1
WE Detailed Report
March 2013
Engro Foods Limited
EFOODS - A seed turning into fruition
KEY DATA
KATS Code
EFOODS
Reuters Code
ENFL.KA
Current Price (Rs)
124.5
Year High, Low (Rs)
134 , 92.33
Market Cap (Rs' bn)
95
Market Cap (US$ mn)
957
Shares Outstanding (mn) 761
Free Float (%)
12
Source: KSE, Reuters & WE Research
We initiate the coverage of Engro Foods Limited (EFOODS) with a
Dec'13 Target Price of Rs 161/share, offers an upside of 29% -BUY. We
have used (DCF, P/S ratio, P/E ratio and P/BV method) to arrive the target price as it's a food group company and major players of the group
are NESTLE, UNILVER, MFFL & NATF. Our bullish view is on back
of increasing market share, uptick in milk prices, diversion of masses
towards UHT milk from unprocessed milk, followed by in-house milk
procurement through Nara farm and continuous expansion in other
food group segments.
We estimate top line average growth of 22.21% (2013-2015), gross margins to average at 27% (2013-2015), average market share of 56% (20132015), and milk price to grow at a CAGR of 5% (2013-2015). The key
risks to our estimates are 1) No barriers to entry in the segment, 2)
Upsurge in discount rate, 3) Failure of new business lines and 4) high
inflationary environment.
CY13: A Booming Year
Price Relative to KSE 100 Index
Inde x
PKR
140
18,000
KSE 100 INDEX
Mar-13
Jan-13
EFOODS
Feb-13
Dec-12
Oct-12
Nov-12
Sep-12
Jul-12
Aug-12
Jun-12
Apr-12
20
May-12
50
10,000
Mar-12
80
12,000
Jan-12
110
14,000
Feb-12
16,000
l
l
l
l
l
l
l
l
We expect CY13 to be a booming year for Efoods as they are planning
to re-launch juice segment and further new products are in the pipeline
Earnings to zoom +45% YoY in CY13 translating into PAT of Rs 3,769
million (EPS: Rs 4.95) and ROE to clock in at 37.50%
We expect Nara Farm and Ice-cream segment to come into operating
profit and would support the bottom-line
Going forward launch of powdered milk plant would result cost efficien cy
and would help reaping higher margins
Source: KSE
EFOODS Financial Snapshot
CY12A
CY13E
Net Sales (Rs mn)
40,169
53,570
Profit after Taxation (Rs mn)
2,595
3,769
EPS (Rs)
3.41
4.95
Book Value (Rs/share)
13.21
18.16
DPS (Rs)
P/E (x)
35.83
24.67
P/BV (x)
9.25
6.73
P/S (x)
2.31
1.74
EBITDA Margin (%)
18.40
19.60
ROE (%)
25.8
27.3
ROA (%)
11.70
13.87
Source: Company Reports & WE Research
CY14F
62,396
5,308
6.97
25.13
1.00
17.52
4.86
1.49
22.40
27.7
16.52
CY15F
72,881
7,212
9.47
34.61
2.00
12.89
3.53
1.28
25.10
27.4
19.01
2
WE Detailed Report
March 2013
Valuation: BUY with a Target Price of Rs 161
We have used 4 different valuation methods to arrive at a consensus target price. Our valuations in detail would be as follows which are based on
Discounted Cash Flows, Price to Sales Ratio, Price to Book Value and
Price to Earnings multiple.
Method 1: Discounted Cash Flow
Rs in million
CY13E
Net Income
3,769
Non Cash Expense
1,446
Change in Working Cap
1,474
CAPEX
(2,738)
Free Cash Flow to Equity
3,581
Discounted Free Cash Flow
3,581
Terminal Value
98,674
PV Terminal Value
80,280
Shares Outstanding
761
Target Price Dec'13 (Rs)
106.02
Source: WE Estimates
CY14F
5,308
1,685
(327)
(2,440)
3,262
2,842
CY15F
7,212
1,909
(332)
(2,439)
4,187
3,179
CY16F
10,859
2,133
(365)
(2,441)
8,124
5,376
Method 2: Price to Sales Ratio (Comparison with peers)
Sector P/S ratio
2.34
Efoods CY13E Sales/share
70.39
Target Price
165
Source: WE Estimates
Method 3: Price to Earnings Ratio (Comparison with peers)
Sector P/E ratio
25.92
Efoods CY13E EPS
4.95
Target Price
128.34
Source: WE Estimates
Method 4: Price to Book Ratio (Comparison with peers)
Sector P/B ratio
27.09
Efoods CY13E BV/share
18.16
Target Price
491.91
Source: WE Estimates
Final Valuation
DCF
P/S Ratio
P/E Ratio
P/BV Ratio
Target Price
Source: WE Estimates
Fair Value Weightage % Contribution
in TP
106.02
50%
53.01
164.71
20%
32.9
128.34
20%
25.7
491.91
10%
49.19
160.8
3
WE Detailed Report
March 2013
Earnings growth came from increase in
top line by +35% YoY with support
from increase in volumetric milk sales
by 25% YoY, increase in market share
to 51% and increase in gross margins
to 25.7% from 22.2% in CY11.
