Engro Foods Limited
An emerging growth story
With a growing population (2010 growth rate: 2.05%) the demand for processed
food is anticipated to grow in the coming years. This is what Engro Foods has
been doing and aims to capitalize on going forward. Penetrating and diversifying
into different areas of high quality dairy segment, Engro Foods first tuned into
profits in 2010. Now with a strong foothold in the UHT milk, ice cream and further
potential for tapping the growing demand within the segments, the company is set
to be listed on the stock exchange. The offer price is set at Rs25 per share. Based
on a DCF valuation of Rs35 per share, we recommend ‘Subscribe’ on the stock as
it offers a potential upside of 40% to our target price.
Initiating Coverage:
Target Price:
SUBSCRIBE
Rs35
June 2011
JS Global Capital Limited
What’s on offer?
Engro Corp (ENGRO) is planning to offer 27mn shares (3.6% of the total paid up
capital) of Engro Foods to the general public at Rs25 per share. Subscription
dates are July 5-7, 2011. The company has already raised Rs1.2bn (48mn share
at Rs25 each) through pre IPO to foreigners and local institutions.
Product Portfolio: Ambient UHT to ice cream to rice
Since its inception in 2006, Engro Foods has been a story of growth and
diversifying its base into high quality dairy products. Engro Foods started its
business with a launch of all purpose (Olpers) milk and cream. The company then
expanded into liquid tea whitener (Tarang) and cooking oil (Tarka) in 2007. Since
then, the company’s market share in the ambient UHT market has grown many
folds to 39% and currently holds the position of a market leader. The aggressive
approach continued in 2009 with the launch of Omore ice cream and flavored milk
(Owsum) followed by fruit juices (Olfrute: 1% market share) and powder tea
whitener in 2010. The new addition to its exquisite product line is the rice business
(mainly export oriented) and its Global business unit (GBU) Al Safa, a Halal meat
brand in North America. Al Safa is currently held under ENGRO’s books and will
eventually be bought by Engro Foods, subject to SBP approvals.
Offer Price:
Rs25
Offer size:
General Public: 27mn shares
Pre-IPO: 48mn shares
Subscription Dates:
General Public: 5-7th Jul 2011
Key numbers
2010A 2011E 2012F 2013F 2014F
EPS (Rs)
0.2
1.0
1.8
2.9
4.6
PBV (x)
3.6
2.3
1.9
1.6
1.2
PE (x)
NM
25.2
13.5
8.6
5.4
Price/sales (x)
0.9
0.6
0.4
0.3
0.3
Source: JS Research
Profits to post a 4 year (2011-15) CAGR of 65%
We project the company’s earnings to grow at a 4 year (2011-2015) CAGR of
65% to Rs5.5bn driven by untapped ambient UHT milk demand in the country.
Out of the total processed milk market (only 7% of total the country’s milk
production), ambient UHT milk segment comprises of a mere 4%. Furthermore,
strong advertising effort to penetrate into the markets of existing products (ice
cream and juices) is also likely to play its role.
Valuation: 40% upside to the offer price of Rs25
Using the DCF methodology with a risk free rate of 14.0% and cost of equity of
19.7%, our fair value for Engro Foods arrives at Rs35, which implies a 40%
upside to the offer price of Rs25 per share. Our liking for Engro Foods is also
backed by the company’s 2011E Price to sale of 0.6x which when compared to
Nestlé’s (its closest peer) average historic multiple is at a deep discount of 67%.
Completed on June 30, 2011 – Distributed on June 30, 2011
Bilal Qamar
Analyst
bilal.qamar@js.com
92 (21) 111-574-111 (Ext: 3099)
JS Research is available on Bloomberg, Thomson Reuters and CapitalIQ
Please refer to the important Disclaimer on the last page
Engro Foods Limited
Page 2
Engro Foods – what it offers?
Engro Foods was formed as a wholly owned subsidiary of ENGRO (formerly
known as Engro Chemical Pakistan Limited) in 2006. In a short period of 5 years,
the company has gained a strong foothold in UHT milk, powder and the ice cream
businesses and looks to diversify its high quality dairy based products. Within this
period, Engro foods Supply Chain (Pvt) Limited was created to look after the
supply chain of the business. It is a 70% owned subsidiary of Engro Foods and
the remaining 30% is owned by Engro Eximp. To top it all up, Engro Foods also
set up a rice plant in Muridke (Punjab) under Engro Foods Supply Chain (Pvt)
Limited (EFSC).
