

We reiterate our ‘Buy’ rating on National Foods (NATF) with a Dec-2018 Target Price of Rs413, offering upside of 38% from current levels. The stock currently trades at FY18E P/S of 1.7x and P/E of 32.1x.

Exports trend likely to continue in 2QFY18

National Foods Ltd (NATF) is expected to announce its 2QFY18 earnings at Rs220mn (EPS: Rs2.13), up 32% YoY. We expect the company’s robust sales growth to continue during 2Q and more than compensate for expected slide in gross margins. We expect top-line to post 43% YoY growth during 2QFY18 as we expect export sales trend to continue during 2Q as well, posting 4x YoY growth in the same. However, we expect gross margins to decline by 90bps YoY, though gross profit is likely to jump by 39% YoY.

On a sequential basis, we expect earnings to drop by 35% QoQ. Lower earnings are a result of expectations of 15% QoQ decline in sales and 140bps QoQ lower gross margins as 1Q sales reflected seasonality with higher demand during Eid festivals.

1HFY18 EPS likely to record 16% YoY growth

Cumulatively in 1HFY18, we expect earnings to clock in at Rs559mn (EPS: Rs5.40), up 15% YoY. While top-line is expected to grow by 47% YoY, driven by consistent growth in local sales and expanding share of exports (1HFY18E: 22%, 1HFY17: 7%), we expect gross margins to take a dip of 270bps YoY to 32%. Higher exports are anticipated to be driven by the company’s recent dedicated export facility at Port Qasim. On the cost front, we expect distribution expenses to increase by 40% YoY with ongoing sales promotion imperative for company’s price elastic products, however the cost is expected to remain controlled at 18% (+100bps YoY) as a percentage of sales.

‘Buy’ intact with TP of Rs413

We reiterate our ‘Buy’ rating on National Foods (NATF) with a Dec-2018 Target Price of Rs413, offering upside of 38% from current levels. The stock currently trades at FY18E P/S of 1.7x and P/E of 32.1x. Key risks to our investment thesis are (1) higher-than-expected increase in costs and (2) increase in competition.

   

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