EFOODS is importing powdered milk
plant in CY13 and as per our information plant likely to be commissioned
between July-Aug'13, this would help
company to improve cost efficiencies
resulting in better gross margins.
A quick look to CY12
Engro Foods has posted PAT of Rs 2,595 million (EPS: Rs 3.40) up
side of +191% YoY in bottom line versus PAT of Rs 891 million
(EPS: Rs 1.17) in CY11. Earnings growth came from increase in top
line by +35% YoY with support from increase in volumetric milk
sales by 25% YoY, increase in market share to 51% and increase in
gross margins to 25.7% from 22.2% in CY11. EFOODS juices segment still incurring losses but company is working in back yard to
change their strategy for expansion. Ice cream business is incurring gross loss but volumes and value have improved, moreover
market share is increasing gradually as Omore brand has established its significant presence in the market. Company's indoor
milk production farm finally made some gain but a good gesture
for contribution in 2013 is expected.
What we see in 2013 and beyond
EFOODS is importing powdered milk plant in CY13 and as per
our information plant likely to be commissioned between JulyAug'13, this would help company to improve cost efficiencies
resulting in better gross margins. Moreover company is also considering launch of Halal meat Canada's product into local market
in order to tap the growing potential of packaged meat needs. In
its analyst briefing, company revealed that it is planning to
improve its market share in ice cream and juice businesses which
still need to shoulder the single-handed growth from milk business. We believe 2013 will be the big year for EFOODS in terms of
profitability and further diversification in food business.
Foreigners Interest in Strategic Investment?
De-listing of UNILVER Pakistan is helping the company's presence in the exchange, and foreigners are taking their positions in
the stock along with big local institutions despite low free float
of 12%. Lately there were rumours of Al Marai- KSA taking
exposure in EFOODS but still no clarification from the management. We believe any stake sell off by the ENGRO Corp would
be above Rs120/share particularly based on growth potential in
the company.
4
WE Detailed Report
March 2013
Previously dairy sector was dominated
by Nestle and other small/medium size
players across the country because at
the time market had little space. Since
launch of Efoods the sector dynamics
have changed, it has created public
awareness towards processed milk
which resulted in CAGR of 10% (20062012) in UHT milk market which
jumped up from 515mn litres annual
sales to 919mn litres in CY12.
Efoods has changed the dynamics of the sector
Engro Foods since entering in 2005 has shown a tremendous
growth ever witnessed by a company in Pakistan's history.
Previously dairy sector was dominated by Nestle and other
small/medium size players across the country because at the time
market had little space. Since launch of Efoods the sector dynamics have changed, it has created public awareness towards
processed milk which resulted in CAGR of 10% (2006-2012) in
UHT milk market which jumped up from 515mn litres annual
sales to 919mn litres in CY12. Whereas Efoods has shown CAGR
of 41% (2006-2012), consequently now it holds market share of
51% in CY2012 up from 12% in CY06.
The major turnaround has been in tea whitener (Tarang) it's the
leader in tea whitener segment and then followed by product
DAIRY OMUNG (cheaper than
unprocessed milk) which resulted
in lifting market share. Other
players in the industry also
jumped in by launching their
products which has developed
new market for UHT milk producers.
Source: We Research
Margins improved significantly
Source: We Research
Source: We Research
Efoods is part of FMCG sector where volumetric growth is the
key factor that drives the profitability. Efoods volumetric sales
improved significantly over the years followed by higher inflation scenario in last few years which forced milk prices to tick up
continuously (unprocessed and processed). Company has formed
its own Nara farm with more than 3,900 herds along with continuous CAPEX to make the whole process more efficient. By
launching various product lines other than UHT milk (Olpers) i.e.
TARANG, OLWEL, OLPERS LIGHT, OMUNG and Flavored
Milk the average sale price per litre comes up above Rs95/ litre
currently, whereas milk processing cost remains unchanged.
Similarly expansion of ice cream business supports the milk sale
indirectly. Consequently company's Gross, EBITDA and Net margins have shown tremendous growth over the years and likely to
inch up. On other side marketing expense ratio is on the declining side down to 11% in CY14E from 16% in CY06, whereas both
operating profit and volumetric sales increasing YoY.
5
WE Detailed Report
March 2013
Key Risk
No barriers to enter into milk/dairy business
Pakistan's is the 6th largest milk producer in the world and the
local market is growing rapidly but still sizeable share is of
unprocessed milk (88%) where as other private sector players are
jumping into the business every year on medium to large scale.
Pakistan is agrarian economy thus it naturally supplement the
business along with support from govt in terms of taxation and
financing. We believe expansion from Nestle or entry of any other
big player international/local player would hurt the market share
of Efoods. Initially no one expected that Efoods would replace
Nestle in term of market share but now it's a reality. We cannot
rule out the fact that market share can be cut down for new entry
of any medium scale player as well.
