BMA Trade Efoods Report 6-Apr-12

8/13/2019 BMA Trade Efoods Report 6-Apr-12

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Company ReportFood Producers

BMA Capital Management Ltd, 801 Unitower, I.I.Chundrigar Road, Karachi , 74000, PakistanFor further queries, please contact: bmaresearch@bmacapit al.com or call UAN: 111-262-111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the informationcontained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon assuch. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, orsolicitation of any offer to buy or sell the securities mentioned.

Pakistan Research

Friday, Apr il 06, 2012

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EFOODS: ALL THE INGREDIENTS FOR

SUSTAINABLE RETURNS!INVESTMENT SUMMARY

Sustainable Long Term Growth Prospects: EFOODS presentsconsiderable long term growth prospects based on 1) rapid expansion intonon cyclical high growth markets 2) triumphant penetration and marketgrowth in key segments of operation and 3) successful establishment of highvalue brands. We project earnings to grow at a CAGR of 49% and revenuegrowth at a CAGR of 21% for the next five years, making EFOODS one ofthe best consumer plays in the Pakistani market

Massive Untapped Potential: The companys advantage stems from itsdominant position in high growth non cyclical UHT milk market, which hasshown double digit market growth in last five years and still represents aminute 4% portion of total tradable milk in Pakistan, presenting massiveuntapped potential going forward. EFOODS has successfully tapped adiverse range of income groups with its innovative product offerings andmarketing, creating unmatched brand equity for its entire dairy portfolio.

Aggress ive Expansion to Fuel Growth: EFOODS has ambitious expansionplans for the coming years, with the company having already announced aPKR8.7bn capex for CY12. We believe aggressive spending to build capacityand expanding distribution network will continue going forward, makingEFOODS a Hundred Billion Turnover company within the next ten years

At tr act ive Valuat ions : Our multiple valuation approaches of DiscountedCash Flows and comparison of relative multiples with local and regionalFMCG players lead to our Dec12 Target Price of PKR57/sh for the company,presenting a 19% upside from current levels .

Financials

PKR mn CY11A CY12E FY13E FY14E FY15E

Revenues 29,859 37,901 46,183 55,880 66,168

Gross Profit 6,629 8,779 11,097 14,235 17,522

Operating Profit 2,412 3,366 4,578 6,772 9,023

PBT 1,363 2,094 2,445 4,484 6,695

PAT 891 1,361 1,589 2,915 4,351

EPS 1.19 1.81 2.11 3.88 5.79

Gross Margins 22% 23% 24% 25% 26%

Revenue Growth 43% 27% 22% 21% 18%

Source: BMA Research

EFOODS - BUY

TP Dec-12: PKR 57

Current Price: PKR 48

Farid Aliani [email protected]

Bloomberg EFOODS PACurrent Price PKR 47.84/sh

Market Cap PKR 35,966 mn

USD 400 mn

Free Float 10%

Shares O/S mn 752

32 weeks High-Low 50.58/ 21.80

Price and Volume Graph

EFOODS vs KSE100 Relative Index Chart

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TABLE OF CONTENTS

EFOODS: Ingredients for sustainable returns 3

Dairy Market: Milking the profits 3

Juices: Lots to squeeze 4

Ice Cream: Icing on the cake 5

Nara Farm & Al Safa: Completing the growthstory 6

Expansion: Leading to a hundred billion 6

Valuations: 19% upside available 6

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EFOODS: Has all the ingredients for sustainable returns

We have revisited our models for Engro Foods (EFOODS) in light of the latestfinancials and our updated Dec12 Target Price for the company stands atPKR57/share, representing 19% upside from current levels. The stock hasconsiderable long term growth prospects based on 1) rapid expansion into noncyclical high growth markets 2) triumphant penetration and market growth in keysegments of operation and 3) successful establishment of high value brands.

EFOODS primarily operates in Dairy, Juices and Ice Cream markets, besideshaving its own farm of over 3,000 animals. The company also manages halalfoods business in North America namely Al-Safa, currently owned by EngroCorp. (ENGRO); the parent company of EFOODS.

