February 17, 2014
Company Update
Pakistan Research
Consumers
EFOODS: Valuations still to reflect end of supernormal growth
EFOODS PA SELL
Price Target: PKR75/Share
Closing Price: PKR103.0/Share
Key Data
162.2 – 80.4
12m Price Range (PKR)
79,036.1
Market Cap (PKRmn)
766.4
Outstanding Shares (mn)
2.6
Avg Daily Volume mn (6m)
1Yr – Relative performance
EFOODS
(%)
160
KSE-100 INDEX
We believe the era of supernormal growth for EFOODS has ended as the company is shifting
its focus from growth to consolidation, leaving EFOODS as essentially a two-brand company.
Olpers and Tarang comprise 86% of revenues and went through testing times during CY13
due to competition, distribution problems and margin contraction. We expect sales growth
to average 11% during CY14-16, while earnings growth will remain strong in CY14/15 due to
trough earnings in CY13, and subsequently fall to 25%. We have downgraded EFOODS to
SELL and reduce our Dec-14 PT to PKR75/share. The stock trades at an expensive CY14 PER
of 41x. We believe EFOODS premium valuation is unjustified as the phase of above average
growth seems to have ended.
SELL as supernormal sales growth has ended: We downgrade EFOODS to SELL and reduce our
Dec-14 PT to PKR75/share (-35%). We expect sales growth to average 11% during CY14-16, as
the era of supernormal volume growth has ended. The stock trades at an expensive CY14 PER
of 41x.
Trouble with the two brands: EFOODS' Olpers' and Tarang, which comprise 86% of sales, went
through testing times during CY13 as competition and distribution problems hampered
Tarang's volumetric sales while cheap availability of loose milk kept EFOODS from raising
Olpers' prices. Gross margins as a result sank from 26% in CY12 to 22% in CY13 (4QCY13: 13%).
The red ocean would cap growth: Tarang is facing fierce competition from the low priced
alternatives and would do well to sustain 2.5% volume growth going forward. We believe
Olpers' may at best sustain 5% volume growth as conversion to UHT milk is slowing down.
140
120
100
80
Source: Elixir Research
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
60
Powder plant to support margins: A 30ktpa milk powder plant would commence in 1QCY14
which will allow in-house production of lean-season milk powder requirement (8-10ktons) at a
saving of USD~100/ton and would be the main driver of margin expansion. Substitution would
likely be gradual as parallel expansion in milk collection infrastructure would take time.
Blue ocean potential has faced setbacks: After successive failures with recent innovations,
EFOODS is shifting focus from growth to consolidation. While loose-milk pilot is on track,
Engro Foods Canada may be rolled back and meat business pilot is being transferred to Engro
Corp.
EFOODS Financial Highlights
EPS - Recurring (PKR)
DPS - (PKR)
BV/share (PKR)
AC
Ujala Adnan
uadnan@elixirsec.com
(+92-21) 3569 4622
CY10A
CY11A
CY12A
CY13A/E
CY14E
CY15E
0.6
1.5
3.4
1.4
2.5
3.0
-
-
-
-
-
-
6.8
9.6
13.2
13.5
16.0
19.0
PER (x)
161
70
30
73
41
34
Dividend Yield
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
P/BV (x)
15.1
10.7
7.8
7.6
6.5
5.4
EV/EBITDA
39.6
22.8
14.2
25.7
16.7
14.9
ROA
4%
8%
13%
1%
9%
10%
8%
15%
35%
3%
25%
30%
762%
77%
69%
-45%
54%
11%
ROE
EBITDA Growth
Source: Elixir Research
Prices as of February 14, 2014
Please refer to the last page for Analyst Certification and other important disclosures.
Company Update
EFOODS
Downgrade to ‘SELL’
We have switched our valuation methodology from relative valuation to discounted cash flows
valuation as we believe that the entire consumer space in Pakistan is overpriced (please refer
to our publication ‘The Consumer Bubble’ released on Friday February 14, 2014). We have
used a risk free rate of 10%, a beta of 1.0 and a market risk premium of 7% for our valuation.
We have used a terminal growth rate of 10% (Elixir Universe 2% to 5%) to account for the high
growth potential in consumer segment. Our Dec-14 PT of PKR75/sh offers a huge downside of
25%. EFOODS is currently trading at very expensive CY14E PER of 41x. We believe EFOODS
premium valuation is unjustified as the phase of above average growth seems to have ended.