Upsurge in discount rate
Pakistan is most likely expected to go for another IMF loan program that would result in upward move in discount rate, our valuations would go south in such scenario and we believe the discount rate has bottomed out.
Failure of business line
Efoods profitability mainly comes from milk business where as
other segments juice/flavored milk and ice-cream have either
made losses or struggling. Especially Efoods has rolled back its
juice segment which is likely to be re-launched in future. We
believe other product lines would be introduced in next 2 years
and big failure from new products would limit the profitability
growth to some extent.
High inflation
Rising energy cost to affect the general price level of commodities
and would also affect the margins of the company along with
other than milk products volumetric sale.
6
WE Detailed Report
March 2013
Company Introduction
Engro Foods started its business in CY05 and its principal business is to produce process and sell dairy and other food products. Efoods has established plants at Sukkur and Sahiwal for
processing and selling branded UHT milk. It has a powdered
milk plant in Sukkur (with an annual capacity of 5,000 tons) and
another is being built in Sahiwal (with an annual capacity of
10,000 tons). It has an ice cream manufacturing facility in
Sahiwal, which has an annual capacity of 36m litres. It also has a
fruit juice plant, a dairy farm and more than 1,300 milk-collection
centres spread across the provinces of Punjab and Sindh. Efoods
has attained clear market leadership in the Pakistan UHT industry, with a share of 51% at the end of 2012. It has launched multiple new products, including ice cream, flavored milk, fruit
juices and milk powders that show significant potential. As part
of its growth strategy, Efoods is looking to become a diversified
food company with a complete range of products in all major
segments, from confectionary to culinary, infant foods and
ready-to-cook meals. Efoods intends to become the premier food
company in Pakistan.
Source: Company Report
7
WE Detailed Report
March 2013
Valuation
EFOODS - Financial Highlights
EPS (Rs)
Book Value (Rs/share)
DPS (Rs)
P/E (x)
P/BV (x)
P/S (x)
Source: WE Research & Company Reports
CY12A
3.41
13.21
35.83
9.25
2.31
CY13E
4.95
18.16
24.67
6.73
1.74
CY14F
6.97
25.13
1.00
17.52
4.86
1.49
CY15F
9.47
34.61
2.00
12.89
3.53
1.28
CY12A
1.76
25.8
11.70
25.69
12.00
18.50
6.46
34.53
191.27
CY13E
1.70
27.3
13.87
26.39
12.70
19.70
7.36
33.36
52.03
CY14F
1.68
27.7
16.52
27.02
14.31
22.70
8.78
16.48
38.92
CY15F
1.65
27.4
19.01
27.08
15.91
25.30
10.09
16.80
34.24
CY12A
40,169
29,848
10,321
4,709
741
430
4,823
903
3,921
1,326
2,595
CY13E
53,570
39,435
14,135
6,428
830
473
6,805
1,007
5,798
2,029
3,769
CY14F
62,396
45,535
16,861
6,864
967
520
8,932
766
8,166
2,858
5,308
CY15F
72,881
53,141
19,739
7,288
729
572
11,593
498
11,095
3,883
7,212
Key Ratios Analysis
Current Ratio (x)
ROE (%)
ROA (%)
Gross Margin (%)
Operating Margin (%)
EBITDA margin (%)
Net Margin (%)
Sales Growth (%)
PAT Growth (%)
Source: WE Research & Company Reports
Income Statement
Rs in million
Sales
Cost of Sales
Gross Profit
Distribution & marketing. Expenses
Administrative Expenses
Other Operating Expenses
Operating Profit
Finance Cost
Profit before Taxation
Taxation
Profit after Taxation
Source: WE Research & Company Reports
8
WE Detailed Report
March 2013
Balance Sheet
Rs in million
Share Capital
Shareholder Equity
Non Current Liabilities
Current Liabilities
Total Liabilities
Non Current Assets
Current Assets
Total Assets
Source: WE Research & Company Reports
CY12A
7,616
10,054
7,693
4,441
12,134
12,676
9,513
22,189
CY13E
7,616
13,823
8,017
5,335
13,351
13,968
13,206
27,174
CY14F
7,616
19,131
6,787
6,209
12,996
14,722
17,404
32,126
CY15F
7,616
26,342
3,920
7,674
11,593
15,252
22,684
37,936
CY12A
2,898
(3,138)
1,726
1,486
1,645
3,131
CY13E
4,037
(2,738)
(369)
930
3,131
4,061
CY14F
5,564
(2,440)
(1,758)
1,366
4,061
5,427
CY15F
7,352
(2,439)
(2,944)
1,969
5,427
7,396
Cash Flow Statement
Rs in million
Cash from Operations
Cash from Investing activities
Cash from Financing
Net change in Cash
Beginning Cash balance
Ending Cash balance
Source: WE Research & Company Reports
WE Financial Services
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Karachi Stock Exchange Building,
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Pakistan
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offer or a solicitation to buy or sell any securities. WE Financial Services & its employees will not be responsible for the consequence of
reliance upon any opinion or statement herein or for any omission. All opinions and estimates contained herein constitute our judgment as
of the date mentioned in the report and are subject to change without notice.
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