Processed milk – an ever growing segment
Engro Foods business started with the processed milk segment which they
currently dominate in terms of market share (39%), overtaking Nestlé in 2010.
This segment offers a great opportunity for growth as it constitutes a mere 7%
(1.4bn litres) of the total trade-able milk. A further break up of the segment reveals
that only a 4% of the total processed milk is used in the Ambient UHT milk
segment, 2.6% in Powder and the rest in Chilled Dairy.
Country’s total milk consumption (mn litres)
Milk
Prod uction
38,000
Wastage
6,000
Farmer
Tradeable
Retention
20,685 (100% )
11,315
Unprocessed
Processed
Milk
Milk
19,250 (93%)
Gawala
8,450 (41%)
Milk Shops
7,300 (35%)
Source: Company presentation
June 2011
1,435 (7%)
Industrial
Sweets
3,500 (17%)
Ambient UHT
795 (4%)
Powder
540 (2.6%)
Chilled
Dairy
100 (0.5%)
Engro Foods Limited
Ambient UHT milk – This section mainly comprises of Engro Foods (Olpers,
Tarang, Owsum and Olper’s cream) and Nestlé constituting ~71% of the total
market share. Engro Foods currently lead the market with a share of 39% with
strong growths coming in from Tarang and Olpers.
Powder Milk – Engro Foods entered the whitening powder business in mid 2010
and gained a single ppt of market share during the year. Nestlé currently
dominates the market, however aggressive advertisement campaign by Engro
Foods on this front can create a niche market for Tarang Powder as in the case of
liquid tea whitener. More so, the company also plans to enter the growing up
powder milk business which is currently dominated by Nido (Nestlé).
Juices – Olfrute juices were launched in mid May 2010 and the company
currently faces strong competition from Nestlé (already a market giant with 66%
share) and Shezan (19% market share). With the help of its strong marketing
chain, the company is well positioned to make inroads into the juices and nectar
market. Furthermore, rising health awareness among the urban population can
trigger a growth potential in this sector.
Ice cream
Omore (Engro Foods ice cream brand) - since its launch in 2009 – has been able
to deeply penetrate into the market and achieve a commendable market share of
17%. Omore’s launch in Karachi (the biggest ice cream market accounting of 23%
of the total market demand) was delayed due to pure dairy nature of the ice
cream. Nevertheless, Omore was finally launched in the city during the current
year which saw its revenue soaring by 96% in 1Q2011. The brand is still in its
development stage and efforts are being made by the company to establish its
brand loyalty through heavy marketing expenditures. That is why the segment has
still been in losses so far. Going forward, we expect the segment’s revenues to
witness a 4 year (2011-15) CAGR of 17% and to post profits from next year.
Rice Business – unlocking international presence
As per the latest numbers released in the economic survey, rice accounts for
0.9% of the GDP and is amongst the major crops being sown in Pakistan.
Pakistan is one of the largest exporters of rice with the most popular type being
Basmati. With ENGRO’s vision of tapping the international market, Engro Foods
has set up a rice plant through EFSC to refine and process rice for Engro Eximp.
The plant has an initial processing capacity of 28k tons which is expected to
double in 2011. EFSC has a ‘Take or Pay’ agreement with Engro Eximp for rice
export and a guaranteed 18% IRR on assets while risks will be borne by Engro
Eximp.
Global Business Unit – Al Safa
Continuing with a global vision, ENGRO has acquired Al Safa at an acquisition
price of US$6.3mn. Due to SBP’s terms and conditions the ownership remains
under ENGRO which eventually be transferred to Engro Foods at cost. Al Safa is
the oldest Halal meat brand in North America and the company aims to target
Muslim population through Halal and Ethnic Food segments. This can further
broaden the aspects of the company to establish itself in the international market.
June 2011
Page 3
Cur r ent ambient UHT mk t. s har e
14%
39%
15%
32%
Engro Foods
Nestle
Haleeb
Rest
So urce: Co mpany presentatio n
Cur r ent juic es ' mar k et s har e
14%
1%
19%
66%
Engro Foods
Nestle
So urce: Co mpany presentatio n
Shezan
Rest
Engro Foods Limited
Page 4
Profitability; 4 year (2011-15) CAGR of 65%
We project the company’s earnings to grow at a 4 year (2011-2015) CAGR of
65% to Rs5.5bn driven by untapped ambient UHT milk demand in the country.
Furthermore, the company’s continuous efforts to diversify its product base and
add value to its existing portfolio seconds our view.
Revenues from the ambient UHT milk segment along with juices are expected to
grow at a 4 year (2011-15) CAGR of 28%. Engro Foods market share in the
ambient UHT milk segment is expected to grow to 49% from the existing 39%.