Valuation
CY14
CY15
CY16
CY17
CY18
CY19
CY20
CY21
CY22
CY23
CY24
Assumption
Risk free rate
10.0%
Risk Premium
7.0%
Beta (x)
1.0
Req. return on Equity
17.0%
Terminal Growth
10.0%
FCFE
557
879
1,294
2,383
4,523
4,655
5,682
6,800
8,106
9,633
11,418
Discount Factor
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Discounted FCFE
557
751
945
1,488
2,414
2,123
2,215
2,266
2,308
2,345
2,375
PV of cash flows
19,788
PV of terminal value
37,326
Equity Value
57,114
Price Target (PKR)
75
Source: Elixir Research
Supernormal sales growth have ended; earnings growth would normalize CY16
onwards
After successive failures with recent innovations, EFOODS is shifting focus from growth to
consolidation, leaving EFOODS as essentially a two-brand company. This means higher
susceptibility of overall sales and earnings to individual brands as Olpers and Tarang comprise
86% of revenues, combined and both have turned into mature brands with limited growth
potential. We expect sales growth to average 11% during CY14-16, driven by 7% growth in
volumes and 5% in prices as the era of supernormal volume growth has ended. Competition
from competing brands and cheaper loose milk would inhibit EFOODS' capacity to take price
increases. Earnings growth will however remain strong in CY14/15 due to CY13 trough
earnings and subsequently average 25% during CY16-19.
2
Elixir Securities
February 17, 2014
Company Update
EFOODS
PKRMn
47
40
40
43
38
30
30
21
20
70%
4.0
60%
3.5
50%
3.0
40%
2.5
30%
2.0
20%
1.5
10%
1.0
0%
0.5
-10%
0.0
15
10
CY18E
CY17E
CY16E
CY15E
CY14E
CY13A
CY12A
CY11A
CY10A
CY09A
-
4.6
Source: Company Accounts, Elixir Research
3.7
3.0
2.6
2.3
1.9
1.1
0.2
CY17E
50
4.5
CY16E
52
80%
PAT
CY15E
57
5.0
CY13A
63
60
90%
CY12A
Growth YOY (RHS) %
CY11A
Total sales
70
CY10A
PKRBn
CY10-18 Net Profit growth
CY14E
CY10-18 Sales growth
Source: Company Accounts, Elixir Research
Recent trouble with the two brands
EFOODS' Olpers' and Tarang, which comprise 86% of sales, went through testing times during
CY13 as volumes fell for Tarang while both Olpers' and Tarang witnessed margin contraction.
EFOODS faced significant distribution problems as it lost its major distributors during early
CY13. Simultaneously, perceived value proposition of UHT milk weakened due to weak loose
milk prices as a result of abundant milk production during 1HCY13. Sales of Tarang were
further dampened by the introduction of low priced alternatives by competition. Management
remained busy in fixing the distribution network and attempted to revive sales through price
offs during 2HCY13 which further dented margins. Gross margins as a result continued to
plummet during the year and fell from the peak of 29.5% in 1QCY13 to 12.8% in 4QCY13, while
full year average fell from 26% in CY12 to 22% in CY13.
Low volumes during CY13
Bn Ltrs/Year
Dairy and juices off-takes
Milk Volumes
30%
0.55
Volume growth %
27%
25%
23%
23%
0.50
20%
0.45
15%
11%
Source: Company Accounts, Elixir Research
3
Elixir Securities
CY14E
CY13A
CY12A
CY11A
CY10A
4%
CY18E
CY14E
CY13E
CY12E
CY11E
CY10E
-5%
4%
-7%
0%
0.30
5%
CY17E
0.35
4%
CY16E
5%
CY15E
10%
0.40
-10%
Source: Company Accounts, Elixir Research
February 17, 2014
Company Update
EFOODS
The red ocean would cap volume growth
Tarang is facing fierce competition in a price sensitive market from the low priced alternatives
introduced by Haleeb Foods, Nurpur and Shakarganj and would do well to sustain 2.5% volume
growth after rebounding by 10% in CY14. We believe Olpers' may at best sustain 5% volume
growth as UHT conversion is slowing down due to affordability issues, cheaper loose milk and
availability of pasteurized milk brands. Despite the setback with Punjab Food Authority
(discussed below) we believe Omung would grow by 20% due to its low existing base. We
expect overall dairy segment volumes of EFOODS to grow by 11% in CY15 and then
subsequently sustain a 4% annual growth.