Dairy Market: Milking the profits

UHT milk market at estimated 860mn liters still represents only ~4% of totaltradable milk in Pakistan. EFOODS has so far demonstrated immense success intapping this segment, evident from it attaining 44% market share by the end ofCY11, making it the leader of this segment. The companys biggest brandTarang is the highest sold tea whitener in Pakistan whereas the flagship brandOlpers has made itself preferred choice of high end consumers. EFOODS withall its dairy brands has made inroads into over 300 towns in the country.

We believe that the UHT market will continue to grow in the range of 7%-11% perannum going forward. We have taken EFOODS market share in UHT segment at45% in our model. However, given that the company has successfully led its dairybrands to quickly become the market leader, we believe EFOODS shouldcontinue to improve its market share in years to come.

EFOODS TP Sensitivi ty to Dairy Market DynamicsUHT Milk Market Growth CY12-CY14

7% 9% 11% 13%

40% 41 44 47 50

45% 48 51 54 57

50% 54 57 61 65

55% 61 64 68 72 E F O O D S M a r k e

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S h a r e

60% 67 71 75 80


The upside risk to our assumptions is the potential ability of Omung toaccelerate conversion from loose milk in urban centers. Omung, dairy liquidpriced competitively at PKR65/liter, costs less then loose milk prices in somemajor urban centers in the country. This can, not only increase the rate ofconversion towards processed dairy in those cities, but also help EFOODS gainfurther market share.


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Omung Price Compared to Fresh Milk

Source: FBS, BMA Research

EFOODS is currently absent from powdered dairy market, but has allocatedPKR2.0bn capex for a powder plant in CY12. This should take the company inthis market CY13 onwards.

Dairy Segment: Projected Growth


Juices: Lots to s queeze

EFOODS entered juices and nectars market in CY10 with their Olfrute brand butwas able to capture only ~1% market by year end. The market, presentlydominated by Nestle, has shown CAGR of over ~25% during the last six years.EFOODS successfully showed volumetric growth of 236% in juice sales in CY11,taking its share to ~3%. We have taken CAGR of 20% for market growth in ourmodel for the next five years and anticipate that EFOODS should be able tocapture 15% market share in next five years.

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Omung priced lower then fresh milk


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Juices and Nectars: Projected Growth


Ice Cream: Icing on the cake

Pakistans Ice Cream market is dominated by Unilevers Walls, with EFOODSOmore becoming the second largest player with 24% share by CY11. Ice Creammarket had an estimated CAGR of 11% from CY06-CY10, but the growth slowedsignificantly in CY11 due to challenges of higher prices and exacerbating powercrisis in the country. We believe that frequent power shutdowns will persist inmedium term, which would continue to keep small retailers reluctant frominvesting in ice creams. These factors have led us to take a cautious approachtowards estimating market growth for Ice Cream, and thus we have modeled in5% CAGR for the market for next five years, far lower then the companysestimates of 11% growth rate for ice cream market.

The growth for Omore in CY11 has come primarily from snatching marketshares from existing players, besides capitalizing on meager market growth.Walls volumetric sales declined by 12% in CY11 to 43mn liters, taking its sharefrom 69% to 59% by year end CY11.

As per EFOODS management, Omore is currently present in less than half of thestores compared to Walls, thus expanding presence of the brand should drivetheir market share further north. The company continues to invest in its cold chaininfrastructure, targeting profitability in this segment by CY13. We have modeled in40% market share for Omore by CY14.

Ice Cream Segment: Projected Growth


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Nara Farm & Al Safa Halal: Completing the growth story

EFOODS Nara Farm presently has over 3,000 animals, of which around 1,590are mature and produce milk. So far the company has not allocated any capital toexpand herd size, and the focus remains on improving yields of the herd, which,at around ~12 liters per day, is significantly below the global average for FrisianJersey Cross breed.

EFOODS manages Al-Safa, the halal business based in North America.Presently Engro Corp. (ENGRO), the parent company of EFOODS, owns Al Safa,with the intention to transfer ownership at cost to EFOODS upon completion ofregulatory requirement and subsequent approval from SECP. We have not builtin Al-Safa into our model.