Further growth is witnessed in the ice cream segment where the market share is
expected to grow to 20% in 2015 from the existing 17%. Keeping in mind the
growing revenues and attainment of economies of scales, company’s gross
margins are expected to rise to 25.3% from 20.9% in 2010.
Segmented revenue (Rs mn)
Net profit (Rs mn)
100,000
Others
6,000
80,000
Ice cream
5,000
60,000
Dairy
4,000
3,000
40,000
2,000
20,000
1,000
0
0
2010
2011
2012
2013
2014
2015
2010
Source: JS Research
Valuation: 40% upside to the offer price of Rs25
Using the DCF methodology with a risk free rate of 14.0% and cost of equity of
19.7%, our fair value for Engro Foods arrives at Rs35, which implies a 40%
upside to the offer price of Rs25 per share. Our liking for Engro Foods is also
backed by the company’s 2011E Price to sale of 0.6 which when compared to
Nestlé’s (its closest peer) average historic multiple is at a deep discount of 67%.
Pr ic e to s ales ( x )
Pr ic e to ear nings ( x )
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
30
June 2011
20
15
10
So urce: JS Research
2015F
2014F
2013F
2012F
0
2011E
2015F
2014F
2013F
2012F
5
2011E
2012
2013
2014
2015
Valuations (Rs mn)
PV of cashflows
7,683
Terminal value
18,304
Total present value
25,987
No of shares (mn)
748
Target price (Rs)
35
Source: JS Research
25
So urce: JS Research
2011
Source: JS Research
Engro Foods Limited
Page 5
Financial highlights
(Rs m n)
2010A
2011E
2012F
2013F
2014F
2015F
Net sales
20,945
31,282
42,163
55,720
68,567
80,978
COGS
16,552
24,381
32,530
42,824
52,047
60,471
4,393
6,900
9,633
12,895
16,520
20,507
930
1,930
3,458
4,807
6,820
9,372
1,630
2,717
4,877
7,105
9,655
12,470
Incom e State m e nt
Gr os s pr ofit
Operating prof it
EBITDA
Financial charges
660
789
1,333
1,475
1,491
956
PBT
270
1,141
2,125
3,332
5,329
8,416
Tax
94
399
744
1,166
1,865
2,946
PAT
176
742
1,381
2,166
3,464
5,470
Shar e holde r's Equity
5,124
8,216
9,597
11,763
15,227
20,697
Non current liabilities
4,814
5,607
8,999
8,696
6,386
4,486
Current liabilities
2,522
5,740
11,192
14,767
17,396
15,696
12,460
19,563
29,788
35,226
39,009
40,879
8,722
15,075
24,211
29,953
32,979
34,000
Balance She e t
Total Liabilitie s & Equity
Non current assets
Total current assets
3,738
4,488
5,577
5,273
6,030
6,879
12,460
19,563
29,788
35,226
39,009
40,879
Earning per share
0.2
1.0
1.8
2.9
4.6
7.3
Book value per share
6.9
11.0
12.8
15.7
20.4
27.7
Price to earning ratio (x)
NM
25.2
13.5
8.6
5.4
3.4
Price to book value (x)
3.6
2.3
1.9
1.6
1.2
0.9
Price to sales (x)
0.9
0.6
0.4
0.3
0.3
0.2
21%
22%
23%
23%
24%
25%
Operating margin
4%
6%
8%
9%
10%
12%
Pretax margin
1%
4%
5%
6%
8%
10%
Net margin
1%
2%
3%
4%
5%
7%
0.4
0.3
0.4
0.4
0.4
0.2
Total debt to equity
0.9
0.8
1.4
1.2
0.9
0.4
Long term debt to equity
0.9
0.7
0.9
0.7
0.4
0.2
Interest cover
1.4
2.4
2.6
3.3
4.6
9.8
ROE
3%
9%
14%
18%
23%
26%
ROA
1%
4%
5%
6%
9%
13%
Total As s e ts
Ratio Analys is
V aluation
Pr ofitability
Gross margin
Solve ncy
Total debt to total assets
M om e ntum
Sales grow th
43%
49%
35%
32%
23%
18%
Net prof it grow th
NM
322%
86%
57%
60%
58%
Source: Company prospectus & JS Research
June 2011
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ANALYST CERTIFICATION
I, Bilal Qamar, the author of this report, hereby certify that all of the views expressed in this research report accurately reflect my
personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will
be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
DISCLAIMER
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