Margins trend
Tarang vs. competitors
Gross margin
26%
Price comparison - SKU 200ml
18
25.7%
25%
24.4%
24.7%
24.0%
24%
17
17
17
23.4%
22.9%
22.8%
23%
22.1%
16
16
22%
21.6%
21%
15
15
15
Chai Mix
Chaika
20%
Source: Company Accounts, Elixir Research
CY18E
CY17E
CY16E
CY15E
CY14E
CY13A
CY12A
CY11A
CY10A
19%
14
Everyday
Tarang
Tea Max
Source: Company Accounts, Elixir Research
Dairy Omung issue in Punjab
Punjab provincial food regulatory department (Punjab Food Authority) seized some stock of
Dairy Omung in Nov-13 claiming that it does not qualify as milk due certain contents. Dairy
Omung is labeled as "dairy drink" rather than milk, while the company management also
contends that Dairy Omung is not UHT milk and is a dairy drink with high calcium content.
However, Omung marketing communications promotes Omung as an alternate to milk. The
company was required to withdraw the entire stock of the product from Lahore district. This
attracted a lot of negative publicity to the product. The matter has been pushed aside for now
as Supreme Court has given stay order in favour of EFOODS.
Powder plant to support margins
Low loose milk prices and fierce competition from other brands would barely allow enough
price hikes to pass through further cost increases and we do not expect price hikes (barring
end of current price offs) to contribute much to margins. As such, support to margins would
likely come from cost reductions. EFOODS plans to commence a 30ktpa milk powder plant in
1QCY14. This will allow the company to produce its lean-season milk powder requirement (810ktons) in-house which would likely yield savings of approximately USD100/ton, and would
be the main driver of margin expansion going forward. Substitution would likely be gradual as
powder production would require parallel expansion in milk collection infrastructure.
4
Elixir Securities
February 17, 2014
Company Update
EFOODS
% of powder requirement met by own plant
Savings from milk powder plant
Powder requirement met by in-house facility
PKRBn
1.2
120%
100%
100%
Savings from powder plant
1.0
1.0
85%
0.8
0.8
80%
66%
0.6
0.6
60%
46%
0.4
0.4
Source: Company Accounts, Elixir Research
CY18E
CY17E
0.2
CY14E
CY18E
CY16E
CY17E
0.0
CY15E
0%
CY14E
0.2
CY16E
24%
20%
CY15E
40%
Source: Company Accounts, Elixir Research
Blue ocean potential has faced several setbacks
After successes with Olpers', Tarang and partial success with Dairy Omung, most of the recent
innovations have not done well. This includes, Lassi, Juices and Engro Foods Canada (North
American meat business). After successive failures with recent innovations, EFOODS is shifting
focus from growth to consolidation. While Engro Foods Canada (North American meat
business) may well be rolled back, domestic meat business experiment is now being carried
out under the parent company (ENGRO) while EFOODS is going ahead with the pilot of Karachi
Dairy project of loose milk under the brand name of Mabrook.
Brands
Status
Olpers’
Successful
Tarang
Successful
Omung
Potential still unclear
O’more
Unsuccessful
Omung Lasii
Unsuccessful
Olfrut
Unsuccessful
Mubrook
Introduction stage
Source: Elixir Research
Ice cream business is still making losses
EFOODS’ ice cream segment has a 7% contribution in the top line. Although EFOODS’ ice
cream brand, Omore, had been successful in gaining the second highest market share of 25%
after ‘Walls’, it is still not profitable. Multiple products launched under the brand name turned
out to be huge failures and the company had to discontinue them. EFOODS ice cream sales
volume declined by ~16% during CY13 owing to its lower geographical penetration together
with overall slowdown in ice-cream consumption within the country. The business segment
has for the first time managed to breakeven in the 4QCY13. EFOODS does have any major
plans to for this business segment during CY14. We expect that EFOODS’ ice-cream segment
will continue to make losses during the current year.
