Morning Shout Pakistan Daily Notes EFOODS: Another risk from Omung classification ƒ
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We reiterate our Underperform rating on EFoods with revised PO of PRs95 (‐
21%). We have revised our earnings estimates downwards by 46%/33%/29% for 2013/2014/2015E after incorporation of revised volumetric estimates post 9mo13 results. EFoods volume centric strategy has received a set back as Omung’s classification as milk has been questioned by Punjab Food Authority. The market reacted to the news and the stock was 4% down to PRs87.46. The company has taken a stay order from Lahore High Court to stop any action taken by the authority. Although, the event might have minimal effect, it has highlighted and created a perception that Omung is not milk but a dairy liquid. In our view, the premium valuation (48x 2013P/E) is not justified given lack of clarity on margin improvement and volumetric pressure. Punjab Food Authority questions classification of Omung as milk According to the media reports yesterday, Punjab Food has seized 6,630 liters of Dairy Omung (low‐priced UHT milk produced by EFoods, mainly catering to lower/middle class) from a store in Lahore as according to the authority it does not fulfill the requirements of Punjab Pure Food Rules 2011. As per the report, EFoods needs to clarify whether it’s UHT milk or a tea whitener. Our discussion with the company management revealed that the concerns raised by the authority are not valid, and EFoods has already obtained a stay order against the action. Implications for EFoods, if parallel lines drawn with Walls case Drawing lines with Unilever Walls ice cream & Yummy ice cream case in past, where Unilever lost the case and courts restricted the company from using the word ice cream for labeling its products (frozen dessert instead) due to non‐compliance with the given definition of ice cream, we attempted to compare Omung with standard UHT milk products available in the market (Nestle/ Olper’s). Our market survey conducted yesterday also revealed that the nutrition content vary for Dairy Omung and standard UHT milk products like Nestle Milk Pak and Olper’s where the energy, protein and calcium contents in Dairy Omung is relatively lower than the standard UHT milk available. This to some extent is also explained by 22% price discount offered in case of Omung vs. Olpers/ Nestle (see table 1). We highlight, Omung is classified as dairy liquid (as on the pack) but the recent event may highlight and change the perception that it’s not milk. As a result, the implications for EFoods would be more pronounced than in case of Walls, especially when we are already witnessing a shift from UHT milk to unprocessed (e.g. Nagori) or non‐UHT packed milk (e.g. Millac). From EFoods own business strategy perspective, any adverse action taken in this regard by the court/ authority would hinder execution of its volume growth strategy while margins will continue to remain under pressure. Estimates cut; Reiterate underperform We take this opportunity to cut our PO by 21% to PRs95 and earnings estimates for the company by 33%/29% for 2014E/2015E. Our estimate change incorporates 11% decline in milk sales volume forecast in line with 9M13 operating results delivered by the company. We believe that premium valuation (48x 2013 P/E) cannot be justified for the stock, which is reeling from margin and volumetric pressure. We also highlight, despite worst of earnings already in bag (one more quarterly result to go), we believe the longer term positive outlook or earnings turnaround need confirmation in terms of visible measures being taken to revive volumetric growth and margin expansion. Under this scenario, any negative news‐flow (like the Omung one) despite being short‐lived or having minimal earning impact could dent stock performance (down 4% yesterday) and hurt investor confidence in future earnings. Refer to important disclosures on page 3 22 November 2013
Arif Shaikh Arif.shaikh@kasb.com KASB Securities Limited +92 21 111 222 000 Current Price PRs87.46 Price Objective PRs95.00 Earning Estimate Changes EPS 2013E 2014E 2015E PO
New 1.83 2.63 3.40 95.00
Old 3.37 3.93 4.82 120.0
% ∆ ‐46% ‐33% ‐29% ‐21%
Source: KASB Research Efoods: Valuation Snapshot (PRsmn) 2013E 2014E Revenues 36,230 42,327 % change ‐9.8% 16.8% PAT 1,395 2,006 % change ‐46.2% 43.8% EPS 1.83 2.63 PER 47.85 33.28 P/BV (x) 6.29 5.29 ROE 13.1% 15.9% EV/EBITDA 16.94 13.29 2015E
