Engro Foods Surprising growth pace leads to TP upgrade Monday February 04, 2013
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Target Price Dec‐13: PKR 136 Current Price: PKR 109 EFOODS’ CY12 earnings (up 193% YoY) have endorsed our view of accelerated growth in the company and have led us to revisit our valuations ƒ
We have upgraded our CY13‐17E EPS targets for EFOODS by 24%‐32% to incorporate for higher volumetric growth in dairy segment and improvement in margins. Our Dec13 TP for the company stands at PKR136/sh, providing 25% upside from current levels Bloomberg ƒ
We have modeled average 13% volumetric growth in ambient UHT for EFOODS for the next five years. The segment will continue to be the backbone of the company ƒ
For CY13, the management aims to innovate in their flagship UHT brand ‘Olpers’, in the Ice Cream business (‘Omore’) and in the juices brand (‘Olfrute’). While a strategic shift may bring welcome change in profitability of Ice Cream and juices segments, we remain wary of back firing risk of any significant initiative in the already successful ‘Olpers’ brand ƒ
It is interesting to note that if EFOODS brand portfolio was valued at par to NESTLE.PA’s (it’s closest peer), EFOODS would trade at PKR175/sh BUY EFOODS.PA
Reuters ENFL.KA
MCAP (USD mn) 846
12M ADT (mn sh.) 3.5
Shares Outstanding 761
Valuations 2012A EPS 3.4 DPS ‐ 2013F 2014F 5.6 7.7 ‐ ‐ EFOODS vs. KSE100 Relative Chart Volume mn(RHS)
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We had highlighted significant upside risks to analyst estimates of pace of growth in Engro Foods (EFOODS) in our CY13 strategy outlook thanks to the company’s diverse positioning of its dairy portfolio. We thus placed EFOODS in our favorite ‘And the next 8’ scrips for CY13. EFOODS’ CY12 earnings (up 193% YoY) have endorsed our view of accelerated growth in the company and have led us to revisit our valuations. We have upgraded our CY13‐17E EPS targets for EFOODS by 24%‐32% to incorporate for 1) higher volumetric growth in dairy segment driven by newly launched products (up 25% in CY12) and 2) improvement in margins thanks to no adverse sales response to price hikes. We have also updated regional and local comparative valuations in our model to arrive at our Dec13 TP of PKR136/sh for EFOODS, providing an upside of 25%. 60
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EFOODS Profile: Engro Foods is a subsidiary of Engro Corporation, headquartered in Karachi. The company is engaged in manufacturing, processing and selling dairy products, ice cream, and frozen desserts. The company also owns and operates a dairy farm. We now anticipate EFOODS’ sales to display an impressive CY12‐17 CAGR of 22% (compared to CY07‐CY12 sales CAGR of 62%). We expect gross margins to lie in the vicinity of 27‐28% this year compared to 25.7% in CY12 (up 350bps from 22.2% in CY11). Dairy & juices segment: Unabated potential… Dairy segment continues to be the backbone of the company, solely responsible for the relentless growth displayed every quarter by EFOODS. The company’s ambient UHT production grew by ~25% in CY12 to estimated 477mn liters, almost double the growth displayed by the UHT market as a whole. This took the company’s market share to 51% compared to 44% in CY11. We have modeled average 13% volumetric growth in ambient UHT for EFOODS for the next five years. While EFOODS decided not to pursue active growth in juice business in CY12, preferring to alter their strategy and approach in this market, the management recently indicated their intention to make a strong comeback in this category from CY13 and onwards. Ice Cream: Targeting breakeven Farid Aliani farid@bmacapital.com +92 111 262 111 Ext: 2059 Ice Cream revenues grew by 10% in CY12 to PKR2.8bn, despite 3% volumetric decline to ~17mn liters. The bottom‐line for the segment was red by PKR439mn in CY12, compared to loss of PKR409mn in CY11. EFOODS targets break‐even in their Ice Cream business
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in CY13. Any improvement in current bottom‐line contribution from Ice Cream segment remains a key upside potential to our EPS estimates for EFOODS. CY13 and beyond: Innovation, expansion… For CY13, the management aims to innovate in their flagship UHT brand ‘Olpers’, in the Ice Cream business (‘Omore’) and in the juices brand (‘Olfrute’). While a strategic shift may bring welcome change in profitability of Ice Cream and juices segments, we remain wary of back firing risk of any significant initiative in the already successful ‘Olpers’ category. EFOODS will continue to seek market expansion in their mass targeted brands of ‘Omung’, ‘Tarang’ and ‘Lassi’. Pertaining to PKR8.8bn capex plan communicated by EFOODS in the beginning of CY12, the management has clarified that they have spent PKR2.6bn during CY12, while capital commitments of further PKR3.1bn have been made. Remaining PKR3.1bn will by committed/spent during ongoing CY13. A further approval to spend PKR3.0bn in CY13 has already been accorded by the board. CY13 may also see ‘Al‐Safa’ on the books of EFOODS, as the company has already paid for the acquisition of the business to Engro Corp. (ENGRO) and SBP approval/application is awaited in this regard. Assessing value of brands… In order to assess how the market is valuing intangibles (mainly the brand portfolio) of EFOODS versus various local and regional peers, we compared enterprise values to net fixed assets of these companies (EV/Net fixed assets). It is interesting to note that if EFOODS brand portfolio was valued at par to NESTLE.PA’s (its closest peer), EFOODS would trade at PKR175/sh. Comparing Market Valuations of Brands Engro Foods (Pakistan)
Nestle (Pakistan)
EV/ Net
Fixed Assets
P/E
P/S
7.7
19.4
2.1
12.4
40.7
2.9
Unilever (Pakistan)
20.8
26.1
2.2
Hindustan Unilever (India)
40.5
36.7
4.4
Nestle (India)
13.4
53.8
6.1
Britannia Industries (India)
11.2
30.8
1.2
Viet Nam Dairy Products
(Vietnam)
10.8
16.1
3.3
Lanka Milk Foods (Sri Lanka)
4.6
36.9
1.0
Source: Bloomberg, BMA Research EFOODS: Price Performance versus BMA Targets EFOODS Price
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