5
Elixir Securities
February 17, 2014
Company Update
EFOODS
Ice cream Losses PKRmn
2.6
CY13A
2.8
CY10A
2.8
CY09A
3.0
Profit after tax
PKRMn
CY12A
Sales Revenue
PKRbn
CY11A
Ice cream sales revenue
0.0
2.5
2.0
-100.0
1.6
1.5
-200.0
1.0
0.7
-300.0
0.5
-321
-353
-400.0
CY13A
CY12A
CY11A
CY10A
CY09A
0.0
Source: Company Accounts, Elixir Research
-417
-405
-445
-500.0
Source: Company Accounts, Elixir Research
Karachi Dairy project
EFOODS has recently launched its pasteurized milk pilot project in Karachi. This involves
tapping into loose milk market in Karachi by providing door-to-door service and delivering
pasteurized milk which is healthier and cleaner than loose milk. This basically entails
eliminating the involvement of middle men and approaching the target market directly. Total
capex for the pilot project is ~PKR200mn spread across CY13 and CY14. The pilot is being
carried out under the brand name of ‘Mubrook’ which mean good news. EFOODS has already
commenced 6 franchises while it plans to take total number of franchises to 30 during the
current year. Mabrook has a low capex business model where the franchisee is required to
carry out the capex for outlet infrastructure. We have incorporated 30 Mubrook franchises in
our estimates and have not taken further growth in network. EFOODS estimates that the total
expected market size for this project would be around PKR100bn. As per our analysis, Karachi
has a total milk consumption of 11k tons per day or PKR200bn per annum.
Upside risks
We highlight the following risk that could derive a higher valuation for EFOODS going forward:
6
Elixir Securities
1.
Karachi dairy project, if successful, would significantly push valuation upwards. 1%
share in Karachi’s dairy market would add PKR2.3bn (6%) to company’s revenue.
2.
EFOODS faced failure in certain products such as Omung Lassi (summer drink), Olfrute
(juices) and Omore (Ice-cream) as market for these products were under developed.
However the possibility of an increase in demand for these products cannot be
ignored and might result in upward revision in the value.
February 17, 2014
Company Update
EFOODS
Financials
Income Statement
PKRmn
CY10A
CY11A
CY12A
CY13A/E
CY14E
CY15E
Net Sales
21,249
30,079
40,167
37,891
43,382
46,736
Operating costs
19,224
26,488
34,091
34,549
38,250
41,015
EBITDA
2,025
3,591
6,076
3,341
5,131
5,721
EBIT
1,311
2,628
4,869
2,190
3,880
4,394
Other Income/Finance cost
(77)
4
(47)
(1,109)
(420)
(348)
Net Profit - Recurring
480
1,111
2,611
1,081
1,905
2,309
EPS – Recurring (PKR)
0.64
1.48
3.41
1.4
2.48
3.01
Net Profit – Reported
480
1,111
2,611
211
1,905
2,309
EPS – Reported (PKR)
0.6
1.5
3.4
0.3
2.5
3.0
PKRmn
CY10A
CY11A
CY12A
CY13A/E
CY14E
CY15E
Paid up Capital
7,000
7,518
7,615
7,660
7,660
7,660
Reserves + Unapp profit
(1,876)
(281)
2,472
2,665
4,569
6,878
Shareholders’ Funds
5,124
7,237
10,087
10,325
12,229
14,538
Long Term Loans
4,814
5,921
7,693
7,025
5,379
3,517
Current Liabilities
2,522
3,480
4,441
3,637
4,691
4,782
Capital & Liabilities
12,460
16,638
22,221
20,987
22,299
22,836
Net Fixed Assets
8,722
10,270
12,676
12,606
11,981
11,064
Source: Elixir Research
Balance Sheet
Current Assets
3,738
6,368
9,528
8,381
10,319
11,772
Total Assets
12,460
16,638
22,204
20,987
22,299
22,836
CY10A
CY11A
CY12A
CY13A/E
CY14E
CY15E
Recurring Net Profit
480
1,111
2,611
211
1,905
2,309
Depreciation
714
963
1,207
1,151
1,251
1,327
Working Capital Changes
(505)
(1,755)
(1,944)
370
(873)
(1,346)
Operating Cash Flows
690
320
1,875
1,732
2,283
2,289
(3,000)
(2,511)
(3,613)
(1,081)
(626)
(409)
Source: Elixir Research
Cash Flow Statement
PKRmn
Capex
Add: Interest (after tax)
429
682
575
510
481
486
Others
1,273
1,002
221
44
-
-
FCFF
(609)
(508)
(942)
1,205
2,137
2,366
Less: Interest (after tax)
(429)
(682)
(575)
(510)
(481)
(486)
Net debt
1,069
1,359
1,605
(673)
(1,634)
(1,856)
32
169
88
22
23
24
-
-
-
-
-
-
Net Cash Flow
32
169
88
22
23
24
Beginning cash