49,052
15.9%
2,596 29.4%
3.40
25.72
4.62
18.0%
11.07
Source: KASB Research Table 1: Nutrition content Olpers Milk Pak Omung Tarang
Energy (k) 159 Protein (g) 7.5 Calcium (mg) 329 Carbohy (g) 11.9 Fat (g) NA Price/litre 90 155 5.5 330 13 9 90 127 4.2 305 10.5 NA 70 207
4.25
NA
10.5
16.5
80*
Source: KASB Research & Market Survey *calculated from 250ml packet **Not Available Page 1
morning shout KSE‐100 Intra‐day Movement Morning News ` SBP’s forex reserves fall to five‐year low of US$3.6bn (The News) Foreign exchange reserves held by the SBP fell to a critically low level of US$3.6bn, lowest in five years, indicating a balance of payments crisis for the country. The net foreign exchange reserves of the central bank had reached a record low level of US$3.4bn (worth less than one‐month of imports) at the end of October 2008, before the country approached the International Monetary Fund (IMF) to obtain the standby arrangement loan facility. The central bank reported on Thursday that Pakistan’s foreign exchange reserves reduced by US$212mn to stand at US$8.865bn, while the foreign exchange reserves held by the central bank declined by US$200mn to US$3.645bn during the week ended on November 13. Technical View Ahmed Hanif ahmed.hanif@kasb.com 23,940
23,860
23,820
23,780
23,740
Low 23,732.1
23,700
9:30 AM
11:20 AM
1:29 PM
Source: KSE Index Data & Volume Leaders % KSE30 KSE100 KSE All Share ENGRO PSO DGKC NML PTC KSE‐100: Counter trend move would be an opportunity The prevailing correct wave can further towards 23,500‐23,600 area. However, any such move should be considered as an opportunity to enter long. RSI and Stochastic though are also showing some weakness in the near term, overall structure continues to have a bullish bias. We favor Banking and Oil & gas sector on weakness. High 23,914.6
23,900
3:18 P
Close 17,977.02 23,784.18 Chg ‐0.2% ‐0.1% Vol. US$mn
55.09 75.56 17,333.78 143.53 306.79 76.32 102.10 30.05 0.2% ‐2.9% 1.6% 1.1% ‐3.6% 0.5% 69.85 22.37 8.25 5.00 4.84 4.68 Source: KSE KSE‐100: Top Gainers & Losers HUMNL
SHEL
MARI
IGIIL
AGL
NML
AGIL
EFOODS
FML
ANL
‐5%
Source: KSE
‐3%
0%
3%
5%
Page 2
morning shout World Markets and Commodity Prices International Equity Markets Asian Markets (Closing Rates)
Price All Ordinaries Shanghai Composite Hang Seng BSE 30 Jakarta Composite KLSE Composite Nikkei 225 NZSE 50 Straits Times Seoul Composite Taiwan Weighted KSE‐100 Index Source: Bloomberg European Markets (Last Trading Session’s Rates)
Price Abs. Chg.
% Chg.
Abs. Chg.
5,284.29 2,205.77 23,580.29 20,229.05 4,326.21 1,794.65 15,365.60 4,818.37 3,172.38 1,993.78 8,099.45 23,784.18 ‐20.3 ‐0.8 ‐120.6 ‐406.1 ‐24.6 ‐4.0 289.5 ‐22.0 ‐11.8 ‐23.5 ‐105.0 ‐16.8 ‐0.4 0.0 ‐0.5 ‐2.0 ‐0.6 ‐0.2 1.9 ‐0.5 ‐0.4 ‐1.2 ‐1.3 ‐0.1 ATX BEL‐20 CAC 40 DAX AEX General Swiss Market FTSE 100 % Chg.
2,629.51 2,846.68 4,253.90 9,196.08 395.33 8,268.69 6,681.33 22.2 ‐6.3 ‐14.5 ‐6.0 ‐1.2 ‐12.5 0.3 0.9 ‐0.2 ‐0.3 ‐0.1 ‐0.3 ‐0.2 0.0 16,009.99 3,969.16 3,402.74 1,795.85 109.2 47.9 35.6 14.5 0.7 1.2 1.1 0.8 American Markets Dow Jones Ind. Average NASDAQ Composite NASDAQ ‐100 S&P 500 Index, RTH Foreign Portfolio Investment in Equities Country Day (US$mn) WTD (US$mn) Pakistan India Indonesia Japan Philippines South Korea Taiwan Thailand Vietnam 0.2 17.1 (44.9) n.a (25.5) (210.7) (364.4) (65.9) 2.6 MTD (US$mn) 10.6 298.1 (25.8) 12,924.4 (31.6) 80.3 (610.8) (209.9) 0.1 YTD (US$mn) 34.7 905.8 (366.4) 18,194.1 (148.1) (596.0) (1,281.8) (906.8) 8.8 YoY ‐ YTD (chg) 402.4 17,235.4 (1,396.5) 124,174.7 808.3 6,046.8 7,068.2 (4,336.1) 211.1 222.5% ‐9.4% ‐184.4% 2743.9% ‐63.0% ‐48.7% 406.9% ‐356.8% 633.2% Date 21‐11 19‐11 21‐11 15‐11 21‐11 21‐11 21‐11 21‐11 21‐11 Source: Bloomberg, NCCPL Forex and Money Market snapshot 6‐Month KIBOR (Offer) 12‐M T‐Bill (Average) 10‐ year PIB (Average) PkR/ US$ Source: KASB Money Market Current Previous Chg. 9.87 9.98 12.95 107.64 9.88 9.98 12.90 107.62 ‐0.01 0.00 0.05 0.02 Commodity Prices Price WTI (Crude Oil) Gold CRB Index Source: Bloomberg 95.09 1,243.08 275.55 Abs. Chg. % Chg. 1.8 ‐1.2 2.3 1.9 ‐0.1 0.8 KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no accounts of the investment objectives, financial situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors. KASB, as a full‐service firm, has or may have business relationships, including investment‐banking relationships, with the companies in this report. Page 3