Halal market in North America is dominated by many small unpackaged sellers.This presents room for growth for Al-Safa by competing directly with the

unpackaged halal players. However in Canada, halal market is dominated byZabiya Halal with over 70% market share followed by Al-Safa with 15% share.The management believes that current rebranding strategy and introduction ofproducts to new store chains would provide Al Safa higher penetration. Moreoverthe company will introduce paratha and rice products going forward.

Expansion: Leading tow ards a hundred billio n top line

EFOODS has ambitious expansion projects in pipeline for their existing dairy, juices and ice cream businesses, besides venturing into additional categories(powdered milk business) within the existing business segments. For CY12, thecompany has already announced PKR8.7bn worth of capital expenditure towardsa new powder plant (PKR2.0bn), expansion of cold chain infrastructure and milkcollection and distribution networks. We project that the company has the abilityto become a 100 Billion enterprise by CY18, given the potential of the marketsEFOODS has successfully tapped so far.

EFOODS plans to maintain a long term debt to equity ratio of 50:50, and does notforesee the need for further equity injection for five years forward to fund theirexpansion. However, the risk of the same cannot be ruled out if the companycomes up with a more capital intensive expansion project then currentlyaccounted for. We have modeled in capex assumptions as per the companysguidance in their IPO documents and later revisions. Internally generated cashwill be aggressively reinvested in the company. Our model suggests thatEFOODS will be able to enter debt repayment phase by CY15, and may startdividend payment post CY16.

Valuation: 19% upsi de available

We have used four valuation approaches of discounted cash flows and relativeprice multiples to estimate our Target Price for EFOODS, giving differentweightage to each. Based on Discounted Cash Flow approach, our model yieldsTP of PKR58/sh. If the average historic premium of FMCG stocks is applied tomarket PER multiple, EFOODS should trade at PKR33/sh based on its CY12-CY14 earnings.


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Keeping illiquidity of FMCG stocks at KSE in mind, we applied regional pricemultiples to estimate EFOODS target price as well. Applying appropriatediscount to regional FMCG companies Price to Sales multiple leads to TP ofPKR72/sh for EFOODS. Similar application of PER multiple of regional FMCGcompanies leads to a TP of PKR44/sh.

Thus, our Dec12 Target Price for EFOODS is PKR57/sh, representing 19%upside from current levels. This leads to our BUY stance on EFOODS.

EFOODS: Determining Target Price

Methodology Weight TP

DCF 35% 58

Regional P/S Multiple 35% 72

Regional PER Multiple 20% 44Local FMCGs PER Multiple 10% 33

Final Target Price 57


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DISCLAIMER

This memorandum is produced by BMA Capital Management Limited and is onlyfor the use of their clients. While the information contained herein is from sourcesbelieved reliable, we do not represent that it is accurate or complete and shouldnot be relied upon as such. Opinions expressed may be revised at any time. Thismemorandum is for information only and is not an offer to buy or sell, orsolicitation of any offer to buy or sell the securities mentioned.

ANALYST CERTIFICATION

I, Farid Aliani, hereby certify that this report represents my personal opinions andanalysis of information. All views are accurately expressed to the best of myknowledge. I certify that no part of my remuneration is linked either directly orindirectly to recommendations or analysis covered in this report

KEY CONTACTS

Research Team Scope Contact No. Email

Uzma Shah Strategy +9221 111 262 111 Ext. 2119 [email protected]

Nurali Barkatali Strategy, Economy, Banks, Electricity +9221 111 262 111 Ext. 2056 [email protected]

Furqan Punjani E&P, OMC, Textile, Chemicals +9221 111 262 111 Ext. 2064 [email protected]

Farid Aliani Fertilizer, Food Producers +9221 111 262 111 Ext. 2059 [email protected]

Affan Ismail Cements +9221 111 262 111 Ext. 2058 [email protected]

Samina Sher Ali Kanji Automobile, Database In charge +9221 111 262 111 Ext. 2061 [email protected]

Naseem Akhtar Khattak Layout & Product Distribution +9221 111 262 111 Ext. 2060 [email protected]

Documents

BMA Trade Efoods Report 6-Apr-12