148
180
349
438
459
482
Ending cash & equivalents
180
349
438
459
482
506
FCFE
Dividends Paid
Source: Company Accounts, Elixir Research
7
Elixir Securities
February 17, 2014
Company Update
EFOODS
Financial Ratios
CY10A
CY11A
CY12A
CY13A/E
CY14E
CY15E
0.6
1.5
3.4
1.4
2.5
3.0
DPS
-
-
-
-
-
-
BVPS
6.8
9.6
13.2
13.5
16.0
19.0
PER
161
70
30
73
41
34
EV/EBITDA
39.6
22.8
14.2
25.7
16.7
14.9
P/BV
15.1
10.7
7.8
7.6
6.5
5.4
Div Yield
0%
0%
0%
0%
0%
0%
ROCE
6%
9%
12%
3%
9%
10%
ROA
4%
8%
13%
1%
9%
10%
ROE
8%
15%
35%
3%
25%
30%
Gearing
0.9
0.6
0.5
0.4
0.2
(0.0)
Turnover Growth
45%
42%
34%
-6%
14%
8%
EBITDA Growth
762%
77%
69%
-45%
54%
11%
n.a
131%
135%
-92%
802%
21%
EPS - rec
Net Profit Growth
Source: Elixir Research
8
Elixir Securities
February 17, 2014
Company Update
EFOODS
Chief Executive Officer
Junaid Iqbal
(92-21) 3569 4617
jiqbal@elixirsec.com
Pakistan Research Team
Institutional Equities
Retail Equities
Azfer Naseem, CFA
Head of Research
(92-21) 3569 4716
anaseem@elixirsec.com
Faisal Bilwani
Head of Equities - FII
(92-21) 3569 3919
fbilwani@elixirsec.com
Muhammad Ali Taufiq
Head of Equity Strategy Retail
(92-21) 3569 3922
alitaufiq@elixirsec.com
Sateesh Balani
(92-21) 3569 4679
sbalani@elixirsec.com
M. Sibtain Mustafa
Head of Equities - LII
(92-21) 3569 3911
smustafa@elixirsec.com
Sikandar Rahim
(92-21) 3569 3914
srahim@elixirsec.com
Ujala Adnan
(92-21) 35694622
Uadnan@elixirsec.com
Jawwad Aboobakar
(92-21) 3565 3182
jawwad@elixirsec.com
Kamran Kaludi
(92-21) 3569 3920
kkaludi@elixirsec.com
Mubashir Anis Silat
(92-21) 3569 4622
manis@elixirsec.com
Muhammad Raza Rawjani
(92-21) 3569 3911
rrawjani@elixirsec.com
Adil Abid
(92-21) 3569 4666
aabid@elixirsec.com
Syed Nasir Rizvi
(92-21) 3569 4679
snarizvi@elixirsec.com
HNW & Family Offices
Harris Ahmed Batla
(92-21) 3569 4706
habatla@elixirsec.com
Khurram Malik
(92-21) 3569 4602
kmalik@elixirsec.com
Ibad-ur-Rehman
(92-21) 3569 4622
irehman@elixirsec.com
Syed Tahseen
(92-21) 3569 4622
tjaved@elixirsec.com
9
Elixir Securities
Lahore Office
Tahir Maqbool
(92-42) 3577 2643
tmaqbool@elixirsec.com
Islamabad Office
Asim Ghafoor Qureshi
(92-51) 227 2341
aghafoor@elixirsec.com
Faisalabad Office
Syed Baqar Hassan
(92-41) 254 1001-4
sbhassan@elixirsec.com
February 17, 2014
Company Update
EFOODS
Analyst Certification
The Elixir Research Team certifies that (1) the views expressed in this report accurately reflect their personal views about all of the subject
companies/securities and (2) no part of their compensation was, is or will be directly or indirectly related to the specific recommendations or
views expressed in this report.
Disclaimer
The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions
contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith.
Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its
accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company
or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as,
an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner
through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the
same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions,
research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their
respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or
other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a
purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities
Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers
described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten
the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price,
or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies
effectively assume currency risk.
© Copyright 2014, Elixir Securities Pakistan (Pvt.) Ltd. All rights reserved. This report or any portion hereof may not be reproduced,
distributed, published or sent to a third party without prior consent of Elixir Securities Pakistan (Pvt.) Ltd.
10
Elixir Securities
February 17, 2014